NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. The Company has two business groups. Our Global Client Services division combines sales and marketing services designed to increase revenue on behalf of our clients. We have solution offerings consisting of service sales and renewals, “Click-to-Cash” or lead development, and sophisticated, high end global call center services. We have developed an integrated solution, the Rainmaker Revenue Delivery Platform
SM
, that combines specialized sales and marketing services coupled with our proprietary, renewals software and business analytics.
Our ViewCentral business provides an end-to-end solution for managing and delivery of training and certification programs, or training-as-a-business, for corporations. The ViewCentral Learning Management System platform is a SaaS, cloud based, on-demand, training management system, available 24x7 with no software installation. This self-service platform is highly configurable, so our customers utilize only the modules they need, branded as they choose. Designed specifically to automate time-consuming manual administration and to maximize training participation, the ViewCentral suite contains tools for before, during and after course delivery.
Our strategy for long-term, sustained growth is to maintain and improve our position as a leading global provider of B2B sales and marketing solutions in selected markets. A key aspect of this enhanced solution is to provide our clients a way to partner with Rainmaker on a scalable, repeatable and reliable sales model. This enables our clients to turn customer contacts into revenue generating opportunities while simplifying otherwise complex sales and marketing needs. We operate as a seamless extension of our clients' sales and marketing teams incorporating their brands and trademarks and leveraging business practices to amplify existing efforts.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Rainmaker Systems, Inc. and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation
In the year ended December 31, 2012, the Company completed the sale of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc. (together “Manila” or “RSL”). RSL met the requirements for presentation as discontinued operations and its operating activities are segregated from the Company's continuing operations including within the consolidated statement of comprehensive loss, and classified solely under the caption loss from discontinued operations, net of tax. As such, certain amounts reported in the accompanying financial statements for
2011
have been retrospectively revised to conform to the
2012
and
2013
presentation. There were no other reclassifications that had a material effect on the previously reported results of operations, total assets or accumulated deficit which are included in the accompanying financial statements.
Going Concern
As reflected in the accompanying consolidated financial statements, we had a net loss from continuing operations of
$21.0 million
and
$4.0 million
for the
year
s ended
December 31, 2013
and
2012
, respectively. During the year ended
December 31, 2013
, we used
$3.2 million
in operating activities from continuing operations.
At
December 31, 2013
, the Company had a net working capital deficit of
$14.5 million
and our principal source of liquidity consisted of
$3.6 million
of cash and cash equivalents and
$3.6 million
of net accounts receivable. Our debt balance as of
December 31, 2013
was
$3.6 million
, of which
$3.0 million
is due to Comerica Bank on May 1, 2014 and
$500,000
due to Agility Capital II, LLC on May 1, 2014, commensurate with the Comerica Credit Facility. See Note 6 for further discussion of our debt agreements. Our accounts payable balance increased from
$7.2 million
as of
December 31, 2012
to
$13.0 million
as of
December 31, 2013
.
$11.1 million
of the December 31, 2013 accounts payable balance is related to a merchant account of a customer that has elected not to renew its contract.
In April 2013, we issued and sold
13.0 million
shares of our common stock in a registered direct offering and raised gross cash proceeds of approximately
$5.8 million
. In order to meet our operating requirements, we will need to raise additional capital from outside third parties or from the sale of non-strategic assets and restructure our debt. Additionally, we are pursuing a plan to achieve profitable operations through a combination of increased sales and decreased expenses. There can be no assurance that we will be successful in obtaining third party capital, selling non-strategic assets or restructuring our debt. We do not have adequate
cash or financial resources to operate for the next twelve months without raising significant additional capital, which raises substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is dependent on our ability to develop profitable operations through implementation of our current business initiatives. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the we are unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the Company, and other relevant facts and circumstances. Actual results could differ materially from those estimates. Accounting policies that include particularly significant estimates are revenue recognition and presentation policies, valuation of accounts receivable, measurement of our deferred tax asset and the corresponding valuation allowance, allocation of purchase price in business combinations, fair value estimates for the expense of employee stock options and warrants and the assessment of recoverability and impairment of goodwill, intangible assets, fixed assets and commitments and contingencies.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of
three
months or less to be cash equivalents. Cash equivalents generally consist of money market funds. The fair market value of cash equivalents represents the quoted market prices at the balance sheet dates and approximates carrying value.
The following is a summary of our cash and cash equivalents at
December 31, 2013
and
2012
(in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Cash and cash equivalents:
|
|
|
|
|
Cash
|
$
|
1,992
|
|
|
$
|
2,854
|
|
|
Money market funds
|
1,641
|
|
|
1,640
|
|
|
Total cash and cash equivalents
|
$
|
3,633
|
|
|
$
|
4,494
|
|
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers or clients’ customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our clients or our clients' customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At
December 31, 2013
and
2012
, our allowance for potentially uncollectible accounts was
$11,000
and
$15,000
, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is recorded using the straight-line method over the assets’ estimated useful lives. Computer equipment and capitalized software are depreciated over
two
to
five
years and furniture and fixtures are depreciated over
five
years. Amortization of leasehold improvements is recorded using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Amortization of fixed assets under capital leases is included in depreciation expense.
Costs of internal-use software are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40,
Internal Use Software,
and FASB ASC 350-50,
Website Development Costs.
The guidance requires that we expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of ASC 350-40 and ASC 350-50 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development costs, payroll and payroll-related costs for employees who are directly associated with and who devote time to develop the internal-use computer software
and associated interest costs are capitalized. We capitalized approximately
$1.5 million
,
$1.1 million
and
$1.3 million
of such costs during the
year
s ended
December 31, 2013
,
2012
and
2011
, respectively. Capitalized costs are amortized using the straight-line method over the shorter of the term of the related client agreement, if such development relates to a specific outsource client, or the software’s estimated useful life, ranging from two to five years. Capitalized internal-use software and website development costs are included in property and equipment on the accompanying balance sheets. For the year ended December 31, 2013, we recorded a charge of
$2.3 million
to impair long-lived assets. See Note 4 for further discussion of the impairment of long-lived assets.
Goodwill and Other Intangible Assets
We completed several acquisitions during the period of February 2005 through January 2010. Goodwill represents the excess of the acquisition purchase price over the estimated fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if events and circumstances indicate that goodwill might be impaired.
In our analysis of goodwill and other intangible assets, we apply the guidance of FASB ASC 350-20-35,
Intangibles – Goodwill and Other-Subsequent Measurement,
in determining whether any impairment conditions exist. In our analysis of other finite lived amortizable intangible assets, we apply the guidance of FASB ASC 360-10-35,
Property, Plant and Equipment – Subsequent Measurement
, in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various technologies and customer relationships of the businesses we have acquired.
We report segment results in accordance with FASB ASC 280,
Segment Reporting
. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The chief operating decision maker does not use product line financial performance as a basis for business operating decisions. In accordance with FASB ASC 350-20-35, we are required to test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. As of December 31, 2013 and 2012, we concluded that we have
one
operating and reportable segment and
one
reporting unit.
As of
December 31, 2013
, we performed our annual goodwill impairment evaluation, as required under FASB ASC 350-20-35, and concluded that goodwill was impaired as the carrying value exceeded the estimated implied fair value and a charge of
$5.4 million
was recorded in the year ended
December 31, 2013
. At
December 31, 2013
and
2012
, we had approximately
$0
and
$5.3 million
, respectively, in goodwill recorded on our consolidated balance sheets. At
December 31, 2013
and
2012
, we had accumulated impairment losses of
$16.9 million
and
$11.5 million
, respectively.
Long-Lived Assets
Long-lived assets including our purchased intangible assets are amortized over their estimated useful lives. In accordance with FASB ASC 360-10-35
,
long-lived assets, such as property, equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented on the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a business unit intended to be sold that meet certain criteria for being held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. For the year ended December 31, 2013, we recorded a charge of
$2.3 million
to impair long-lived assets. See Note 4 for further discussion of the impairment of long-lived assets.
Revenue Recognition and Presentation
Substantially all of our revenue is generated from (i) the online sale of our clients products to their small and medium-sized business (“SMB”) customers, (ii) the sale of our clients’ service contracts and maintenance renewals, (iii) lead development and other telesales services, and (iv) software subscriptions for hosted internet sales of web-based training. We recognize revenue from the online sale of our clients' products and the sale of our clients’ service contracts and maintenance renewals on the “net basis”, which represents the amount billed to the end customer less the amount paid to our client. Revenue is recognized when a purchase order from a client’s customer is received, the service or service contract or maintenance agreement is delivered, the fee is fixed or determinable, the collection of the receivable is reasonably assured, and no significant post-delivery obligations remain unfulfilled. Revenue from lead development and other telesales services that we perform is recognized as the services are provided
and is generally earned ratably over the service contract period. We earn revenue from our software application subscriptions of hosted online sales of web-based training ratably over each contract period. Since these software subscriptions are usually paid in advance, we have recorded a deferred revenue liability on our balance sheet that represents the prepaid portions of subscriptions that will be earned over the next
one
to
five
years.
Our agreements typically do not contain multiple deliverables, however, if an agreement contains multiple elements, we allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE"), if available, third-party evidence ("TPE"), if VSOE is not available, or estimated selling price ("ESP"), if neither VSOE nor TPE is available. As we are unable to establish VSOE or TPE for the elements of our arrangements, we establish ESP for each element. If an agreement contains multiple deliverables that do not qualify for separate accounting for the product and service transactions, then the revenue and the cost of related professional services on the entire arrangement is recognized ratably over the contract term beginning on the date of delivery of product or service with customer-specific customization, if any. Entering into agreements with multiple elements with stand-alone value in the future may affect the timing of our revenue recognition and may have an impact on our future financial statements.
