Item 1. Financial Statements
Notes to Consolidated Financial Statements
(In thousands, except share and per share data, where otherwise noted or instances where expressed in millions)
1. Organization and Operations
TechTarget, Inc. and its subsidiaries (the Company) is a leading provider of specialized online content for
buyers of corporate information technology (IT) products and services, and a leading provider of marketing services for the sellers of those solutions. The Companys offerings enable IT vendors to identify, reach and influence
corporate IT decision makers who are actively researching specific IT purchases through customized marketing programs that include data analytics-driven intelligence solutions, demand generation and brand advertising. The Company operates a network
of over 140 websites, each of which focuses on a specific IT sector, such as storage, security or networking. During the critical stages of the purchase decision process, these content offerings meet IT professionals needs for expert, peer and
IT vendor information, and provide a platform on which IT vendors can launch targeted marketing campaigns which generate measurable, high return on investment (ROI). As IT professionals have become increasingly specialized, they have
come to rely on the Companys sector-specific websites for purchasing decision support. The Companys content enables IT professionals to navigate the complex and rapidly changing IT landscape where purchasing decisions can have
significant financial and operational consequences. Based upon the logical clustering of users respective job responsibilities and the marketing focus of the products that the Companys customers are advertising, the Companys key
marketing opportunities and audience extensions are currently addressed using nine distinct media groups: Application Architecture and Development; Channel; CIO/IT Strategy; Data Center and Virtualization Technologies; Business Applications and
Analytics; Networking; Security; Storage; and TechnologyGuide.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain significant accounting policies as
described below and elsewhere in these Notes to Consolidated Financial Statements.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, Bitpipe, Inc.,
TechTarget Securities Corporation (TSC), TechTarget Limited, TechTarget (HK) Limited (TTGT HK), TechTarget (Beijing) Information Technology Consulting Co. Ltd. (TTGT Consulting), TechTarget (Australia) Pty Ltd.,
TechTarget (Singapore) Pte Ltd., E-Magine Médias SAS (LeMagIT) and TechTarget Germany GmbH. Bitpipe, Inc. features websites that provide in-depth vendor generated content targeted to corporate IT professionals. TSC is a
Massachusetts corporation. TechTarget Limited is a subsidiary doing business principally in the United Kingdom. TTGT HK is a subsidiary incorporated in Hong Kong in order to facilitate the Companys activities in the Asia-Pacific region.
Additionally, through its wholly-owned subsidiaries, TTGT HK and TTGT Consulting, the Company effectively controls a variable interest entity (VIE), Keji Wangtuo Information Technology Co., Ltd., (KWIT), which was
incorporated under the laws of the Peoples Republic of China (PRC). TechTarget (Australia) Pty Ltd. and TechTarget (Singapore) Pte Ltd. are the entities through which the Company does business in Australia and Singapore,
respectively; LeMagIT and TechTarget Germany GmbH, both wholly-owned subsidiaries of TechTarget Limited, are entities through which the Company does business in France and Germany, respectively.
PRC laws and regulations prohibit or restrict foreign ownership of Internet-related services and advertising businesses. To comply with these
foreign ownership restrictions, the Company operates its websites and provides online advertising services in the PRC through KWIT. The Company entered into certain exclusive agreements with KWIT and its shareholders through TTGT HK, which obligated
TTGT HK to absorb all of the risk of loss from KWITs activities and entitled TTGT HK to receive all of their residual returns. In addition, the Company entered into certain agreements with the authorized parties through TTGT HK, including
Management and Consulting Services, Voting Proxy, Equity Pledge and Option Agreements. TTGT HK assigned all of its rights and obligations to the newly formed wholly foreign-owned enterprise (WFOE), TTGT Consulting. The WFOE is
established and existing under the laws of the PRC, and is wholly owned by TTGT HK.
Based on these contractual arrangements, the Company
consolidates the financial results of KWIT as required by Accounting Standards Codification (ASC) subtopic 810-10,
Consolidation: Overall
, because the Company holds all the variable interests of KWIT through the WFOE, which is the
primary beneficiary of KWIT. Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Company and the VIE through the aforementioned agreements, whereby the equity holders of KWIT assigned all of
their voting rights underlying their equity interest in KWIT to the WFOE. In addition, through the other
6
aforementioned agreements, the Company demonstrates its ability and intention to continue to exercise the ability to obtain substantially all of the profits and absorb all of the expected losses
of KWIT. All significant intercompany accounts and transactions between the Company, its subsidiaries, and KWIT have been eliminated in consolidation.
Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted (Generally Accepted Accounting Principles, or GAAP) in the United States (U.S.) for
interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the
U.S. for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been
reflected in the consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim periods or for the full year. The information included in these
consolidated financial statements should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the consolidated financial statements and
accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications
are not material and had no effect on the reported results of operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the
Company evaluates its estimates, including those related to revenues, long-lived assets, goodwill, the allowance for doubtful accounts, stock-based compensation, earnouts, self-insurance accruals and income taxes. Estimates of the carrying value of
certain assets and liabilities are based on historical experience and on various other assumptions that the Company believes to be reasonable. Actual results could differ from those estimates.
