Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Registration Statement (General Form) HTML 1.31M
2: EX-3.1 Ex-3.1: Amended and Restated Certificate of HTML 81K
Incorporation
3: EX-3.3 Ex-3.3: Bylaws HTML 69K
4: EX-4.3 Ex-4.3: Third Amended and Restated Investors' HTML 166K
Rights Agreement
5: EX-4.4 Ex-4.4: Third Amended and Restated Stock HTML 109K
Restriction
6: EX-4.5 Ex-4.5: Third Amended and Restated Voting HTML 106K
Agreement
7: EX-10.1 Ex-10.1: Form of Indemnification Agreement HTML 61K
20: EX-10.10.1 Ex-10.10.1: Employment and Noncompetition HTML 50K
Agreement
21: EX-10.10.2 Ex-10.10.2: Letter Agreement Dated September 29, HTML 12K
2006 With George Chamoun
22: EX-10.11 Ex-10.11: Separation Agreement HTML 32K
23: EX-10.12 Ex-10.12: Series B Preferred Stock Purchase HTML 155K
Agreement
24: EX-10.13 Ex-10.13: Series C Preferred Stock Purchase HTML 168K
Agreement
25: EX-10.18.1 Ex-10.18.1: Sublease HTML 95K
26: EX-10.18.2 Ex-10.18.2: First Amendment to Sublease HTML 37K
27: EX-10.18.3 Ex-10.18.3: Second Amendment to Sublease HTML 31K
8: EX-10.2.1 Ex-10.2.1: 1999 Stock Option Plan HTML 46K
9: EX-10.2.2 Ex-10.2.2: Amendment to 1999 Stock Option Plan HTML 13K
10: EX-10.3.1 Ex-10.3.1: 2000 Stock Plan HTML 76K
11: EX-10.3.2 Ex-10.3.2: First Amendment to 2000 Plan HTML 13K
12: EX-10.3.3 Ex-10.3.3: Second Amendment to 2000 Stock Plan HTML 13K
13: EX-10.3.4 Ex-10.3.4: Third Amendment to 2000 Stock Plan HTML 13K
14: EX-10.4.1 Ex-10.4.1: 2006 Stock Plan HTML 53K
15: EX-10.4.2 Ex-10.4.2: Amendment No. 1 to 2006 Stock Plan HTML 12K
16: EX-10.6 Ex-10.6: Management Bonus Plan HTML 24K
17: EX-10.7 Ex-10.7: Letter Agreement With Ron Frankel HTML 17K
18: EX-10.8 Ex-10.8: Offer Letter With Eric Blachno HTML 33K
19: EX-10.9 Ex-10.9: Letter Agreement With Ross Winston HTML 13K
28: EX-16.1 Ex-16.1: Letter Regarding Change in Certifying HTML 11K
Accountant
29: EX-23.1 Ex-23.1: Consent of Deloitte & Touche LLP HTML 11K
30: EX-23.2 Ex-23.2: Consent of Freed Maxick & Battaglia, HTML 11K
CPAs, Pc
(Name, address, including zip
code and telephone number, including area code, of agent for
service)
Copies to:
Kenneth R. McVay, Esq.
Ward Breeze, Esq.
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
220 West
42nd
Street,
21st
Floor New York, New York10036
(212) 730-8133
Glenn M. Reiter, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue New York, New York10017
(212) 455-2000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of earlier effective registration statement for
the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF
REGISTRATION FEE
Title of Each
Class of
Proposed
Maximum
Securities to be
Registered
Aggregate
Offering Price (1) (2)
Amount of
Registration Fee (1)
Common stock, par value $0.01 per
share
$
86,250,000
$
2,648
(1)
Includes offering price of shares
of common stock that may be purchased by the underwriters to
cover over-allotments, if any.
(2)
Estimated solely for the purpose of
computing the amount of the registration fee pursuant to
Rule 457(o) under the Securities Act.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is declared effective. This preliminary prospectus is
not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or
sale is not permitted.
Subject
to Completion,
Dated ,
2007
Synacor, Inc.
Shares
Common Stock
This is the initial public offering of Synacor, Inc. We are
offering shares
of our common stock. We anticipate that the initial public
offering price will be between $
and $ per share. We intend to
apply to list our common stock on The Nasdaq Global Market under
the symbol “SYNC.”
Investing in our common stock involves risk. See “Risk
Factors” beginning on page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Per
Share
Total
Public offering price
$
$
Underwriting discounts and
commissions
$
$
Proceeds, before expenses, to
Synacor, Inc.
$
$
The underwriters expect to deliver the shares of our common
stock to investors in New York, New York on or
about ,
2007.
We have granted the underwriters the right to purchase up
to
additional shares of common stock to cover over-allotments.
This summary highlights selected information contained in
greater detail elsewhere in this prospectus. This summary does
not contain all the information you should consider before
investing in our common stock. You should carefully read the
entire prospectus, including “Risk Factors” and our
consolidated financial statements and related notes, before
making an investment decision. Unless the context otherwise
requires, we use the terms “Synacor,” the
“company,”“we,”“us” and
“our” in this prospectus to refer to Synacor, Inc. and
its subsidiaries and predecessor entities on a consolidated
basis.
Our
Business
We provide an Internet platform and a portfolio of digital
content and services that enable broadband service providers to
create a compelling online experience for their subscribers. Our
platform is used to create customized Internet portals and
includes integration infrastructure, subscriber personalization
capabilities, a content management and delivery system and a
customer-branded video player and toolbar. Our platform also
aggregates free and paid digital content and value-added
services, including video, from third-party providers to create
a customized and branded Internet portal solution. We deliver a
seamless subscriber experience by integrating these services and
products with existing customer billing and management systems,
thereby allowing our customers to extend their brands and
enhance their subscriber relationships. We believe our solution
assists our customers in promoting subscriber retention,
increasing average revenue per user, or ARPU, and cultivating
new revenue streams.
Our customers primarily consist of providers of high-speed
Internet access, or broadband service providers, such as cable
television multi-system operators, or MSOs, telecommunications
operators, or Telcos, and independent Internet service
providers, or ISPs. Our customers include, among others, Charter
Communications, Inc., EarthLink, Inc., Embarq Corporation, Time
Warner Cable Inc., United Online, Inc. and Virgin Media Limited.
Based on our own internal estimates, we believe that, as of
March 31, 2007, our customers had over 21.0 million
broadband Internet subscribers, over 5.0 million narrowband
Internet subscribers and over 33.0 million household
television subscribers in the United States and the United
Kingdom.
We have an extensive network of relationships with digital
content and service providers. By combining our technology
platform with our portfolio of digital content and services, we
enable our customers to flexibly package content and services
for their subscribers, which allows them to differentiate their
brand and respond to changing subscriber needs. Our content
providers include, among others, CinemaNow, CNN, Encyclopedia
Britannica, Fox Sports Interactive Media, MLB Advanced Media,
MusicNet, Inc. and NASCAR.
We generate subscriber-based revenues from the provision of our
technology platform, value-added services and paid content. By
using Internet search and advertising technologies, we also
generate revenues from subscribers’ usage of our
customers’ websites, which we refer to as traffic. We have
a revenue-sharing relationship with Google, Inc., or Google,
that allows us to monetize search activity that takes place on
our customers’ portals, and we work with several
advertising networks to monetize traffic generated by our
customers’ portals with display and other forms of
non-search advertising.
Our
Industry
The Internet has emerged as a global digital medium for content,
communications, advertising and commerce. According to
International Data Corporation, or IDC, the number of households
with Internet access in 2006 was approximately 72.3 million
in the United States and 306.7 million globally. IDC
estimates that the number of broadband Internet subscribers in
the United States will increase from 56.3 million in 2006
to 91.5 million in 2011, while the total
number of broadband subscribers globally will increase from
232.7 million in 2006 to 386.6 million in 2011.
The growth of the Internet has also led to increasing demand for
digital content and services. According to Frost &
Sullivan Limited, or Frost & Sullivan, the
U.S. residential online paid content and services market,
which includes music, online games and video, is projected to
grow from $3.1 billion in 2006 to $8.8 billion in
2011. As digital media consumption, commerce and overall usage
grow across the Internet, advertisers are also shifting a
greater proportion of their marketing budgets online. According
to IDC, online advertising spending in the United States is
projected to increase from $16.9 billion in 2006 to
$31.4 billion by 2011.
Against this backdrop, there is an emerging trend towards
convergence of digital media within the residence. Consumers are
increasingly using their home networks to access multimedia,
such as streaming video, music and online content, from multiple
platforms, including personal computers, stereos, home theater
systems and a variety of Internet-enabled networked devices. IDC
forecasts that the number of network-enabled video devices, one
of the key building blocks of this “digital home,”
will grow from 1.6 million units in the United States in
2006 to 45.3 million units in 2011, for a compound annual
growth rate, or CAGR, of 96%.
As usage of the Internet continues to grow, the broadband access
market has become increasingly competitive due to the
commoditization of Internet access, pricing pressure, evolving
consumer demand and the advent of competing new access
technologies. MSOs and Telcos are competing directly with each
other by packaging broadband Internet access with other
services, such as fixed-line voice, television and mobile
communications. At the same time, Internet media and technology
companies such as AOL LLC, Google, Microsoft Corporation and
Yahoo! Inc. are competing with MSOs, Telcos and ISPs for
consumer loyalty and spending. To retain subscribers in this
competitive environment, broadband service providers are seeking
to evolve from providers of basic voice, television and Internet
access services to integrated providers of digital content and
service offerings.
To maintain and grow their subscriber bases and effectively
compete in the current environment, broadband service providers
are seeking to provide a differentiated solution—in
particular, compelling digital content and value-added online
services—that can help promote subscriber retention and
increase their ARPU. Providing online content and services,
however, has not traditionally been a focus of broadband service
providers, and many have not developed the expertise required to
provide a seamless user experience integrating a broad range of
online offerings. Constantly changing subscriber needs and
tastes and rapidly evolving technology, coupled with the
difficulty of delivering a digital media experience, create
technical and management challenges for companies seeking to
deliver these offerings. Broadband service providers are also
challenged to extend and strengthen their brand beyond the core
Internet access market.
Our
Solution
We provide an Internet platform and a portfolio of digital
content and services that enable broadband service providers to
create a compelling online experience for their subscribers. Our
solution provides our customers with the following key benefits:
Differentiation of Broadband Service Providers’
Offerings. Our platform enables broadband service
providers, both domestic and international, to differentiate
their offerings by packaging and customizing a wide variety of
free and paid digital content and value-added services for their
subscribers. Our platform also includes a comprehensive content
management and delivery solution that enables our customers to
aggregate and deliver content and service offerings from diverse
sources.
Access to a Diverse Portfolio of Digital Content and
Services. We have an extensive network of
relationships with content and service providers and aggregated
a broad portfolio of digital content and services. Using our
platform, we and our customers can flexibly package such content
and services and make them available to their subscribers.
Ability to Integrate Different
Technologies. We integrate our platform with our
customers’ internal systems, which allows subscribers to
access third-party content from within the customer-branded
portal with a single sign-on and consolidated billing.
Focus and Expertise in Delivering Services and
Content. We are singularly focused on developing
an Internet platform and providing a portfolio of digital
content and services for our customers. The size of our customer
base, together with their associated subscriber footprint, and
the depth of our technology expertise provide us with the
ability to continually develop and refine our solutions in a way
that may not be feasible for many of our customers on a
stand-alone basis.
Support for Online Branding Strategies of Broadband Service
Providers. Our solution is a “white
label” solution that features the customer’s brand and
not ours. Unlike co-branded solutions, where the solution
provider could have different or competing objectives and could
seek to promote its own brand, we focus solely on strengthening
our customers’ relationship with their subscribers.
Enhanced Customer Presence in the Digital
Home. Our solution offers our customers the
ability to extend their presence in the digital home by
providing them with a flexible technology platform that scales
across multiple devices, including personal computers,
television sets, personal multimedia players and mobile phones.
Our
Strategy
Our goal is to accelerate the growth of our business and to
achieve long-term profitability. In order to achieve this goal,
we seek to:
•
Enhance our technology platform;
•
Increase subscriber penetration of paid and packaged online
services and products;
•
Increase usage and revenue from traffic generated by our
services and products;
•
Broaden our customer base;
•
Expand our international operations; and
•
Increase support for new digital platforms and technologies.
Risks Related to
Our Business
Our business is subject to a number of risks that you should be
aware of before making an investment decision. These risks are
discussed more fully in “Risk Factors” beginning on
page 8.
Some of these risks are:
•
We have a limited operating history and may not be able to
achieve operational or financial success;
•
We have a history of significant net losses and may not be
profitable in future periods;
•
Any loss of, or diminution in, our business relationship with
Google could materially and adversely affect our financial
performance;
A loss of any significant customer could negatively affect our
financial performance;
•
Our business could suffer if we do not continue to obtain
high-quality content at a reasonable cost;
•
The loss of key officers or an inability to attract and retain
qualified personnel could harm our business; and
•
We may not effectively manage growth in our business.
Our History and
Corporate Information
Synacor was originally formed as a New York corporation in
January 1998 with the name Chek, Inc., or Chek. Chek, an
Internet messaging technology provider, designed and managed a
proprietary messaging platform that supported the hosting of
branded
e-mail and
time management applications. In December 2000, Chek acquired
MyPersonal. com, Inc., or MyPersonal, through a recapitalization
and stock swap and changed its name to CKMP, Inc. MyPersonal
developed white label Internet community portals and built and
managed a flexible platform for delivering content-rich, branded
portals to affinity groups with a focus on the educational
marketplace. In July 2001, CKMP, Inc. changed its name to
Synacor, Inc., and in November 2002, Synacor re-incorporated
under the laws of the State of Delaware. MyPersonal remained a
subsidiary of Synacor until May 2007 when it was dissolved.
Our corporate headquarters are located at 40 La Riviere
Drive, Suite 300, Buffalo, New York14202. Our telephone
number is
(716) 853-1362.
Our website address is www.synacor.com. Information
contained on our website is not incorporated by reference into
this prospectus, and you should not consider information
contained on our website to be part of this prospectus or in
deciding whether to invest in our common stock.
Synacor®
and other trademarks of Synacor appearing in this prospectus are
the property of Synacor. This prospectus contains additional
trade names and trademarks of other companies. We do not intend
our use or display of other companies’ trade names or
trademarks to imply a relationship with, or endorsement or
sponsorship of us by, these other companies.