Our revenue recognition policy involves significant judgments and estimates about collectability. We assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of our clients’ customers, which is based on current published credit ratings, current events and circumstances regarding the business of our clients’ customers and other factors that we believe are relevant. If we determine that collection is not reasonably assured, we defer revenue recognition until such time as collection becomes reasonably assured, which is generally upon receipt of cash payment.
In addition, we provide an allowance in accrued liabilities for the cancellation of service contracts that occurs within a specified time after the sale, which is typically less than
30
days. This amount is calculated based on historical results and constitutes a reduction of the net revenue we record for the commission we earn on the sale.
Cost of Services
Cost of services consists of costs associated with promoting and selling our clients’ products and services including compensation costs of telesales personnel, telesales commissions and bonuses, outsourced call center services, costs of designing, producing and delivering marketing services, and salaries and other personnel expenses related to fee-based activities. Cost of services also includes the costs of allocated facility and telephone usage for our telesales representatives as well as other direct costs associated with the delivery of our services, including credit card fees related to the online sale of our clients' products. Most of the costs are personnel related and fluctuate in relation to our net revenue. Bonuses and sales commissions will typically change in proportion to revenue or profitability.
Income Taxes
We account for income taxes using the liability method. The liability method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. At
December 31, 2013
and
2012
, we had gross deferred tax assets of
$46.0 million
and
$31.8 million
, respectively. At
December 31, 2013
and
2012
, the deferred tax assets were subject to a
100%
valuation allowance and therefore are not recorded on our balance sheet as assets. Realization of our deferred tax assets is limited and we may not be able to fully utilize these deferred tax assets to reduce our tax rates.
FASB ASC 740,
Income Taxes
, prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under this guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FASB ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Our policy for recording interest and penalties related to uncertain tax positions is to record such items as a component of income before taxes. Penalties, interest paid and interest received are recorded in interest and other expense, net, in the statement of comprehensive loss. There were immaterial amounts accrued for interest and penalties related to uncertain tax positions as of
December 31, 2013
,
2012
and
2011
.
Stock-Based Compensation
FASB ASC 718,
Compensation - Stock Compensation
, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. See Note 10 for further discussion of this standard and its effects on the financial statements presented herein.
Concentrations of Credit Risk and Credit Evaluations
Our financial instruments that expose us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable.
We place our cash and cash equivalents in a variety of financial institutions and limit the amount of credit exposure through diversification and by investing the funds in money market accounts which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the balance of cash deposits is in excess of the FDIC insurance limits.
We sell our clients’ products and services primarily to business end users and, in most transactions, assume full credit risk on the sale. Credit is extended based on an evaluation of the financial condition of our client’s customer, and collateral is generally not required. Credit losses have historically been immaterial, and such losses have been within management’s expectations.
In the year ended
December 31, 2013
, we recorded an out-of-period adjustment to decrease revenue by
$38,000
and increase general and administrative expense by
$420,000
for an overstatement of credit card receivables. The overstatement of an aggregate of
$458,000
relates to unrecorded chargebacks of
$293,000
and
$165,000
during the third and fourth quarters of fiscal 2012 following the suspension in August 2012 of a merchant account relating to a customer contract. This out-of-period item did not have a material impact on the current and the previously reported periods.
In the
year
ended
December 31, 2013
,
three
clients each accounted for
10%
or more of our net revenue, with Microsoft representing approximately
43%
of our net revenue, Symantec representing approximately
24%
of our net revenue and Hewlett-Packard representing approximately
10%
of our net revenue. In the
year
ended
December 31, 2012
,
three
clients each accounted for
10%
or more of our net revenue, with Microsoft representing approximately
35%
of our net revenue, Symantec representing approximately
21%
of our net revenue and Hewlett-Packard representing approximately
11%
of our net revenue. In the
year
ended
December 31, 2011
,
three
clients each accounted for
10%
or more of our net revenue, with Microsoft representing approximately
22%
of our net revenue, Symantec representing approximately
21%
of our net revenue and Hewlett-Packard representing approximately
14%
of our net revenue.
No individual client’s end-user customer accounted for
10%
or more of our revenues in any period presented.
As of
December 31, 2013
,
three
customers accounted for
10%
or more of our net accounts receivable, with Symantec representing approximately
40%
of our net accounts receivable, Microsoft representing approximately
25%
of our net accounts receivable, and Hewlett-Packard representing approximately
11%
of our net accounts receivable. As of December 31, 2012,
three
customers accounted for 10% or more of our net accounts receivable with Hewlett-Packard representing approximately
13%
of our net accounts receivable, Symantec representing approximately
12%
of our net accounts receivable and Comcast representing approximately
11%
of our net accounts receivable.
We have outsourced services agreements with our significant clients that expire at various dates ranging through March 2018. Our agreements with Microsoft expire at various dates from June 2014 through June 2015, and can be terminated with
thirty
days notice. Our agreements with Hewlett-Packard expire in October 2014 and March 2018 and can generally be terminated prior to expiration with
sixty
days notice. Symantec has elected not to renew its customer contracts with the Company, which expire on March 31, 2014.
Fair Value of Financial Instruments
The amounts reported as cash and cash equivalents, accounts receivable and accrued liabilities approximate fair value due to their short-term maturities.
The amounts reported as fair value of notes payable are at carrying value at December 31, 2013 and 2012. Accounts payable and notes payable are estimated at December 31, 2013 to have a fair value, using Level 3 input assumptions, of
$6.2 million
and
$3.6 million
, respectively, for financial statement disclosure purposes only. At December 31, 2012 the carrying value of notes payable approximated fair value.
Segment Reporting
In accordance with FASB ASC 280,
Segment Reporting
, we concluded that we have
one
operating and reportable segment.
Foreign Currency Translation
The functional currency of our foreign subsidiaries was determined to be their respective local currencies (Canadian Dollar, Philippine Peso and Great Britain Pound). Foreign currency assets and liabilities are translated at the current exchange rates at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates in effect during the period. The related unrealized gains and losses from foreign currency translation are recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity in the consolidated balance sheet, consolidated statement of operations and comprehensive loss. Net gains and losses resulting from foreign exchange transactions are included in interest and other expense, net, in the consolidated statements of operations and comprehensive loss.
Recent Accounting Standards
In February 2013, the FASB issued ASU No. 2013-02 -
Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income
. This update improves the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this standard in the first quarter of 2013. Adoption of this standard did not have any material impact on our financial position, results of operations or cash flows.
In March 2013, the FASB issued ASU No. 2013-05 –
Foreign Currency Matters.
This update requires that an entity should release cumulative currency translation adjustments to net income when the entity ceases to have controlling financial interest in a foreign entity or a group of financial assets in a foreign entity. This new guidance is effective for the first reporting period beginning after
December 15, 2013
. We adopted this standard in the fourth quarter of 2012 in accounting for the sale of RSL.
2. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the year. Diluted net loss per share also gives effect, as applicable, to the potential dilutive effect of outstanding stock options and warrants, using the treasury stock method, unvested restricted share awards, and convertible securities, using the if converted method, as of the beginning of the period presented or the original issuance date, if later.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net loss from continuing operations
|
$
|
(21,021
|
)
|
|
$
|
(3,965
|
)
|
|
$
|
(10,448
|
)
|
|
Net income (loss) from discontinued operations
|
50
|
|
|
(6,307
|
)
|
|
(531
|
)
|
|
Net loss
|
$
|
(20,971
|
)
|
|
$
|
(10,272
|
)
|
|
$
|
(10,979
|
)
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding – basic and diluted
|
38,639
|
|
|
27,123
|
|
|
25,050
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share - continuing operations
|
$
|
(0.54
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.42
|
)
|
|
Basic and diluted net income (loss) per share - discontinued operations
|
—
|
|
|
(0.23
|
)
|
|
(0.02
|
)
|
|
Basic and diluted net loss per share
|
$
|
(0.54
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.44
|
)
|
For the
year
s ended
December 31, 2013
,
2012
and
2011
, we excluded approximately
3.7 million
,
4.0 million
and
3.9 million
options, warrants and unvested restricted share awards, respectively, from the calculation of diluted net loss per share as these financial instruments were anti-dilutive.
3. DISCONTINUED OPERATIONS
In the quarter ended June 30, 2012, the Company concluded that RSL, our Manila-based operations, no longer fit with the long term strategic plans of the Company. The Company committed to a plan to sell our Manila-based operations, which were sold to Shore Solutions, Inc. (“Shore”) in December 2012, as described below. RSL's operating results for the
year
s ended
December 31, 2013
,
2012
and
2011
are reported as discontinued operations in the consolidated financial statements.
On December 17, 2012, the Company closed a stock purchase agreement (the “SPA”) with Shore pursuant to which the Company agreed to sell the Company's Manila-based operations of Rainmaker Systems, Ltd. and its wholly owned subsidiary, Rainmaker Asia, Inc., to Shore.
