mrin-10q_20160331.htm

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-35838

 

Marin Software Incorporated

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

20-4647180

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

123 Mission Street, 27th Floor, San Francisco, CA

 

94105

(Address of Principal Executive Offices)

 

(Zip Code)

(415) 399-2580

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

o

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of April 30, 2016, the registrant had 38,153,940 shares of common stock outstanding.

 

 

 

 


 

Table of Contents

 

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited).

 

3

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

3

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

4

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

18

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

27

Item 4.

 

Controls and Procedures.

 

28

PART II

 

OTHER INFORMATION

 

29

ITEM 1.

 

LEGAL PROCEEDINGS

 

29

ITEM 1A.

 

RISK FACTORS

 

29

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

46

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

46

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

46

ITEM 5.

 

OTHER INFORMATION

 

46

ITEM 6.

 

EXHIBITS

 

47

SIGNATURES

 

48

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

MARIN SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

At  March 31,

 

 

 

 

 

 

 

2016

 

 

At December 31,

 

 

 

(unaudited)

 

 

2015*

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,237

 

 

$

37,326

 

Accounts receivable, net

 

 

23,858

 

 

 

21,718

 

Prepaid expenses and other current assets

 

 

4,208

 

 

 

4,186

 

Total current assets

 

 

64,303

 

 

 

63,230

 

Property and equipment, net

 

 

21,234

 

 

 

21,817

 

Goodwill

 

 

19,578

 

 

 

19,417

 

Intangible assets, net

 

 

9,579

 

 

 

10,405

 

Other noncurrent assets

 

 

1,334

 

 

 

1,323

 

Total assets

 

$

116,028

 

 

$

116,192

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,376

 

 

$

1,710

 

Accrued expenses and other current liabilities

 

 

12,071

 

 

 

11,185

 

Deferred revenues

 

 

1,544

 

 

 

1,430

 

Current portion of long-term debt

 

 

881

 

 

 

1,384

 

Total current liabilities

 

 

15,872

 

 

 

15,709

 

Long-term debt, less current portion

 

 

1,421

 

 

 

1,557

 

Other long-term liabilities

 

 

4,624

 

 

 

4,795

 

Total liabilities

 

 

21,917

 

 

 

22,061

 

Commitments and contingences (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value - 500,000 shares authorized, 38,200 and 37,568 shares issued, 38,127 and 37,419 outstanding at March 31, 2016, and December 31, 2015, respectively

 

 

38

 

 

 

37

 

Additional paid-in capital

 

 

279,571

 

 

 

275,604

 

Accumulated deficit

 

 

(184,146

)

 

 

(179,733

)

Accumulated other comprehensive loss

 

 

(1,352

)

 

 

(1,777

)

Total stockholders’ equity

 

 

94,111

 

 

 

94,131

 

Total liabilities and stockholders’ equity

 

$

116,028

 

 

$

116,192

 

 

*

Derived from our audited consolidated financial statements as of December 31, 2015.

See accompanying notes to the condensed consolidated financial statements.

 

 

3


 

MARIN SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenues, net

 

$

27,188

 

 

$

26,413

 

Cost of revenues

 

 

9,190

 

 

 

9,709

 

Gross profit

 

 

17,998

 

 

 

16,704

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

9,107

 

 

 

12,157

 

Research and development

 

 

8,009

 

 

 

8,484

 

General and administrative

 

 

4,969

 

 

 

5,720

 

Total operating expenses

 

 

22,085

 

 

 

26,361

 

Loss from operations

 

 

(4,087

)

 

 

(9,657

)

Interest expense, net

 

 

(18

)

 

 

(11

)

Other income, net

 

 

33

 

 

 

244

 

Loss before provision for income taxes

 

 

(4,072

)

 

 

(9,424

)

Provision for income taxes

 

 

(341

)

 

 

(236

)

Net loss

 

 

(4,413

)

 

 

(9,660

)

Foreign currency translation adjustments

 

 

425

 

 

 

(977

)

Comprehensive loss

 

$

(3,988

)

 

$

(10,637

)

Net loss per share available to common stockholders, basic and diluted

 

$

(0.12

)

 

$

(0.27

)

Weighted-average shares used to compute net loss per share available to common stockholders, basic and diluted

 

 

37,767

 

 

 

35,745

 

Stock-based compensation is allocated as follows (Note 9):

 

 

 

 

 

 

 

 

Cost of revenues

 

$

421

 

 

$

229

 

Sales and marketing

 

 

499

 

 

 

715

 

Research and development

 

 

2,022

 

 

 

1,627

 

General and administrative

 

 

880

 

 

 

924

 

Amortization of intangible assets is allocated as follows (Note 5):

 

 

 

 

 

 

 

 

Cost of revenues

 

$

271

 

 

$

215

 

Sales and marketing

 

 

248

 

 

 

180

 

Research and development

 

 

271

 

 

 

216

 

General and administrative

 

 

36

 

 

 

35

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

4


 

MARIN SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(4,413

)

 

$

(9,660

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

1,665

 

 

 

1,630

 

Amortization of internally developed software

 

 

681

 

 

 

542

 

Amortization of intangible assets

 

 

826

 

 

 

646

 

Loss on disposal of property and equipment

 

 

1

 

 

 

4

 

Unrealized foreign currency losses (gains)

 

 

7

 

 

 

(243

)

Noncash interest expense related to warrants issued in connection with debt

 

 

7

 

 

 

9

 

Stock-based compensation related to equity awards and restricted stock

 