Industry
Data
We make statements in this prospectus about our industry,
including historical and projected future broadband subscribers
and usage and on-line advertising expenditures. We have derived
this information from reports and analyses prepared by
third-party market research firms, including the following: IDC;
Frost & Sullivan; eMarketer, Inc., or eMarketer; and
comScore, Inc., or comScore. We have no reason to believe that
any of this information is inaccurate in any material respect;
however, we are not able to independently verify this
information.
Common stock to be outstanding after this offering
shares
Use of proceeds
We intend to use the net proceeds from this offering for working
capital and other general corporate purposes. We may also use a
portion of the net proceeds to acquire other businesses,
products or technologies. We do not have agreements or
commitments for any specific acquisitions at this time. See
“Use of Proceeds.”
Dividend policy
We do not anticipate paying cash dividends for the foreseeable
future. See “Dividend Policy.”
Proposed Nasdaq Global Market symbol
SYNC
The number of shares of our common stock to be outstanding
following this offering is based on 11,800,955 shares of
our common stock outstanding as of March 31, 2007, which
assumes the conversion of all outstanding shares of our
preferred stock, but excludes:
•
2,354,720 shares of common stock issuable upon exercise of
options outstanding as of March 31, 2007 at a weighted
average exercise price of $0.94 per share;
•
598,292 shares of common stock issuable upon exercise of
warrants outstanding as of March 31, 2007 at an exercise
price of $1.17 per share;
•
11,032 shares of common stock reserved as of March 31,2007 for future grant under our 2000 Stock Plan;
•
587,897 shares of common stock reserved as of
March 31, 2007 for future grant under our 2006 Stock
Plan; and
•
shares of common
stock reserved for future issuance under our 2007 Equity
Incentive Plan, which will become effective on the effective
date of the registration statement of which this prospectus is a
part.
Unless otherwise indicated, this prospectus reflects and assumes
the following:
•
the automatic conversion of all outstanding shares of our
preferred stock into 11,596,759 shares of common stock
concurrently with the closing of the offering;
•
the filing of our amended and restated certificate of
incorporation and the adoption of our amended and restated
bylaws immediately prior to the closing of this offering; and
•
no exercise by the underwriters of their option to purchase up
to an
additional shares
from Synacor in the offering.
The following tables summarize the consolidated financial data
for our business for the periods presented. You should read this
summary consolidated financial data in conjunction with
“Selected Consolidated Financial Data,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, all included elsewhere
in this prospectus.
We derived the summary consolidated financial data for the years
ended December 31, 2004, 2005 and 2006 and as of
December 31, 2005 and 2006 from our audited consolidated
financial statements and related notes, which are included in
this prospectus. The summary consolidated financial data for the
three months ended March 31, 2006 and 2007 and as of
March 31, 2007 are derived from our unaudited condensed
consolidated financial statements and related notes included
elsewhere in this prospectus. The unaudited condensed
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and
include, in the opinion of management, all adjustments, which
include only normal recurring adjustments, that management
considers necessary for the fair presentation of the financial
information set forth in those statements. Historical results
are not necessarily indicative of future results and the results
for the three months ended March 31, 2007 are not
necessarily indicative of the results to be expected for the
year ending December 31, 2007.
The following table sets forth consolidated balance sheet data
as of December 31, 2005 and 2006. The table also sets forth
consolidated balance sheet data as of March 31, 2007:
•
on an actual basis;
•
on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of preferred stock into common stock
concurrently with the closing of this offering; and
•
on a pro forma as adjusted basis to give effect to (i) the
conversion of all outstanding shares of preferred stock into
common stock concurrently with the closing of the offering and
(ii) the receipt of the estimated net proceeds from the
sale
of shares
of common stock offered by us in this offering at an assumed
initial public offering price of $
, which is the midpoint of the range of the initial public
offering price listed on the cover page of this prospectus,
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
the filing of our amended and restated certificate of
incorporation immediately prior to the closing of this offering.
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus before deciding
to invest in our common stock. If any of the following events
actually occur or risks actually materialize, our business,
financial condition or results of operations could be materially
and adversely affected. In that case, the trading price of our
common stock could decline, and you might lose some or all of
your investment.
Risks Related to
Our Business
We have a limited
operating history and may not be able to achieve operational or
financial success.
We have only a limited history of generating revenues, and the
future revenue potential of our business is uncertain. As a
result of our short operating history, we have limited financial
data that can be used to evaluate our business and assess our
future prospects. Any evaluation of our business and our
prospects must be considered in light of our limited operating
history, which may not be indicative of future performance, and
the risks and uncertainties encountered by companies in our
stage of development. As an early stage company, we face
increased risks, uncertainties, expenses and difficulties. To
address these risks and uncertainties, we must do the following:
•
maintain and expand our current, and develop new, relationships
with broadband service providers and other potential customers;
•
maintain and expand our current, and develop new, relationships
with third-party content owners;
•
maintain and expand our current, and develop new, relationships
with search and advertising partners;
•
retain or improve our current revenue-sharing arrangements with
our customers, third-party content owners and our search and
advertising partners;
•
continue to develop new high-quality products that achieve
significant market acceptance;
•
continue to develop and upgrade our technology;
•
continue to enhance our information processing systems;
•
increase the number of subscribers that access our content and
purchase our premium offerings;
•
execute our business and marketing strategies successfully;
•
respond to competitive developments; and
•
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these objectives,
which could cause our business to suffer. In addition,
accomplishing these objectives might be very expensive, which
could adversely impact our operating results and financial
condition.
We have a history
of significant net losses and may not be profitable in future
periods.
We have incurred significant losses since inception, including a
net loss of $3.0 million in 2004, a net loss of
$0.8 million in 2005 and a net loss of $2.3 million in
2006. Due to increased
expenses, our net loss for the three months ended March 31,2007 exceeded our net loss for the comparable period in 2006,
and our net loss for the year ending December 31,2007 may exceed our net loss for 2006. Our expenses will
continue increasing as we implement initiatives designed to grow
our business, including, among other things, the development and
marketing of new services and products, licensing of content,
expansion of our infrastructure, international expansion and
general and administrative expenses associated with being a
public company. If our revenues do not sufficiently increase to
offset these expected increases in operating expenses, we will
continue to incur significant losses and will not become
profitable. Our revenue growth in recent periods should not be
considered indicative of our future performance. In fact, in
future periods, our revenues could decline. Accordingly, we may
not be able to achieve profitability in the future. Any failure
to achieve profitability may materially and adversely affect our
business, results of operations and financial condition, as well
as the trading price of our common stock.
Our quarterly
revenues and operating results can fluctuate, and if we fail to
meet or exceed the expectations of securities analysts or
investors, our stock price and the value of your investment
could decline substantially.
As a result of our limited operating history and the rapidly
changing nature of the markets in which we compete, our
quarterly revenues and operating results are likely to fluctuate
from period to period. These fluctuations may be caused by a
number of factors, many of which are beyond our control,
including:
•
any failure of significant customers to renew their agreements
with us;
•
our ability to attract new customers;
•
any failure to maintain strong relationships and favorable
revenue sharing arrangements with our search and advertising
partners, in particular Google;
•
our ability to increase sales of value-added services and paid
content to existing subscribers;
•
a reduction in the quantity or pricing of sponsored links that
subscribers click on;
•
a reduction in the pricing of display advertisements by
advertisers;
•
the timing and success of new service and product introductions
by us or our competitors;
•
service outages, other technical difficulties or security
breaches;
•
limitations relating to the capacity of our networks, systems
and processes;
•
changes in our pricing policies or those of our competitors;
•
changes in the prices our customers charge for value-added
services and paid content;
•
variations in the demand for our services and products and the
implementation cycles of our services and products by our
customers;
•
our failure to accurately estimate or control costs, including
costs related to the initial launch of new customers’
websites;
•
maintaining appropriate staffing levels and capabilities
relative to projected growth;
•
the timing of costs related to the development or acquisition of
technologies, services or businesses to support our existing
customer base and potential growth opportunities; and
•
general economic, industry and market conditions and those
conditions specific to Internet usage and online businesses.
Because the market for our services and products is relatively
new and rapidly changing, it is difficult to predict future
financial results. For these reasons, you should not rely on
period-to-period comparisons of our financial results, if any,
as indications of future results. Our future operating results
could fall below the expectations of securities analysts or
investors and significantly reduce the trading price of our
common stock. Fluctuations in our operating results will likely
increase the volatility of our stock price.
Google accounts
for a significant portion of our revenue, and any loss of, or
diminution in, our business relationship with Google could
materially and adversely affect our financial
performance.
We leverage traffic on our customers’ websites to generate
search and advertising revenues, a substantial portion of which
are derived from text-based links to advertisers’ websites
as a result of Internet searches. We have a revenue-sharing
relationship with Google, under which we typically include a
Google-branded search tool on customer portals. When a
subscriber makes a search request using this tool, we deliver it
to Google. Google returns search results to us that include
advertiser-sponsored links. If the subscriber clicks on a
sponsored link, Google receives payment from the sponsor of that
link and shares a portion of that payment with us. We then
typically share a portion of that payment with the applicable
customer. Google-related revenues accounted for approximately
49.7% of our net sales in 2006 and 46.3% of our net sales in the
three months ended March 31, 2007. Our agreement with
Google, which was renewed in July 2006, expires in July 2008,
unless we and Google mutually elect to renew it. If advertisers
were to discontinue their usage of Internet search, if
Google’s revenues from search-based advertising were to
decrease, if our share of Google’s revenues were to be
reduced, or if our agreement with Google were to be terminated
for any reason or renewed on less favorable terms, our revenues
could be materially and adversely affected.
Most of our
customers are MSOs and Telcos, and consolidation within the
cable and telecommunications industries, or migration of MSO and
Telco subscribers from one broadband service provider to
another, could adversely affect our business.
Our net sales from MSOs and Telcos, including our search and
advertising revenue generated by the traffic on these
customers’ websites, accounted for more than 83% of our net
sales in 2006 and more than 81% of our net sales in the three
months ended March 31, 2007. The cable and
telecommunications industries have experienced consolidation
over the past several years, and we expect that this trend will
continue. As a result of consolidation, some of our customers
may be acquired by companies with which we do not have existing
relationships and which may have relationships with one of our
competitors or may have the in-house capacity to perform the
services we provide. As a result, such acquisitions could cause
us to lose customers and the associated subscriber-based and
search and advertising revenues. For example, in April 2006,
Comcast Corporation, or Comcast, completed its acquisition of
Susquehanna Communications, which subsequently ended its
relationship with us as a customer in April 2007. In addition,
in July 2006, Time Warner Cable Inc., or Time Warner, and
Comcast announced that they completed the acquisition of
substantially all of the assets of Adelphia Communications
Corp., or Adelphia. In connection with the acquisition, we
entered into a new agreement with Time Warner, under which we
agreed that we will continue providing Adelphia subscribers who
became Time Warner subscribers the same services that such
subscribers had been receiving under our agreement with Adelphia
prior to the acquisition. We refer to this agreement as the
Adelphia legacy agreement. Our revenues from the traffic
associated with the former Adelphia subscribers have, however,
declined significantly and we expect revenues associated with
this traffic to continue to decline or cease in the near term.
Consolidation may also require us to reduce prices as a result
of enhanced customer leverage. We may not be able to offset the
effects of any price reductions, and we may not be
able to expand our customer base to counter any revenue declines
resulting from the loss of customers or subscribers.
MSO and Telco subscribers may become dissatisfied with their
current broadband service provider and may switch to another
provider. In the event that there is substantial subscriber
migration from our existing customers to service providers with
which we do not have a relationship, the fees that we receive on
a per-subscriber basis, and the related search and advertising
revenues generated by these customers’ websites, could
decline.
A loss of any
significant customer could negatively affect our financial
performance.
We derive a substantial portion of our net sales from a small
number of customers. When combined with the search and
advertising revenue associated with traffic generated from their
websites, net sales from two customers, Charter Communications
Inc., or Charter, and Time Warner (pursuant to the Adelphia
legacy agreement only), together accounted for approximately
45.8% of our net sales for the three months ended March 31,2007 and approximately 53.0% of our net sales for the year ended
December 31, 2006, with each of these customers accounting
for more than 10.0% in each such period. Our contracts with
these and other customers are generally long-term contracts,
with a term of approximately two to three years. If any one of
these key contracts is not renewed or otherwise is terminated,
or if revenues from these significant customers decline because
of competitive or other reasons, our revenues would decline and
our ability to achieve or sustain profitability would be
impaired. In addition to loss of subscriber-based revenues,
including portal and paid content sales, we would also lose
significant revenues from the related search and advertising
services that we provide on these customers’ websites. We
must maintain our key customer relationships, but we cannot
assure you that we will be successful in doing so.
Our agreements
with some of our customers and content providers contain
penalties for non-performance and fixed payments, which could
limit our ability to improve our financial
performance.
We have entered into service level agreements with most of our
customers. These agreements generally call for specific system
“up times” and 24 hours per day, seven days per
week support and include penalties for non-performance. We may
be unable to fulfill these commitments due to circumstances
beyond our control, which could subject us to substantial
penalties under those agreements, harm our reputation and result
in a reduction of revenues or the loss of customers, which would
have an adverse effect on our business.
Moreover, certain of our agreements with customers and content
providers require us to make fixed payments to them. The
aggregate amount of such fixed payments for the years ending
2007, 2008 and 2009 are approximately $7.1 million,
$6.5 million and $1.6 million, respectively. We are
required to make these fixed payments regardless of the
achievement of any revenue objectives or subscriber or usage
levels. If we do not achieve our financial objectives, these
contractual commitments would constitute a greater percentage of
our revenue than originally anticipated and affect our
profitability.
Our sales cycles
in contracting with new customers are long and unpredictable,
which makes it difficult to project when we will obtain new
customers and when we will generate additional revenues and cash
flows from those customers.
We market our services and products directly to broadband
service providers, including MSOs, Telcos and ISPs. New customer
relationships typically take time to finalize. Due to operating
procedures in many organizations, a significant time period may
pass between selection of our services and products by key
decision-makers and the signing of a contract. The length of
time between the initial customer sales call and the realization
of significant
sales is difficult to predict and can range from several months
to several years. As a result, it is difficult to predict when
we will obtain new customers and when we will begin to generate
revenues and cash flows from these potential new customers.
Our sales growth
will be adversely affected if we are unable to expand the
breadth of our services and products or to introduce new
services and products on a timely basis.