Revenue Recognition
The Company
generates substantially all of its revenues from the sale of targeted advertising campaigns, which are delivered via its network of websites, data analytics solutions, and events. In all cases, revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
The majority of the Companys online media sales involve multiple product offerings, which are described in more detail below. Because
neither vendor-specific objective evidence of fair value nor third party evidence of fair value exists for all elements in the Companys bundled product offerings, the Company uses an estimated selling price which represents managements
best estimate of the stand-alone selling price for each deliverable in an arrangement. The Company establishes best estimates considering multiple factors including, but not limited to, class of client, size of transaction, available media
inventory, pricing strategies and market conditions. The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. The Company uses the relative
selling price method to allocate consideration at the inception of the arrangement to each deliverable in a multiple element arrangement. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable
on the basis of the deliverables best estimated selling price. Revenue is then recognized as delivery occurs.
The Company evaluates
all deliverables of an arrangement at inception and each time an item is delivered, to determine whether they represent separate units of accounting. Based on this evaluation, the arrangement consideration is measured and allocated to each of these
elements.
7
Online Offerings
IT Deal Alert.
This suite of products and services includes IT Deal Alert: Qualified Sales Opportunities, which profiles
specific in-progress purchase projects, IT Deal Alert: Priority Engine, which is a subscription service powered by the Companys Activity Intelligence platform that integrates into salesforce.com and delivers information to allow
marketers and sales personnel to identify those accounts who are actively researching new technology purchases, IT Deal Alert: Deal Data, which is a customized solution aimed at sales intelligence and data scientist functions that makes the
Companys Activity Intelligence data directly consumable by the customers internal applications, and IT Deal Alert: TechTarget Research, which is a newly launched subscription product that sources proprietary information about
purchase transactions from IT professionals who are making and have recently completed these purchases. Qualified Sales Opportunities revenue is recognized when the Qualified Sales Opportunity is delivered to the Companys customer, Priority
Engine revenue is recognized ratably over the duration of the service, Deal Data revenue is recognized upon delivery of the data to the Companys customer, and Research revenue is recognized when the product is delivered.
Core Online.
The Companys core online offerings enable its customers to reach and influence prospective buyers through content
marketing programs designed to generate demand for their solutions, and through display advertising and other brand programs that influence consideration by prospective buyers.
Demand Solutions.
As part of its demand solutions campaign offerings, the Company may guarantee a minimum number of qualified
leads to be delivered over the course of the campaign. The Company determines the content necessary to achieve performance guarantees. Scheduled end dates of campaigns sometimes need to be extended, pursuant to the terms of the arrangement, to
satisfy lead guarantees. The Company estimates a revenue reserve necessary to adjust revenue recognition for extended campaigns. These estimates are based on the Companys experience in managing and fulfilling these offerings. The customer
generally has cancellation privileges which normally require advance notice by the customer and require proportional payment by the customer for the portion of the campaign provided by the Company. Additionally, the Company offers sales incentives
to certain customers, primarily in the form of volume rebates, which are classified as a reduction of revenues and are calculated based on the terms of the specific customers contract. The Company accrues for these sales incentives based on
contractual terms and historical experience. The Company recognizes revenue on contracts where pricing is based on cost per lead during the period in which leads are delivered to its customers and recognizes revenue on duration-based campaigns
ratably over the duration of the campaign, which is usually less than six months.
Brand Solutions
.
Brand solutions
consist mostly of banner revenue, which is recognized in the period in which the banner impressions, engagements or clicks occur and microsite revenue, which is recognized over the period during which the microsites are live.
Custom Content Creation
.
Custom content revenue is recognized when the creation is completed and delivered to the
customer.
Other.
Other includes list rental revenue, which is recognized in the period in which the
Company delivers the customers content to a list of the Companys registered members, and revenue from third party revenue sharing arrangements, which is primarily recognized on a net basis in the period in which the services are
performed
.
Events
Revenue from vendor-sponsored events, whether sponsored exclusively by a single vendor or in a multi-vendor sponsored event, is recognized upon
completion of the event in the period the event occurs. The majority of the Companys events are free to qualified attendees; however, certain events are based on a paid attendee model. The Company recognizes revenue for paid attendee events
upon completion of the event.
Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as
deferred revenue. The Company excludes from its deferred revenue and accounts receivable balances amounts for which it has billed in advance prior to the start of a campaign or the delivery of services.
8
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and
contingent consideration. Due to their short-term nature and liquidity, the carrying value of these instruments, with the exception of contingent consideration, approximates their estimated fair values. See Note 3 for further information on the fair
value of the Companys investments. The fair value of contingent consideration was estimated using a discounted cash flow method described in Note 5.
Long-lived Assets, Goodwill and Indefinite-lived Intangible Assets
Long-lived assets consist primarily of property and equipment, capitalized software, goodwill and other intangible assets. The Company reviews
long-lived assets, including property and equipment and finite intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would trigger an
impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset or an adverse action or a significant decrease in the market price. A specifically
identified intangible asset must be recorded as a separate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is
separable. Accordingly, intangible assets consist of specifically identified intangible assets. Goodwill is the excess of any purchase price over the estimated fair value of net tangible and intangible assets acquired.
