NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
— UNAUDITED —
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Rainmaker Systems, Inc. and its subsidiaries ("Rainmaker", "we", "our", or the "Company") is focused on serving large business enterprises to help them increase sales to small and medium sized businesses ("SMB"). The Company's services include lead generation services, SMB sales and contract renewals and the management of outside training for profit.
We have developed an integrated solution, the Rainmaker Revenue Delivery Platform
SM
, that combines specialized sales and marketing services with our proprietary, renewals software and business analytics. Our services include marketing strategy development, personalized renewals or subscription e-commerce and microsite creation and hosting, inbound and outbound e-mail, direct mail, chat, and high-end global call center services.
Our ViewCentral SaaS platform provides an end-to-end solution for the management and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System ("LMS") platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly configurable, so our customers utilize only the modules they need, branded as they choose. Designed specifically to automate time-consuming manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.
We are headquartered in the Silicon Valley in Campbell, California, and have additional operations outside of London, England. We also utilize outsourced service providers located in the Dominican Republic and the Philippines. Our global clients consist primarily of large enterprises operating in a range of industries, including hardware, software, software-as- a-service and telecommunications, selling into their SMB market.
Our strategy for long-term, sustained growth is to maintain and improve our position as a leading global provider of B2B sales and marketing solutions in selected markets. A key aspect of this enhanced solution is to provide our clients a way to partner with Rainmaker on a scalable, repeatable and reliable sales model. This enables our clients to turn customer contacts into revenue generating opportunities while simplifying otherwise complex sales and marketing needs. We operate as a seamless extension of our clients' sales and marketing teams incorporating their brands and trademarks and leveraging business practices to amplify existing efforts.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The interim financial statements are unaudited but reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the results of these periods.
The results of our operations for the
three
months ended
March 31, 2014
are not necessarily indicative of results to be expected for the year ending
December 31, 2014
, or any other period. These consolidated financial statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2013
("2013 Form 10-K"), as filed with the SEC on April 1, 2013. Balance sheet information as of
December 31, 2013
has been derived from the audited financial statements for the year then ended.
Liquidity and Going Concern
As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of
$2.3 million
for the
three
months ended
March 31, 2014
. During the
three
months ended
March 31, 2014
, we generated
$817,000
in cash from operating activities.
At
March 31, 2014
, the Company had a net working capital deficit of
$16.4 million
. Our principal source of liquidity as of
March 31, 2014
consisted of
$1.9 million
of cash and cash equivalents and
$2.5 million
of net accounts receivable. Our debt balance as of
March 31, 2014
was
$2.9 million
, of which
$2.5 million
was due to Comerica Bank on May 1, 2014 and
$407,000
was due to Agility Captial II, LLC on May 1, 2014, commensurate with the Comerica credit facility. On May 12, 2014, Comerica Bank issued a notice of default. On May 12, 2014, Agility Capital II, LLC issued a notice of default. See Note 5 for further discussion of our debt agreements. Our accounts payable balance increased from
$13.0 million
as of December 31, 2013 to
$15.0 million
as of
March 31, 2014
.
$12.9 million
of the
March 31, 2014
accounts payable balance is related to a merchant account of a customer.
In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of assets and restructure our debt. Additionally, we are pursuing a plan to achieve profitable operations through a combination of increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital, selling assets or restructuring our debt. We do not have adequate cash or financial resources to operate for the next twelve months without raising significant additional capital, which raises substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent on our ability to develop profitable operations through implementation of our current business initiatives. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the Company, and other relevant facts and circumstances. Actual results could differ materially from those estimates. Accounting policies that include particularly significant estimates are revenue recognition and presentation policies, valuation of accounts receivable, measurement of our deferred tax asset and the corresponding valuation allowance, commitments and contingencies, fair value estimates for the expense of employee stock options and warrants and the assessment of recoverability and impairment of goodwill and long-lived assets.