To retain our existing customers, attract new customers and
increase overall revenues, we must continue to develop and
introduce new services and products on a timely basis and
continue to develop additional features to our existing product
base. If our existing and prospective customers do not perceive
that we will deliver our services and products when we promise
to do so, and if they do not perceive our services and products
to be of sufficient value and quality, we may lose the
confidence of our existing customer base and fail to increase
sales to these existing customers, and we may not be able to
attract new customers, each of which would adversely affect our
operating results.
We rely on our
management team and need additional personnel to expand our
business, and the loss of key officers or an inability to
attract and retain qualified personnel could harm our
business.
We depend on the continued contributions of our senior
management and other key personnel, especially Ron Frankel, our
chief executive officer, Eric Blachno, our chief financial
officer, George Chamoun, our senior vice president, and Ross
Winston, our chief technology officer. The loss of the services
of any of our executive officers or other key employees could
harm our business. All of our executive officers and key
employees are at-will employees, which means they may terminate
their employment relationship with us at any time.
Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial,
finance, marketing and creative personnel. We face intense
competition for qualified individuals from numerous technology,
marketing and media companies, and we may incur significant
costs to attract them. We may be unable to attract and retain
suitably qualified individuals, or we may be required to pay
increased compensation in order to do so. If we are unable to
attract and retain the qualified personnel we need to succeed,
our business would suffer.
Volatility or lack of performance in the trading price of our
common stock following the consummation of this offering may
also affect our ability to attract and retain our key employees.
Many of our senior management personnel and other key employees
have become, or will become, vested in a substantial amount of
stock or stock options. Employees may be more likely to leave us
if the shares they own or the shares underlying their options
have significantly appreciated in value relative to the original
purchase prices of the shares or the exercise prices of the
options, or if the exercise prices of the options that they hold
are significantly above the trading price of our common stock.
If we are unable to retain our employees, our business,
operating results and financial condition would be harmed.
We depend on
third parties for content that is critical to our business, and
our business could suffer if we do not continue to obtain
high-quality content at a reasonable cost.
We license the content that we aggregate on our customers’
portals from numerous third-party content providers, and our
future success is highly dependent upon our ability to maintain
and enter into new relationships with these and other content
providers. In the future, some of our content providers may not
give us access to high-quality content or may increase the
royalties, fees or percentages that they charge us for their
content, which could have a
material negative effect on our operating results. Our rights to
the content that we offer to our customers and their subscribers
are not exclusive, and the content providers could license their
content to our competitors. Our content providers could even
grant our competitors exclusive licenses. In addition, our
customers are not prohibited from entering into content deals
directly with our content providers. Any failure to enter into
or maintain satisfactory arrangements with content providers
would adversely affect our ability to provide a variety of
interesting services and products to our customers. Our
reputation and operating results could suffer as a result, and
it may be more difficult for us to develop new relationships
with potential customers. Our costs as a percentage of revenues
may also increase due to price competition.
System failures
or capacity constraints could harm our business and financial
performance.
The provision of our services and products depends on the
continuing operation of our information technology and
communications systems. Any damage to or failure of our systems
could result in interruptions in our service. Interruptions in
our service could reduce our revenues and profits, and our
reputation could be damaged if people believe our systems are
unreliable. Our systems are vulnerable to damage or interruption
from snow storms, terrorist attacks, floods, fires, power loss,
telecommunications failures, computer viruses, computer denial
of service attacks or other attempts to harm our systems and
similar events. Our data center is also subject to break-ins,
sabotage and intentional acts of vandalism and to potential
disruptions if the operators of the facility have financial
difficulties. Although we maintain insurance to cover a variety
of risks, the scope and amount of our insurance coverage may not
be sufficient to cover our losses resulting from system failures
or other disruptions to our online operations. For example, the
limit on our business interruption insurance is approximately
$1.0 million. Any system failure or disruption and any
resulting losses that are not recoverable under our insurance
policies may materially harm our business, operating results and
financial condition.
Although we regularly
back-up our
systems and store these system
back-ups in
a site located in the greater Buffalo, New York area, we do not
have full second-site redundancy. If we were forced to rely on
our system
back-ups, we
would experience significant delays in restoring the
functionality of our customers’ websites and could
experience loss of data, which would harm our business and our
operating results.
Our services and
products may become less competitive or even obsolete if we fail
to respond to technological developments.
Our future success will depend, in part, on our ability to
modify or enhance our services and products to meet customer and
subscriber needs, to add functionality and to address
technological advancements that would improve their performance.
For example, if our services and products do not adapt to the
increasing video usage on the Internet or to take into account
evolving developments in social networking, then they could
begin to appear obsolete.
To remain competitive, we will need to develop new services and
products and adapt our existing ones to address these and other
evolving technologies and standards. However, we may be
unsuccessful in identifying new opportunities or in developing
or marketing new services and products in a timely or
cost-effective manner. In addition, our product innovations may
not achieve the market penetration or price levels necessary for
profitability. If we are unable to develop enhancements to, and
new features for, our existing services and products or if we
are unable to develop new services and products that keep pace
with rapid technological developments or changing industry
standards, our services and products may become obsolete, less
marketable and less competitive, and our business will be harmed.
We must
effectively manage growth in our business.
To date, we have expanded our business through organic growth.
We expect to continue to grow organically, and we may also grow
through strategic acquisitions in the future. This growth has
placed, and may continue to place, significant demands on our
management and our operational and financial infrastructure. Our
ability to manage our growth effectively and to integrate new
technologies and acquisitions into our existing business will
require us to continue to expand our operational, financial and
management information systems and to continue to retain,
attract, train, motivate and manage key employees. Continued
growth could strain our ability to:
•
develop and improve our operational, financial and management
controls;
•
enhance our reporting systems and procedures;
•
recruit, train and retain highly skilled personnel;
•
maintain our quality standards; and
•
maintain content owner and customer satisfaction.
Managing our growth will require significant expenditures and
allocation of valuable management resources. If we fail to
achieve the necessary level of efficiency in our organization as
it grows, our business, operating results and financial
condition would be harmed.
Expansion into
international markets, which is an important part of our
strategy, but where we have limited experience, will subject us
to risks associated with international operations.
We plan to expand our product offerings internationally,
particularly in Europe and, over the long term, in Asia and
Latin America. We have limited experience in marketing and
operating our services and products in international markets,
and we may not be able to successfully develop our business in
these markets. Our success in these markets will be directly
linked to the success of relationships with potential customers,
content partners and other third parties.
As the international markets in which we plan to operate
continue to grow, competition in these markets will intensify.
Local companies may have a substantial competitive advantage
because of their greater understanding of and focus on the local
markets. Some of our domestic competitors who have substantially
greater resources than we do may be able to more quickly and
comprehensively develop and grow in the international markets.
International expansion may also require significant financial
investment including, among other things, the expense of
developing localized products, the costs of acquiring foreign
companies and the integration of such companies with our
operations, expenditure of resources in developing customer and
content relationships and the increased costs of supporting
remote operations.
Other risks of doing business in international markets include
the increased risks and burdens of complying with different
legal and regulatory standards, difficulties in managing and
staffing foreign operations, recruiting and retaining talented
direct sales personnel, limitations on the repatriation of funds
and fluctuations of foreign exchange rates, varying levels of
Internet technology adoption and infrastructure, and our ability
to enforce contracts in foreign jurisdictions. In addition, our
success in international expansion could be limited by barriers
to international expansion such as tariffs, adverse tax
consequences and technology export controls. If we cannot manage
these risks effectively, the costs of doing business in some
international markets may be prohibitive or our costs may
increase disproportionately to our revenues.
We may expand our
business through acquisitions of, or investments in, other
companies or new technologies, which may divert our
management’s attention or prove not to be
successful.
Although we have no present understandings, commitments or
agreements to pursue acquisitions of other businesses, we may
decide to do so in the future. Future acquisitions could divert
management’s time and focus from operating our business. In
addition, integrating an acquired company, business or
technology is risky and may result in unforeseen operating
difficulties and expenditures, including, among other things:
•
incorporating new technologies into our existing business
infrastructure;
•
consolidating corporate and administrative functions;
•
coordinating our sales and marketing functions to incorporate
the new business or technology;
•
maintaining morale, retaining and integrating key employees to
support the new business or technology and managing our
expansion in capacity; and
•
maintaining standards, controls, procedures and policies
(including effective internal controls over financial reporting
and disclosure controls and procedures).
In addition, a significant portion of the purchase price of
companies we may acquire may be allocated to acquired goodwill
and other intangible assets, which must be assessed for
impairment at least annually. In the future, if our acquisitions
do not yield expected returns, we may be required to take
charges to our earnings based on this impairment assessment
process, which could harm our operating results.
Future acquisitions could result in potentially dilutive
issuances of our equity securities, including our common stock,
or the incurrence of debt, contingent liabilities, amortization
expenses or acquired in-process research and development
expenses, any of which could harm our financial condition and
operating results. Future acquisitions may also require us to
obtain additional financing, which may not be available on
favorable terms or at all.
Our business
depends, in part, on our ability to protect and enforce our
intellectual property rights.
The protection of our intellectual property is critical to our
success. We rely on copyright and trademark enforcement,
contractual restrictions and trade secret laws to protect our
proprietary rights. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and nondisclosure agreements with certain parties
with whom we conduct business to limit access to and disclosure
of our proprietary information. However, if we are unable to
adequately protect our intellectual property, our business may
suffer from the piracy of our technology and the associated loss
in revenue. Other parties may also independently develop similar
or competing products that do not infringe upon our intellectual
property rights, and that are similar or superior to our
technology.
Protecting against the unauthorized use of our intellectual
property and other proprietary rights is expensive, difficult
and, in some cases, impossible. Litigation may be necessary in
the future to enforce or defend our intellectual property
rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such
litigation could be costly and divert management resources,
either of which could harm our business. Furthermore, many of
our current and potential competitors have the ability to
dedicate substantially greater resources to enforce their
intellectual property rights than we do. Accordingly, despite
our efforts, we may not be able to prevent third parties from
infringing upon or misappropriating our intellectual property.
Any claims from a
third party that we are infringing upon its intellectual
property, whether valid or not, could subject us to costly and
time-consuming litigation or expensive licenses or force us to
curtail some services or products.
Companies in the Internet and technology industries own large
numbers of patents, copyrights, trademarks and trade secrets and
frequently enter into litigation based on allegations of
infringement or other violations of intellectual property
rights. As we face increasing competition, the possibility of
intellectual property rights claims against us grows. Our
technologies may not be able to withstand any third-party claims
or rights against their use. Any intellectual property claims,
with or without merit, could be time-consuming, expensive to
litigate or settle and could divert management resources and
attention. An adverse determination also could prevent us from
offering our services and products to others and may require
that we procure substitute products or services for our
customers.
In the case of any intellectual property rights claim, we may
have to pay damages or stop using technology found to be in
violation of a third party’s rights. We may have to seek a
license for the technology, which may not be available on
reasonable terms and may significantly increase our operating
expenses. The technology also may not be available for license
to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require
significant effort and expense. If we cannot license or develop
technology for the infringing aspects of our business, we may be
forced to limit our service and product offerings and may be
unable to compete effectively. Any of these consequences could
harm our operating results.
We are not currently subject to any legal proceedings with
respect to our intellectual property; however, we may from time
to time become a party to various legal proceedings with respect
to our intellectual property arising in the ordinary course of
our business.
Any unauthorized
disclosure or theft of private information we gather could harm
our reputation and subject us to claims or litigation.
We collect, and have access to, personal information of
subscribers, including names, addresses, account numbers, credit
card numbers and email addresses. Unauthorized disclosure of
personally identifiable information regarding website visitors,
whether through breach of our systems by an unauthorized party,
employee theft or misuse, or otherwise, could harm our business.
If there were an inadvertent disclosure of personally
identifiable information, or if a third party were to gain
unauthorized access to the personally identifiable information
we possess, our operations could be seriously disrupted and we
could be subject to claims or litigation arising from damages
suffered by subscribers or our customers. In addition, we could
incur significant costs in complying with the multitude of
state, federal and foreign laws regarding the unauthorized
disclosure of personal information. Finally, any perceived or
actual unauthorized disclosure of the information we collect
could harm our reputation, substantially impair our ability to
attract and retain customers and have an adverse impact on our
business.
We may require
additional capital to grow our business, and this capital may
not be available on acceptable terms or at all.
We have historically relied on outside financing, principally
equity investments by venture capital investors, which are a
substantial majority of our existing stockholders, and, to a
lesser degree, cash flows from operations to fund our
operations, capital expenditures and expansion. In the future,
the operation of our business and our growth strategy may
require significant additional capital, especially if we were to
accelerate our expansion and acquisition plans. If the cash
generated from operations and from this offering are not
sufficient to meet our capital requirements, we will need to
seek additional capital, potentially through debt or equity
financings, to fund our growth. We may not be able to raise
needed capital on terms
acceptable to us or at all. Financings, if available, may be on
terms that are dilutive or potentially dilutive to our
stockholders, and the prices at which new investors would be
willing to purchase our securities may be lower than the initial
public offering price, in which case our existing stockholders
would suffer substantial dilution. The holders of new securities
may also receive rights, preferences or privileges that are
senior to those of existing holders of our common stock. If new
sources of financing are required but are insufficient or
unavailable, we could be required to delay, abandon or otherwise
modify our growth and operating plans to the extent of available
funding, which would harm our ability to grow our business.
Changes in, or
interpretations of, accounting rules and regulations, including
recent rules and regulations regarding expensing of stock
options, could result in unfavorable accounting charges and make
attracting and retaining personnel more difficult.
We prepare our financial statements to conform to accounting
principles generally accepted in the United States, or GAAP.
These accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the Securities
and Exchange Commission, or SEC, and other regulatory bodies. A
change in accounting principles could have a significant effect
on our reported results and might affect our reporting of
transactions completed before a change is announced. For
example, we have used stock options as a fundamental component
of our employee compensation packages. We believe that stock
options directly motivate our employees to maximize long-term
stockholder value and, through the use of vesting, encourage
employees to remain in our employ. Several regulatory agencies
and entities have made regulatory changes that could make it
more difficult or expensive for us to grant stock options to
employees. For example, the FASB released Statement of Financial
Accounting Standards, or SFAS 123R, “Share-Based
Payments,” which required us to record a charge to earnings
for employee stock option grants beginning in January 2006. We
may, as a result of these changes, incur increased compensation
costs or change our equity compensation strategy, which could
make it more difficult to attract, retain and motivate
employees. Any of these factors could materially and adversely
affect our business, operating results and financial condition.