 

3,822

 

 

 

3,495

 

Provision for bad debts

 

 

195

 

 

 

100

 

Deferred income tax benefits

 

 

 

 

 

(80

)

Excess tax benefits from stock-based award activities

 

 

 

 

 

(8

)

Changes in operating assets and liabilities, net of effect of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,204

)

 

 

(26

)

Prepaid expenses and other current assets

 

 

 

 

 

(1,215

)

Other assets

 

 

(6

)

 

 

552

 

Accounts payable

 

 

(331

)

 

 

961

 

Deferred revenues

 

 

122

 

 

 

(318

)

Accrued expenses and other current liabilities

 

 

323

 

 

 

(169

)

Net cash provided by (used in) operating activities

 

 

695

 

 

 

(3,780

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(267

)

 

 

(2,342

)

Capitalization of internally developed software

 

 

(1,493

)

 

 

(827

)

Payment of contingent consideration for prior acquisition

 

 

(93

)

 

 

 

Acquisition of business, net of cash acquired

 

 

 

 

 

(7,509

)

Net cash used in investing activities

 

 

(1,853

)

 

 

(10,678

)

Financing activities

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(646

)

 

 

(929

)

Repurchase of unvested shares

 

 

 

 

 

(2

)

Proceeds from exercise of common stock options

 

 

162

 

 

 

333

 

Proceeds from employee stock purchase plan, net

 

 

384

 

 

 

361

 

Stock issuance costs

 

 

 

 

 

(51

)

Excess tax benefits from stock-based award activities

 

 

 

 

 

8

 

Net cash used in financing activities

 

 

(100

)

 

 

(280

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

169

 

 

 

(717

)

Net decrease in cash and cash equivalents

 

 

(1,089

)

 

 

(15,455

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

37,326

 

 

 

68,253

 

End of period

 

$

36,237

 

 

$

52,798

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment recorded in accounts payable and accrued expenses

 

$

4

 

 

$

1,027

 

Issuance of common stock in connection with acquisition of business

 

 

 

 

 

4,337

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5


 

Marin Software Incorporated

Notes to Condensed Consolidated Financial Statements

(dollars and share numbers in thousands, except per share data)

 

1. Summary of Business and Significant Accounting Policies

Marin Software Incorporated (the “Company”) was incorporated in Delaware in March 2006. The Company provides a leading cross-channel performance advertising cloud platform for search, display and social advertising channels, offered as an integrated software-as-a-service, or SaaS, solution. The Company’s platform enables digital marketers to improve financial performance, realize efficiencies and time savings, and make better business decisions. The Company’s corporate headquarters are located in San Francisco, California, and the Company has additional offices in the following locations: Austin, Chicago, Dublin, Hamburg, London, New York, Paris, Portland, Shanghai, Sydney and Tokyo.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring items, considered necessary for fair statement have been included. The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results to be expected for the year ending December 31, 2016, or for other interim periods or for future years.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation. The condensed consolidated balance sheet as of December 31, 2015, is derived from audited financial statements as of that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on February 22, 2016.

Fair Value Measurements

The Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at cost, which approximates fair value because of the short-term nature of those instruments. Based on borrowing rates available to the Company for loans with similar terms and maturities, and in consideration of the Company’s credit risk profile, the carrying value of borrowings (Note 6) approximates fair value (level 2 within the fair value hierarchy).

Cash equivalents consist of money market funds, which are readily convertible into cash and have original maturity dates of less than three months from the date of their respective purchases. These money market funds presented as cash equivalents on the consolidated balance sheets are classified as level 1 within the fair value hierarchy, and totaled $25,587 and $25,564 as of March 31, 2016 and December 31, 2015, respectively.

Allowance for Doubtful Accounts and Revenue Credits

The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the Company’s receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. The Company has not historically experienced significant credit losses from its accounts receivable. The Company performs a regular review of its customers’ payment histories and associated credit risks and it does not require collateral from its customers. Certain contracts with advertising agencies contain sequential liability provisions, whereby the agency does not have an obligation to pay the Company until payment is received from the agency’s customers. In these circumstances, the Company evaluates the credit worthiness of the agency’s customers, in addition to the agency itself. As of March 31, 2016 and December 31, 2015, the Company recorded an allowance for doubtful accounts in the amount of $2,006 and $2,188, respectively.

From time to time, the Company provides credits to customers and an allowance is made based on historical credit activity. As of March 31, 2016, and December 31, 2015, the Company recorded an allowance for potential customer credits in the amount of $1,566 and $2,274, respectively.

6


 

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which generally range from two to six years. Estimated remaining useful lives of purchased intangible assets are evaluated to assess whether events or changes in circumstances warrant a revision to the remaining periods of amortization.

In addition, we evaluate our goodwill for impairment at least annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that these assets may be impaired. No goodwill impairment has been identified in any of the periods presented.

Revenue Recognition

The Company generates revenues principally from subscriptions either directly with advertisers or with advertising agencies to its platform for the management of search, social and display advertising. The Company’s subscription agreements are generally one year or longer in length. The Company’s subscription fee under most contracts is variable based on the value of the advertising spend that the Company’s advertisers manage through the Company’s platform and is generally invoiced on a monthly basis. Contracts with direct advertisers and certain contracts with advertising agencies also include a minimum monthly fee that is payable over the duration of the contract. The Company’s customers do not have the right to take possession of the software supporting the application service at any time, nor do the arrangements contain general rights of return. The Company commences revenue recognition for both direct advertisers and advertising agencies when all of the following conditions are met:

 

·

persuasive evidence of an arrangement exists;

 

·

the Company’s platform is made available to the customer;

 

·

the fee is fixed or determinable; and

 

·

collection is reasonably assured.