Significant Accounting Policies
There have been no material changes during 2014 in the Company's significant accounting policies to those previously disclosed in the 2013 Form 10-K.
Recent Accounting Standards
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2014, as compared to the recent accounting pronouncements described in the Company’s 2013 Form 10-K, that are of significance, or potential significance, to the Company’s condensed consolidated financial statements.
2. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the year. Diluted net loss per share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options and warrants, using the treasury stock method, unvested restricted share awards, and convertible securities, using the if converted method, as of the beginning of the period presented or the original issuance date, if later.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
Net loss from continuing operations
|
$
|
(2,313
|
)
|
|
$
|
(3,450
|
)
|
Net income from discontinued operations
|
—
|
|
|
156
|
|
Net loss
|
$
|
(2,313
|
)
|
|
$
|
(3,294
|
)
|
|
|
|
|
Weighted-average shares of common stock outstanding – basic and diluted
|
41,636
|
|
|
28,994
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
Continuing operations
|
$
|
(0.06
|
)
|
|
$
|
(0.12
|
)
|
Discontinued operations
|
—
|
|
|
0.01
|
|
Net loss
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
The following table presents the unvested restricted stock awards, stock options and stock warrants that were excluded from the calculation of diluted net loss per share for the
three
months ended
March 31, 2014
and 2013 as these securities were anti-dilutive (in thousands).
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
Unvested restricted stock awards
|
542
|
|
|
2,142
|
|
Stock options
|
—
|
|
|
876
|
|
Stock warrants
|
1,795
|
|
|
1,578
|
|
Total anti-dilutive securities
|
2,337
|
|
|
4,596
|
|
3. CUSTOMER CONCENTRATION
We have generated a significant portion of our revenue from sales to customers of a limited number of clients. In the three months ended
March 31, 2014
,
two
clients accounted for
75%
of our net revenue, with Microsoft Corporation ("Microsoft") representing approximately
54%
of our net revenue and Symantec Corporation ("Symantec") representing approximately
21%
of our net revenue. In the three months ended
March 31, 2013
,
two
clients accounted for
64%
of our net revenue, with Microsoft representing approximately
39%
of our net revenue and Symantec representing approximately
25%
of our net revenue.
As of March 31, 2014,
three
customers accounted for
61%
of our net accounts receivable, with Microsoft representing approximately
31%
of our net accounts receivable, Symantec representing approximately
18%
of our net accounts receivable, and Hewlett-Packard representing approximately
12%
of our net accounts receivable. As of December 31, 2013,
three
customers accounted for
76%
of our net accounts receivable, with Symantec representing approximately
40%
of our net accounts receivable, Microsoft representing approximately
25%
of our net accounts receivable, and Hewlett-Packard representing approximately
11%
of our net accounts receivable.
We have outsourced services agreements with our significant clients that expire at various dates ranging through March 2018. Our agreements with Symantec expired on March 31, 2014. Our agreements with Microsoft expire at various dates from June 2014 through June 2015, and can be terminated with
thirty days
notice. Our agreements with Hewlett-Packard expire in October 2014 and March 2018 and can be terminated prior to expiration with
sixty days
notice.