Goodwill and indefinite-lived intangible assets are not amortized but are reviewed annually for impairment or more frequently if impairment
indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives, which range from three to ten years, using methods of amortization that are expected to reflect the
estimated pattern of economic use, and are reviewed for impairment when events or changes in circumstances suggest that the assets may not be recoverable. Consistent with the Companys determination that it has only one reporting segment, it
has been determined that there is only one reporting unit and goodwill is tested for impairment at the entity level. The Company performs its annual test of impairment of goodwill as of December 31st of each year and whenever events or changes
in circumstances suggest that the carrying amount may not be recoverable using the two step process required by ASC 350,
Intangibles Goodwill and Other
(ASC 350). The first step of the impairment test is to identify
potential impairment by comparing the reporting units fair value with its net book value (or carrying amount), including goodwill. The fair value is estimated based on a market value approach. If the fair value of the reporting unit exceeds
its carrying amount, the reporting units goodwill is not considered to be impaired and the second step of the impairment test is not performed. Whenever indicators of impairment become present, the Company would perform the second step and
compare the implied fair value of the reporting units goodwill, as defined by ASC 350, to its carrying value to determine the amount of the impairment loss, if any. As of December 31, 2015, there were no indications of impairment based on
the step one analysis, and the Companys estimated fair value exceeded its goodwill carrying value by a significant margin. There were no indications of impairment as of March 31, 2016.
Based on the aforementioned evaluation, the Company believes that, as of the balance sheet dates presented, none of the Companys
goodwill or other long-lived assets were impaired. The Company did not have any intangible assets with indefinite lives as of March 31, 2016 or December 31, 2015.
Allowance for Doubtful Accounts
The Company offsets gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable credit losses in its existing accounts receivable. The allowance for doubtful accounts is reviewed on a regular basis, and all past due balances are reviewed individually for collectability.
Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.
Property and Equipment and Other Capitalized Assets
Property and equipment and other capitalized assets are stated at cost. Property and equipment acquired through acquisitions of businesses are
initially recorded at fair value. Depreciation is calculated on the straight-line method based on the month the asset is placed in service.
9
Internal-Use Software and Website Development Costs
The Company capitalizes costs incurred during the development of its website applications and infrastructure as well as certain costs relating
to internal-use software. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized internal-use software and website development costs are reviewed for recoverability whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. The Company capitalized internal-use
software and website development costs of $0.7 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively.
Income Taxes
The Companys
deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. A valuation allowance is established against net deferred tax
assets if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return using a more likely than not threshold as required by the provisions of ASC 740-10,
Accounting for Uncertainty in Income Taxes
(ASC 740).
The Company recognizes any interest and penalties related to unrecognized tax benefits in income tax expense.
Stock-Based Compensation
The
Company has two stock-based employee compensation plans which are more fully described in Note 10. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized in the Consolidated Statement of
Operations and Comprehensive Income using the straight-line method over the vesting period of the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock option awards.
Comprehensive Income
Comprehensive income includes all changes in equity during a period, except those resulting from investments by stockholders and distributions
to stockholders. The Companys comprehensive income includes changes in the fair value of the Companys unrealized gains (losses) on available for sale securities and foreign currency translation adjustments.
There were no material reclassifications out of accumulated other comprehensive income in the periods ended March 31, 2016 or 2015.
Foreign Currency
The functional
currency for each of the Companys subsidiaries is the local currency of the country in which it is incorporated. All assets and liabilities are translated into U.S. dollar equivalents at the exchange rate in effect on the balance sheet date or
at a historical rate. Revenues and expenses are translated at average exchange rates. Translation gains or losses are recorded in stockholders equity as an element of accumulated other comprehensive loss.
Net (Loss) Income Per Share
Basic
earnings per share is computed based on the weighted average number of common shares and vested restricted stock awards outstanding during the period. Because the holders of unvested restricted stock awards do not have nonforfeitable rights to
dividends or dividend equivalents, the Company does not consider these awards to be participating securities that should be included in its computation of earnings per share under the two-class method. Diluted earnings per share is computed using
the weighted average number of common shares and vested, undelivered restricted stock awards outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option and restricted stock award
programs using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and restricted stock awards is computed using the average market price for the respective period. In addition, the assumed
proceeds under the treasury stock method include the average unrecognized compensation expense and assumed tax benefit of stock options and restricted stock awards that are in-the-money. This results in the assumed buyback of additional
shares, thereby reducing the dilutive impact of stock options and restricted stock awards.
10
Recent Accounting Pronouncements
Accounting Guidance Adopted in 2016
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2015-05,
Customers Accounting for Fees Paid in a Cloud Computing Arrangement (Subtopic 350-40)
(ASU 2015-05), which provides guidance to customers about whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a
software license, the customer should account for a cloud computing arrangement as a service contract. The guidance in ASU 2015-05 is required for annual reporting periods (including interim periods within the reporting period) beginning after
December 15, 2015. The Company adopted the provisions of the new standard on January 1, 2016 and the adoption did not have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, I
ncome Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes
(ASU 2015-17). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the previous guidance, which required entities to separately
present deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet. The guidance in ASU 2015-17 is required for annual reporting periods beginning after December 15, 2016, including interim periods
within the reporting period. The Company early adopted the provisions of the new standard on January 1, 2016. Implementing the new pronouncement resulted in the Company retrospectively reclassifying approximately $2.3 million in current
deferred tax assets to noncurrent as of December 31, 2015.
Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09), which
supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date
(ASU 2015-14). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. As a result, this guidance is now effective for annual reporting periods (including
interim reporting periods within those periods) beginning after December 15, 2017 (January 1, 2018 for the Company) and early adoption is permitted only as of annual reporting periods (including interim reporting periods within those reporting
periods) beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
, which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and
Licensing
, which provides further implementation guidance for ASU 2014-09. These standards will be effective for the Company in the first quarter of fiscal year 2019, although early adoption is permitted. The Company is currently evaluating the
impact that this guidance will have on its consolidated financial statements and disclosure.
In January 2016, the FASB issued ASU
No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10)Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01). ASU 2016-01 addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact that this guidance will
have on its consolidated financial statements and disclosure.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic
842)
(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. ASU 2016-02 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 currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosure.
11
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income
taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosure.
3. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash
equivalents, short-term and long-term investments and contingent consideration. The fair value of these financial assets and liabilities was determined based on three levels of input as follows:
|
|
|
Level 1.
Quoted prices in active markets for identical assets and liabilities;
|
|
|
|
Level 2.
Observable inputs other than quoted prices in active markets; and
|
|
|
|
Level 3.
Unobservable inputs.
|
The fair value hierarchy of the Companys
financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
March 31,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1)
|
|
$
|
200
|
|
|
$
|
200
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments(2)
|
|
|
14,146
|
|
|
|
|
|
|
|
14,146
|
|
|
|
|
|
Long-term investments(2)
|
|
|
5,727
|
|
|
|
|
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,073
|
|
|
$
|
200
|
|
|
$
|
19,873
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
December 31,
2015
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1)
|
|
$
|
122
|
|
|
$
|
122
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments(2)
|
|
|
10,646
|
|
|
|
|
|
|
|
10,646
|
|
|
|
|
|
Long-term investments(2)
|
|
|
9,262
|
|
|
|
|
|
|
|
9,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,030
|
|
|
$
|
122
|
|
|
$
|
19,908
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration current(3)
|
|
$
|
1,326
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,326
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in cash and cash equivalents on the accompanying consolidated balance sheets; valued at quoted market prices in active markets.
|
(2)
|
Short-term and long-term investments consist of municipal bonds, corporate bonds and government agency bonds; their fair value is calculated using an interest rate yield curve for similar instruments.
|
12
(3)
|
The Companys valuation techniques and Level 3 inputs used to estimate the fair value of contingent consideration payable in connection with the LeMagIT acquisition are described in Note 5. The contingent
consideration, net of a $0.4 million holdback, was paid in January 2016. The holdback is fixed in value and is, therefore, no longer a contingent liability; it is included in current liabilities on the Companys Consolidated Balance Sheet as of
March 31, 2016.
|
4. Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at date of purchase.
Cash equivalents are carried at cost, which approximates their fair market value. Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Cash
|
|
$
|
14,763
|
|
|
$
|
14,661
|
|
Money market funds
|
|
|
200
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
14,963
|
|
|
$
|
14,783
|
|
|
|
|
|
|
|
|
|
|
The Companys short-term and long-term investments are accounted for as available for sale securities.
These investments are recorded at fair value with the related unrealized gains and losses included in accumulated other comprehensive loss, a component of stockholders equity, net of tax. The cumulative unrealized gain (loss), net of taxes,
was $2 and $(19) as of March 31, 2016 and December 31, 2015, respectively. Realized gains and losses on the sale of these investments are determined using the specific identification method. There were no realized gains or losses during
the three months ended March 31, 2016 or 2015.
Short-term and long-term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency bonds
|
|
$
|
7,612
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
7,615
|
|
Municipal bonds
|
|
|
11,754
|
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
11,751
|
|
Corporate bonds
|
|
|
504
|
|
|
|
3
|
|
|
|
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term investments
|
|
$
|
19,870
|
|
|
$
|
10
|
|
|
$
|
(7
|
)
|
|
$
|
19,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency bonds
|
|
$
|
7,615
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
7,600
|
|
Municipal bonds
|
|
|
11,818
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
11,804
|
|
Corporate bonds
|
|
|
505
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term investments
|
|
$
|
19,938
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
|
$
|
19,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had seven debt securities in an unrealized loss position at March 31, 2016. All of these
securities have been in such a position for no more than six months. The unrealized loss on those securities was approximately $7 and the fair value was $9.0 million. The Company uses specific identification when reviewing these investments for
impairment. Because the Company does not intend to sell the investments that are in an unrealized loss position and it is not likely that the Company will be required to sell any investments before recovery of their cost basis, the Company does not
consider those investments with an unrealized loss to be other-than-temporarily impaired at March 31, 2016.