The Company recognizes the total minimum fee for both direct advertisers and advertising agencies, where applicable, over the duration of the contract, commencing on the date that the Company’s platform is made available to the customer, provided revenues recognized do not exceed amounts that are invoiced and due. The variable fee, which is based on a percentage of the value of the advertising spend managed through the Company’s platform, is recognized once the amount is fixed or determinable, which is generally on a monthly basis concurrent with the issuance of the customer invoice. Signed contracts are used as evidence of an arrangement. The Company assesses collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. Certain agreements with advertising agencies also contain sequential liability provisions, which provide that the agency has no obligation to pay the Company until the agency receives payment from its customers. In these circumstances, the Company evaluates the credit worthiness of the agency’s customers, in addition to the agency itself, to conclude whether or not collectability is reasonably assured. If the Company determines collectability is not reasonably assured, the Company defers the revenue recognition until collectability becomes reasonably assured.

The Company applies the authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables. Professional services and training, when sold with the Company’s platform subscription services, are accounted for separately when those services have standalone value. In determining whether professional services and training services can be accounted for separately from subscription services, the Company considers the following factors: availability of the services from other vendors; the nature of the services; the dependence of the subscription services on the customer’s decision to buy the professional services; and whether the Company sells the Company’s subscription services without professional services. If the deliverables have stand-alone value, the Company accounts for each deliverable separately and revenues are recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have stand-alone value, the deliverables that do not have stand-alone value are combined with the final deliverables within the arrangement and treated as a single unit of accounting. Revenues for arrangements treated as a single unit of accounting are recognized over the period of the contract commencing upon delivery of the final deliverable. As of March 31, 2016, the Company did not have stand-alone value for the professional services and training services. This is because the Company includes professional services and training services with the Company’s subscription services and those services are not available from other vendors.

7


 

Cost of Revenues

Cost of revenues primarily consists of costs related to hosting the Company’s cloud-based platform, providing implementation and ongoing customer support, data communications expenses, salaries and benefits of operations and support personnel, software license fees, costs associated with website development activities, indirect overhead, amortization expense associated with capitalized internally developed software and intangible assets and property and equipment depreciation.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718) which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which updates the new revenue standard (ASU 2014-09) by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance require an entity to (1) identify the specified goods or services (or bundles of goods or services), including rights to goods or services from a third party and (2) determine whether it controls each specified good or service before each good or service (or right to a third party good or service) is transferred to the customer. This guidance will be effective for the Company in the first quarter of its fiscal year ending December 31, 2017. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for annual periods beginning after December 15, 2018 and interim periods therein, and must be adopted using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new standard eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. It requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new standard is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. We early adopted this standard during the first quarter of 2016 on a prospective basis, and it did not have an effect on the Company’s financial position or results of operations. We will apply the new guidance to future adjustments to provisional amounts.

In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The guidance requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance as it relates to such awards. This guidance is effective for the Company in its first quarter of fiscal year ending December 31, 2017. The Company is currently evaluating the impact of our pending adoption of this ASU on the consolidated financial statements.

8


 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates when compared with the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of its fiscal year ending December 31, 2017. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

 

 

2. Business Combination

On February 12, 2015, pursuant to the terms of a Share Purchase Agreement, the Company acquired all outstanding shares of capital stock of SocialMoov S.A.S. (“SocialMoov”), with SocialMoov surviving as a wholly-owned subsidiary of the Company. Based in Paris, France, SocialMoov is a provider of social advertising tools for advertisers and agencies.

The total purchase price for the acquisition was $13,288, which consisted of 636 shares of the Company’s common stock valued at $4,337 upon the closing date using the weighted average of the Company’s closing date stock price for a short period of time preceding the closing date of the acquisition, $8,858 in cash paid at the acquisition date and $93 in cash paid as contingent consideration during the first quarter of 2016. Of the cash consideration paid at the closing date, $1,894 is held in escrow to secure indemnification obligations of the shareholders of SocialMoov to the Company following the closing, which has not been released as of the filing date of this Quarterly Report on Form 10-Q.

In addition, the Company agreed to issue 927 shares of common stock at future dates as defined in the Share Purchase Agreement, valued at $6,487 upon the closing date of the acquisition using the Company’s closing date stock price immediately preceding the acquisition, to existing employee shareholders of SocialMoov in connection with the acquisition, which are conditioned upon such employees’ continuous employment with the Company. These shares have been excluded from the purchase consideration and are being recognized as post-acquisition stock-based compensation expense over the employees’ requisite service periods. In February 2016, the Company issued 463 of these shares. The Company also granted RSUs representing 219 shares of common stock, valued at $959 using the Company’s grant date stock price, with time-based vesting to employees of SocialMoov that continued employment with SocialMoov subsequent to the acquisition. The Company recognizes compensation expense equal to the grant date fair value of the common stock or stock-based awards on a straight-line basis over the employee’s requisite service period.