4. BALANCE SHEET COMPONENTS
Prepaids and Other Current Assets
Prepaids and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Prepaids and other current assets:
|
|
|
|
Prepaid expenses
|
$
|
718
|
|
|
$
|
623
|
|
Deferred professional service costs
|
209
|
|
|
252
|
|
VAT tax receivable
|
237
|
|
|
440
|
|
Other current assets
|
216
|
|
|
303
|
|
Prepaids and other current assets
|
$
|
1,380
|
|
|
$
|
1,618
|
|
Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
March 31,
2014
|
|
December 31,
2013
|
Property and equipment:
|
|
|
|
|
|
Computer equipment
|
3 years
|
|
$
|
3,973
|
|
|
$
|
3,993
|
|
Capitalized software and development
|
2-5 years
|
|
13,342
|
|
|
13,208
|
|
Furniture and fixtures
|
5 years
|
|
335
|
|
|
309
|
|
Leasehold improvements
|
Lease term
|
|
124
|
|
|
123
|
|
|
|
|
17,774
|
|
|
17,633
|
|
Accumulated depreciation and amortization
|
|
|
(17,186
|
)
|
|
(17,099
|
)
|
Construction in process (1)
|
|
|
270
|
|
|
157
|
|
Property and equipment, net
|
|
|
$
|
858
|
|
|
$
|
691
|
|
_____________
|
|
(1)
|
Construction in process at
March 31, 2014
consists primarily of costs incurred to further develop and enhance our ViewCentral platform. Estimated cost to complete these projects is in the range of
$230,000
to
$260,000
, subject to future revisions.
|
Other Non-current Assets
Other non-current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Other non-current assets:
|
|
|
|
Deposits
|
$
|
—
|
|
|
$
|
4
|
|
Credit card reserve deposits
|
478
|
|
|
391
|
|
Deferred professional service costs
|
695
|
|
|
445
|
|
Other non-current assets
|
$
|
1,173
|
|
|
$
|
840
|
|
Accounts Payable
Approximately
$12.9 million
in accounts payable as of March 31, 2014 represents collections by the Company on behalf of software sales to third party customers associated with a customer's value added reseller arrangement. This balance is owed to the customer and the Company is currently negotiating a settlement arrangement on the balance due. As of March 31, 2014, included in accounts receivable is
$452,000
associated with this customer.
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Other accrued liabilities:
|
|
|
|
Payable to customers *
|
$
|
1,158
|
|
|
$
|
1,158
|
|
Accrued professional fees
|
238
|
|
|
663
|
|
Accrued VAT taxes
|
313
|
|
|
248
|
|
Accrued sales tax
|
277
|
|
|
229
|
|
Settlement liability
|
—
|
|
|
200
|
|
Reseller rebates
|
12
|
|
|
190
|
|
Other liabilities
|
843
|
|
|
977
|
|
Other accrued liabilities
|
$
|
2,841
|
|
|
$
|
3,665
|
|
* - Amounts represent collections on customer receivables associated with "product sales" in excess of amounts owed to state jurisdictions. The Company is in the process of evaluating remediation plans for the balance due.
Deferred Revenue and Deferred Professional Services Costs:
In April 2013, the Company entered into an arrangement to provide subscription services and perform material modifications to its LMS platform to a significant customer. Through March 31, 2014, the customer has not accepted the modifications and is not using the platform and accordingly, no revenue has been recognized under this arrangement through March 31, 2014. As of March 31, 2014, the Company has recorded deferred revenue of
$2.2 million
of which
$422,000
is included in current deferred revenue and
$1.8 million
is included in noncurrent deferred revenue. The Company has also deferred related professional service costs incurred associated with the customization of the LMSP of
$860,000
. Deferred professional service costs of
$165,000
and
$695,000
is included in prepaid and other current assets and other noncurrent assets, respectively.
The Company anticipates that acceptance of the material modifications will occur in the second quarter of fiscal 2014 and will begin to amortize the deferred balances over the remaining subscription period of
52 months
.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Comerica term loan
|
$
|
1,500
|
|
|
$
|
1,800
|
|
Comerica revolving line
|
998
|
|
|
1,230
|
|
Agility line of credit, net of discount of $67 and $96
|
340
|
|
|
404
|
|
Notes payable – insurance
|
89
|
|
|
207
|
|
Total notes payable
|
2,927
|
|
|
3,641
|
|
Less: current portion
|
(2,927
|
)
|
|
(3,641
|
)
|
Total notes payable, less current portion
|
$
|
—
|
|
|
$
|
—
|
|
Comerica Bank Credit Facility
On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the "Comerica Credit Facility"). The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was
$5 million
, comprised of a
$3 million
term loan facility ("Term Loan") and a
$2 million
revolving line of credit ("Revolving Line"), which includes a
$500,000
sub-facility for letters of credit and certain credit card services. Under the terms of the Comerica Credit Facility, the Company could request advances under (i) the Term Loan until December 14, 2012, and (ii) the Revolving Line in an aggregate outstanding amount not to exceed the lesser of (i) the Revolving Line or (ii) the borrowing base, which is 80% of the Company's eligible accounts receivable balances, less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Term Loan advances outstanding on December
14, 2012 became payable in
thirty
equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014 as described below. As of
March 31, 2014
, there was
$1.5 million
outstanding under the Term Loan and
$1.0 million
outstanding under the Revolving Line.