Investors could
lose confidence in our financial reports, and the trading price
of our common stock may be adversely affected, if our internal
controls over financial reporting are found by management or by
our independent registered public accounting firm not to be
adequate or if we disclose material weaknesses in those
controls.
Effective internal controls are necessary for us to provide
reliable financial reports and prevent fraud. In addition,
Section 404 of the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, will require us to evaluate and report on
our internal control over financial reporting and have our
independent registered public accounting firm attest to our
evaluation beginning with our Annual Report on
Form 10-K
for the year ending December 31, 2008. We are in the
process of preparing and implementing an internal plan for
compliance with Section 404 and strengthening and testing
our system of internal controls to provide the basis for our
report. The process of implementing our internal controls and
complying with Section 404 will be expensive and time
consuming, and will require significant attention of management.
We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial
processes and reporting in the future. Even if we conclude, and
our independent registered public accounting firm concurs, that
our internal control over financial reporting provides
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles, because of its inherent limitations,
internal control over financial reporting may not prevent or
detect fraud or misstatements. Failure to implement required new
or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations.
If we or our independent registered public accounting firm
discover a material weakness in our internal control over
financial reporting, the disclosure of that fact, even if
quickly remedied, could reduce the market’s confidence in
our financial statements and harm our stock price.
In addition, a delay in compliance with Section 404 could
subject us to a variety of administrative sanctions, including
ineligibility for short form resale registration, action by the
SEC, the suspension or delisting of our common stock from The
Nasdaq Global Market and the inability of registered
broker-dealers to make a market in our common stock, which would
further reduce the trading price of our common stock and could
harm our business.
Completion of our
initial public offering may limit our ability to use our net
operating loss carryforwards.
As of December 31, 2006, we had substantial federal and
state net operating loss, or NOL, carryforwards. Under the
provisions of the Internal Revenue Code of 1986, as amended,
substantial changes in our ownership may limit the amount of NOL
carryforwards that we can utilize in the future to offset
taxable income. We believe that, as a result of this initial
public offering, it is possible that a change in our ownership
will be deemed to have occurred. If such a change in our
ownership is deemed to occur, our ability to use our NOL
carryforwards in any fiscal year may be limited under these
provisions.
Risks Related to
Our Industry
The growth of the
market for our services and products depends on the continued
growth of the Internet as a medium for content, advertising,
commerce and communications.
Expansion in the sales of our services and products depends on
the continued acceptance of the Internet as a platform for
content, advertising, commerce and communications. The
acceptance of the Internet as a medium for such uses could be
adversely impacted by delays in the development or adoption of
new standards and protocols to handle increased demands of
Internet activity, security, reliability, cost, ease-of-use,
accessibility and quality-of-service. The performance of the
Internet and its acceptance as such a medium has been harmed by
viruses, worms, and similar malicious programs, and the Internet
has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure. If for any
reason the Internet does not remain a medium for widespread
content, advertising, commerce and communications, the demand
for our services and products would be significantly reduced,
which would harm our business.
The growth of the
market for our services and products depends on the development
and maintenance of the Internet infrastructure.
Our business strategy depends on continued Internet and
broadband access growth. Any downturn in the use or growth rate
of the Internet or broadband access would be detrimental to our
business. If the Internet continues to experience significant
growth in number of users, frequency of use and amount of data
transmitted, the Internet infrastructure might not be able to
support the demands placed on it and the performance or
reliability of the Internet may be adversely affected. The
success of our business therefore depends on the development and
maintenance of a sound Internet infrastructure. This includes
maintenance of a reliable network backbone with the necessary
speed, data capacity and security, as well as timely development
of complementary products, such as routers, for providing
reliable Internet access and services. Consequently, as Internet
usage increases, the growth of the market for our products
depends upon improvements made to the Internet as well as to
individual customers’ networking
infrastructures to alleviate overloading and congestion. In
addition, any delays in the adoption of new standards and
protocols required to govern increased levels of Internet
activity or increased governmental regulation may have a
detrimental effect on the Internet infrastructure.
A substantial
portion of our net sales are derived from search and
advertising, so that our net sales might decline if advertisers
do not continue their usage of the Internet as an advertising
medium.
We have derived and expect to continue to derive a substantial
portion of our net sales from search-based and other advertising
on our customers’ websites. However, the prospects for
continued demand and market acceptance for Internet advertising
are uncertain. If advertisers do not continue to increase their
usage of the Internet, our revenue might stagnate or decline.
Advertisers that have traditionally relied on other advertising
media may not advertise on the Internet. Most advertising
agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the
Internet and devote only a small portion of their advertising
expenditures to online advertising. As the Internet evolves,
advertisers may find online advertising to be a less attractive
or effective means of promoting their services and products than
traditional methods of advertising and may not continue to
allocate funds for Internet advertising. Many historical
predictions by industry analysts and others concerning the
growth of the Internet as a commercial medium have overstated
the growth of the Internet and you should not rely upon them.
This growth may not occur or may occur more slowly than
estimated.
Most of our search revenues are based on the number of paid
“clicks” on sponsored links that are included in
search results generated from our customers’ websites.
Generally, each time a subscriber clicks on a sponsored link,
the search provider that provided the commercial search result
receives a fee from the advertiser who paid for such commercial
click and the search provider pays us a portion of that fee and
we, in turn, typically share a portion of the fee we receive
with our customer. If an advertiser receives what it perceives
to be a large number of clicks for which it needs to pay, but
that do not result in a desired activity or an increase in
sales, the advertiser may reduce or eliminate its advertisements
through the search provider that provided the commercial search
result to us. This may lead to a loss of revenue to our search
providers and consequently to lesser fees paid to us, which
could have a material negative effect on our financial results.
We cannot assure you that market prices for online advertising
will not decrease due to competitive or other factors. In
addition, if a large number of Internet users use filtering
software programs that limit or remove advertising from the
users’ view, advertisers may perceive that Internet
advertising is not effective and may choose not to advertise on
the Internet. Moreover, there are varying standards for the
measurement of the effectiveness of Internet advertising, and no
single standard may develop sufficiently to support online
advertising as a significant advertising medium. If no such
standards develop, advertisers may be reluctant to transition to
the Internet from conventional media.
The market for
Internet-based services and products in which we operate is
highly competitive, and if we cannot compete effectively, our
sales may decline and our business may be harmed.
Competition in the market for Internet-based services and
products in which we operate is intense and involves
rapidly-changing technologies and customer and subscriber
requirements, as well as evolving industry standards and
frequent product introductions. Our primary competitors include
broadband service providers with internal information technology
staff capable of developing similar solutions in-house and
Yahoo! Inc., or Yahoo!, InfoSpace, Inc., or InfoSpace, Ask.com,
a wholly-owned business of IAC/InterActiveCorp, or Ask, Google,
AOL
LLC, or AOL, and MSN, a division of Microsoft Corporation, or
Microsoft. Advantages of some of our existing and potential
competitors’ over us include the following:
•
significantly greater revenues and financial resources;
•
stronger brand and consumer recognition;
•
the capacity to leverage their marketing expenditures across a
broader portfolio of services and products;
•
more extensive proprietary intellectual property from which they
can develop or aggregate content without having to pay fees or
paying significantly lower fees than we do;
•
pre-existing relationships with content providers that afford
them access to content while blocking the access of competitors
to that same content;
•
pre-existing relationships with MSOs, Telcos and ISPs that
afford them a strong customer base;
•
lower labor and development costs; and
•
broader global distribution and presence.
If we are unable to compete effectively or we are not as
successful as our competitors in our target markets, our sales
could decline, our margins could decline and we could lose
market share, any of which would materially harm our business,
operating results and financial condition.
Subscriber tastes
continually change and are unpredictable, and our sales may
decline if we fail to enhance our service and content offerings
to achieve continued subscriber acceptance.
Our business depends on aggregating and providing services and
content that our customers will place on their websites,
including news, entertainment, sports and other content that
subscribers find engaging, and value-added services and paid
content that subscribers will buy. We must continue to invest
significant resources in licensing efforts, research and
development and marketing to enhance our service and content
offerings, and we must make decisions about these matters well
in advance of product releases to implement them in a timely
manner. Our success depends, in part, on unpredictable and
volatile factors beyond our control, including subscriber
preferences, competing content providers and portals and the
availability of other news, entertainment, sports and other
services and content. If our services and content are not
responsive to the requirements of our customers or the
preferences of their subscribers, or the services and content
are not brought to market in a timely and effective manner, our
business, operating results and financial condition would be
harmed. Even if our services and content are successfully
introduced and initially adopted, a subsequent shift in the
preferences of our customers or their subscribers could cause a
decline in our services and content’s popularity that could
materially reduce our revenues and harm our business, results of
operations and financial condition.
Government
regulation of the Internet continues to evolve, and new laws and
regulations could significantly harm our financial
performance.
Today, there are relatively few laws specifically directed
towards conducting business over the Internet. We expect more
stringent laws and regulations relating to the Internet to be
enacted. The adoption or modification of laws related to the
Internet could harm our business, operating results and
financial condition by, among other things, increasing our costs
and administrative burdens. Due to the increasing popularity and
use of the Internet, many laws
and regulations relating to the Internet are being debated at
the international, federal and state levels, which are likely to
address a variety of issues such as:
•
user privacy and expression;
•
ability to collect
and/or share
necessary information that allows us to conduct business on the
Internet;
•
export compliance;
•
pricing and taxation;
•
fraud;
•
advertising;
•
intellectual property rights;
•
consumer protection;
•
protection of minors;
•
content regulation;
•
information security; and
•
quality of services and products.
Several federal laws that could have an impact on our business
have been adopted. The Digital Millennium Copyright Act of 1998
is intended to reduce the liability of online service providers
of third-party content, including content that may infringe
copyrights or rights of others. The Children’s Online
Privacy Protection Act imposes additional restrictions on the
ability of online services to collect user information from
minors. In addition, the Protection of Children from Sexual
Predators Act requires online service providers to report
evidence of violations of federal child pornography laws under
certain circumstances.
Laws and regulations regarding user privacy and information
security impact our business because we collect and use personal
information regarding the users of our customers’ websites.
We use this information to deliver more relevant content and
services and provide subscribers with a personalized online
experience. We share this information on an aggregate basis with
our partners and, subject to confidentiality agreements, to
prospective partners and sponsors. Laws such as the CAN-SPAM Act
of 2003 or other user privacy or security laws could restrict
our and our customers’ ability to market products to their
subscribers, create uncertainty in Internet usage and reduce the
demand for our services and products or require us to redesign
our customers’ Internet portals.
We could find it costly for us to comply with existing and
potential laws and regulations, and they could harm our
marketing efforts and our attractiveness to advertisers by,
among other things, restricting our ability to collect
demographic and personal information from subscribers or to use
or disclose that information in certain ways. If we were to
violate these laws or regulations, or if it were alleged that we
had, we could face private lawsuits, fines, penalties and
injunctions and our business could be harmed. Even though we
believe we meet the safe harbor requirements of the Digital
Millennium Copyright Act, we could be exposed to copyright
actions, which could be costly and time-consuming to defend.
Finally, the applicability to the Internet and other online
services of existing laws in various jurisdictions governing
issues such as property ownership, sales and other taxes, libel
and personal privacy is uncertain. Any new legislation or
regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business,
or the application of existing laws and regulations to the
Internet and other online services could also
increase our costs of doing business, discourage Internet
communications, reduce demand for our services, and expose us to
substantial liability.
Risks Related to
this Offering and Ownership of Our Common Stock
Our existing
stockholders will continue to have substantial control over us
after this offering, which could limit your ability to influence
the outcome of key corporate decisions, such as an acquisition
of our company.
Following the consummation of this offering, our directors,
executive officers and holders of more than 5% of our common
stock, together with their affiliates, will beneficially own, in
the aggregate, approximately % of
our outstanding common stock, or %
if the underwriters exercise their over-allotment option in
full. As a result, these stockholders, if they act together,
would have the ability to control the outcome of matters
submitted to our stockholders for approval, including the
election of directors and any merger, consolidation or sale of
all or substantially all of our assets. In addition, these
stockholders, if they act together, would have the ability to
control the management and affairs of our company. Accordingly,
this concentration of ownership might harm the trading price of
our common stock by:
•
delaying, deferring or preventing a change in our control;
•
impeding a merger, consolidation, takeover or other business
combination involving us; or
•
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
Future sales of
our common stock may cause the trading price of our common stock
to decline.
If our existing stockholders, particularly our directors, their
affiliated venture capital funds and our executive officers,
sell substantial amounts of our common stock in the public
market, or are perceived by the public market as intending to
sell, the trading price of our common stock could decline below
the initial public offering price. Based on shares outstanding
as of March 31, 2007, upon completion of this offering, we
will have
outstanding shares
of common stock
(or shares
if the underwriters exercise their over-allotment option in
full). Of these shares, only the shares of common stock sold in
this offering will be immediately freely tradable, without
restriction, in the public market, except for those shares held
by “affiliates,” as that term is defined in
Rule 144 under the Securities Act of 1933, as amended, or
the Securities Act.
Our directors, executive officers, holders of substantially all
of our common stock and holders of options and warrants to
purchase our stock have agreed with the underwriters, subject to
certain exceptions, not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period through the
date that is 180 days after the date of this prospectus,
except with the prior written consent of Deutsche Bank
Securities Inc. In addition, substantially all of the holders of
our common stock and options to purchase our common stock have
previously entered into agreements with us not to sell or
otherwise transfer any of their common stock or securities
convertible into or exchangeable for shares of common stock for
a period through the date 180 days after the date of this
prospectus.
The 180-day
restricted period under the agreements with the underwriters
described in the preceding paragraph will be automatically
extended if: (1) during the last 17 days of the
180-day
restricted period we release earnings results or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
180-day
restricted period, we
announce that we will release earnings results during the
16-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the release of the earnings results or
material news or the occurrence of a material event relating to
us.
Upon the expiration of the contractual
lock-up
agreements pertaining to this offering 180 days from the
date of this prospectus, or such longer period described above,
up to an
additional shares
will be eligible for sale in the public
market, of
which will be held by directors, executive officers and other
affiliates and will be subject to volume limitations under
Rule 144 under the Securities Act and, in certain cases,
various vesting agreements. Some of our existing stockholders
have demand and piggyback rights to require us to register with
the Securities and Exchange Commission, or SEC, up to
11,671,891 shares of our common stock, subject to
contractual
lock-up
agreements. See “Description of Capital
Stock—Registration Rights” for more information. If we
register any of these shares of common stock, the stockholders
would be able to sell those shares freely in the public market.