13
Municipal, government agency, and corporate bonds have contractual maturity dates that range from
July 2016 to April 2018. All income generated from these investments is recorded as interest income.
5. Acquisition
LeMagIT
On December 17, 2012, the Company purchased all of the outstanding shares of its French partner, E-Magine Médias SAS, for
approximately $2.2 million in cash plus a potential future earnout valued at $0.7 million at the time of the acquisition. Approximately $1.2 million of the cash payment was made at closing, and the remainder was paid in two equal installments in
2013 and 2014. The earnout was subject to certain revenue growth targets and the payment was adjusted each period based on actual results. In valuing the contingent consideration, it was determined that fair value adjustments were necessary to
appropriately reflect the inherent risk and related time value of money associated with these potential payments. Accordingly, a discount rate of 28% was used. The calculation of these fair values required the use of significant inputs that are not
observable in the market and thus represented a Level 3 fair value measurement as defined in ASC 820,
Fair Value Measurements and Disclosures
. The significant inputs in the Level 3 measurements not supported by market activity included
estimated future revenues as well as the rates used to discount them. The installment payments were recorded at present value using a discount rate of 10%.
The earnout payment of $1.3 million, net of a $0.4 million holdback, was paid in January 2016. The portion of the payment that is related to
the fair value of the earnout as of the acquisition date, amounting to approximately $0.5 million, is reflected in financing activities in the Companys Consolidated Statement of Cash Flows for the three months ended March 31, 2016. The balance
of the payment is reflected as an operating cash flow. The holdback is included in current liabilities in the Companys Consolidated Balance Sheet as of March 31, 2016.
6. Intangible Assets
The following table summarizes the Companys intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
|
Estimated
Useful Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer, affiliate and advertiser relationships
|
|
|
59
|
|
|
$
|
6,982
|
|
|
$
|
(6,578
|
)
|
|
$
|
404
|
|
Developed websites, technology and patents
|
|
|
10
|
|
|
|
1,272
|
|
|
|
(660
|
)
|
|
|
612
|
|
Trademark, trade name and domain name
|
|
|
58
|
|
|
|
1,815
|
|
|
|
(1,702
|
)
|
|
|
113
|
|
Proprietary user information database and Internet traffic
|
|
|
5
|
|
|
|
1,223
|
|
|
|
(1,173
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
11,292
|
|
|
$
|
(10,113
|
)
|
|
$
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Estimated
Useful Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer, affiliate and advertiser relationships
|
|
|
59
|
|
|
$
|
6,996
|
|
|
$
|
(6,379
|
)
|
|
$
|
617
|
|
Developed websites, technology and patents
|
|
|
10
|
|
|
|
1,222
|
|
|
|
(603
|
)
|
|
|
619
|
|
Trademark, trade name and domain name
|
|
|
58
|
|
|
|
1,819
|
|
|
|
(1,685
|
)
|
|
|
134
|
|
Proprietary user information database and Internet traffic
|
|
|
5
|
|
|
|
1,232
|
|
|
|
(1,154
|
)
|
|
|
78
|
|
Non-compete agreements
|
|
|
3
|
|
|
|
76
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
11,345
|
|
|
$
|
(9,897
|
)
|
|
$
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over their estimated useful lives, which range from three to ten years, using
methods of amortization that are expected to reflect the estimated pattern of economic use. The remaining amortization expense will be recognized over a weighted-average period of approximately 2.55 years. Amortization expense was $0.3 million and
$0.4 million for the three month periods ended March 31, 2016 and 2015. Amortization expense is recorded within operating expenses as the intangible assets consist of customer-related assets and website traffic that the Company considers to be
in support of selling and marketing activities. The Company wrote off $0.1 million of fully amortized intangible assets in the first quarter of 2016. The Company did not write off any fully amortized intangible assets in the first quarter of 2015.
The change in the gross carrying amount of intangible assets during the three months ended March 31, 2016, was due to foreign currency translation gains and losses.
14
The Company expects amortization expense of intangible assets to be as follows:
|
|
|
|
|
Years Ending December 31:
|
|
Amortization
Expense
|
|
2016 (April 1st December 31st)
|
|
$
|
530
|
|
2017
|
|
|
170
|
|
2018
|
|
|
105
|
|
2019
|
|
|
89
|
|
2020
|
|
|
75
|
|
Thereafter
|
|
|
210
|
|
|
|
|
|
|
|
|
$
|
1,179
|
|
|
|
|
|
|
7. Net (Loss) Income Per Common Share
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net (loss) income per common
share is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(48
|
)
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock and vested, undelivered restricted stock awards
outstanding
|
|
|
32,594,064
|
|
|
|
33,135,628
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock and vested, undelivered restricted stock awards
outstanding
|
|
|
32,594,064
|
|
|
|
33,135,628
|
|
Effect of potentially dilutive shares (1)
|
|
|
|
|
|
|
1,835,799
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares of common stock and vested, undelivered restricted stock awards
outstanding and potentially dilutive shares
|
|
|
32,594,064
|
|
|
|
34,971,427
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Per Share:
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In calculating diluted net (loss) income per share, 0.4 million and 0.5 million shares related to outstanding stock options and unvested restricted stock awards were excluded for the three months ended
March 31, 2016 and 2015, respectively, because they were anti-dilutive. Additionally, shares used to calculate diluted net loss per share exclude 1.0 million shares related to outstanding stock options and unvested restricted stock awards
for the three months ended March 31, 2016 that would have been dilutive if the Company had net income during that period.