The interest rate per annum for advances under the Comerica Credit Facility is the Prime Referenced Rate, as defined in the Comerica Credit Facility, plus the applicable margin. Prior to March 1, 2014, the applicable margin was one and one half percent (
1.50%
) per annum for the Revolving Line and two and one quarter percent (
2.25%
) per annum for the Term Loan. Beginning March 1, 2014, the applicable margin is two and one quarter percent (
2.25%
) per annum for the Revolving Line and one and one half percent (
1.50%
) per annum for the Term Loan. The interest rates on our Term Loan and Revolving Line were
5.50%
and
4.75%
, respectively, as of
March 31, 2014
.
The Comerica Credit Facility is secured by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least
1.25
to 1.00. The Comerica Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica's approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Comerica Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Comerica Credit Facility. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding loan balance could become due and payable immediately and our existing credit facilities with Comerica Bank could be canceled. As of
March 31, 2014
, we were not in compliance with all loan covenants.
On February 27, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Revolving Line were past due. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. On March 19, 2014, the Company and Comerica Bank entered into a forbearance agreement pursuant to which Comerica Bank agreed to extend the scheduled maturity date of the Revolving Line until May 1, 2014. In addition, under the terms of the forbearance agreement, (i) the amounts outstanding under the Term Loan are due on May 1, 2014, coterminous with the Revolving Line, (ii) advances under the Revolving Line are limited to
$1.0 million
at any time outstanding, (iii) restricted cash in the amount of
$1,562,000
will be held in a segregated deposit account at Comerica Bank as additional collateral for the Term Loan, (iv) effective March 1, 2014, the applicable margin for the Revolving Line was increased to two and one quarter percent (
2.25%
), and for the Term Loan was decreased to one and one half percent (
1.50%
), and (v) the Company must satisfactorily address a material accounts payable owed to a customer by April 1, 2014.
On May 12, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Comerica Credit Facility were past due and the Company did not satisfactorily address a material accounts payable owed to a customer. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. Due to the notice of default, pursuant to the Comerica Credit Facility, effective May 12, 2014, the applicable margin for the Revolving Line and the Term Loan was increased to five percent (
5%
). In addition, the Company notified Comerica Bank on May 14, 2014, that as of April 30, 2014, the Revolving Line exceeded the Borrowing Base by
$179,000
. The overadvanced position was primarily due to invoices to
two
foreign subsidiaries of a major customer which may not be included in the borrowing base under the terms of the Comerica Credit Facility.