In addition, the shares that are either subject to outstanding
options or that may be granted in the future under our 2007
Equity Incentive Plan, and the shares that are subject to
outstanding warrants, will become eligible for sale in the
public market to the extent permitted by the provisions of
various vesting agreements, the contractual
lock-up
agreements and Rules 144 and 701 under the Securities Act.
After this offering, we intend to register the shares of our
common stock that we may issue under our equity plans. Once we
register these shares, they can be freely sold in the public
market upon issuance, subject to any vesting or contractual
lock-up
agreements.
If any of these additional shares described are sold, or if it
is perceived that they will be sold, in the public market, the
trading price of our common stock could decline. For additional
information, see “Shares Eligible for Future Sale.”
Some provisions
of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that you
may consider favorable or prevent the removal of our current
board of directors and management.
Our amended and restated certificate of incorporation and
amended and restated bylaws contain provisions that may
discourage, delay or prevent a merger or acquisition that you
may consider favorable or prevent the removal of our current
board of directors and management. We have a number of
anti-takeover devices in place that will hinder takeover
attempts, including:
•
our board of directors is classified into three classes of
directors with staggered three-year terms;
•
our directors may only be removed for cause, and only with the
affirmative vote of at least 50.1% of the voting interest of
stockholders entitled to vote;
•
only our board of directors and not our stockholders will be
able to fill vacancies on our board of directors;
•
only our chairman of the board, our chief executive officer or a
majority of our board of directors, and not our stockholders,
are authorized to call a special meeting of stockholders;
•
our stockholders will be able to take action only at a meeting
of stockholders and not by written consent;
our amended and restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established and shares of which may be issued without
stockholder approval; and
•
advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of stockholders.
These provisions and other provisions in our charter documents
could discourage, delay or prevent a transaction involving a
change in our control. Any delay or prevention of a change of
control transaction could cause stockholders to lose a
substantial premium over the then-current trading price of their
shares. These provisions could also discourage proxy contests
and could make it more difficult for you and other stockholders
to elect directors of your choosing or to cause us to take other
corporate actions you desire.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which, subject to some exceptions,
prohibits “business combinations” between a Delaware
corporation and an “interested stockholder,” which is
generally defined as a stockholder who becomes a beneficial
owner of 15% or more of a Delaware corporation’s voting
stock, for a three-year period following the date that the
stockholder became an interested stockholder. Section 203
could have the effect of delaying, deferring or preventing a
change of control that our stockholders might consider to be in
their best interests. See “Description of Capital
Stock—Anti-Takeover Effects of Our Certificate of
Incorporation and Bylaws and Delaware Law.”
We have not paid
cash dividends on our capital stock and we do not expect to do
so in the foreseeable future.
We have not historically paid cash dividends on our capital
stock. We anticipate that we will retain all future earnings and
cash resources for the future operation and development of our
business, and as a result, we do not anticipate paying any cash
dividends to holders of our capital stock for the foreseeable
future. Any future determination regarding the payment of any
dividends will be made at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements, general business conditions
and other factors that our board may deem relevant.
Consequently, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way
to realize any future gains on their investment. Investors
seeking cash dividends should not invest in our common stock.
We will have
broad discretion in the use of the net proceeds from this
offering and may fail to apply these proceeds
effectively.
Our management will have broad discretion in the application of
the net proceeds that we will receive from this offering,
including for working capital, possible acquisitions and other
general corporate purposes. We cannot specify with certainty the
actual uses of the net proceeds that we will receive from this
offering. You may not agree with the manner in which our
management chooses to allocate and spend the net proceeds.
Pending their use, we may invest the net proceeds from this
offering in a manner that does not produce income or that loses
value. The failure by our management to apply these funds
effectively could harm our business and financial condition.
Purchasers in
this offering will suffer immediate and substantial
dilution.
The initial public offering price of our common stock is
substantially higher than the net tangible book value per share
of our common stock outstanding immediately after this offering.
Our pro forma net tangible book value as of March 31, 2007
was $16.8 million, or approximately $1.43 per share. Our
pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our
total liabilities and divided
by 11,800,955 shares of common stock outstanding after
giving effect to the automatic conversion of all outstanding
shares of preferred stock into shares of common stock upon the
closing of this offering. Investors who purchase our common
stock in this offering will pay a price per share that
substantially exceeds the pro forma net tangible book value per
share of our common stock. If you purchase our common stock in
this offering, you will experience immediate and substantial
dilution of $ in the net
tangible book value per share of our common stock, based upon
the initial public offering price of
$ per share, which represents the
mid-point of the range set forth on the cover page of this
prospectus. Investors who purchase our common stock in this
offering will have purchased % of
the shares outstanding immediately after the offering, but will
have paid % of the total
consideration for those shares. If previously granted options or
warrants are exercised, additional dilution will occur. As of
March 31, 2007, options to purchase 2,354,720 shares
of our common stock with a weighted average exercise price of
approximately $0.94 per share were outstanding. In addition, as
of the date of this prospectus, warrants to purchase an
aggregate of 598,292 shares of our common stock with an
exercise price of $1.17 were outstanding. Exercise of these
options and warrants will result in additional dilution to
purchasers of our common stock in this offering.
An active market
for our common stock may not develop, which could make it
difficult for you to sell your shares of common stock and could
have a material adverse effect on the value of your
investment.
Prior to this offering, there has been no public market for
shares of our common stock. We plan to submit an application to
have our common stock approved for listing on The Nasdaq Global
Market under the symbol “SYNC.” However, we cannot
assure you that an active public trading market for our common
stock will develop on that exchange or elsewhere or, if
developed, that any market will be active or sustained.
Accordingly, we cannot assure you of the liquidity of any such
market, your ability to sell your shares of common stock or the
prices that you may obtain for your shares of common stock. As a
result, you could lose all or part of your investment.
The trading price
and volume of our common stock is likely to be volatile, and you
might not be able to sell your shares at or above the initial
public offering price.
Even if an active trading market develops, the trading price of
our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to
occur. If the trading price of our common stock declines
significantly, you may be unable to resell your shares at or
above your purchase price. We cannot assure you that the trading
price of our common stock will not fluctuate or decline
significantly in the future. Some of the factors that could
negatively affect our share price or result in fluctuations in
the price or trading volume of our common stock include:
•
variations in our financial performance;
•
announcements of technological innovations, new services and
products, strategic alliances or significant agreements by us or
by our competitors;
•
recruitment or departure of key personnel;
•
changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
our common stock;
•
market conditions in our industry, the industries of our
customers and the economy as a whole;
adoption or modification of laws, regulations, policies,
procedures or programs applicable to our business or
announcements relating to these matters; and
•
the expiration of contractual
lock-up
agreements.
In addition, if the market for technology stocks or the stock
market in general experiences loss of investor confidence, the
trading price of our common stock could decline for reasons
unrelated to our business, operating results or financial
condition. The trading price of our common stock might also
decline in reaction to events that affect other companies in our
industry even if these events do not directly affect us. Some
companies that have had volatile market prices for their
securities have had securities class actions filed against them.
A suit filed against us, regardless of its merits or outcome,
could cause us to incur substantial costs and could divert
management’s attention.
If securities or
industry analysts do not publish research or reports about our
company, our stock price and trading volume could
decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts cease coverage
of our company or fail to publish reports on us regularly,
demand for our stock could decrease, which might cause our stock
price and trading volume to decline.
We will incur
increased costs and demands upon management as a result of
complying with federal securities laws and regulations
applicable to public companies, which could adversely affect our
financial performance.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, the Sarbanes-Oxley Act and the rules and
regulations of The Nasdaq Global Market. The Sarbanes-Oxley Act,
as well as rules subsequently implemented by the SEC and The
Nasdaq Global Market, imposes additional requirements on public
companies, including enhanced corporate governance practices.
For example, the Nasdaq listing requirements require that listed
companies satisfy certain corporate governance requirements
relating to independent directors, audit committees,
distribution of annual and interim reports, stockholder
meetings, stockholder approvals, solicitation of proxies,
conflicts of interest, stockholder voting rights and codes of
business conduct.
The requirements of these rules and regulations will increase
our legal, accounting and financial compliance costs, will make
some activities more difficult, time-consuming and costly and
may also place undue strain on our personnel, systems and
resources. Our management and other personnel will need to
devote a substantial amount of time to these requirements. These
rules and regulations will also make it more difficult and more
expensive for us to maintain directors’ and officers’
liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to maintain
coverage. If we are unable to maintain adequate directors’
and officers’ insurance, our ability to recruit and retain
qualified directors, especially those directors who may be
considered independent for purposes of Nasdaq rules, and
officers will be significantly curtailed.
This prospectus includes forward-looking statements that reflect
our current views with respect to future events or our future
financial performance and involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to
differ materially from any future results, levels of activity,
performance or achievements expressed or implied by these
forward-looking statements. Words such as, but not limited to,
“believes,”“expects,”“anticipates,”“estimates,”“intends,”“plans,”“targets,”“likely,”“may,”“might,”“will,”“would,”“should,”“could,” and similar expressions or phrases identify
forward-looking statements. Forward-looking statements include,
but are not limited to, statements about:
our ability to maintain or broaden relationships with existing
customers and develop relationships with new customers;
•
our success in anticipating market needs or developing new or
enhanced services and products to meet those needs;
•
our expectations regarding market acceptance of our services and
products;
•
our ability to recruit and retain qualified technical and other
key personnel;
•
our competitive position in our industry, as well as innovations
by our competitors;
•
our success in managing growth;
•
our plans to expand into international markets;
•
our success in identifying and managing potential acquisitions;
•
our capacity to protect our confidential information and
intellectual property rights;
•
our need to obtain additional funding and our ability to obtain
funding in the future on acceptable terms;
•
our expectations regarding the use of proceeds from this
offering; and
•
anticipated trends and challenges in our business and the
markets in which we operate.
Any forward-looking statements contained in this prospectus are
based upon our historical performance and our current plans,
estimates and expectations. The inclusion of this
forward-looking information should not be regarded as a
representation by us, the underwriters or any other person that
the future plans, estimates or expectations contemplated by us
will be achieved. All forward-looking statements involve risks,
assumptions and uncertainties. The occurrence of the events
described, and the achievement of the expected results, depend
on many factors, some or all of which are not predictable or
within our control. Actual results may differ materially from
expected results. See “Risk Factors” and elsewhere in
this prospectus for a more complete discussion of these risks,
assumptions and uncertainties and for other risks and
uncertainties. These risks, assumptions and uncertainties are
not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any
of our forward-looking statements. Other unknown or
unpredictable factors also could harm our results. In light of
these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. Except as
required by law, we undertake no obligation to update publicly
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
We estimate that our net proceeds from the sale of
the shares
of common stock that we are offering will be approximately
$ , assuming an initial public
offering price of $ per share,
which is the midpoint of the range of the initial public
offering price listed on the cover page of this prospectus, and
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us. If
the underwriters’ option to purchase additional shares in
this offering is exercised in full, we estimate that our net
proceeds will increase by approximately
$ .
We intend to use the net proceeds to us from this offering for
working capital and other general corporate purposes, which may
include expansion of our sales and marketing activities,
investment in research and development to enhance our product
offerings and other corporate opportunities that may arise in
the future.
We may also use a portion of the net proceeds to expand our
current business through acquisitions of other businesses,
products or technologies. However, we do not have agreements or
commitments for any specific acquisitions at this time.
We have not yet determined the specific uses of the net proceeds
from this offering and, therefore, cannot specify with certainty
the amounts to be used for each of the purposes discussed above.
The amounts and timing of any expenditures will vary depending
on the amount of cash generated by our operations, competitive
and technological developments and the rate of growth of our
business. As a result, we will have broad discretion in applying
the net proceeds from this offering, and investors will be
relying on our judgment regarding the application of these net
proceeds.
Pending the use of the net proceeds from this offering, we
intend to invest the net proceeds in short-term
investment-grade, interest-bearing securities.
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all future earnings and
cash resources for the future operation and development of our
business and do not anticipate paying any cash dividends for the
foreseeable future. Any future determination to declare cash
dividends will be made at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements, general business conditions
and other factors that our board of directors may deem relevant.
The following table sets forth our capitalization as of
March 31, 2007:
•
on an actual basis;
•
on a pro forma basis to give effect to the automatic conversion
of all outstanding shares of preferred stock into common stock
concurrently with the closing of this offering; and
•
on a pro forma as adjusted basis to give effect to (i) the
conversion of all outstanding shares of preferred stock into
common stock concurrently with the closing of the offering and
(ii) the receipt of the estimated net proceeds from the
sale
of shares
of common stock offered by us in this offering at an assumed
initial public offering price of $
, which is the midpoint of the range of the initial public
offering price listed on the cover page of this prospectus,
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
the filing of our amended and restated certificate of
incorporation immediately prior to the closing of this offering.
You should read this table in conjunction with “Selected
Consolidated Financial Data,”“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes included elsewhere in this prospectus.
Capital lease obligations,
including current portion
2,400
2,400
Stockholders’ equity:
Common stock, $0.01 par value
per share, 20,000,000 shares authorized,
204,196 shares issued and outstanding, actual;
20,000,0000 shares authorized, 11,800,955 shares
issued and outstanding, pro forma; shares authorized, shares
issued and outstanding, pro forma as adjusted
2
60
Mandatorily convertible shares of
Series A,
Series A-1,
Series B and Series C preferred stock ($0.01 par
value per share), 12,520,389 shares authorized,
11,596,759 shares issued and outstanding, actual;
12,520,389 shares authorized, no shares issued and
outstanding pro forma; 12,520,389 shares authorized, no
shares issued and outstanding, pro forma as adjusted
28,432
—
Additional paid-in capital
40,683
69,057
Accumulated deficit
(52,297
)
(52,297
)
Total stockholders’ equity
16,820
16,820
Total capitalization
$
19,220
$
19,220
$
If the underwriters’ option to purchase additional shares
in the offering were exercised in full, pro forma as adjusted
cash and cash equivalents, additional paid-in capital, total
stockholders’ equity (deficit), total capitalization and
shares issued and outstanding as of March 31, 2007 would be
$ ,
$ ,
$ ,
$
and shares,
respectively.