|
8. Bank Demand Loan Payable
As of March 31, 2016, the Company has a $5.0 million Revolving Credit Facility (the Credit Agreement),
which is a discretionary $5.0 million demand revolving line. At the Companys option, the Credit Agreement bears interest at either the prime rate less 1.00% or the London Interbank Offered Rate (LIBOR) plus the applicable LIBOR
margin. The applicable LIBOR margin is based on the ratio of total funded debt to earnings before interest, other income and expense, income taxes, depreciation, and amortization (EBITDA) for the preceding four fiscal quarters. As of
March 31, 2016, the applicable LIBOR margin was 1.25%. Unless earlier payment is required by an event of default, all principal and unpaid interest will be due and payable on the interest payment date; however, there is an automatic rollover
provision for all loans for which LIBOR is elected by the Company. Borrowings, if any, under the Credit Agreement
15
would be collateralized by a security interest in substantially all assets of the Company. There are no financial covenant requirements and no unused line fees under the Credit Agreement. At
March 31, 2016 and December 31, 2015 there were no amounts outstanding under the Credit Agreement.
9. Commitments and Contingencies
Operating Leases
The Company conducts its operations in leased office facilities under various noncancelable operating lease agreements that expire through
March 2020. In August 2009, the Company entered into an agreement to lease approximately 87,875 square feet of office space in Newton, Massachusetts (the Newton Lease). The Newton Lease commenced in February 2010 and has a term of ten
years. In November 2010, the Newton Lease was amended to include an additional 8,400 square feet of office space (the Amended Newton Lease). The Amended Newton Lease commenced in March 2011 and runs concurrently with the term of the
Newton Lease. The Company is receiving certain rent concessions over the life of the Newton Lease as well as the Amended Newton Lease. In July 2015, the Newton Lease was again amended to include an additional 14,203 square feet of office space (the
Second Amended Newton Lease). The Second Amended Newton Lease commenced in the first quarter of 2016 and runs concurrently with the term of the Newton Lease. There are no rent concessions related to the Second Amended Newton Lease, and
all rent concessions which were part of the Newton Lease and Amended Newton Lease remain unchanged.
Certain of the Companys
operating leases include lease incentives and escalating payment amounts and are renewable for varying periods. The Company is recognizing the related rent expense on a straight-line basis over the term of the lease taking into account the lease
incentives and escalating lease payments.
Future minimum lease payments under the Companys noncancelable operating leases at
March 31, 2016 are as follows:
|
|
|
|
|
Years Ending December 31:
|
|
Minimum Lease
Payments
|
|
2016 (April 1st December 31st)
|
|
$
|
3,753
|
|
2017
|
|
|
4,448
|
|
2018
|
|
|
4,505
|
|
2019
|
|
|
4,492
|
|
2020
|
|
|
683
|
|
|
|
|
|
|
|
|
$
|
17,881
|
|
|
|
|
|
|
Net Worth Tax Contingency
In late March 2010, the Company received a letter from the Department of Revenue of the Commonwealth of Massachusetts (the MA DOR)
requesting documentation demonstrating that TSC had been classified by the MA DOR as a Massachusetts security corporation for the 2006 and 2007 tax years. Following subsequent correspondence with the MA DOR and a settlement conference on
March 22, 2011, the Company received a Notice of Assessment from the MA DOR with respect to additional excise taxes on net worth related to TSC. Based on the Companys previous assessment that it was probable that the MA DOR would require
an adjustment to correct TSCs tax filings such that it would be treated as a Massachusetts business corporation for the applicable years, the Company recorded a liability representing its best estimate at that time of the potential net worth
tax exposure. The tax benefits available to a Massachusetts security corporation are composed of (i) a different rate structure (1.32% on gross investment income vs. 9.5% on net income) (See Note 12) and (ii) exemption from the 0.26%
excise tax on net worth. As of the date of the ruling, the Company had recorded a liability of approximately $257 to account for the tax differential in all open years, including penalties and interest. On August 17, 2011, the Company filed
Applications for Abatement with the MA DOR. In January 2012, the Company filed Petitions for Formal Procedure with the Massachusetts Appellate Tax Board (the ATB). A trial took place in April 2014, and in May 2015 the ATB ruled in favor
of the MA DOR. During the second quarter of 2015, the Company accepted an amnesty offer from the MA DOR and paid all amounts due.
Litigation
From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation.
At March 31, 2016 and December 31, 2015, the Company did not have any pending claims, charges, or litigation that it expects would have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
16
10. Stock-Based Compensation
Stock Option Plans
In September 1999, the Company approved a stock option plan (the 1999 Plan) that provided for the issuance of shares of common
stock incentives. The 1999 Plan provided for the granting of incentive stock options (ISOs), nonqualified stock options (NSOs), and stock grants. These incentives were offered to the Companys employees, officers,
directors, consultants, and advisors. Each option is exercisable at such times and subject to such terms as determined by the Companys Board of Directors (the Board); grants generally vest over a four year period, and expire no
later than ten years after the grant date.