Pursuant to the SPA, Shore acquired
100%
of the issued and outstanding stock of RSL. Under the SPA, the Company received an initial cash payment at closing of
$845,000
. In addition to the closing payment, the Company may receive additional contingent consideration based on multiple earn-out provisions included within the stock purchase agreement, which provides the Company the ability to receive additional consideration of
$300,000
at target plus a nominal percentage of certain revenues of RSL during the period from January 1, 2013 through December 31, 2015. The Company did not record any additional consideration for the year ended
December 31, 2013
. Rainmaker determined the loss on disposal of our Manila-based operations based on the net book value of RSL as of December 17, 2012 offset by the closing payment, net of the Company’s closing costs. All contingent consideration will be considered earned as determinable at the future measurement periods. The loss on disposal of discontinued operations for the year ended December 31, 2012 was
$3.3 million
.
The accompanying consolidated statements of operations and comprehensive loss and cash flows have been reclassified for all periods presented to remove the operating results of RSL from continuing operations and to present the results of RSL as loss from discontinued operations, net of tax. The operating results for the year ended
December 31, 2013
represent payments and true up adjustments. Loss on disposal of discontinued operations of
$69,000
for the year ended
December 31, 2013
is a post-closing adjustment in the working capital at the closing date pursuant to the SPA. Income (loss) from discontinued operations, net of income taxes for all periods presented reflect the operating results of RSL and are as follows (in thousands):
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|
|
|
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|
|
|
|
|
|
Year ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Revenue
|
$
|
156
|
|
|
$
|
10,225
|
|
|
$
|
11,888
|
|
|
Cost of services
|
37
|
|
|
11,103
|
|
|
10,048
|
|
|
Gross margin
|
119
|
|
|
(878
|
)
|
|
1,840
|
|
|
Operating expenses
|
—
|
|
|
1,988
|
|
|
2,190
|
|
|
Non-operating expenses
|
—
|
|
|
100
|
|
|
181
|
|
|
Income (loss) from discontinued operations, net of tax
|
119
|
|
|
(2,966
|
)
|
|
(531
|
)
|
|
Loss on disposal of discontinued operations
|
(69
|
)
|
|
(3,341
|
)
|
|
—
|
|
|
Net income (loss) from discontinued operations
|
$
|
50
|
|
|
$
|
(6,307
|
)
|
|
$
|
(531
|
)
|
RSL cost of services for the year ended
December 31, 2012
includes
$499,000
related to the write-off of a receivable due to the bankruptcy of a client.
4. BALANCE SHEET COMPONENTS (in thousands)
Prepaids and Other Current Assets
Prepaids and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Prepaids and other current assets:
|
|
|
|
|
Prepaid expenses
|
$
|
623
|
|
|
$
|
174
|
|
|
Deferred professional service costs
|
252
|
|
|
—
|
|
|
VAT tax receivable
|
440
|
|
|
—
|
|
|
Credit card deposits
|
—
|
|
|
895
|
|
|
Other current assets
|
303
|
|
|
223
|
|
|
Prepaids and other current assets
|
$
|
1,618
|
|
|
$
|
1,292
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Property and equipment:
|
|
|
|
|
|
|
Computer equipment
|
3 years
|
|
$
|
3,993
|
|
|
$
|
3,974
|
|
|
Capitalized software and development
|
2-5 years
|
|
13,208
|
|
|
13,686
|
|
|
Furniture and fixtures
|
5 years
|
|
309
|
|
|
437
|
|
|
Leasehold improvements
|
Lease term
|
|
123
|
|
|
232
|
|
|
|
|
|
17,633
|
|
|
18,329
|
|
|
Accumulated depreciation and amortization
|
|
|
(17,099
|
)
|
|
(16,015
|
)
|
|
Construction in process (1)
|
|
|
157
|
|
|
141
|
|
|
Property and equipment, net
|
|
|
$
|
691
|
|
|
$
|
2,455
|
|
_____________
|
|
|
|
(1)
|
Construction in process at
December 31, 2013
consists primarily of costs incurred to further develop and enhance our ViewCentral platform and implement a new ERP system . Estimated costs to complete the projects are in the range of
$125,000
to
$150,000
, subject to future revisions.
|
We evaluated the contract base related to our e-commerce platform business at
December 31, 2013
and determined that the property and equipment, principally capitalized software development costs, supporting this business was impaired. An analysis was performed using the Discounted Cash Flow Method of Income Approach using Level 3 inputs under ASC 820. The net cash flows are those expected to be generated from the forecasted base of business, discounted at the Company's weighted average cost of capital of
23%
. Based on this analysis, we recorded an impairment charge of
$2.3 million
in the year ending
December 31, 2013
.
Goodwill
The following table reflects the activity in our accounting for goodwill for the years ended
December 31, 2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
Goodwill:
|
Total
|
|
Balance at December 31, 2011
|
$
|
5,268
|
|
|
Foreign currency adjustments
|
69
|
|
|
Balance at December 31, 2012
|
5,337
|
|
|
Foreign currency adjustments
|
31
|
|
|
Impairment
|
(5,368
|
)
|
|
Balance at December 31, 2013
|
$
|
—
|
|
At December 31, 2013, we reported a stockholder' deficit and therefore had a negative carrying value for its single reporting unit. In accordance with Accounting Standards Update 2010-28, due to certain qualitative factors constituting indicators of impairment, we performed a Step 2 analysis of goodwill during the quarter ended December 31, 2013. Such indicators of impairment included a significant decline in revenues, the loss of customers, a deterioration of the Company's liquidity situation and an event of default for the Company's borrowing arrangements. The Step 2 analysis indicated that the carrying value of goodwill exceeded the implied value of goodwill and a charge for impairment of goodwill of
$5.4 million
was recorded for the year ended
December 31, 2013
.
The following valuation methods were employed in determining the implied value of goodwill:
|
|
|
|
•
|
The Discounted Cash Flow method of the Income Approach;
|
|
|
|
|
•
|
The Multi-period Excess Earnings Method of the Income Approach was utilized to derive the fair value of the Customer Relationships;
|
|
|
|
|
•
|
The Relief from Royalty Method of the Income Approach was utilized to derive the fair value of the Existing Technology and Trade Name; and
|
|
|
|
|
•
|
The Cost Approach was utilized to derive the fair value of the Assembled & Trained Workforce.
|
The significant assumptions that are Level 3 unobservable inputs used in the impairment analysis are as follows:
|
|
|
|
•
|
Weighted average cost of capital of
23%
;
|
|
|
|
|
•
|
Customer attrition rate of
20%
; and
|
|
|
|
|
•
|
Terminal growth rate of
5%
.
|
At
December 31, 2013
and
2012
, we had accumulated goodwill impairment losses of
$16.9 million
and
$11.5 million
, respectively.
Other Non-current Assets
Other non-current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Other non-current assets:
|
|
|
|
|
Deposits
|
$
|
4
|
|
|
$
|
26
|
|
|
Credit card reserve deposits
|
391
|
|
|
390
|
|
|
Deferred professional service costs
|
445
|
|
|
—
|
|
|
Other non-current assets
|
$
|
840
|
|
|
$
|
416
|
|
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Other accrued liabilities:
|
|
|
|
|
Payable to customers
|
$
|
1,158
|
|
|
$
|
1,058
|
|
|
Accrued professional fees
|
663
|
|
|
652
|
|
|
Accrued VAT taxes
|
248
|
|
|
148
|
|
|
Accrued sales tax
|
229
|
|
|
320
|
|
|
Settlement liability
|
200
|
|
|
—
|
|
|
Reseller rebates
|
190
|
|
|
196
|
|
|
Other liabilities
|
977
|
|
|
768
|
|
|
Other accrued liabilities
|
$
|
3,665
|
|
|
$
|
3,142
|
|
5. ACQUISITIONS
Optima Consulting Partners Ltd.
On January 29, 2010, our wholly-owned subsidiary Rainmaker Europe entered into and closed a stock purchase agreement with the shareholders of Optima, a B2B lead development provider with offices then in England, France and Germany. Under the terms of the agreement, we acquired all of the outstanding stock of Optima in exchange for a cash payment of
$492,000
,
480,000
shares of Rainmaker common stock valued at approximately
$701,000
, and a note payable of
$350,000
payable in
two
installments with
$200,000
plus accrued interest due
eighteen
months from the closing date and
$150,000
plus accrued interest due
twenty-four
months after the closing date, subject to post closing conditions.
The stock purchase agreement also provided for
two
potential additional payments of
$375,000
each in a combination of stock and/or cash contingent on the achievement of certain performance metrics in fiscal 2010 and fiscal 2011, and subject to post closing conditions. The fair value of the potential additional payments was derived using the Company's estimates (Level 3 inputs) of a
50%
probability of achievement. The 2010 achievement level was not met. In 2010, the Company reduced the estimated fair value of the contingent consideration liability by
$190,000
and recorded a corresponding gain on re-measurement of this liability within operating expenses. In 2011, the Company recorded a
$44,000
loss on the re-measurement of this liability as it became apparent that a portion of the achievement level was met. As of December 31, 2011, the Company accrued
$225,000
as contingent consideration relating to the Optima acquisition. In April 2012, the Company made a payment of
$225,000
based on the achievement of performance metrics for the year ended December 31, 2011 per the stock purchase agreement. The liability was settled with both cash and equity consideration in accordance with the stock purchase agreement. Also see Note 8 for disclosure regarding the fair value of financial instruments.
As noted above, we issued common stock as consideration in the Optima acquisition during the two-year period ended
December 31, 2012
. The following table summarizes the common stock issued in this transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Acquisition
|
Transaction
Date
|
|
# of Common
Shares
Issued
|
|
Market Price
Used per
Share
|
|
Value of Shares
Issued
|
|
Registration
Effective Date
|
|
Optima Consulting Partners Ltd.
|
January 29, 2010
|
|
480,000
|
|
|
$
|
1.46
|
|
|
$
|
701
|
|
|
Not applicable
|
These shares were not registered, as they are sellable under Rule 144 of the Securities Act of 1933, as amended, and the holding period had expired as of
December 31, 2012
. Half of these shares were subject to a contractual agreement and remained non-transferrable until July 29, 2011.