The results of operations and the fair values of the assets acquired and liabilities assumed have been included in the accompanying unaudited condensed financial statements since the acquisition date. The following table summarizes the fair values of tangible assets acquired, liabilities assumed, intangible assets and residual goodwill from the acquisition of SocialMoov (in thousands except years):

 

 

 

Estimated

 

 

Estimated

 

 

Fair Value

 

 

Useful Life

Tangible assets acquired

 

$

2,607

 

 

N/A

Liabilities assumed

 

 

(3,508

)

 

N/A

Developed technology

 

 

3,800

 

 

5 years

Customer relationships

 

 

2,080

 

 

4 years

Tradename

 

 

260

 

 

3 years

Goodwill

 

 

8,049

 

 

Indefinite

Total purchase price

 

$

13,288

 

 

 

 

The goodwill is primarily attributable to synergies expected to arise from the acquisition, and is not expected to be deductible for tax purposes. The values assigned to the intangible assets are based on a third-party valuation analysis, which includes estimates and judgments regarding expectations for the success and life cycles of the solutions and technologies acquired.

 

 

3. Restructuring Activities

During the third and fourth quarters of 2015, the Company executed organizational restructurings (the “2015 Restructuring Plans”) in order to improve cost efficiencies and realign its sales and marketing operations. Actions pursuant to the 2015 Restructuring Plans were substantially complete as of December 31, 2015, and the associated costs were not material for the three months ended March 31, 2016.

 

 

9


 

4. Balance Sheet Components

The following table shows the components of property and equipment as of the dates presented:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Computer equipment

 

$

26,484

 

 

$

26,279

 

Software

 

 

18,105

 

 

 

16,602

 

Office equipment

 

 

1,016

 

 

 

1,016

 

Furniture, fixtures and leasehold improvements

 

 

6,072

 

 

 

6,049

 

 

 

 

51,677

 

 

 

49,946

 

Less:  Accumulated depreciation and amortization

 

 

(30,443

)

 

 

(28,129

)

 

 

$

21,234

 

 

$

21,817

 

 

Depreciation and amortization of internally developed software for the three months ended March 31, 2016 and 2015 was $2,346 and $2,172, respectively.

The following table shows the components of accrued expenses and other current liabilities as of the dates presented:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accrued salary and payroll related expenses

 

$

4,254

 

 

$

4,829

 

Accrued accounts payable

 

 

5,083

 

 

 

3,417

 

Customer advances

 

 

1,502

 

 

 

1,463

 

Income tax payable

 

 

102

 

 

 

236

 

Sales and use tax payable

 

 

366

 

 

 

434

 

Other

 

 

764

 

 

 

806

 

 

 

$

12,071

 

 

$

11,185

 

 

 

5. Goodwill and Intangible Assets

The goodwill activity for the three months ended March 31, 2016 consisted of the following:

 

Balance at December 31, 2015

 

$

19,417

 

Add: Payment of contingent consideration for SocialMoov acquisition

 

 

93

 

Add: Other adjustments to goodwill

 

 

68

 

Balance at March 31, 2016

 

$

19,578

 

 

Intangible assets consisted of the following as of the dates presented:

 

 

 

March 31,

 

 

December 31,

 

 

Estimated

 

 

2016

 

 

2015

 

 

Useful Life

Developed technology

 

$

9,910

 

 

$

9,910

 

 

5 - 6 years

Customer relationships

 

 

3,370

 

 

 

3,370

 

 

4 years

Non-compete agreements and tradenames

 

 

1,390

 

 

 

1,390

 

 

2 - 3 years

 

 

 

14,670

 

 

 

14,670

 

 

 

Less: accumulated amortization

 

 

(5,091

)

 

 

(4,265

)

 

 

 

 

$

9,579

 

 

$

10,405

 

 

 

 

Amortization expense was $826 and $646 for the three months ended March 31, 2016 and 2015, respectively.

10


 

Future estimated amortization of intangible assets as of March 31, 2016, is presented below:

 

Remaining nine months of 2016

 

$

2,254

 

Year ending December 31, 2017

 

 

2,850

 

Year ending December 31, 2018

 

 

2,537

 

Year ending December 31, 2019

 

 

1,843

 

Year ending December 31, 2020

 

 

95

 

 

 

$

9,579

 

 

 

6. Debt

Capital Lease Arrangements

In February 2013, the Company entered into a capital lease arrangement with an equipment manufacturer to finance the acquisition of computer equipment. The lease had an effective annual interest rate of 6.0% and was repayable in 36 consecutive equal monthly installments of principal and interest. During the first quarter of 2016, the Company exercised its right to purchase the underlying equipment at its estimated fair market value of $206.

In August and December 2015, the Company entered into separate capital lease arrangements with the same equipment manufacturer to finance the acquisition of additional computer equipment. These leases have an effective annual interest rate of 5.8% and are repayable in 48 consecutive equal monthly installments of principal and interest. At the end of the lease periods of both leases, the Company has the option to purchase the underlying equipment at the estimated fair market value or for a nominal amount. As of March 31, 2016 and December 31, 2015, the net book value of the equipment under the capital leases was $2,061 and $2,446, respectively, and the remaining principal balance payable was $2,337 and $2,700, respectively.

Revolving Credit Facility

In July 2015, the Company entered into an amendment to its existing loan and security agreement pursuant to which Silicon Valley Bank agreed to increase the revolving credit facility of up to the lesser of $20,000 or 80% of the Company’s eligible accounts receivable. Also, the expiration date of the revolving credit facility was extended to July 31, 2017, and the annual interest rate was amended to (a) the prime rate or (b) the London interbank offered rate then in effect, plus a margin of 2.75%, payable on a monthly basis. The amendment contains affirmative and negative covenants, including covenants related to the delivery of financial and other information, the maintenance of certain financial covenants, as well as limitations on dispositions, changes in business or management, mergers or consolidations, dividends and other corporate actions. The revolving credit facility was amended further in February 2016 to update the terms of certain covenants. No amounts were outstanding pursuant to the revolving credit facility as of March 31, 2016 and December 31, 2015.