2,354,720 shares of common stock issuable upon exercise of
stock options outstanding as of March 31, 2007 at a
weighted average exercise price of $0.94 per share;
•
598,292 shares of common stock issuable upon exercise of
warrants outstanding as of March 31, 2007 at an exercise
price of $1.17 per share;
•
11,032 shares of common stock reserved as of March 31,2007 for future issuance under our 2000 Stock Plan; and
•
587,897 shares of common stock reserved as of
March 31, 2007 for future issuance under our 2006 Stock
Plan.
•
shares
of common stock reserved for future issuance under our 2007
Equity Incentive Plan, which will become effective on the
effective date of the registration statement of which this
prospectus is a part.
See “Management—Equity Benefit Plans” for a
description of our equity plans.
Our pro forma net tangible book value as of March 31, 2007
was $16.8 million, or approximately $1.43 per share. Our
pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our
total liabilities and divided by 11,800,955 shares of
common stock outstanding after giving effect to the automatic
conversion of all outstanding shares of preferred stock into
shares of common stock upon the closing of this offering.
Net tangible book value dilution per share to new investors
represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the
pro forma net tangible book value per share of common stock
immediately after completion of this offering. After giving
effect to our sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share,
which is the midpoint of the range of the initial public
offering price listed on the cover page of this prospectus, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book
value as of March 31, 2007 would have been
$ million, or
$ per share. This represents an
immediate increase in pro forma net tangible book value of
$ per share attributable to new
investors and an immediate dilution in pro forma net tangible
book value of $ per share to
purchasers of common stock in this offering, as illustrated in
the following table:
Assumed initial public offering
price per share
$
Pro forma net tangible book value
per share as of March 31, 2007
1.43
Increase in pro forma net tangible
book value per share attributable to new investors
Pro forma net tangible book value
per share after the offering
Dilution per share to new investors
If the underwriters exercise in full their option to purchase
additional shares of our common stock in this offering, the pro
forma net tangible book value per share after the offering would
be $ per share, the increase in
pro forma net tangible book value per share to existing
stockholders would be $ per share
and the dilution to new investors purchasing shares in this
offering would be $ per share.
Each $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) our pro forma net tangible book value
by $ million, or
$ per share, the increase in pro
forma net tangible book value attributable to new investors by
$ per share and the dilution in
pro forma net tangible book value per share to purchasers of
common stock in this offering by $
per share, assuming that the number of shares offered by us, as
set forth on the cover page of this prospectus, remains the same
and after deducting an assumed underwriting discount and
estimated offering expenses we must pay.
The following table presents on a pro forma basis as of
March 31, 2007, after giving effect to the automatic
conversion of all outstanding shares of preferred stock into
common stock upon completion of this offering, the differences
between the existing stockholders and the
purchasers of shares in the offering with respect to the number
of shares purchased from us, the total consideration paid and
the average price paid per share:
Average
Price
Shares
Purchased
Total
Consideration
per
Number
Percent
Amount
Percent
Share
(in thousands
except share and per share data)
Existing stockholders
11,800,955
$
69,117
$
5.86
New stockholders
Total
As of March 31, 2007, there were options outstanding to
purchase a total of 2,354,720 shares of common stock at a
weighted average exercise price of $0.94 per share. To the
extent outstanding options are exercised, there will be further
dilution to new investors. For a description of our equity
plans, please see “Management—Equity Benefit
Plans.”
You should read the following selected consolidated historical
financial data below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements,
related notes and other financial information included in this
prospectus. The selected consolidated financial data in this
section is not intended to replace the consolidated financial
statements and is qualified in its entirety by the consolidated
financial statements and related notes included in this
prospectus.
We derived the selected consolidated financial data for the
years ended December 31, 2004, 2005 and 2006 and as of
December 31, 2005 and 2006 from our audited consolidated
financial statements and related notes, which are included in
this prospectus. We derived the selected consolidated financial
data for the years ended December 31, 2002 and 2003 and as
of December 31, 2002, 2003 and 2004 from our audited
consolidated financial statements and related notes, which are
not included in this prospectus. The selected consolidated
financial data for the three months ended March 31, 2006
and 2007 and as of March 31, 2007 are derived from our
unaudited condensed consolidated financial statements and
related notes included elsewhere in this prospectus. The
unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and include, in the opinion of management, all
adjustments, which include only normal recurring adjustments,
that management considers necessary for the fair presentation of
the financial information set forth in those statements.
Historical results are not necessarily indicative of future
results and the results for the three months ended
March 31, 2007 are not necessarily indicative of the
results to be expected for the year ending December 31,2007.
The pro forma basic and diluted net loss per common share data
for the year ended December 31, 2006 and the three months
ended March 31, 2007 reflect the conversion of all of our
outstanding shares of preferred stock into
11,596,759 shares of common stock in connection with this
offering. See Note 1 of Notes to Consolidated Financial
Statements for an explanation of the method used to determine
the number of shares used in computing pro forma basic and
diluted net loss per common share.
The following discussion of our results of operations and
financial condition should be read in conjunction with the
information set forth in “Selected Consolidated Financial
Data” and our consolidated financial statements and the
notes thereto included in this prospectus. This discussion
contains forward-looking statements based upon our current
expectations, estimates and projections that involve risks and
uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements due to, among
other considerations, the matters discussed under “Risk
Factors” and “Special Note Regarding Forward-Looking
Statements.”
Overview
We provide an Internet platform and a portfolio of digital
content and services that enable broadband service providers,
such as MSOs, Telcos and ISPs, to create a compelling online
experience for their subscribers. Our technology platform is
used to create customized Internet portals and includes
integration infrastructure, subscriber personalization
capabilities, a content management and delivery system and a
customer-branded video player and toolbar. Our platform also
aggregates free and paid value-added services and digital
content, including video, from third-party providers to create a
customized and branded Internet portal solution. We deliver a
seamless subscriber experience by integrating these services and
products with existing customer billing and management systems,
thereby allowing our customers to extend their brands and
enhance their subscriber relationships. We believe our solution
assists our customers in promoting subscriber retention,
increasing ARPU and cultivating new revenue streams.
We were originally formed as a New York corporation in January
1998 with the name Chek, Inc. Chek, an Internet messaging
technology provider, designed and managed a proprietary
messaging platform that supported the hosting of branded
e-mail and
time management applications. In December 2000, Chek acquired
MyPersonal through a recapitalization and stock swap and changed
its name to CKMP, Inc. MyPersonal developed white label Internet
community portals and built and managed a flexible platform for
delivering content-rich, branded portals to affinity groups with
a focus on the educational marketplace. In July 2001, CKMP, Inc.
changed its name to Synacor, Inc., and in November 2002, Synacor
re-incorporated under the laws of the State of Delaware.
MyPersonal remained a subsidiary of Synacor until May 2007 when
it was dissolved.
Trends in Our
Business
The cable and telecommunications industries have experienced
considerable merger and acquisition activity over the past
several years, and we expect that this trend will continue.
Business combinations in these industries affect us because some
of our customers may acquire or be acquired by other companies,
which may have pre-existing in-house capabilities or
relationships with our competitors to provide the services and
products that we now provide. In some cases, acquisitions have
adversely affected our business. For example, in April 2007,
Susquehanna Communications ended its relationship with us as a
customer following its April 2006 acquisition by Comcast. In
other cases, merger and acquisition activity in the cable and
telecommunications industries has presented us with
opportunities for growth. For example, in 2006, Time Warner and
Comcast acquired substantially all of Adelphia’s assets;
and although our revenues from Adelphia subscribers have
declined significantly following the acquisition, we are now
providing Time Warner with premium content for its high speed
Internet service, Roadrunner. In addition, in 2007 our customer
NTL Incorporated, or NTL, merged with Telewest Global, Inc., or
Telewest, and Virgin Mobile Holdings
(U.K.) plc, or Virgin Mobile. VirginMedia Inc., the successor to
NTL, expanded the use of our platform beyond NTL’s
subscriber base to Telewest subscribers.
During 2004, 2005 and 2006, we benefited significantly from the
application of search and advertising technologies to subscriber
traffic generated by our customers’ websites. Not only did
our search and advertising revenues increase in dollar amount
and as a percentage of net sales, but also these revenues
enabled our service and product offerings to become profit
centers for many of our customers through revenue-sharing
arrangements with them. During those three years, the growth in
our search and advertising revenues was significantly greater
than the growth in our subscriber-based revenues. That growth
was principally based on two factors: the initial rollout of
search and advertising technologies across our network of
customer websites; and improvement in the techniques we use to
generate revenue from the traffic generated by these websites.
While we anticipate continued growth in search and advertising
revenues, we believe that the rate of growth will be more in
line with that of our subscriber-based revenues principally due
to two factors: we are beyond the initial rollout phase for
search and advertising; and future growth will more likely
result from increases in subscribers of existing and new
customers, as well as continued improvements in our ability to
monetize traffic.
We continue to invest in building employee and systems
infrastructures to support our growth and develop and promote
our services and products, which may cause our operating margins
to decrease. We have experienced, and expect to continue to
experience, growth in our operations as we acquire new
customers, as our existing customers acquire new subscribers and
as we increase our presence in international markets. Our
full-time employee headcount has increased from 28 at
December 31, 2003 to 165 at June 30, 2007, which has
required us to make substantial investments in property and
equipment. In addition, our capital expenditures have grown from
approximately $750,000 in 2005 to approximately
$3.6 million in 2006. We expect to continue to make
significant capital expenditures in 2007 related to our
information and technology infrastructure. We also expect that
our research and development expenses will rise in 2007 as we
continue to develop our technology platform, primarily as a
result of additional increases in headcount. As a result, the
growth rate of our costs and expenses may exceed the growth rate
of our revenues in 2007.
Once we become a public company, we will incur significant
legal, accounting and other costs that we have not previously
incurred as a private company. The Sarbanes-Oxley Act of 2002
and related rules of the SEC and The Nasdaq Global Market
regulate corporate governance practices of public companies. We
expect that compliance with these public company requirements,
including ongoing costs to comply with Section 404 of the
Sarbanes-Oxley Act, which includes documenting, reviewing and
testing our internal controls over financial reporting, will
significantly increase our general and administrative costs.
These costs will also include the costs of our independent
registered public accounting firm to issue an opinion on the
effectiveness of our internal control over financial reporting
on an annual basis beginning with the year ending
December 31, 2008. We also may incur higher costs for
director and officer liability insurance.
Our Net
Sales
We derive our net sales from two categories: subscriber-based
revenues and revenues generated from search and advertising
activities.
Subscriber-Based
Revenues
We define subscriber-based revenues as fees and subscription
amounts that we receive from our customers. These fees and
subscription amounts are for subscriber-based activities,
including the use of our proprietary technology platform and the
use of, or access to, value-
added services and paid content. Our technology platform is used
to create customized Internet portals and includes integration
infrastructure, subscriber personalization capabilities, a
content management and delivery system and a customer-branded
video player and toolbar. Value-added services include hosted
email services, which are designed to meet both consumer and
small business client needs, and online security services, such
as anti-virus protection, firewall and intrusion detection and
pop-up
blockers. Paid content includes premium online offerings from
third parties, such as games and streaming and downloadable
music and movies.
Monthly subscriber levels typically form the basis for
calculating and generating subscriber-based revenues. They
generally are determined by multiplying a per-subscriber
per-month fee by the number of subscribers applicable to the
particular services being offered or consumed. In certain cases,
we charge a fixed monthly fee for specific services provided to
the customer to form a base fee for the customer, in addition to
the per-subscriber fees.
Subscriber-based revenues are recognized on a monthly basis as
the applicable services or content is consumed by, or made
available to, subscribers. We generally determine subscriber
levels in conjunction with our customers. Several methodologies
may be used to determine the number of subscribers in a
particular month, including, for example, the number of
subscribers on a particular day of the month or the average
number of subscribers during the month. We typically follow the
methodology our customers use to determine their own subscriber
levels, and we then reconcile those levels with our own
databases to determine the accurate subscriber levels for
billing purposes. Our processes for determining subscriber
levels are consistent across all of our subscriber-based
services, including use of the technology platform, value-added
services and paid content.
Search and
Advertising Revenues
We use Internet search and advertising technologies to generate
revenue from the traffic generated by our customers’
Internet portals. In the case of searches, we have a
revenue-sharing relationship with Google, pursuant to which we
typically include a Google-branded search tool on our
customers’ portals. When a subscriber makes a search
request using this tool, we deliver it to Google. Google returns
search results to us that include advertiser-sponsored links. If
the subscriber clicks on a sponsored link, Google receives
payment from the sponsor of that link and shares a portion of
that payment with us. We then typically share a portion of that
payment with the applicable customer. We recognize our revenue
share from Google monthly.
We generate advertising revenue when subscribers view or click
on a text or display advertisement that we delivered. We
typically recognize the revenue monthly from our advertising
network partners, who manage the placement of advertising into
our customers’ websites and other web pages that we
control. Depending on the relationship between our advertising
network partners and their advertisers, the revenue may be
calculated on a cost per impression basis, which means the
advertiser pays based on the number of times its advertisements
appear, a cost per click basis, which means that an advertiser
pays only when a subscriber clicks on one of its advertisements,
or another methodology agreed upon by our partners and us.
As with search, we generally pay a share of the advertising
revenue to those customers of ours who make their web sites
available for the delivery of these advertisements. The
revenue-sharing amounts to be paid by us generally take the form
of variable payments based on a percentage of our advertising
revenues and are paid monthly or quarterly in arrears.
Revenue-sharing amounts are expensed as incurred.
Our total net sales grew from approximately $2.4 million in
the year ended December 31, 2004 to approximately
$26.3 million in the year ended December 31, 2006. The
growth in net sales was due, in large part, to growth in our
customer base and development of our portfolio of digital
content and services. Net sales growth in 2006 was also due to
the organic growth of our existing customers’ subscriber
base and our improved ability to generate additional revenue
from those subscribers.
Customers
As of March 31, 2007, we derived net sales from over 30
customers, a substantial portion of which comes from a small
number of them. When combined with the search and advertising
revenue associated with traffic generated from their websites,
net sales from two customers, Charter and Time Warner (pursuant
to the Adelphia legacy agreement only), together accounted for
approximately 45.8% of our net sales for the three months ended
March 31, 2007 and approximately 53.0% of our net sales the
year ended December 31, 2006, with each of them accounting
for more than 10.0% in each such period.
Critical
Accounting Policies
The preparation of our financial statements requires us to make
estimates, assumptions and judgments that affect the amounts
reported in our financial statements and the accompanying notes.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates.