6. LONG-TERM DEBT OBLIGATIONS
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Comerica term loan
|
$
|
1,800
|
|
|
$
|
3,000
|
|
|
Comerica revolving line
|
1,230
|
|
|
1,493
|
|
|
Agility line of credit, net of discount of $96 and $0
|
404
|
|
|
—
|
|
|
Notes payable – insurance
|
207
|
|
|
34
|
|
|
Total notes payable
|
3,641
|
|
|
4,527
|
|
|
Less: current portion
|
(3,641
|
)
|
|
(2,727
|
)
|
|
Total notes payable, less current portion
|
$
|
—
|
|
|
$
|
1,800
|
|
Comerica Bank Credit Facility
On June 14, 2012, the Company entered into a Loan and Security Agreement with Comerica Bank (the “Comerica Credit Facility”), which replaced Bridge Bank, N.A. as the Company's primary lender. The maximum amount of credit available to the Company under the Comerica Credit Facility at inception was
$5 million
, comprised of a
$3 million
term loan facility (“Term Loan”) and a
$2 million
revolving line of credit (“Revolving Line”), which included a
$500,000
sub-facility for letters of credit and certain credit card services. Under the terms of the Comerica Credit Facility, The Company could request advances under (i) the Term Loan until December 14, 2012, and (ii) the Revolving Line in an aggregate outstanding amount not to exceed the lesser of (A) the Revolving Line or (B) the borrowing base, which is
80%
of our eligible accounts receivable balances, less the aggregate face amount of letters of credit issued and the aggregate limits of any credit cards issued and any merchant credit card processing reserves. Term Loan advances outstanding on December 14, 2012 became payable in
thirty
equal monthly installments of principal, plus accrued interest, beginning on January 1, 2013. Amounts borrowed under the Revolving Line became due on December 14, 2013, which was subsequently extended to May 1, 2014, as described below. As of December 31, 2013, there was
$1.8 million
outstanding under the Term Loan and
$1.2 million
outstanding under the Revolving Line
The interest rate per annum for advances under the Comerica Credit Facility is the Prime Referenced Rate, as defined in the Comerica Credit Facility, plus the applicable margin. Prior to March 1, 2014, the applicable margin is one and one half percent (
1.50%
) per annum for the Revolving Line and two and one quarter percent (
2.25%
) per annum for the Term Loan. Beginning March 1, 2014, the applicable margin is two and one quarter percent (
2.25%
) per annum for the Revolving Line and one and one half percent (
1.50%
) per annum for the Term Loan. The interest rates on our Term Loan and Revolving Line were
5.50%
and
4.75%
, respectively, as of
December 31, 2013
.
The Comerica Credit Facility is secured by substantially all of Rainmaker’s consolidated assets. Rainmaker must comply with certain financial covenants, including maintaining a minimum liquidity ratio with respect to all indebtedness owing to Comerica Bank of at least
1.25
to 1.00. The Comerica Credit Facility contains customary covenants that will, subject to limited exceptions, require Comerica Bank’s approval to, among other things, (i) create liens; (ii) make capital expenditures; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Comerica Credit Facility also provides for customary events of default, including nonpayment, breach of covenants, material adverse events, payment defaults of other indebtedness, failure to deliver audited financial statements with an unqualified opinion, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Comerica Credit Facility. If we are not able to comply with such covenants or if any event of default otherwise occurs, our outstanding loan balance could become due and payable immediately and our existing credit facilities with Comerica Bank could be canceled. As of
December 31, 2013
, we were not in compliance with all loan covenants as we were past due on repayment of the amounts outstanding under the Revolving Line.
On February 27, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Revolving Line were past due. The notice of default also stated that Comerica Bank would not take any action to enforce its rights and remedies under the Comerica Credit Facility but reserved the right to do so in the future. On March 19, 2014, the Company and Comerica Bank
entered into a forbearance agreement pursuant to which Comerica Bank agreed to extend the scheduled maturity date of the Revolving Line until May 1, 2014. In addition, under the terms of the forbearance agreement, (i) the amounts outstanding under the Term Loan are due on May 1, 2014, coterminous with the Revolving Line, (ii) advances under the Revolving Line are limited to
$1,000,000
at any time outstanding, (iii) restricted cash in the amount of
$1,562,000
will be held in a segregated deposit account at Comerica Bank as additional collateral for the Term Loan, (iv) effective March 1, 2014, the applicable margin for the Revolving Line was increased to two and one quarter percent (
2.25%
), and for the Term Loan was decreased to one and one half percent (
1.50%
), and (v) the Company must satisfactorily address a material accounts payable owed to a customer by April 1, 2014.
Agility Capital Credit Facility
On October 30, 2013, the Company closed a Loan Agreement (the "Agility Loan Agreement") with Agility Capital II, LLC (“Agility”), providing for a revolving line of credit of up to
$500,000
, which amount may be increased to
$650,000
under certain conditions (the “Maximum Revolving Line”). The Company may request advances under the Agility Loan Agreement in an aggregate outstanding amount not to exceed the lesser of (i) the applicable Maximum Revolving Line or (ii) a borrowing base equal to
30%
of the Company's eligible accounts receivable balances. Amounts borrowed under the Agility Loan Agreement are due on the earlier of (i) the date on which the Company’s borrowings under its loan agreement with Comerica Bank become due and payable, and (ii) October 25, 2014. The interest rate per annum for advances under the Loan Agreement is
12.00%
. If a default occurs under the Loan Agreement, the interest rate per annum for advances under the Loan Agreement would increase to
18.00%
. In addition, if a default in the payment of principal occurs under the Loan Agreement, the Company would be required to pay a default fee equal to
$10,000
plus an additional
$15,000
for each subsequent
30
-day period during which such payment default remains uncured. The Agility Loan Agreement became due on December 14, 2013, commensurate with the Comerica Credit Facility. On February 28, 2014, Agility issued a notice of default due to the notice of default issued by Comerica Bank, as discussed above. The Company paid a default fee of
$10,000
to Agility on February 28, 2014 for failure to pay principal when due. Such default was subsequently cured as a result of the extension of the maturity date to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Revolving Line.
The Agility Loan Agreement is secured by substantially all of Rainmaker’s consolidated assets. The Agility Loan Agreement contains customary covenants that will, subject to limited exceptions, require Agility’s approval to, among other things, (i) create liens; (ii) acquire or transfer assets outside of the ordinary course of business; (iii) pay cash dividends; and (iv) merge or consolidate with another company. The Agility Loan Agreement also requires that the Company comply with the financial covenants contained in its loan agreement with Comerica Bank. The Agility Loan Agreement also provides for customary events of default, including nonpayment, breach of covenants, payment defaults of other indebtedness, and certain events of bankruptcy, insolvency and reorganization that may result in acceleration of outstanding amounts under the Agility Loan Agreement. The Company’s obligations under the Agility Loan Agreement are subordinated to the Company’s obligations under its loan agreement with Comerica Bank, pursuant to a subordination agreement between Agility and Comerica Bank. As of December 31, 2013, there was
$500,000
outstanding under the Agility Loan Agreement.
In addition, Agility received a warrant to purchase
216,667
shares of the Company's common stock. The warrant has a
7
-year term and an exercise price of
$0.45
per share. The warrant may also be exercised by way of a cashless exercise. The warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as future issuances of common stock at a price below the warrant's exercise price, stock dividends, stock splits and other similar events. The fair value of the warrant upon issuance is recorded as a discount to the face value of the Maximum Revolving Line and is amortized to interest expense over the one year life of the note.
Bridge Bank Credit Facility
In April 2004, we entered into a business loan agreement and a commercial security agreement with Bridge Bank (the “Bridge Credit Facility”). The Bridge Credit Facility, as last amended in November 2011, had a maturity date of December 10, 2012. The maximum amount of credit that could be borrowed under the Bridge Credit Facility was
$6 million
, subject to a borrowing base, and included a
$1.0 million
sub-facility for standby letters of credit. The interest rate per annum for advances under the Bridge Credit Facility was equal to the greater of (i)
3.5%
, or (ii) one quarter of one percent (
0.25%
) above the prime lending rate. In June 2012, we terminated the Bridge Credit Facility and repaid all borrowings thereunder.
In July 2005, we issued an irrevocable standby letter of credit in the amount of
$100,000
to our landlord for a security deposit for our corporate headquarters located in Campbell, California. The letter of credit issued by Bridge Bank was replaced in July 2012 by a letter of credit in like amount issued by Comerica Bank under the Credit Facility described above.
In December 2010, we issued an irrevocable standby letter of credit in the amount of
250,000
Great Britain Pounds to Barclays Bank PLC to secure our overdraft facility described below. The letter of credit was issued by Bridge Bank and we terminated this letter of credit in June 2012.
Overdraft Facility
On November 25, 2010, our subsidiary, Rainmaker EMEA Limited, established an overdraft facility with Barclays Bank PLC in the amount of
247,500
Great Britain Pounds. This overdraft facility was secured by a
250,000
Great Britain Pounds standby letter of credit issued by Bridge Bank as noted above. In June 2012, we repaid and terminated the overdraft facility.