The maturities of all outstanding debt, including the capital lease arrangements, as of March 31, 2016, are as follows:

 

Year ending

 

 

 

 

2016

 

$

739

 

2017

 

 

582

 

2018

 

 

617

 

2019

 

 

399

 

 

 

 

2,337

 

Less:

 

 

 

 

Current portion

 

 

(881

)

Discount on long-term debt

 

 

(35

)

Noncurrent portion of debt

 

$

1,421

 

 

 

11


 

7. Common Stock

As of March 31, 2016, and December 31, 2015, the Company’s certificate of incorporation authorizes the issuance of 500,000 shares of $0.001 par value common stock. Reserved shares of common stock are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Options or RSUs available for future grant under stock option plans

 

 

4,551

 

 

 

4,041

 

Options outstanding under stock option plans

 

 

6,161

 

 

 

5,960

 

RSUs outstanding under stock option plans

 

 

2,217

 

 

 

1,221

 

Shares available for future issuance under ESPP

 

 

1,482

 

 

 

776

 

Shares to be issued in connection with acquisition of SocialMoov

 

 

463

 

 

 

927

 

 

 

 

14,874

 

 

 

12,925

 

 

 

8. Equity Award Plans

In April 2006, the Company’s Board of Directors (the “Board”) adopted and the stockholders approved the 2006 Stock Option Plan (“2006 Plan”). The 2006 Plan provides for the grant of incentive stock options under the federal tax laws and non-statutory stock options. Only employees may receive incentive stock options, but non-statutory stock options may be granted to employees, non-employee directors and consultants. The stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by the Board. The term of options granted under the 2006 Plan may not exceed ten years. Certain options are eligible for exercise prior to vesting. Exercised but unvested shares of common stock are subject to repurchase by the Company at the initial exercise price. The proceeds from the shares of common stock subject to repurchase are classified as a liability and reclassified to equity as the shares vest. Under the 2006 Plan’s early exercise feature, the Company had the right to repurchase 8 and 18 shares of common stock as of March 31, 2016, and December 31, 2015, respectively. The Company records cash received from the exercise of unvested stock options as a long-term liability, as well as the fair value of vested outstanding options to non-employee consultants. As of March 31, 2016, and December 31, 2015, $74 and $249, respectively, has been recorded as a long-term liability on the accompanying unaudited condensed consolidated balance sheets.

In February 2013, the Board and stockholders approved the 2013 Equity Incentive Plan (“2013 Plan”), under which 4,500 shares of common stock were originally reserved for issuance. Additionally, all reserved and unissued shares under the 2006 Plan at the time the 2013 Plan became effective are eligible for issuance under the 2013 Plan. The 2013 Plan became effective on March 21, 2013, at which time the Company ceased to grant equity awards under the 2006 Plan. The 2013 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards and stock bonuses to the Company’s employees, directors, consultants, independent contractors and advisors. On January 1 of each of the first ten calendar years through 2023, the number of shares of common stock reserved under the 2013 Plan will automatically increase by an amount equal to 5% of the total outstanding shares as of immediately preceding December 31, or such lesser number of shares as determined by the Board. Pursuant to terms of the 2013 Plan, the shares available for issuance increased by approximately 1,878 shares of common stock on January 1, 2016.

12


 

Stock Options

A summary of stock option activity under the 2006 Plan and 2013 Plan is as follows:

 

 

 

Options Outstanding

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price Per Share

 

 

(in Years)

 

 

Value

 

Balances at December 31, 2015

 

 

5,960

 

 

$

7.58

 

 

 

7.85

 

 

$

957

 

Options granted

 

 

442

 

 

 

3.29

 

 

 

9.93

 

 

 

 

 

Options exercised

 

 

(67

)

 

 

2.46

 

 

 

 

 

 

 

 

Options forfeited and cancelled

 

 

(174

)

 

 

8.94

 

 

 

 

 

 

 

 

Balances at March 31, 2016

 

 

6,161

 

 

 

7.29

 

 

 

7.81

 

 

$

631

 

Options exercisable

 

 

2,825

 

 

$

7.96

 

 

 

6.40

 

 

$

630

 

Options vested

 

 

2,772

 

 

$

7.91

 

 

 

6.52

 

 

$

630

 

Options vested and expected to vest

 

 

5,870

 

 

$

7.34

 

 

 

7.75

 

 

$

631

 

 

RSUs

A summary of RSUs granted and unvested under the 2013 Plan is as follows:

 

 

 

RSUs Outstanding

 

 

 

 

 

 

 

Weighted Average

 

 

 

Number of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value Per Unit

 

Granted and unvested at December 31, 2015

 

 

1,221

 

 

$

9.36

 

RSUs granted

 

 

1,300

 

 

 

3.30

 

RSUs vested

 

 

(105

)

 

 

3.15

 

RSUs cancelled and withheld to cover taxes

 

 

(199

)

 

 

4.98

 

Granted and unvested at March 31, 2016

 

 

2,217

 

 

$

4.70

 

 

Employee Stock Purchase Plan

In February 2013, the Board and stockholders approved the 2013 Employee Stock Purchase Plan (“2013 ESPP”), under which 1,000 shares of common stock were originally reserved for issuance. The 2013 ESPP became effective on March 22, 2013. The 2013 ESPP provides generally for six-month purchase periods and the purchase price for shares of common stock purchased under the 2013 ESPP will be 85% of the lesser of the fair market value of the common stock on (i) the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period. On January 1 of each of the first 10 calendar years following the first offering date, the number of shares reserved under the 2013 ESPP will automatically increase by an amount equal to 1% of the total outstanding shares as of immediately preceding December 31, but not to exceed 700 shares. Pursuant to terms of the 2013 ESPP, the shares available for issuance increased by approximately 376 shares on January 1, 2016. During the three months ended March 31, 2016 and 2015, no shares were issued under the 2013 ESPP.