Agility Capital Credit Facility
On October 30, 2013, the Company closed a Loan Agreement (the "Agility Loan Agreement") with Agility Capital II, LLC (“Agility”), providing for a revolving line of credit of up to
$500,000
, which amount may be increased to
$650,000
under certain conditions (the “Maximum Revolving Line”). The Company may request advances under the Agility Loan Agreement in an aggregate outstanding amount not to exceed the lesser of (i) the applicable Maximum Revolving Line or (ii) a borrowing base equal to
30%
of the Company's eligible accounts receivable balances. Amounts borrowed under the Loan Agreement are due on the earlier of (i) the date on which the Company’s borrowings under its loan agreement with Comerica Bank become due and payable, and (ii) October 25, 2014. The interest rate per annum for advances under the Agility Loan Agreement is
12.00%
. If a default occurs under the Loan Agreement, the interest rate per annum for advances under the Agility Loan Agreement would increase to
18.00%
. In addition, if a default in the payment of principal occurs under the Agility Loan Agreement, the Company would be required to pay a default fee equal to
$10,000
plus an additional
$15,000
for each subsequent
30
-day period during which such payment default remains uncured. The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility. On February 28, 2014, Agility issued a notice of default due to the notice of default issued by Comerica Bank, as discussed above. The Company paid a default fee of
$10,000
to Agility on February 28, 2014 for failure to pay principal when due. Such default was subsequently cured as a result of the extension of the maturity date to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Revolving Line.
On May 12, 2014, Agility issued a notice of default due as the amounts outstanding under the Agility Loan Agreement were past due. The Company paid a default fee of
$10,000
to Agility on May 12, 2014 for failure to pay principal when due. The notice of default also stated that Agility would not take any action to enforce its rights and remedies under the Agility Credit Facility but reserved the right to do so in the future. In addition, the Company notified Agility on May 14, 2014, that as of April 30, 2014, the Agility Loan Agreement exceeded the Borrowing Base by
$100,000
. The overadvanced position was primarily due to invoices to
two
foreign subsidiaries of a major customer which may not be included in the borrowing base under the terms of the Agility Loan Agreement.
The Agility Loan Agreement is secured by substantially all of Rainmaker’s consolidated assets. The Agility Loan Agreement contains customary covenants that will, subject to limited exceptions, require Agility’s approval to, among other things, (i) create liens; (ii) acquire or transfer assets outside of the ordinary course of business; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Agility Loan Agreement also requires that the Company comply with the financial covenants contained in its loan agreement with Comerica Bank. The Agility Loan Agreement also provides for customary events of default, including nonpayment, breach of covenants, payment defaults of other indebtedness, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Agility Loan Agreement. The Company’s obligations under the Agility Loan Agreement are subordinated to the Company’s obligations under its loan agreement with Comerica Bank, pursuant to a subordination agreement between Agility and Comerica Bank. As of
March 31, 2014
, there was
$407,000
outstanding under the Agility Loan Agreement.
In addition, Agility received a warrant to purchase
216,667
shares of the Company's common stock. The warrant has a
7
-year term and an exercise price of
$0.45
per share. The warrant may also be exercised by way of a cashless exercise. The warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as future issuances of common stock at a price below the warrant's exercise price, stock dividends, stock splits and other similar events.
Notes Payable – Insurance
On
December 11, 2013
, we entered into an agreement with AON Private Risk Management to finance our 2013 to 2014 insurance premiums with First Insurance Funding Corp. in the amount of
$237,000
. The interest rate on the note payable is
4.99%
and the note is payable in
eight
equal monthly installment payments beginning in
December 2013
. As of
March 31, 2014
, the remaining liability under this financing agreement was
$89,000
.
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of
March 31, 2014
, our operating commitments include operating leases for our facilities and certain property and equipment that expire at various dates through 2015. These arrangements allow us to obtain the use of the equipment and facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets. Rent expense under operating lease agreements for continuing operations during the
three
months ended
March 31, 2014
and
2013
was
$139,000
and
$153,000
, respectively.
Litigation
On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton sought full payment of severance benefits in the amount of approximately
$1.0 million
, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action are the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Silton's complaint and a cross-complaint against Silton. On or about August 1, 2013, Silton filed an answer to the cross-complaint.
Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and
1,000,000
shares of the Company's common stock, which were issued during the three months ended March 31, 2014. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating
the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of
$200,000
in the year ended December 31, 2013.