Notes Payable – Optima acquisition
On
January 29, 2010
, we entered into and closed a stock purchase agreement for Optima Consulting Partners Limited (“Optima”). In accordance with this agreement, we entered into a note payable for
$350,000
payable in
two
installments, with
$200,000
plus accrued interest due
eighteen months
from the closing date and
$150,000
plus accrued interest due
twenty-four months
after the closing date. We paid the first installment of the note in
July 2011
and fully settled the liability by paying the second installment in
January 2012
. The interest rate on the note payable was
0.4%
per year and we recorded the present value of the note payable discounted over
two years
at a rate of
6.2%
. The resulting discount on note payable was amortized over the two-year term of the note.
Notes Payable – insurance
On
August 13, 2012
, we entered into an agreement with AON Private Risk Management to finance our 2012 to 2013 insurance premiums with AFCO Acceptance Corporation in the amount of
$62,000
. The interest rate on the note payable was
6.07%
and the note was payable in
nine
equal monthly installment payments beginning in
September 2012
. The note was fully paid in July 2013.
On December 11, 2013, we entered into an agreement with AON Private Risk Management to finance our 2013 to 2014 insurance premiums with First Insurance Funding Corp. in the amount of
$237,000
. The interest rate on the note payable is
4.99%
and the note is payable in
eight
equal monthly installment payments beginning in December 2013. As of
December 31, 2013
, the remaining liability under this financing agreement was
$207,000
.
Future debt maturities at
December 31, 2013
are as follows (in thousands):
|
|
|
|
|
|
|
|
2014
|
$
|
3,737
|
|
|
2015 and thereafter
|
—
|
|
|
Total
|
$
|
3,737
|
|
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of
December 31, 2013
, our operating commitments include operating leases for our facilities and certain property and equipment that expire at various dates through 2015 which are described in more detail below. These arrangements allow us to obtain the use of facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating leases allows us to use these assets for our business while minimizing the obligations and upfront cash flow related to purchasing the assets.
In
October 2009
, we executed a second amendment to the operating lease for our corporate headquarters in Campbell, California to reduce our lease cost. Under this amendment, we reduced the amount of space that we lease to
16,430
square feet. On October 31, 2012, the Company executed a third amendment of the operating lease for our corporate headquarters, effective December 1, 2012, with a
three
-year term. On January 31, 2013, the Company executed a fourth amendment to the Campbell operating lease, effective February 1, 2013, providing an additional
3,936
square feet of space. The fourth amendment did not modify the three-year term of the third amendment to the Campbell operating lease. Annual base rent under the amended lease was approximately
$365,000
in the first year of the lease, or
$208,000
after deducting free base rent in the first three months of the amended lease, and increases by approximately
3%
each year thereafter for the remaining term. In addition, we will continue to pay our proportionate share of operating costs and taxes based on our occupancy, and an irrevocable standby letter of credit issued to the landlord was reduced to
$40,000
for a security deposit. On July 2, 2013, we executed the fifth amendment to the Campbell operating lease effective July 1, 2013, providing an additional
6,771
square feet of space. The fifth amendment to the Campbell operating lease did not change the terms of the lease as previously amended. Annual base rent under the amended lease is approximately
$536,000
in the first year of the lease and increases by
3%
each year thereafter for the remaining term. The fifth amendment to the Campbell operating lease increased the irrevocable standby letter of credit issued to the landlord to
$61,000
.
In
September 2011
, we extended an existing lease in Austin, Texas on approximately
21,388
square feet of space for a term of
24
months through December 31, 2013. Annual rent under the lease approximated
$212,000
, or
$18,000
monthly. Additionally, we paid our proportionate share of maintenance on the common areas in the business park. On January 25, 2013, the Company announced the closure of the Company's Austin facility as operations were to be consolidated in our headquarters in Campbell, California and our United Kingdom location as part of a strategic reallocation of resources designed to increase levels of service to customers and generate operating cost savings. On May 10, 2013, the Company agreed to terminate the Austin facility lease effective September 15, 2013. During the year ended
December 31, 2013
, the Company recorded a charge of
$179,000
related to the Austin facility closure.
In
October 2012
, we executed an office lease agreement for office space in Godalming outside of London, where we have call center operations. The facility’s
5,000
square feet of call center space will be utilized to better accommodate our current operations in Europe and provide additional space for expansion. The lease has a
thirty
-month term and terminates in March 2015. Annual base rent for this facility is
28,000
Great Britain Pounds. Based on the exchange rate at
December 31, 2013
, annual rent is approximately
$45,000
.
Rent expense under operating lease agreements for continuing operations during the years ended
December 31, 2013
,
2012
and
2011
was
$535,000
,
$773,000
and
$903,000
respectively. Rent expense for the year ended
December 31, 2011
includes
$99,000
related to the closure of our Montreal facility. The Company incurred rent expense under operating lease agreement for our discontinued operations during the years ended
December 31, 2013
,
2012
and
2011
of
$0
,
$158,000
and
$207,000
, respectively.
Future minimum payments under our non-cancelable operating leases with terms in excess of one year at
December 31, 2013
are as follows (in thousands):
|
|
|
|
|
|
|
|
2014
|
$
|
590
|
|
|
2015
|
566
|
|
|
2016 and thereafter
|
46
|
|
|
Total minimum payments
|
$
|
1,202
|
|
Contingencies
On February 8, 2013, the Company's former Chief Executive Officer, Michael Silton, filed a demand for arbitration and complaint with the American Arbitration Association, alleging breach of contract and other causes of action relating to the termination of Mr. Silton's employment with the Company in October 2012. Mr. Silton sought full payment of severance benefits in the amount of approximately
$1.0 million
, plus compensation for unused vacation, related penalties and punitive damages. On March 21, 2013, the Company filed a responsive pleading in the arbitration proceedings. On May 15, 2013, the American Arbitration Association appointed an arbitrator. Thereafter, Mr. Silton withdrew his arbitration claim and on May 22, 2013, filed a complaint against the Company in the Santa Clara Superior Court. The allegations and causes of action were the same as the complaint filed with the American Arbitration Association. On July 5, 2013, the Company filed an answer to Mr. Silton's complaint and a cross-complaint against Mr. Silton. On or about August 1, 2013, Mr. Silton filed an answer to the cross-complaint. Between July and December 2013, the parties served and responded to written discovery requests and produced documents. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a confidential settlement agreement. Pursuant to the settlement agreement, and in exchange for a release of claims, Mr. Silton received a payment from the Company's insurer and
1,000,000
shares of the Company's common stock. A portion of the payment and the shares of common stock was paid to Mr. Silton's legal counsel. After effectuating the terms of the settlement, the case was formally dismissed on March 17, 2014. In connection with the settlement agreement, the Company recorded a charge of
$200,000
in the year ended
December 31, 2013
.
On July 9, 2013, YKnot Holdings LLC (“YKnot”) filed a complaint seeking damages against the Company in the Santa Clara Superior Court alleging breach of contract and related causes of action arising from the eCommerce Processor Agreement (the “Agreement”) entered into by YKnot and the Company in January 2012. The central allegation in the complaint alleged that the Company failed to timely pay over certain reserves held by the Company against chargebacks and returns relating to YKnot's products in accordance with the Agreement. On August 12, 2013, the Company filed an answer to the complaint and filed a cross-complaint against YKnot. In January 2014, the parties agreed to proceed to mediation. On January 28, 2014, the parties reached a settlement at mediation and executed a settlement agreement pursuant to which the Company and YKnot agreed to a mutual "walk away" settlement and release with no money or other consideration paid to either party.
From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of operations.
Guarantees
On July 18, 2012, we issued an irrevocable standby letter of credit in the amount of
$100,000
to our landlord for a security deposit for our corporate headquarters located in Campbell, California. The letter of credit was issued by Comerica Bank under the Credit Facility. On October 31, 2012, the Company executed a third amendment to the Campbell operating lease for our corporate headquarters in which the security deposit was reduced to
$30,000
. On January 31, 2013, the Company executed a fourth amendment to the Campbell operating lease in which the security deposit was increased to
$40,000
. On July 2, 2013, the Company executed a fifth amendment to the Campbell operating lease in which the security deposit was increased to
$61,000
.
Our customer contracts typically require us to contingently indemnify against certain qualified third party claims. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not had to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of
December 31, 2013
and
2012
.
Restricted Cash
Restricted cash represents the reserve for the refunds due for non-service payments inadvertently paid to us by our clients’ customers instead of paid directly to our clients. At the time of cash receipt, we record a current liability for the amount of non-service payments received.