 

 

9. Stock-Based Compensation

For stock-based awards granted by the Company, stock-based compensation expense is measured at grant date based on the fair value of the award and is expensed over the requisite service period. The Company recorded stock-based compensation of $3,822 and $3,495 for the three months ended March 31, 2016 and 2015, respectively.

13


 

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of options. This model requires the input of highly subjective assumptions including the expected volatility, risk-free interest rate and the expected life of options. The Company used the following assumptions:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Dividend yield

 

 

 

 

 

 

Expected volatility

 

 

47.4

%

 

 

49.5

%

Risk-free interest rate

 

 

1.53

%

 

 

1.79

%

Expected life of options (in years)

 

 

6.25

 

 

 

6.25

 

Forfeiture rate

 

 

7.0

%

 

 

7.0

%

 

As the Company has limited historical option exercise data, the expected term of the stock options granted to employees was calculated based on the simplified method. Under the simplified method, the expected term is equal to the average of an option’s weighted-average vesting period and its contractual term. Pursuant to the SEC Staff Accounting Bulletin (“SAB”) No. 110, the Company will continue to use the simplified method until sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. The Company estimates the expected volatility of its common stock on the date of grant based on the historical stock volatilities of similar publicly-traded entities over a period equal to the expected terms of the options, as the Company does not have sufficient trading history to use the volatility of its own common stock. The Company has no history or expectation of paying cash dividends on its common stock. The risk-free interest rate is based on the United States Treasury yield for a term consistent with the expected life of the options in effect at the time of grant.

Cash proceeds from the exercise of stock options were $162 and $333 during the three months ended March 31, 2016 and 2015, respectively.

Compensation expense is recognized ratably over the requisite service period. As of March 31, 2016, there was $9,282 of unrecognized compensation cost related to options, which is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock and RSUs

As of March 31, 2016, there was $11,253 of unrecognized compensation cost related to restricted stock and RSUs, which is expected to be recognized over a weighted-average period of 2.6 years. The Company uses the fair market value of the underlying common stock on the dates of grant to determine the fair value of restricted stock and RSUs. Stock-based compensation expense related to these awards is recognized on a straight-line basis over the service period of the award for the estimated number of shares that are ultimately expected to vest.

Employee Stock Purchase Plan

The Company estimates the fair value of purchase rights under the 2013 ESPP using the Black-Scholes valuation model. The fair value of each purchase right under the 2013 ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with assumptions substantially similar to those used for the valuation of our stock option awards.

 

 

10. Income Taxes

The Company’s quarterly provision for income taxes is based on an estimated effective annual income tax rate. The Company’s quarterly provision for income taxes also includes the tax impact of certain unusual or infrequently occurring items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

Income tax expense for the three months ended March 31, 2016 and 2015, was $341 and $236 on pre-tax losses of $4,072 and $9,424, respectively. As of March 31, 2016, the income tax rate varies from the United States statutory income tax rate primarily due to valuation allowances in the United States and taxable income generated by the Company’s foreign wholly-owned subsidiaries.

14


 

The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and, therefore, the need for valuation allowances on a quarterly basis. There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in the Company’s effective tax rate. The Company will maintain the valuation allowances until it is more likely than not that the net deferred tax assets will be realized.

Tax positions taken by the Company are subject to audits by multiple tax jurisdictions. The Company accounts for uncertain tax positions and believes that it has provided adequate reserves for its unrecognized tax benefits for all tax years still open for assessment. The Company also believes that it does not have any tax position for which it is not reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next year. There were no interest or penalties associated with uncertain tax positions included within the income tax expense balance for the three months ended March 31, 2016 and 2015.

 

 

11. Net Loss Per Share Available to Common Stockholders

Basic net loss per share available to common stockholders is calculated by dividing the net loss available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted-average number of shares of common stock used to calculate the Company’s basic net loss per share available to common stockholders excludes those shares subject to repurchase related to unvested common shares, stock options that were exercised prior to vesting, restricted stock issued and RSUs settled for shares of common stock, as these shares are not deemed to be outstanding for accounting purposes until they vest. The diluted net loss per share of common stock is computed by dividing the net loss using the weighted-average number of shares of common stock, excluding common stock subject to repurchase, and, if dilutive, potential shares of common stock outstanding during the period. Potential shares of common stock consist of common stock subject to repurchase, stock options to purchase common stock, restricted common stock issued and RSUs settled for shares of common stock.