On July 9, 2013, YKnot Holdings LLC (“YKnot”) filed a complaint seeking damages against the Company in the Santa Clara Superior Court alleging breach of contract and related causes of action arising from the eCommerce Processor Agreement (the “Agreement”) entered into by YKnot and the Company in January 2012. The central allegation in the complaint alleged that the Company failed to timely pay over certain reserves held by the Company against chargebacks and returns relating to YKnot's products in accordance with the Agreement. On August 12, 2013, the Company filed an answer to the complaint and filed a cross-complaint against YKnot. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a settlement agreement pursuant to which the Company and YKnot agreed to a mutual "walk away" settlement and release with no money or other consideration paid to either party.
From time to time in the ordinary course of business, we are subject to other claims, asserted or unasserted, or named as a party to other lawsuits or investigations. We are not aware of any such asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of operations.
7. FAIR VALUE MEASUREMENTS
A summary of the activity of the fair value of the Level 3 liabilities for the three months ended
March 31, 2014
and
2013
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Fair Value of
Level 3
Liabilities
|
|
Transfers In (Out)
|
|
Gain on Fair
Value Re-
measurement
|
|
Ending Fair
Value of
Level 3
Liabilities
|
2014
|
|
|
|
|
|
|
|
Common stock warrant liability
|
$
|
93
|
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
76
|
|
2013
|
|
|
|
|
|
|
|
Common stock warrant liability
|
$
|
348
|
|
|
$
|
—
|
|
|
$
|
(225
|
)
|
|
$
|
123
|
|
The following table represents the fair value hierarchy for our financial assets and liabilities held by us measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
March 31, 2014
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Money market funds (1)
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
Common stock warrant liability (2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76
|
|
December 31, 2013
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Money market funds (1)
|
$
|
1,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
Common stock warrant liability (2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93
|
|
____________
|
|
(1)
|
Money market funds are valued using active quoted market rates.
|
|
|
(2)
|
The fair value of our common stock warrant liability is determined using the Black–Scholes valuation method utilizing the quoted price of our common stock in an active market. Volatility is estimated based on the historical market activity of our stock. The expected life is based on the remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' remaining contractual term. See detailed inputs below.
|
The Company uses the Black-Scholes model to value our common stock warrant liability. The following are the assumptions used to measure the warrant liability at
March 31, 2014
and
December 31, 2013
, which were determined in a manner consistent with that described for stock option awards as set forth in Note 8:
|
|
|
|
|
|
March 31, 2014
|
|
March 31, 2013
|
Contractual life in years
|
2.25 - 6.58
|
|
2.5 - 6.75
|
Volatility
|
93.61% to 100.10%
|
|
88.84%
|
Risk-free interest rate
|
0.44% to 2.30%
|
|
0.78% to 2.45%
|
Dividend rate
|
—%
|
|
—%
|
The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at
March 31, 2014
and
December 31, 2013
approximate fair value due to their short-term maturities.
Notes payable is estimated at
March 31, 2014
and
December 31, 2013
to have a fair value, using Level 3 input assumptions, of
$2.9 million
and
$3.6 million
, respectively. Notes payable fair value approximates the carrying value as the substantive terms and rights of the holders approximate similar terms the Company could obtain from other accredited financial institutions.
8. STOCKHOLDERS' EQUITY
Treasury Stock
During the
three
months ended
March 31, 2014
, we had restricted stock awards that vested. We are required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. Accordingly, we offer employees the ability to have vested shares withheld by us in an amount equal to the amount of taxes to be withheld. We purchased
12,624
shares during the
three
months ended
March 31, 2014
with a cost of approximately
$3,000
from employees to cover federal and state taxes due.
During the three months ended March 31, 2014, we issued
1,000,000
shares from treasury pursuant to the settlement agreement with our former CEO. The weighted cost of shares issued from treasury was approximately
$1.3 million
of which
$200,000
was recorded as a reduction of other accrued liabilities and the remaining
$1.1 million
was recorded as a reduction of additional paid-in capital.