While our significant accounting policies are described in more
detail in the notes to our consolidated financial statements
included in this prospectus, we believe the following accounting
policies to be the most critical to the judgments and estimates
used in the preparation of our consolidated financial statements.
Revenue
Recognition
We recognize net sales in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition, or
SAB 104. SAB 104 requires that four basic criteria
must be met prior to revenue recognition: (1) persuasive
evidence of an arrangement exists, (2) delivery has
occurred or the services have been rendered, (3) the fee is
fixed and determinable and (4) collection of the resulting
receivable is reasonably assured.
Certain of our arrangements contain multiple elements,
consisting of the various services we offer. Multiple element
arrangements typically consist of the use of our technology
platform to deliver an Internet portal combined with the
delivery of our value-added services and paid content. These
arrangements are accounted for in accordance with Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21.
In such arrangements, we have historically determined that each
of the services made available to our customers constitutes a
separate unit of accounting pursuant to the guidance set forth
in
EITF 00-21.
In accordance with
EITF 00-21,
arrangement consideration is allocated to each unit based on its
relative fair value. We have historically concluded that the
stated rates charged for our services have been an accurate
reflection of their fair values based on our own market
knowledge and that of our customers and partners. Accordingly,
we have utilized these stated rates for the purposes of
allocating arrangement consideration to each of the accounting
units. Although our process for the determination of stated
rates is generally consistent among our various customer
arrangements, our identification of accounting units and their
relative fair value is separately made for each of our customer
arrangements. Applicable revenue recognition criteria are
separately considered for each unit of accounting once it and
its relative fair value have been defined.
The terms of our arrangements with our customers, Google and our
advertising network partners are specified in written
agreements. These written agreements constitute the persuasive
evidence of the arrangements with our customers that are a
pre-condition to the recognition of revenue. The evidence used
to document that delivery or performance has occurred generally
consists of third-party communication of either numbers of
subscribers or the revenue generated in a reporting period.
Occasionally, a customer will notify us of subsequent
adjustments to previously reported subscriber data. These
adjustments, once accepted by us, will result in adjustments to
net sales and cost of sales. The historical occurrences of such
adjustments, and the amounts involved, have not been significant.
Although prices used in our revenue recognition formulas are
generally fixed pursuant to the written arrangements with our
customers, Google and our advertising network partners, the
number of subscribers or the amount of search and advertising
revenues that are subject to our pricing arrangements are not
known until the reporting period has closed. Although this data
is, in most cases, available prior to the completion of our
periodic financial statements, this data may need to be
estimated. When made, these estimates are based upon our
historical experience with the relevant party. Adjustments to
these estimates have historically not been significant. The
receipt of this volume data also serves to verify that we have
appropriately satisfied our obligation to our customers for that
reporting period.
Pursuant to the terms of our customer contracts, we commence the
accrual of net sales for our services once the contract has been
signed, its terms reviewed and understood, the service, content
or both have been made available to the customer and reliable
information as to the number of subscribers using the service is
made available to us.
We undertake an evaluation of the credit-worthiness of both new
and, on a periodic basis, existing customers. Based on these
reviews and our strong history of collections, we have
determined that that collection of our calculated revenues is
probable.
Revenue
Sharing
As discussed above, we generally pay our customers a portion of
the revenue generated from search and advertising. In accordance
with Emerging Issues Task Force Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, the revenue derived from these arrangements that
involve traffic supplied by customers is reported on a gross
basis because we are the primary obligor in the arrangements,
are involved in the determination of the service specifications,
have discretion in supplier selection and bear credit risk.
Income
Taxes
We account for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, or
SFAS 109. We estimate our income tax liability through
calculations we perform for the determination of our current
income tax liability, together with assessing temporary
differences resulting from the different treatment of items for
income tax and financial reporting purposes. These differences
result in deferred income tax assets and liabilities, which are
recorded on our balance sheet. Management then assesses the
likelihood that deferred income tax assets will be recovered in
future periods. In assessing the need for a valuation allowance
against the net deferred income tax asset, we consider factors
such as future reversals of existing taxable temporary
differences, taxable income in prior carryback years, if
carryback is permitted under the tax law, tax planning
strategies and future taxable income exclusive of reversing
temporary differences and carryforwards. To the extent that we
cannot conclude that it is more likely than not that the benefit
of such assets will be realized, we establish a valuation
allowance to adjust the net carrying value of such assets.
To date, we have recorded a full valuation allowance against our
gross deferred income tax assets, principally NOL carryforwards,
due to uncertainty regarding our ability to generate future
taxable income. Any deferred income tax benefit or provision to
date has been offset by changes in the valuation allowance
against our deferred income tax assets. To the extent we
determine that all or a portion of our valuation allowance is no
longer necessary, we will recognize an income tax benefit in the
period such determination is made for the reversal of the
valuation allowance. Once the valuation allowance is eliminated,
its reversal will no longer be available to offset our current
income tax provision. These events could have a material impact
on our reported results of operations.
As of December 31, 2006, we had approximately
$33.1 million of federal and approximately
$18.9 million of state NOL carryforwards, which begin to
expire in 2018. The NOLs are subject to change of control
limitations that generally restrict the utilization of the NOLs
on an annual basis. Due to the uncertainty as to our ability to
generate sufficient taxable income in the future and utilize the
NOLs before they expire, we have recorded a valuation allowance
to reduce the net deferred income tax asset to zero. Our tax
provision includes only the net income tax expense attributable
to our operations outside of the United States, which was
$14,000 in 2006.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN 48, an interpretation of SFAS 109. This
interpretation clarifies the accounting for income taxes by
prescribing that a company should use a more-likely-than-not
recognition threshold based on the technical merits of the tax
position taken. Tax provisions that meet the
more-likely-than-not recognition threshold should be measured as
the largest amount of tax benefits, determined on a cumulative
probability basis, which is more likely than not to be realized
upon ultimate settlement in the financial statements.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting for interim
periods, disclosure and transition, and explicitly excludes
income taxes from the scope of Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies.
FIN 48 is effective for fiscal years beginning after
December 15, 2006, and was adopted by us on January 1,2007. As of March 31, 2007, we had gross unrecognized tax
benefits of approximately $300,000, which may reduce our NOLs in
the future. We file income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. For
income tax returns filed by us, we are no longer subject to
U.S. federal, state and local tax examinations by tax
authorities for years before 2002, although carryforward tax
attributes that were generated prior to 2002 may still be
adjusted upon examination by tax authorities if they either have
been or will be utilized. It is our policy to recognize interest
and penalties related to income tax matters in income tax
expense.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for stock option
grants in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, or
APB 25, and complied with the disclosure provisions of Statement
of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation, or SFAS 123, as amended
by Statement of Financial Accounting Standards No. 148,
Accounting for Stock Based Compensation—Transition and
Disclosure, or SFAS 148. Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic
value of options (the difference between the deemed fair value
of our common stock and the option exercise price) at the grant
date and is amortized ratably over the option’s vesting
period.
On January 1, 2006, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment, or SFAS 123R,
which requires us to measure the cost of employee services
received in exchange for an award of equity instruments, based
on the fair value of the award on the date of grant, and to
recognize the cost over the period during which the employee is
required to provide services in exchange for
the award. We adopted SFAS 123R using the modified
prospective transition method and, therefore, have not restated
results for prior periods. Under this transition method,
stock-based compensation expense is recorded for the unvested
portion of previously issued awards that remain outstanding at
January 1, 2006 using the same estimate of grant date fair
value and the same attribution method used to determine the pro
forma disclosure under SFAS 123.
Subsequent to the adoption of SFAS 123R, we estimate the
fair value of our stock-based awards on the date of grant using
the Black-Scholes option-pricing model. The determination of
fair value using the Black-Scholes model requires a number of
complex and subjective variables. One key input into the model
is the estimated fair value of our common stock on the date of
grant. For periods prior to May 1, 2006, we performed an
internal valuation analysis to determine the fair value of our
common stock in connection with granting stock options to
employees. This analysis used our projected future cash flows,
discounted at a rate that reflects both our weighted average
cost of capital and the lack of liquidity of our stock, and an
implied market value analysis based on the stock price
performance of our most comparable public peers (as determined
by management) within the Internet service provider enabler
industry. Beginning May 1, 2006, we determined the fair
value of our common stock with the assistance of valuations by
an unrelated valuation specialist. The valuations used valuation
methods commonly used in the valuation of private company equity
securities for purposes of estimating the fair value of their
common stock.
Other key variables in the Black-Scholes option-pricing model
include the expected volatility of our common stock price, the
expected term of the award and the risk-free interest rate. We
determined that, as a private company, it was not practicable to
estimate the volatility of our stock price, based on our low
frequency of price observations. Therefore, expected
volatilities were based on a volatility factor computed based
upon an external peer group analysis of publicly traded
companies based in the United States within a predetermined
market capitalization range. The analysis provided historical
and implied volatilities of the public comparables and developed
an estimate of constant expected volatility for us. The expected
term for options prior to January 1, 2006 is 10 years.
For options granted subsequent to December 31, 2005, the
expected term is 6.5 years consistent with the simplified
method. The risk free interest rate was based on the implied
yield available at the time the options were granted on
U.S. Treasury zero coupon issues with a remaining term
equal to the expected term of the option. The expected dividend
yield is 0% for all periods presented, based upon our historical
practice of electing not to declare or pay cash dividends on our
common stock. In addition, under SFAS 123R, we are required
to estimate forfeitures of unvested awards when recognizing
compensation expense. If factors change and we employ different
assumptions in the application of SFAS 123R in future
periods, the compensation expense we record may differ
significantly from what we have recorded during 2006 and the
three months ended March 31, 2007.
As of December 31, 2006, the unrecognized compensation
expense related to unvested stock-based awards granted prior to
that date, for which vesting is probable, was approximately
$241,000. These expenses are expected to be recognized over a
weighted average period of 1.6 years.
We expect stock-based compensation expense to increase in
absolute dollars as a result of the adoption of SFAS 123R
as options that were granted at the beginning of 2006 and beyond
vest and we continue to grant new options to employees. The
actual amount of stock-based compensation expense we record in
any fiscal period will depend on a number of factors, including
the number of shares subject to the stock options issued, the
fair value of our common stock at the time of issuance and the
expected volatility of our stock price over time.
The following table sets forth selected consolidated statements
of operations data as a percentage of total net sales for each
of the periods indicated.
Net Sales. Our total net sales increased by
approximately $2.8 million, or 48%, to approximately
$8.7 million for the three months ended March 31, 2007
from approximately $5.9 million for the same period in
2006. Subscriber-based net sales increased approximately
$0.8 million, or 24%, to approximately $4.1 million in
the three months ended March 31, 2007 from approximately
$3.3 million for the same period in 2006. The increase was
largely driven by the addition of new customers and an increase
in the number of our existing customers’ subscribers.
Search and advertising net sales increased by approximately
$2.0 million, or 80%, to approximately $4.6 million
for the three months ended March 31, 2007 from
approximately $2.5 million for the same period in 2006,
primarily as a result of increases in the traffic on our
customers’ portals, the number of searches, the revenue per
search and the number of display advertising impressions.
Cost of Sales. Cost of sales consists of
revenue-share costs, vendor content acquisition costs and
infrastructure costs. Revenue-share and vendor content
acquisition costs may be based on a percentage of our revenue,
on a fixed fee schedule, on the number of subscribers per month
or any combination of the foregoing. Percentage of revenue
arrangements are expensed as incurred based on the revenue
earned during the relevant accounting period. Fixed fee
arrangements are expensed ratably over the term of the contract
or on a forecasted per subscriber use basis. Fees based on the
number of subscribers are expensed based on the
number of subscribers having access to the specific content
during the relevant accounting period.
Our cost of sales increased by approximately $1.7 million,
or 48%, to approximately $5.1 million for the three months
ended March 31, 2007 from approximately $3.5 million
for the same period in 2006. The increase was proportional to
the increase in our net sales and reflected increased revenue
sharing, vendor content acquisition and various support costs
necessary to meet the larger sales volume. Cost of sales as a
percentage of net sales also remained consistent at 59%.
Research and Development Expenses. Research
and development expenses include costs incurred for product
development, including the development of and enhancements to
our technology platform and related infrastructures, and
customer and content integration. These expenses consist
primarily of compensation and related costs for personnel
associated with research and development activities.
Research and development expenses increased by approximately
$0.4 million, or 37%, to approximately $1.4 million
for the three months ended March 31, 2007 from
approximately $1.0 million for the same period in 2006. The
increase was due primarily to increased headcount to support new
product initiatives and customer deployments. As a percentage of
net sales, research and development expenses declined to 16% of
sales in the three months ended March 31, 2007 from 17% of
net sales in the three months ended March 31, 2006.
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of salaries, benefits,
commissions and bonuses paid to our direct sales and marketing
personnel, as well as costs related to advertising, industry
conferences, promotional materials and other sales and marketing
programs. We expense advertising as incurred.
Sales and marketing expenses increased by approximately $941,000
to approximately $1.7 million for the three months ended
March 31, 2007 from approximately $0.7 million for the
same period in 2006 primarily as a result of the hiring of a new
direct salesperson and additional marketing personnel and the
launch of new marketing programs during the last half of 2006
and the first quarter of 2007.
General and Administrative Expenses. General
and administrative expenses consist primarily of salaries and
related expenses for executive management, finance, accounting,
human resources and other administrative functions, as well as
professional fees, overhead, rent and expenses incurred for
general corporate purposes.
General and administrative expenses increased by approximately
$317,000, or 35%, to approximately $1.2 million for the
three months ended March 31, 2007 from approximately
$0.9 million for the same period in 2006 due largely to
higher rent and occupancy expenses for our new headquarters,
increased audit fees and additional headcount in our finance and
human resources departments. As a percentage of sales, general
and administrative expenses declined to 14% of net sales in the
three months ended March 31, 2007 from 16% of net sales in
the same period in 2006 as sales growth outpaced spending for
the first quarter of 2007 as compared to the first quarter of
2006.
Depreciation and Amortization. Depreciation
and amortization includes depreciation of our computer hardware
and software, furniture and fixtures, and other property,
depreciation on capital leased assets, amortization of leasehold
improvements and amortization of deferred financing costs.
Depreciation and amortization increased by approximately
$195,000 to approximately $273,000 for the three months ended
March 31, 2007 from approximately $78,000 for the same
period in 2006 due principally to our acquisition of additional
equipment to support the addition of new customers.