In April 2007, the Board approved the 2007 Stock Option and Incentive Plan (the 2007
Plan), which was approved by the stockholders of the Company and became effective upon the consummation of the Companys IPO in May 2007. Effective upon the consummation of the IPO, no further awards were made pursuant to the 1999 Plan,
but any outstanding awards under the 1999 Plan remain in effect and continue to be subject to the terms of the 1999 Plan. The 2007 Plan allows the Company to grant ISOs, NSOs, stock appreciation rights, deferred stock awards, restricted stock and
other awards. Under the 2007 Plan, stock options may not be granted at less than fair market value on the date of grant, and grants generally vest over a three to four year period. Stock options granted under the 2007 Plan expire no later than ten
years after the grant date. Additionally, beginning with awards made in August 2015, the Company has the option to direct a net issuance of shares for satisfaction of tax liability with respect to vesting of awards and delivery of shares. Prior to
August 2015, this choice of settlement method was solely at the discretion of the award recipient. The Company has reserved for issuance an aggregate of 2,911,667 shares of common stock under the 2007 Plan plus an additional annual increase to be
added automatically on January 1 of each year, beginning on January 1, 2008, equal to the lesser of (a) 2% of the outstanding number of shares of common stock (on a fully-diluted basis) on the immediately preceding December 31
and (b) such lower number of shares as may be determined by the compensation committee of the Board of Directors of the Company. The number of shares available for issuance under the 2007 Plan is subject to adjustment in the event of a stock
split, stock dividend or other change in capitalization. Generally, shares that are forfeited or canceled from awards under the 2007 Plan also will be available for future awards. To date, 8,224,334 shares have been added to the 2007 Plan in
accordance with the automatic annual increase. In addition, shares subject to stock options returned to the 1999 Plan, as a result of their expiration, cancellation or termination, are automatically made available for issuance under the 2007 Plan.
As of March 31, 2016, a total of 2,725,163 shares were available for grant under the 2007 Plan.
Accounting for Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of an award.
The expected volatility of options granted has been determined using a weighted average of the historical volatility of the Companys
stock for a period equal to the expected life of the option. The expected life of options has been determined utilizing the simplified method. The risk-free interest rate is based on a zero coupon U.S. treasury instrument whose term is
consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company applied an
estimated annual forfeiture rate in determining the expense recorded in each period.
A summary of the stock option activity under the
Companys stock option plans for the three months ended March 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Activity
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding at December 31, 2015
|
|
|
2,922,736
|
|
|
$
|
7.97
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,250
|
)
|
|
|
7.36
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,250
|
)
|
|
|
7.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2016
|
|
|
2,913,236
|
|
|
$
|
7.97
|
|
|
|
1.34
|
|
|
$
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2016
|
|
|
2,913,236
|
|
|
$
|
7.97
|
|
|
|
1.34
|
|
|
$
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at March 31, 2016
|
|
|
2,913,236
|
|
|
$
|
7.97
|
|
|
|
1.34
|
|
|
$
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
During the three months ended March 31, 2016, the total intrinsic value of options exercised
(i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was not material, and the total amount of cash received from exercise of these options was $0.1 million. During the three
months ended March 31, 2015, the total intrinsic value of options exercised was $1.3 million, and the total amount of cash received from exercise of these options was $1.8 million.
Restricted Stock Awards
Restricted stock awards are valued at the market price of a share of the Companys common stock on the date of the grant. A summary of the
restricted stock award activity under the 2007 Plan for the three months ended March 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Activity
|
|
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
|
|
Aggregate Intrinsic
Value
|
|
Nonvested outstanding at December 31, 2015
|
|
|
1,987,894
|
|
|
$
|
6.93
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(77,640
|
)
|
|
|
5.89
|
|
|
|
|
|
Forfeited
|
|
|
(135,234
|
)
|
|
|
6.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested outstanding at March 31, 2016
|
|
|
1,775,020
|
|
|
$
|
7.02
|
|
|
$
|
13,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total grant date fair value of restricted stock awards that vested during the three months ended
March 31, 2016 and 2015 was $1.0 million and $2.5 million, respectively.
As of March 31, 2016, there was $8.9 million of total
unrecognized compensation expense related to stock options and restricted stock awards which is expected to be recognized over a weighted average period of 1.5 years.
11. Stockholders Equity
Reserved Common Stock
As of March 31, 2016, the Company has reserved 7,796,754 shares of common stock for use in settling outstanding options and unvested
restricted stock awards that have not been issued as well as future awards available for grant under the 2007 Plan.
Common Stock Repurchase Program
In February 2016, the Company announced that the Board had authorized a $20 million stock repurchase program (the 2016
Repurchase Program), whereby the Company is authorized to repurchase the Companys common stock from time to time on the open market or in privately negotiated transactions at prices and in the manner that may be determined by the Board.