Stock Compensation
We expense stock-based compensation to the same expense categories in which the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the
three
months ended
March 31, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
Stock-based compensation expense included in:
|
|
|
|
Cost of services
|
$
|
21
|
|
|
$
|
17
|
|
Sales and marketing
|
24
|
|
|
118
|
|
Technology and development
|
29
|
|
|
43
|
|
General and administrative
|
82
|
|
|
801
|
|
|
$
|
156
|
|
|
$
|
979
|
|
At
March 31, 2014
, approximately
$1.0 million
of stock-based compensation expense relating to unvested awards had not been amortized and will be expensed in future periods through 2016. Under current grants that are unvested and outstanding, approximately
$270,000
will be expensed in the remainder of
2014
as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.
During the
three
months ended
March 31, 2014
and
2013
, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
Expected life in years
|
4.39
|
|
|
3.76
|
|
Volatility
|
86.51
|
%
|
|
65.99
|
%
|
Risk-free interest rate
|
1.53
|
%
|
|
0.44
|
%
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
Forfeiture Rates:
|
|
|
|
Options
|
21.89
|
%
|
|
27.61
|
%
|
Restricted stock
|
—
|
%
|
|
15.04
|
%
|
Expected life of our option grants is estimated based on our analysis of our actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the most recent period of time equal to the expected term of the options. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We have not historically paid dividends and we do not expect to pay dividends in the near term and therefore we have set the dividend rate at
zero
.
A summary of activity under our 2003 Stock Incentive Plan (the "2003 Plan") and 2012 Equity Inducement Plan (the "2012 Plan") for the
three
months ended
March 31, 2014
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Available
for Grant
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
Balance at December 31, 2013
|
1,534
|
|
|
2,698
|
|
|
$
|
0.67
|
|
Authorized
|
1,660
|
|
|
—
|
|
|
—
|
|
Options granted
|
(40
|
)
|
|
40
|
|
|
0.25
|
|
Restricted stock awards granted
|
(100
|
)
|
|
—
|
|
|
—
|
|
Options exercised
|
—
|
|
|
—
|
|
|
—
|
|
Options canceled
|
128
|
|
|
(128
|
)
|
|
0.41
|
|
Restricted stock awards forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Balance at March 31, 2014
|
3,182
|
|
|
2,610
|
|
|
$
|
0.67
|
|
In accordance with the 2003 Plan, the number of shares authorized for grant under the 2003 Plan automatically increases on the first trading date of January by an amount equal to the lesser of
4%
of our outstanding common stock at the previous December 31 or
2,000,000
shares. Shares outstanding at
December 31, 2013
were
41,495,000
and the additional shares authorized amounted to
1,660,000
under the 2003 Plan.
The following table summarizes the activity with regard to restricted stock awards during the
three
months ended
March 31, 2014
. Restricted stock awards were issued from the 2003 Plan and any issuances reduce the shares available for grant as indicated in the previous table. During the three months ended
March 31, 2014
, we granted restricted stock awards for
100,000
shares to
two
members of our board of directors with immediate vesting. Restricted stock awards are valued at the closing market price of our stock on the date of the grant (in thousands).
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Price
|
Balance of nonvested shares at December 31, 2013
|
582
|
|
|
$
|
0.69
|
|
Granted
|
100
|
|
|
0.25
|
|
Vested
|
(185
|
)
|
|
0.42
|
|
Forfeited
|
—
|
|
|
—
|
|
Balance of nonvested shares at March 31, 2014
|
497
|
|
|
$
|
0.70
|
|
The total grant date fair value of the nonvested restricted stock awards was
$349,000
as of
March 31, 2014
.
9. SUBSEQUENT EVENTS
On May 12, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Comerica Credit Facility were past due and the Company did not satisfactorily address a material accounts payable owed to a customer. On May 12, 2014, Agility Capital II LLC issued a notice of default due as the amounts outstanding under the Agility Loan Agreement were past due. See Note 5 for further discussion of our debt agreements