8. FAIR VALUE MEASUREMENTS
Fair value is the exchange price that would be the amount received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, we use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
|
|
|
|
Level 1
|
— Quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
Level 2
|
— Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
|
|
Level 3
|
— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A summary of the activity of the fair value of the Level 3 liabilities for the years ended
December 31, 2013
and
2012
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Value of
Level 3
Liabilities
|
|
Transfers In (Out)
|
|
Loss(Gain) on Fair
Value Re-
measurement
|
|
Foreign
Currency
Adjustment
|
|
Ending Fair
Value of Level 3
Liabilities
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Common stock warrant liability
|
$
|
348
|
|
|
$
|
89
|
|
|
$
|
(344
|
)
|
|
$
|
—
|
|
|
$
|
93
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration — Optima (1)
|
$
|
225
|
|
|
$
|
(225
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common stock warrant liability
|
$
|
517
|
|
|
$
|
—
|
|
|
$
|
(169
|
)
|
|
$
|
—
|
|
|
$
|
348
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration — Optima (1)
|
$
|
182
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
(1
|
)
|
|
$
|
225
|
|
|
Common stock warrant liability
|
$
|
—
|
|
|
$
|
815
|
|
|
$
|
(298
|
)
|
|
$
|
—
|
|
|
$
|
517
|
|
____________
|
|
|
|
(1)
|
The contingent consideration paid under the Optima stock purchase agreement was
$225,000
based on the achievement of certain performance metrics for the calendar year ended December 31, 2011. The contingent consideration payment was transferred from our fair value measurements once the final calculation was determinable. The liability was settled in April 2012 in accordance with the guidelines of the Optima Stock Purchase Agreement.
|
The following table represents the fair value hierarchy for our financial assets and liabilities held by us measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31, 2013
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Money market funds (1)
|
$
|
1,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
Common stock warrant liability (2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93
|
|
|
December 31, 2012
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Money market funds (1)
|
$
|
1,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
Common stock warrant liability (2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
348
|
|
____________
|
|
|
|
(1)
|
Money market funds are valued using active quoted market rates.
|
|
|
|
|
(2)
|
The fair value of our common stock warrant liability (see Note 6 - Long-Term Debt Obligations and Note 10 - Stockholders' Equity) is determined using the Black–Scholes valuation method utilizing the quoted price of our common stock in an active market. Volatility is estimated based on the historical market activity of our stock. The expected life is based on the remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' remaining contractual term. See detailed inputs below.
|
The Company uses the Black-Scholes model to value our common stock warrant liability. The following are the assumptions used to measure the common stock warrant liability at
December 31, 2013
and
2012
, which were determined in a manner consistent with that described for stock option awards as set forth in Note 10:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Expected life in years
|
2.50 - 6.75
|
|
|
3.50
|
|
|
Volatility
|
88.84
|
%
|
|
65.99
|
%
|
|
Risk-free interest rate
|
0.78% to 2.45%
|
|
|
0.34
|
%
|
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
The amounts reported as cash and cash equivalents, accounts receivable and accrued liabilities approximate fair value due to their short-term maturities.
The amounts reported as fair value of notes payable are at carrying value at
December 31, 2013
and
2012
. Accounts payable and notes payable are estimated at
December 31, 2013
to have a fair value, using Level 3 input assumptions, of
$6.2 million
and
$3.6 million
, respectively, for financial statement disclosure purposes only. At December 31, 2012 the carrying value of notes payable approximated fair value. The Company also used Level 3 input assumptions to determine the fair value of goodwill and certain capitalized software which are not recorded on a recurring fair value basis.
9. INCOME TAXES
The components of loss before income taxes from continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
United States
|
$
|
(20,536
|
)
|
|
$
|
(3,540
|
)
|
|
$
|
(10,176
|
)
|
|
Foreign
|
(1,142
|
)
|
|
(184
|
)
|
|
(253
|
)
|
|
Loss before income tax expense
|
$
|
(21,678
|
)
|
|
$
|
(3,724
|
)
|
|
$
|
(10,429
|
)
|
Income tax expense for the years ended
December 31, 2013
,
2012
and
2011
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
State
|
(16
|
)
|
|
43
|
|
|
44
|
|
|
Foreign
|
(100
|
)
|
|
104
|
|
|
(74
|
)
|
|
|
(116
|
)
|
|
147
|
|
|
(68
|
)
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
(522
|
)
|
|
86
|
|
|
86
|
|
|
State
|
(37
|
)
|
|
8
|
|
|
4
|
|
|
Foreign
|
18
|
|
|
—
|
|
|
(3
|
)
|
|
|
(541
|
)
|
|
94
|
|
|
87
|
|
|
Total income tax (benefit) expense
|
$
|
(657
|
)
|
|
$
|
241
|
|
|
$
|
19
|
|
Income tax expense for discontinued operations for the years ended
December 31, 2013
,
2012
and
2011
(in thousands) is
$0
,
$95
, and
$96
, respectively. The income tax benefit recorded in the year ended
December 31, 2013
is primarily a result of the impairment of goodwill.
A reconciliation between the income tax benefit computed by applying the U.S. federal tax rate to loss before income taxes and actual income tax expense for the years ended
December 31, 2013
,
2012
and
2011
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Tax benefit computed at federal statutory rate
|
$
|
(7,353
|
)
|
|
$
|
(1,266
|
)
|
|
$
|
(3,546
|
)
|
|
Effect of state income taxes
|
(48
|
)
|
|
36
|
|
|
33
|
|
|
Foreign rate differential
|
466
|
|
|
61
|
|
|
8
|
|
|
Change in valuation allowance
|
6,284
|
|
|
1,163
|
|
|
3,392
|
|
|
Stock based compensation
|
120
|
|
|
96
|
|
|
391
|
|
|
Other
|
(126
|
)
|
|
151
|
|
|
(259
|
)
|
|
Total income tax (benefit) expense
|
$
|
(657
|
)
|
|
$
|
241
|
|
|
$
|
19
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the value of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets as of
December 31, 2013
and
2012
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
$
|
41,014
|
|
|
$
|
27,841
|
|
|
Depreciation and amortization
|
3,919
|
|
|
2,778
|
|
|
Accrued reserves and other
|
1,036
|
|
|
1,162
|
|
|
Total deferred tax assets
|
45,969
|
|
|
31,781
|
|
|
Valuation allowance
|
(45,964
|
)
|
|
(31,781
|
)
|
|
Net deferred tax asset
|
5
|
|
|
—
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Fixed Assets
|
(31
|
)
|
|
—
|
|
|
Acquired goodwill
|
—
|
|
|
(567
|
)
|
|
Total deferred tax liability
|
$
|
(26
|
)
|
|
$
|
(567
|
)
|
Realization of deferred tax assets is dependent upon future taxable earnings, the timing and amount of which are uncertain. Due to the cumulative operating losses in earlier years and continued significant loss in the most recent year, management believes
that it is more likely than not that the deferred tax assets will not be realizable in future periods. The valuation allowance for deferred tax assets increased approximately
$13.5 million
and
$1.2 million
during the years ended
December 31, 2013
and
2012
, respectively. The increase in valuation allowance is mainly due to current year losses.
As of
December 31, 2013
, we have net operating loss carryforwards for federal and state of California tax purposes of
$101.6 million
and
$34.3 million
, respectively. The net operating loss carryforwards will expire at various dates beginning in 2020 through 2033 for federal tax purposes, if not utilized. The net operating loss for California tax purposes will begin to expire in 2014 through 2033, if not utilized. As of December 31, 2013, we also have a capital loss of
$11.5 million
and
$4.5 million
, respectively, for federal and California income tax purposes. Both federal and California capital losses will expire in 2017, if not utilized.
Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income that can be offset by net operating loss carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules limiting net operating loss carryforwards. We performed a new analysis of prior ownership changes under IRC Section 382 up to December 31, 2013. The analysis concluded that the Company had not incurred any new ownership changes since the last performed analysis as of December 31, 2006.
Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries because such earnings are intended to be permanently reinvested. There are no unremitted earnings as of
December 31, 2013
.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. There are no ongoing examinations by income taxation authorities at this time. The Company’s tax years from 2000 to
2013
remain open to United States federal income tax and California examination due to the carryforward of unutilized net operating losses. The Company’s tax years from no earlier than 2009 and forward remain open to examination in certain foreign tax jurisdictions.
The Company does not anticipate any significant changes to the FASB ASC 740 liability for unrecognized tax benefits within twelve months of this reporting date. The Company adopted the provisions of FASB ASC 740 as of January 1, 2007. The amount of unrecognized tax benefit as of
December 31, 2013
and
2012
is not material.
The Company has adopted the accounting policy that interest and penalties will be classified as a component of operating income and losses. No interest and penalties were recorded as of
December 31, 2013
and
2012
.
In September 2013, the IRS released final tangible property regulations ("repair regulations") under Sections 162(a) and 263(a) of the Internal Revenue Code, regarding the deduction and capitalization of amounts paid to acquire, produce, or improve tangible property. The final regulations replace temporary regulations that were issued in December 2011 and are effective for tax years beginning January 1, 2014, with early adoption permitted for tax years beginning January 1, 2012. The final regulations are effective for the Company for its tax year beginning January 1, 2014, and the Company is currently evaluating the impact of the final repair regulations on its consolidated financial statements but does not expect this to have a material impact to the financial statements.
10. STOCKHOLDERS' EQUITY
Preferred Stock
We have
5,000,000
shares of preferred stock authorized. Our board of directors has the authority to issue the preferred stock and to fix or alter the rights, privileges, preferences and restrictions related to the preferred stock, and the number of shares constituting any such series or designation.
No
shares of preferred stock were outstanding at
December 31, 2013
and
2012
.
Common Stock
In June 2011, we issued and sold
3.7 million
shares of our common stock, together with warrants to purchase up to an aggregate
1.6 million
additional shares, in a public offering. The offering was made pursuant to a prospectus filed with our shelf registration statement on Form S-3 (File No. 333-171946), which was filed with the SEC on January 28, 2011, amended on February 18, 2011 and declared effective by the SEC on March 7, 2011, the prospectus supplement dated June 22, 2011, and the free writing prospectus dated June 23, 2011. We received gross cash proceeds of approximately
$3.9 million
from the equity offering. The
$3.3 million
of net cash proceeds from the offering were used for general corporate purposes, including working capital and capital expenditures.