The following table presents the calculation of basic and diluted net loss per share:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

Net loss available to common stockholders

 

$

(4,413

)

 

$

(9,660

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average number of shares, basic and diluted

 

 

37,767

 

 

 

35,745

 

Net loss per share available to common stockholders

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share available to common stockholders

 

$

(0.12

)

 

$

(0.27

)

 

The following table presents the potential shares of common stock outstanding that were excluded from the computation of diluted net loss per share available to common stockholders for the periods presented because including them would have been anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Options to purchase common stock

 

 

6,161

 

 

 

7,071

 

Restricted stock units

 

 

2,217

 

 

 

1,457

 

Restricted common stock issued

 

 

66

 

 

 

565

 

Common stock subject to repurchase

 

 

8

 

 

 

60

 

Total

 

 

8,452

 

 

 

9,153

 

 

 

12. Segment Reporting

The Company defines the term “chief operating decision maker” to be the Chief Executive Officer. The Chief Executive Officer reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating of financial performance. Accordingly, the Company has determined that it operates as a single reportable and operating segment.

15


 

Revenues by geographic area, based on the billing location of the customer, were as follows for the periods presented:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

United States of America

 

$

18,740

 

 

$

17,315

 

International

 

 

8,448

 

 

 

9,098

 

Total revenues, net

 

$

27,188

 

 

$

26,413

 

 

Long-lived assets, excluding goodwill and intangible assets, by geographic area were as follows for the periods presented:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

United States of America

 

$

20,304

 

 

$

20,825

 

International

 

 

930

 

 

 

992

 

Total long-lived assets, net

 

$

21,234

 

 

$

21,817

 

 

 

13. Commitments and Contingencies

Operating Leases

Rent expense for the three months ended March 31, 2016 and 2015 was $2,168 and $1,969, respectively.

Future minimum lease payments for significant operating leases, net of sublease payments from a portion of the Company’s San Francisco office space, as of March 31, 2016, were as follows:

 

Remaining nine months of 2016

 

$

5,399

 

Year ending December 31, 2017

 

 

7,092

 

Year ending December 31, 2018

 

 

4,810

 

Year ending December 31, 2019

 

 

4,261

 

Year ending December 31, 2020 and thereafter

 

 

9,485

 

 

 

$

31,047

 

 

Legal Matters

From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with GAAP, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, ruling, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling was to occur in any specific period or if a loss becomes probable and estimable, there exists the possibility of a material adverse impact on the Company’s results of operations, financial position or cash flows.

Indemnification

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, each party may indemnify, defend and hold the other party harmless with respect to such claim, suit or proceeding brought against it by a third party alleging that the indemnifying party’s intellectual property infringes upon the intellectual property of the third party, or results from a breach of the indemnifying party’s representations and warranties or covenants, or that results from any acts of negligence or willful misconduct. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these obligations on the unaudited consolidated condensed balance sheets as of March 31, 2016 and audited consolidated balance sheets as of December 31, 2015.

16


 

The Company also indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company has a Directors and Officers insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these obligations on the unaudited consolidated condensed balance sheets as of March 31, 2016 and audited consolidated balance sheets as of December 31, 2015.

Other Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

 

17


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2015, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 22, 2016. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.” These statements are often identified by the use of words such as “believe,” “may,” “potentially,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “project,” “plan,” “predict,” “expect,” “seek” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Form 10-Q. Except as required by law, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We provide a leading cross-channel advertising cloud platform that enables digital marketers to improve performance of their online advertising campaigns across devices, realize efficiencies and time savings, and make better business decisions. Our integrated platform is a software-as-a-service, or SaaS, analytics, workflow and optimization solution for marketing professionals, allowing them to effectively manage their digital advertising spend across search, social and display channels. Our software solution is designed to help our customers:

 

·

measure the effectiveness of their advertising campaigns through our proprietary reporting and analytics capabilities;

 

·

manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as ad creation and bidding, across multiple publishers and channels; and

 

·

optimize campaigns across multiple publishers and channels based on market and business data to achieve desired revenue outcomes using our predictive bid management technology.

We were incorporated in 2006 and initially focused on building the core elements of our cloud-based platform, which we currently use to service our customers. In September 2007, we launched Marin Enterprise, which targets large advertisers and agencies. We released Marin Professional Edition in March 2011, which targets mid-market advertisers and agencies. We have an iterative development process and we typically release new features every month. Additionally, we have continued to expand internationally since our incorporation, opening our Hamburg, Paris and Sydney offices in 2011, our Dublin and Tokyo offices in 2012 and our Shanghai office in 2013. We completed our acquisitions of SocialMoov S.A.S., or “SocialMoov,” and NowSpots, Inc., which conducted business as Perfect Audience, or “Perfect Audience,” in February 2015 and June 2014, respectively, to complement our product offerings.

In order to grow revenues, we need to invest in (1) sales activities by adding sales representatives globally to target new advertisers and agencies and (2) research and development to improve and further expand our platform and support for additional publishers. These activities will require us to make investments, particularly in research and development and sales and marketing, and if these investments do not generate additional customers or additional advertising spend managed by our platform, our future operating results could be harmed.

The majority of our revenue is derived from our advertisers in the United States. We believe the markets outside of the United States offer an opportunity for growth, and we intend to make additional investments in sales and marketing to expand in these markets.

Components of Results of Operations

Revenues

We generate revenues principally from subscription contracts under which we provide advertisers with access to our search, social and display advertising management platform, either directly or through the advertiser’s relationship with an agency with whom we have a contract. In accordance with the subscription contracts, we charge fees generally based upon the amount of advertising spend that our customers manage through our platform. Our search subscription contracts are generally one year or longer in length, while initial social and display contracts may vary in duration.