During the three months ended March 31, 2016, the Company did not repurchase any shares of common stock pursuant to the 2016 Repurchase Program.
In August 2014, the Company announced that the Board had authorized a $20 million stock repurchase program (the 2014 Repurchase
Program), whereby the Company was authorized to repurchase the Companys common stock from time to time on the open market or in privately negotiated transactions. In May 2015, the Board amended the program to authorize an additional $10
million to be used for such purchases. During the year ended December 31, 2015, the Company repurchased 1,671,687 shares of common stock for an aggregate purchase price of $15 million pursuant to the 2014 Repurchase Program. The 2014 Repurchase
Program expired on December 31, 2015.
Repurchased shares are recorded under the cost method and are reflected as treasury stock in
the accompanying Consolidated Balance Sheets. All repurchased shares were funded with cash on hand.
18
12. Income Taxes
The Companys effective income tax rate before discrete items was 40.2% and 41.6% for the three months ended
March 31, 2016 and 2015, respectively. The lower rate in 2016 as compared to 2015 was primarily due to the impact of state income tax apportionment. The Company recognized income tax benefits for discrete items of an immaterial amount during
the three months ended March 31, 2016 and $0.4 million during the three months ended March 31, 2015. Additionally, the Company recognized an adjustment to foreign tax expense in the amount of $150 during the three months ended
March 31, 2016. The effective income tax rate is based upon the estimated annual effective tax rate in compliance with ASC 740 and other related guidance. The Company updates the estimate of its annual effective tax rate at the end of each
quarterly period. The Companys estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and its interpretations of tax laws. The Companys practice is to recognize interest and/or penalties
related to income tax matters in income tax expense, which were not material for the three months ended March 31, 2016 and 2015.
In
late March 2010, the Company received a letter from the MA DOR requesting documentation demonstrating that TSC, a wholly-owned subsidiary of the Company, had been classified by the MA DOR as a Massachusetts security corporation for the 2006 and 2007
tax years. Following subsequent correspondence with the MA DOR, the Company determined that it was more likely than not that the MA DOR would require an adjustment to correct TSCs tax filings such that it would be treated as a Massachusetts
business corporation for the applicable years. The Company recorded a tax reserve of approximately $0.4 million. The tax benefits available to a Massachusetts security corporation are composed of (i) a different rate structure (1.32% on gross
investment income vs. 9.5% on net income) and (ii) exemption from the 0.26% excise tax on net worth (see Note 9). On August 17, 2011, the Company filed Applications for Abatement with the MA DOR. In January 2012, the Company filed
Petitions under Formal Procedure with the ATB. A trial took place in April 2014, and in May 2015 the ATB ruled in favor of the MA DOR. As of the date of the ruling, the Company had recorded a current liability of approximately $677 to account for
the tax differential in all open years, which included penalties and interest for the potential state income tax liability arising from the difference between the income tax rates applicable to security corporations and business corporations in
Massachusetts. During the second quarter of 2015, the Company accepted an amnesty offer from the MA DOR and paid all amounts due.
13. Segment Information
The Company views its operations and manages its business as one operating segment based on factors such as how the Company
manages its operations and how its executive management team reviews results and makes decisions on how to allocate resources and assess performance.
Geographic Data
Net sales to
unaffiliated customers by geographic area* were as follows**:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
18,901
|
|
|
$
|
17,884
|
|
International
|
|
|
6,130
|
|
|
|
5,774
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
23,658
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets*** by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
United States
|
|
$
|
99,081
|
|
|
$
|
99,091
|
|
International
|
|
|
4,904
|
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,985
|
|
|
$
|
104,071
|
|
|
|
|
|
|
|
|
|
|
*
|
based on current customer billing address; does not consider the geo-targeted (target audience) location of the campaign
|
**
|
no single country outside of the U.S. accounted for 10% or more of revenue during any of these periods
|
***
|
comprised of property, plant and equipment, net; goodwill; and intangible assets, net
|
19
14. Subsequent Events
Tender Offer and Credit Facility
On May 3, 2016, the Companys Board of Directors approved a tender offer to purchase up to 8 million shares of the Companys common stock,
par value $0.001 per share (the Tender Offer). The Company intends to launch the Tender Offer on May 10, 2016 at a purchase price per share of $7.75, which equals the average of the daily volume-weighted average price of our common
stock traded on the NASDAQ Global Market during normal market hours for each of the five trading days from May 2 through May 6, 2016, as reported by S&P Capital IQ. The Tender Offer will expire on June 8, 2016, unless extended. The Company
will fund the purchase of shares pursuant to the Tender Offer through a combination of cash on hand and the proceeds of a new 5-year senior secured credit facility for $50 million (the Credit Facility). The Credit Facility, which was
entered into on May 9, 2016, is subject to customary representations and covenants.
Concurrently with the Boards approval of the Tender Offer,
the Board of Directors terminated the $20 million Share Repurchase Program announced in February 2016. On May 5, 2016, the Company terminated the discretionary $5.0 million demand revolving credit line (see Note 8); there were no amounts outstanding
under the revolving credit line as of March 31, 2016.
20