In April 2013, we issued and sold
13.0 million
shares of our common stock in a registered direct offering and raised gross cash proceeds of approximately
$5.8 million
. The
$5.5 million
of net cash proceeds from the offering were used for general corporate purposes, including working capital and capital expenditures.
Common Stock Warrants
The
1.5 million
warrants issued to investors in the June 2011 public offering have an initial
5
-year term and an exercise price of
$1.40
per share and became exercisable
six
months after their issuance date. If at any time the shares of common stock issuable thereunder are not registered for resale pursuant to an effective registration statement, the warrants may be exercised by way of a cashless exercise. The warrants also contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events. In addition, the placement agent received a warrant to purchase a number of shares of common stock equal to three percent (
3.0%
) of the number of shares purchased by investors in the offering, which approximates
110,000
shares. The placement agent warrant has an initial
5
-year term and an exercise price of
$1.05
per share and became exercisable
six
months after its issuance date. The placement agent warrant may also be exercised by way of a cashless exercise. The placement agent warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as stock dividends, stock splits and other similar events.
In October 2013, we issued a warrant to Agility Capital II, LLC to purchase
216,667
shares of the Company's common stock. The warrant has a
7
-year term and an exercise price of
$0.45
per share. The warrant may also be exercised by way of a cashless exercise. The warrant also contains provisions that protect its holder against dilution by adjustment of the exercise price and the number of shares issuable thereunder in certain events such as future issuances of common stock at a price below the warrant's exercise price, stock dividends, stock splits and other similar events.
We have classified all of the above mentioned warrants as liabilities under the caption “Common stock warrant liability” and recorded the liability at its estimated fair value with the corresponding gains or losses as a separate line item after operating loss from operations in the consolidated statement of operations and comprehensive loss, under the caption “Gain due to change in fair value of warrant liability.” See Note 8 for disclosures regarding the fair value of financial instruments. In the years ended
December 31, 2013
and
2012
, we recorded gains of
$344,000
and
$169,000
, respectively, on the fair value re-measurement of the warrants.
The following table summarizes the terms of those outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
Date of Issuance
|
Warrants
Outstanding at
December 31, 2013
|
|
Exercise
Price
|
|
Term from Date
of Issuance
|
|
June 22, 2011
|
110,092
|
|
|
$1.05
|
|
Five Years
|
|
June 24, 2011
|
1,467,887
|
|
|
$1.40
|
|
Five Years
|
|
October 30, 2013
|
216,667
|
|
|
$0.45
|
|
Seven Years
|
Treasury Stock
During the three year period ended
December 31, 2013
, the Company had restricted stock awards that vested. The Company is required to withhold income taxes at statutory rates based on the closing market value of the vested shares on the date of vesting. The Company offers employees the ability to sell their vested shares to the Company in an amount equal to the amount of income taxes to be withheld. During
2013
, the Company purchased
273,724
shares with a cost of approximately
$149,000
from employees to cover federal and state taxes due. During
2012
, the Company purchased
152,399
shares with a cost of approximately
$122,000
from employees to cover federal and state taxes due. During
2011
, the Company purchased
398,741
shares with a cost of approximately
$338,000
from employees to cover federal and state taxes due.
Equity Incentive Plans
2003 Stock Incentive Plan
. In 2003, the Board of Directors adopted the 2003 Stock Incentive Plan (“2003 Plan”), which was approved by stockholders on May 14, 2003. The 2003 Plan was amended and restated effective May 15, 2007, again on May 15, 2008, again on February 18, 2013 and again on June 5, 2013. The 2003 Plan was amended in 2007 to provide for new annual grants to non-employee members of the Board to reflect the
5
-for-1 reverse stock split of our common stock, which was effective as of December 15, 2005, and to reflect certain changes in applicable tax, securities and accounting rules arising after the date the 2003 Plan was adopted. The 2003 Plan was amended again in 2008 with the approval of the stockholders to increase the aggregate number of shares of common stock available for issuance under the 2003 Plan by
950,000
shares, to increase the maximum number of shares that could be issued under the annual evergreen provision of the 2003 Plan from
600,000
shares to
1,000,000
shares (or, if less,
4%
of the total outstanding shares), and to permit awards with respect to such increased number of shares potentially through May 15, 2018. The 2003 Plan was further amended in February 2013 to increase the automatic annual grants to non-employee Board members occurring on the date of each annual stockholders meeting from
20,000
restricted shares to
100,000
restricted shares, to change the initial grant made to new directors upon their first election or appointment as a non-employee Board member from
20,000
options to
50,000
restricted shares, and to allow each non-employee Board member to elect to take all or a portion of such director's annual retainer fee or meeting fees in common stock in lieu of cash. The 2003 Plan was amended again in June
2013 with the approval of the stockholders to increase the aggregate number of shares of common stock available for issuance under the 2003 Plan by
1,200,000
shares, to increase the maximum number of shares that can be issued under the annual evergreen provision of the 2003 Plan from
1,000,000
shares to
2,000,000
shares (or, if less
4%
of the total outstanding shares) and to extend the term of the 2003 Plan through June 5, 2023.
The 2003 Plan provides for the issuance of incentive stock options or nonqualified stock options to employees, consultants and non-employee members of the board of directors, and issuance of shares of common stock for purchase or as a bonus for services rendered (restricted stock awards). Options granted under the 2003 Plan are priced at not less than
100%
of the fair market value of the common stock on the date of grant and have a maximum term of
ten
years from the date of grant. In the case of incentive stock options granted to employees who own
10%
or more of our outstanding common stock, the exercise price may not be less than
110%
of the fair value of the common stock on the date of grant and such options will have a maximum term of
five
years from the date of grant. Options granted to employees and consultants become exercisable and vest in
one
or more installments over varying periods ranging up to
four
years as specified by the board of directors. Unexercised options generally expire upon, or within,
three
months of termination of employment, depending on the circumstances surrounding termination. Restricted stock awards granted to employees, consultants and non-employee directors typically vest over a
one
to
four
year period from the date of grant. Vesting of these awards is contingent upon continued service and any unvested awards are forfeited immediately upon termination of service, subject to the discretion of the board of directors.
The 2003 Plan also provides for a fixed issuance amount to non-employee members of the board of directors at prices not less than
100%
of the fair value of the common stock on the date of grant and a maximum term of
ten
years from the date of grant. Generally, options granted to non-employee members of the board of directors are immediately exercisable and vest in
two
or more installments over periods ranging from
twelve
to
twenty-four
months from the date of grant. Unexercised options expire
twelve
months from the termination date of service as a non-employee member of the board of directors.
At the beginning of the
2013
and
2012
fiscal years, the number of shares authorized for grant under the 2003 Plan automatically increased on the first trading date of January by an amount equal to the lesser of
4%
of our outstanding common stock at December 31 or
1,000,000
shares. For both
2013
and
2012
, the number of shares authorized for grant under the 2003 Plan increased by
1,000,000
shares. Shares forfeited that were granted under the 2003 Plan are available for future grant. In the future, the Company may seek stockholder approval to increase the shares available to grant to employees, consultants, and non-employee directors based on the growth of the Company. Total shares available for grant under the 2003 Plan was
1,252,000
at
December 31, 2013
.
2012 Inducement Equity Incentive Plan
. On December 21, 2012, the Board of Directors approved and adopted the Company's 2012 Inducement Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of nonqualified stock options and shares of common stock, either with or without a purchase price, to newly hired employees as a material inducement to such individuals entering into our employment. Stockholder approval of the 2012 Plan was not required under Nasdaq Capital Market and SEC rules then applicable to the Company. Options granted under the 2012 Plan are priced at not less than
100%
of the fair market value of the common stock on the date of grant and have a maximum term of
ten years
from the date of grant. Awards granted to employees under the 2012 Plan vest in accordance with a schedule determined by the Compensation Committee of our Board of Directors. In December 2012, the Compensation Committee granted an inducement equity award to Donald Massaro under the Company's 2012 Plan in connection with his entering into employment as our President and Chief Executive Officer. The number of shares subject to the awards issued to Mr. Massaro and the related vesting schedules are as follows: (1) a grant of
500,000
restricted shares of common stock which vest 1/16th quarterly over a
four
year term, (2) an option to purchase
500,000
shares of common stock which vest 1/16th quarterly over a
four
year term and (3) a grant of
250,000
restricted shares of common stock which vested in a single installment on March 31, 2013. On February 19, 2013, the Company authorized an additional
375,000
shares under the 2012 Plan in connection with an inducement equity award of
375,000
restricted shares of common stock issued to the Company's then incoming chief financial officer. Total shares available for grant under the 2012 Plan was
281,250
at December 31, 2013.
Stock-Based Compensation Expense
We account for stock-based compensation awards issued to employees and directors using the guidance from ASC 718, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. This guidance requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of comprehensive loss.
The fair value of stock options is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including expected time to exercise, future stock price volatility, risk-free interest rates, and dividend rates which greatly affect the calculated values. Stock-based compensation expense is recorded net of an estimated forfeiture rate and trued-up upon vesting. These factors could change in the future, which would affect the stock-based compensation expense in
future periods. The estimated fair value of stock-based compensation awards is amortized using the straight-line method over the vesting period of the awards.