18


 

If our contractual arrangement is with an advertising agency, the advertiser is not a party to the terms of the contract. Accordingly, most advertisers through our agency customers do not have a commitment to use our services, and the advertisers may be added or removed from our platform at the discretion of the respective agency. We invoice the advertising agency for the amounts due under the contract. Historically, approximately half of our revenues have been earned from advertising agency customers. Under our subscription contracts with most direct advertisers and some of our agency customers, customers contractually commit to a minimum monthly platform fee, which is generally greater than one-half of our estimated monthly revenues from these customers, at the time the contract is signed. However, most of our subscription contracts with our advertising agency customers do not include a committed minimum monthly platform fee. Additionally, advertisers we serve through our arrangements with our advertising agencies generally do not have a minimum commitment to continue using our services. Our subscription fee under most contracts is variable based upon the value of advertising spend that our customers manage through our platform, although some customers pay a flat monthly rate over the term of their subscription contract.

Our subscription contracts indicate the date at which we begin invoicing our customers, which is generally the first day of the month following the execution of the contract. We generally invoice the greater of the minimum monthly platform fee or the percentage of advertising spend on our platform. The implementation process for new advertisers is typically four to six weeks; however, we generally have not charged a separate implementation fee under our standard subscription contracts. Our deferred revenues primarily consist of the unearned portion of minimum monthly platform fees paid at least three months in advance.

Cost of Revenues

Cost of revenues primarily includes personnel costs, consisting of salaries, benefits, bonuses and stock-based compensation, for employees associated with our cloud infrastructure and global services for implementation and ongoing customer service organizations. Other costs of revenues include fees paid to contractors who supplement our support and data center personnel, expenses related to the use of a third-party data center, depreciation of data center equipment, amortization of internally developed software, amortization of intangible assets and allocated overhead.

We intend to continue to invest in our global services and in the capacity of our hosting service infrastructure. As we continue to invest in technology innovation through our research and development organization, we expect to have increased amortization of internally developed software. We expect that this investment in technology should not only expand the breadth and depth of our cross-channel performance advertising cloud platform but also increase the efficiency of how we deliver these solutions. The level and timing of investment in these areas could affect our cost of revenues in the future.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs, sales commissions and other costs including travel and entertainment, marketing and promotional events, public relations, marketing activities, professional fees and allocated overhead. All of these costs are expensed as incurred, including sales commissions. Our commission plans provide that payment of commissions to our sales representatives are paid based on the actual amounts we invoice customers over a period that is generally up to five months following the execution of the applicable customer contract.

We may continue investing in sales and marketing by expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring marketing events, which we believe may enable us to add new customers and increase penetration within our existing customer base. We expect that, in the future, sales and marketing expenses will continue to be our largest operating expense category and may increase in absolute dollars.

Research and Development Expenses

Research and development expenses consist primarily of personnel costs for our product development and engineering employees and executives, including salaries, benefits, stock-based compensation expense and bonuses. Also included are non-personnel costs such as professional fees payable to third-party development resources, amortization of intangible assets and allocated overhead.

Our research and development efforts are focused on enhancing our software architecture, adding new features and functionality to our platform and improving the efficiency with which we deliver these services to our customers. In the future, research and development expenses may increase in absolute dollars, partially offset by the capitalization of internally developed software. We believe that these investments are necessary to maintain and improve our competitive position.

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General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation expense and bonuses, for our administrative, legal, human resources, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, audit fees, tax services and legal fees, as well as professional fees, insurance and other corporate expenses, along with amortization of intangible assets and allocated overhead.

We may incur incremental costs associated with supporting the growth of our business, both in terms of size and geographic expansion, and to meet the increased compliance requirements associated with our continued operation as a public company. Such costs may include increases in our accounting and legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with the Sarbanes-Oxley Act of 2002. As a result, our general and administrative expenses may increase in absolute dollars in future periods.

Results of Operations

The following table is a summary of our consolidated statements of operations. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Revenues, net

 

$

27,188

 

 

$

26,413

 

Cost of revenues (1) (2)

 

 

9,190

 

 

 

9,709

 

Gross profit

 

 

17,998

 

 

 

16,704

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing (1) (2)

 

 

9,107

 

 

 

12,157

 

Research and development (1) (2)

 

 

8,009

 

 

 

8,484

 

General and administrative (1) (2)

 

 

4,969

 

 

 

5,720

 

Total operating expenses

 

 

22,085

 

 

 

26,361

 

Loss from operations

 

 

(4,087

)

 

 

(9,657

)

Interest expense, net

 

 

(18

)

 

 

(11

)

Other income, net

 

 

33

 

 

 

244

 

Loss before provision for income taxes

 

 

(4,072

)

 

 

(9,424

)

Provision for income taxes

 

 

(341

)

 

 

(236

)

Net loss

 

$

(4,413

)

 

$

(9,660

)

Other financial data:

 

 

 

 

 

 

 

 

Adjusted EBITDA (3)

 

$

1,423

 

 

$

(3,763

)

 

(1)

Stock-based compensation expense included in the unaudited condensed consolidated statements of operations data above was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Cost of revenues

 

$

421

 

 

$

229

 

Sales and marketing

 

 

499

 

 

 

715

 

Research and development

 

 

2,022

 

 

 

1,627

 

General and administrative

 

 

880

 

 

 

924

 

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(2)

Amortization of intangible assets included in the unaudited condensed consolidated statements of operations data above was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Cost of revenues

 

$

271

 

 

$

215

 

Sales and marketing

 

 

248