We expense stock-based compensation to the same expense categories in which the respective award grantee’s salary expense is reported. The table below reflects stock-based compensation expense for the
year
s ended
December 31, 2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Stock-based compensation expense from continuing operations included in:
|
|
|
|
|
|
|
Cost of services
|
$
|
75
|
|
|
$
|
84
|
|
|
$
|
73
|
|
|
Sales and marketing
|
150
|
|
|
51
|
|
|
169
|
|
|
Technology and development
|
215
|
|
|
116
|
|
|
186
|
|
|
General and administrative
|
1,070
|
|
|
559
|
|
|
1,594
|
|
|
|
$
|
1,510
|
|
|
$
|
810
|
|
|
$
|
2,022
|
|
At
December 31, 2013
, approximately
$1,167,000
of stock-based compensation relating to unvested awards had not been amortized and will be expensed in future periods through 2016. Under current grants that are unvested and outstanding, approximately
$432,000
will be expensed in
2014
as stock-based compensation, subject to true-up adjustments for forfeitures and vestings during the year.
We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for the risk-free interest rate on the date of grant. We prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants, stock volatility and an estimated forfeiture rate. Expected life of our option grants is estimated based on our analysis of our actual historical option exercises and cancellations. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We have not historically paid dividends and we do not expect to pay dividends in the near term and therefore we have set the dividend rate at
zero
.
During the years ended
December 31, 2013
,
2012
and
2011
, the weighted average valuation assumptions for stock option awards and forfeiture rates used for the expense calculations for stock option and restricted stock awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Expected life in years
|
3.94
|
|
|
3.76
|
|
|
3.76
|
|
|
Volatility
|
73.52
|
%
|
|
65.99
|
%
|
|
65.99
|
%
|
|
Risk-free interest rate
|
0.50
|
%
|
|
0.38
|
%
|
|
1.00
|
%
|
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Forfeiture Rates:
|
|
|
|
|
|
|
Options
|
21.53
|
%
|
|
27.61
|
%
|
|
27.61
|
%
|
|
Restricted stock
|
19.43
|
%
|
|
15.04
|
%
|
|
15.04
|
%
|
A summary of option activity under our active Stock Incentive Plans for the years ended
December 31, 2013
,
2012
and
2011
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2010
|
674
|
|
|
$
|
2.25
|
|
|
Granted
|
600
|
|
|
0.98
|
|
|
Exercised
|
(15
|
)
|
|
1.00
|
|
|
Canceled
|
(238
|
)
|
|
1.96
|
|
|
Balance at December 31, 2011
|
1,021
|
|
|
1.59
|
|
|
Granted
|
585
|
|
|
0.70
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Canceled
|
(437
|
)
|
|
1.29
|
|
|
Balance at December 31, 2012
|
1,169
|
|
|
1.25
|
|
|
Granted
|
2,155
|
|
|
0.46
|
|
|
Exercised
|
(5
|
)
|
|
0.81
|
|
|
Canceled
|
(621
|
)
|
|
1.00
|
|
|
Balance at December 31, 2013
|
2,698
|
|
|
$
|
0.67
|
|
The weighted average grant date fair value of options granted during the years ended
December 31, 2013
,
2012
and
2011
was
$0.33
,
$0.31
and
$0.47
, respectively, per share.
The following table summarizes information about stock options outstanding as of
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Vested
|
|
Range of Exercise Prices
|
|
Number
Outstanding
(in thousands)
|
|
Weighted
Average
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate Intrinsic Value at Closing Price of $0.24 on 12/31/13
|
|
Number
Exercisable (in thousands)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate Intrinsic Value at Closing Price of $0.24 on 12/31/13
|
|
$0.35 - $ 0.40
|
|
829
|
|
|
9.33
|
|
$
|
0.40
|
|
|
$
|
—
|
|
|
110
|
|
|
$
|
0.40
|
|
|
$
|
—
|
|
|
$0.41 - $ 0.45
|
|
462
|
|
|
9.56
|
|
0.44
|
|
|
—
|
|
|
33
|
|
|
0.45
|
|
|
—
|
|
|
$0.46 - $ 0.68
|
|
501
|
|
|
8.78
|
|
0.55
|
|
|
—
|
|
|
75
|
|
|
0.55
|
|
|
—
|
|
|
$0.69 - $ 0.69
|
|
500
|
|
|
8.99
|
|
0.69
|
|
|
—
|
|
|
125
|
|
|
0.69
|
|
|
—
|
|
|
$0.70 - $13.20
|
|
406
|
|
|
5.86
|
|
1.64
|
|
|
|
|
279
|
|
|
2.01
|
|
|
|
|
$0.35 - $13.20
|
|
2,698
|
|
|
8.68
|
|
$
|
0.67
|
|
|
$
|
—
|
|
|
622
|
|
|
$
|
1.20
|
|
|
$
|
—
|
|
The aggregate intrinsic value represents the net value which would have been received by the option holders had all option holders exercised their in-the-money options as of
December 31, 2013
. The Company received cash proceeds from the exercise of stock options of
$4,000
and
$15,000
in the years ended
December 31, 2013
and
2011
, respectively. There were no options exercised during the year ended
December 31, 2012
. The total intrinsic value of the options exercised during the years ended
December 31, 2013
and
2011
was approximately
$1,000
and
$4,000
, respectively.
Restricted stock awards are issued from the 2003 and 2012 Plans and any issuances reduce the shares available for grant. Restricted stock awards are valued at the closing market price of our stock on the date of the grant. During the year ended
December 31, 2013
, we granted restricted stock awards totaling
650,000
shares to
four
members of our board of directors with immediate vesting. One restricted stock award for
250,000
shares to
one
director was subsequently rescinded. During the year ended
December 31, 2013
, we granted restricted stock awards totaling
100,000
shares to
two
board advisors with vesting terms of
one year
and a fair value of
$35,000
at date of grant. The following table summarizes the activity with regard to restricted stock awards during the years ended
December 31, 2013
,
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted Average
Grant Price
|
|
Balance at December 31, 2010
|
2,457
|
|
|
$
|
1.47
|
|
|
Granted
|
995
|
|
|
1.03
|
|
|
Vested
|
(1,363
|
)
|
|
0.86
|
|
|
Forfeited
|
(743
|
)
|
|
1.36
|
|
|
Balance at December 31, 2011
|
1,346
|
|
|
1.03
|
|
|
Granted
|
2,145
|
|
|
0.79
|
|
|
Vested
|
(720
|
)
|
|
0.78
|
|
|
Forfeited
|
(516
|
)
|
|
0.93
|
|
|
Balance at December 31, 2012
|
2,255
|
|
|
0.78
|
|
|
Granted
|
1,518
|
|
|
0.70
|
|
|
Rescinded
|
(250
|
)
|
|
0.93
|
|
|
Vested
|
(1,986
|
)
|
|
0.52
|
|
|
Forfeited
|
(955
|
)
|
|
0.80
|
|
|
Balance at December 31, 2013
|
582
|
|
|
$
|
0.69
|
|
The total fair value of the nonvested restricted stock awards at grant date was
$402,000
as of
December 31, 2013
.
11. RELATED PARTY TRANSACTIONS
In June 2011, we issued and sold
3.7 million
shares of our common stock, together with warrants to purchase up to an aggregate
1.6 million
additional shares, in a public offering. Members of our board of directors purchased
135,660
shares at a price of
$1.29
per share. They also received warrants to purchase up to an additional
54,264
shares with an initial exercise price of
$1.40
per share. See Note 10 to our consolidated financial statements for more information regarding our equity offering.
In April 2013, we issued and sold
13.0 million
shares of our common stock in a registered direct offering and raised gross cash proceeds of approximately
$5.8 million
. Members of our board of directors and our Chief Executive Officer purchased an aggregate of
500,025
shares at a price of
$0.45
per share in the offering.
12. EMPLOYEE BENEFIT PLAN
We have a defined contribution benefit plan established under the provisions of Section 401(k) of the Internal Revenue Code. All employees may elect to contribute up to
20%
of their compensation to the plan through salary deferrals, subject to annual limitations. Participants’ contributions are fully vested at all times. During the years ended
December 31, 2013
,
2012
and
2011
, the Company had no matching contributions to the plan and incurred a credit of approximately
$14,000
,
$19,000
and
$12,000
, respectively, relating to forfeitures under the plan.
13. INTEREST AND OTHER EXPENSE, NET
The components of interest and other expense, net are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Interest expense, net
|
228
|
|
|
237
|
|
|
193
|
|
|
Currency transaction (gain) loss
|
35
|
|
|
(21
|
)
|
|
(15
|
)
|
|
Other
|
31
|
|
|
—
|
|
|
—
|
|
|
Interest and other expense, net
|
294
|
|
|
216
|
|
|
178
|
|
14. SUBSEQUENT EVENTS
On January 28, 2014, we entered into a settlement agreement to settle a claim filed by Michael Silton, the Company's former Chief Executive Officer. See Note 7 for a discussion of the settlement agreement with Mr. Silton.
On January 28, 2014, we entered into a settlement agreement with YKnot Holdings LLC ("Yknot") to settle a claim filed by YKnot. See Note 7 for a discussion of the settlement agreement with Yknot.
On February 27, 2014, Comerica Bank issued a notice of default as the amounts outstanding under the Revolving Line were past due. On February 28, 2014, Agility Capital II LLC ("Agility") issued a notice of default due to the notice of default issued by Comerica Bank. On March 19, 2014, the Company and Comerica Bank entered into a forbearance agreement pursuant to which Comerica Bank agreed to extend the scheduled maturity date of the Revolving Line until May 1, 2014. The Agility default was subsequently cured as a result of the extension of the maturity date to May 1, 2014, commensurate with the extension of the scheduled maturity date of the Revolving Line. See Note 6 for a discussion of the debt obligations to Comerica Bank and Agility.