Other Income. Other income consists primarily
of interest income on cash deposits. Other income increased to
approximately $180,000 for the three months ended March 31,2007 from approximately $22,000 for the same period in 2006 due
largely to the investment of the proceeds from the sale of
Series C preferred stock in October 2006.
Interest Expense. Interest expense increased
to approximately $44,000 for the three months ended
March 31, 2007 from approximately $37,000 for the same
period in 2006 primarily as a result of additional capital lease
obligations.
Provision for Income Taxes. We have incurred
operating losses since our inception and, consequently, did not
incur any federal or state income taxes for the three months
ended March 31, 2006 and 2007. We have a deferred income
tax asset at March 31, 2007 of approximately
$13.8 million, resulting primarily from NOLs. Due to
uncertainty as to our ability to generate sufficient taxable
income in the future to utilize these deferred tax assets, we
have recorded a valuation allowance for their full amount at
March 31, 2007. We do not anticipate recording significant
tax benefits or provisions in the near future.
Net Loss. Based on the factors described
above, our net loss for the three months ended March 31,2007 was approximately $820,000, which was approximately
$523,000 greater than our net loss for the same period in 2006.
Net Sales. Our total net sales increased by
approximately $12.0 million, or 84%, to approximately
$26.3 million in 2006 from approximately $14.3 million
in 2005. Subscriber-based net sales increased approximately
$3.9 million, or 43%, to approximately $12.9 million
in 2006 from approximately $9.0 million in 2005. The
increase was largely driven by the addition of new customers and
an increase in the number of our existing customers’
subscribers. Search and advertising net sales increased by
approximately $8.1 million to approximately
$13.4 million in 2006 from approximately $5.3 million
in 2005, primarily as a result of increases in the traffic on
our customers’ portals, the number of searches, the revenue
per search and the number of display advertising impressions.
Cost of Sales. Cost of sales increased by
approximately $7.5 million to approximately
$15.3 million in 2006 from approximately $7.8 million
in 2005. Cost of sales also increased as a percentage of net
sales to 58% in 2006 from 54% in 2005. Cost of sales increased
at a rate greater than the growth of net sales primarily because
of an increase in revenue-share costs and vendor content
acquisition costs.
Research and Development Expenses. Research
and development expenses increased by approximately
$1.7 million, or 63%, to approximately $4.3 million in
2006 from approximately $2.6 million in 2005, primarily as
a result of increased headcount to support new product
initiatives and customer deployments. As a percentage of net
sales, research and development expenses declined to 16% in 2006
from 18% in 2005.
Sales and Marketing Expenses. Sales and
marketing expenses increased by approximately $1.7 million,
or 78%, to approximately $3.9 million in 2006 from
approximately $2.2 million in 2005, primarily as a result
of the hiring of our Vice President of Marketing and other
marketing personnel and the launch of new marketing programs
during the second half of 2006.
General and Administrative Expenses. General
and administrative expenses increased by approximately
$2.4 million to approximately $4.7 million in 2006
from approximately $2.3 million in 2005 and increased to
18% of net sales in 2006 from 16% of net sales in 2005. The
increase was due largely to additional headcount, increased
occupancy expenses resulting from the relocation of our
corporate headquarters, including higher rent and build-out
costs,
increased audit fees, increased recruiting expenses for key
personnel, and the establishment of an allowance for doubtful
accounts.
Depreciation and Amortization. Depreciation
and amortization for 2006 increased to approximately $465,000
from approximately $177,000 in 2005 due principally to our
acquisition of additional computing equipment to support new
customers and growth in our existing customers’ subscriber
bases, including a network operating center. We also acquired
computing equipment to accommodate our increased headcount.
Loss on Extinguishment of Debt. We recognized
an approximately $32,000 loss on extinguishment of debt in 2006
attributable to our early repayment of notes payable with the
proceeds from the sale of our Series C preferred stock. The
notes were originally due in November 2007 and were repaid in
October 2006.
Other Income. Other income increased to
approximately $279,000 in 2006 from approximately $93,000 in
2005 due largely to the investment of the proceeds from the sale
of Series C preferred stock in October 2006.
Interest Expense. Interest expense increased
to approximately $132,000 in 2006 from approximately $117,000 in
2005, primarily as a result of additional capital lease
obligations.
Provision for Income Taxes. We did not accrue
federal or state income taxes for 2005 or 2006. We did, however,
accrue approximately $14,000 of income tax expenses for 2006
related to foreign income taxes. We had a deferred income tax
asset at December 31, 2006 of approximately
$13.8 million, resulting primarily from stock and other
compensation expense and NOLs. Due to uncertainty as to our
ability to generate sufficient taxable income in the future to
utilize these deferred tax assets, we have recorded a valuation
allowance for their full amount at December 31, 2006. We do
not anticipate recording significant tax benefits or provisions
in the near future.
Net Loss. Based on the factors described
above, our net loss for 2006 was approximately
$2.3 million, which was $1.5 million greater than our
net loss in 2005.
Net Sales. Our total net sales increased by
approximately $12.0 million to approximately
$14.3 million in 2005 from approximately $2.4 million
in 2004. Subscriber-based net sales increased to approximately
$9.1 million in 2005 from approximately $2.2 million
in 2004. The increase was largely driven by the addition of new
customers and an increase in the number of our existing
customers’ subscribers. Search and advertising net sales
increased to approximately $5.3 million in 2005 from
approximately $0.2 million in 2004. The significant
increase occurred because 2005 was the first year in which we
made search advertising technologies widely available on our
customers’ websites.
Cost of Sales. Cost of sales increased by
approximately $6.5 million to approximately
$7.8 million in 2005 from approximately $1.2 million
in 2004. Cost of sales also increased as a percentage of net
sales to 54% in 2005 from 52% in 2004. Cost of sales increased
at a rate greater than the growth of net sales primarily because
of an increase in revenue-share costs and vendor content
acquisition costs.
Research and Development Expenses. Research
and development expenses increased by approximately
$1.3 million, or 92%, to approximately $2.6 million in
2005 from approximately $1.4 million in 2004, primarily as
a result of the hiring of additional technical and engineering
personnel. As a percentage of net sales, research and
development expenses declined to 18% of sales in 2005 from 57%
in 2004.
Sales and Marketing Expenses. Sales and
marketing expenses increased by approximately $0.8 million,
or 58%, to approximately $2.2 million in 2005 from
approximately
$1.4 million in 2004, primarily as a result of the addition
of client services personnel. As a percentage of net sales,
sales and marketing expenses declined to 15% of net sales in
2005 from 59% of net sales in 2004 due to the growth in net
sales.
General and Administrative Expenses. General
and administrative expenses increased by approximately
$1.2 million to approximately $2.3 million in 2005
from approximately $1.1 million in 2004, largely because of
the hiring of additional personnel in our finance and human
resources departments. As a percentage of net sales, general and
administrative expenses declined to 16% of net sales in 2005
from 47% of net sales in 2004 due to growth in net sales.
Depreciation and Amortization. Depreciation
and amortization decreased to approximately $177,000 in 2005
from approximately $191,000 in 2004 due to an increase in the
useful lives of certain assets, principally computing equipment,
which was partially offset by the acquisition of additional
equipment.
Other Income. Other income increased to
approximately $93,000 in 2005 from approximately $27,000 in 2004
due largely to increased invested cash and cash equivalents
balances. Those balances were higher as a result of the sale of
shares of our Series B preferred stock in October 2004.
Interest Expense. Interest expense increased
to approximately $117,000 in 2005 from approximately $77,000 in
2004, primarily as a result of additional capital lease
obligations.
Provision for Income Taxes. We did not incur
federal or state income taxes for 2004 or 2005. We had a
deferred income tax asset at December 31, 2005 of
approximately $13.2 million, resulting primarily from stock
and other compensation expense and NOLs. Due to uncertainty as
to our ability to generate sufficient taxable income in the
future to utilize these deferred tax assets, we have recorded a
valuation allowance for their full amount at December 31,2005. We do not anticipate recording significant tax benefits on
provisions in the near future.
Net Loss. Based on the factors described
above, our net loss for 2005 was approximately
$0.8 million, which was approximately $2.2 million, or
74%, less than our net loss in 2004.
The following tables set forth selected unaudited quarterly
consolidated statement of operations data for each of the
quarters indicated. The consolidated financial statements for
each of these quarters have been prepared on the same basis as
the audited consolidated financial statements included in this
prospectus and, in the opinion of management, include all
adjustments necessary for the fair presentation of the
consolidated results of operations for these periods. You should
read this information together with our consolidated financial
statements and related notes included elsewhere in this
prospectus. These quarterly operating results are not
necessarily indicative of the results for any future period.
Three Months
Ended
(unaudited)
March
June
September
December
March
June
September
December
March
31,
30,
30,
31,
31,
30,
30,
31,
31,
(in
thousands)
2005
2005
2005
2005
2006
2006
2006
2006
2007
Net sales
$
2,340
$
3,044
$
3,732
$
5,224
$
5,866
$
5,957
$
6,952
$7,552
$
8,677
Cost of sales(1)
957
1,503
1,981
3,340
3,453
3,505
3,590
4,779
5,116
Research and development
547
608
732
728
990
1,020
1,010
1,254
1,359
Sales and marketing
448
537
618
611
714
1,049
897
1,279
1,655
General and administrative(1)
358
375
636
930
913
1,098
1,326
1,342
1,230
Depreciation and amortization
31
38
50
58
78
113
130
144
273
Loss from operations
(1
)
(17
)
(285
)
(443
)
(282
)
(828
)
(1
)
(1,246
)
(956
)
Other income (expense):
Loss on extinguishment of debt
—
—
—
—
—
—
—
(32
)
—
Other income
21
21
25
26
22
14
10
233
180
Interest expense
(28
)
(28
)
(30
)
(31
)
(37
)
(36
)
(38
)
(21
)
(44
)
Total other income (expense), net
(7
)
(7
)
(5
)
(5
)
(15
)
(22
)
(28
)
180
136
Loss before income taxes
(8
)
(24
)
(290
)
(448
)
(297
)
(850
)
(29
)
(1,066
)
(820
)
Provision for income taxes
—
—
—
—
—
—
—
14
—
Net loss
$
(8
)
$
(24
)
$
(290
)
$
(448
)
$
(297
)
$
(850
)
$
(29
)
$(1,080
)
$
(820
)
(1)
Exclusive of depreciation and amortization shown separately.
Over the nine quarters presented in the table above, net sales
have generally increased due primarily to the addition of new
customers and an increase in the number of subscribers of our
existing customers. As the number of our customers’
subscribers increased, the subscriber-based fees we earned for
the use of our technology platform, value-added services and
paid content also increased. A larger number of subscribers also
resulted in greater traffic on customers’ web sites, which
resulted in increased search and advertising revenue for us. In
addition, we increased the revenue generated per subscriber by
selling increasing amounts of value-added services and paid
content.
Cost of sales as a percentage of net sales increased in each of
the quarters in 2005 from 41% to 64% as we expanded our
portfolio of value-added services and paid content to sell to
subscribers. Cost of sales as a percentage of net sales then
leveled off at 59% for the first two quarters of 2006. It
decreased to 52% in the third quarter of 2006 because
non-recurring engineering fees, or NREs, contributed to an
increase in our net sales for that quarter. The NREs were fees
for professional services that we rendered to a customer on a
special project basis in connection with enhancements to the
customer’s portal and premium content delivery system. Cost
of sales as a percentage of net sales then increased to 63% in
the fourth quarter
before returning to 59% in the first quarter of 2007. The
increase in the fourth quarter was due to the cessation of the
NREs upon completion of the special project and increased
contractual commitments to customers.
On an absolute basis, total expenses from operations increased
significantly in each of the nine quarters presented due
primarily to increased cost of net sales and increased
headcount. Additional sales and marketing expenses related to
the launch of new marketing campaigns also drove the increases
in the fourth quarter of 2006 and the first quarter of 2007.
Liquidity and
Capital Resources
Our primary liquidity and capital resource requirements are for
financing working capital, investing in capital expenditures
such as computer hardware and software, supporting research and
development efforts, introducing new technology, enhancing
existing technology and marketing our services and products to
new and existing customers. To the extent that existing cash and
cash equivalents, cash from operations, cash from short-term
borrowings and the net proceeds from this offering are
insufficient to fund our future activities, we may need to raise
additional funds through public or private equity offerings or
debt financings.
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily with venture capital
funding. In four separate issuances of preferred stock, from
Series A in November 2002 to Series C in October and
November 2006, we have raised approximately $28.9 million
from institutional investors. The proceeds from all of these
issuances have been used for general business purposes, with the
exception of the Series C preferred stock offering, a
portion of which was used to repay approximately $700,000 of
notes payable. Each share of preferred stock is convertible into
common stock at the respective conversion ratio for each series
of preferred stock at any time, subject to adjustment triggered
by changes in our capitalization such as a stock split.
Conversion is automatic in the event of a public offering of
common stock at a price per share representing a post-offering
valuation (on a fully diluted basis) of at least
$150.0 million with gross proceeds of at least
$25.0 million. This conversion of all our outstanding
series of preferred stock is expected to take place upon
consummation of this offering.
As of March 31, 2007, we had approximately
$12.7 million of cash and cash equivalents. We have
invested a substantial portion of our available funds in money
market funds for which credit loss is not anticipated. The
primary objective of our investment activities is to preserve
principal while maximizing income received from our investments.
We believe that our existing cash and cash equivalents and the
net proceeds from this offering will be sufficient to meet our
anticipated working capital and capital expenditure requirements
for at least the next 12 months.
Cash
Flows
Operating
Activities
We have historically experienced negative cash flows from
operating activities as we continue to expand our business and
build our infrastructure. Cash flows from operations will
continue to be affected primarily by the extent to which we
increase personnel, primarily in research and development and
sales and marketing, to grow our business. Our largest source of
cash flows from operating activities is cash collections from
customers. Our primary uses of cash from operating activities
are for revenue-share and content acquisition costs, personnel
related expenditures, facilities expenses and research and
development costs to support our sales growth.
Net cash used in operating activities was approximately
$2.0 million for the three months ended March 31, 2007
as compared to approximately $0.5 million for the same
period in 2006,
for an increase of approximately $1.5 million. The increase
was primarily attributable to increased trade receivables
corresponding with the increase in our net sales, combined with
headcount increases that resulted in increased payroll accruals.
We also experienced an increase in unearned revenues as of
March 31, 2007 as compared to March 31, 2006.
Net cash used in operating activities was approximately
$1.9 million for the year ended December 31, 2006 as
compared to approximately $1.2 million for the year ended
December 31, 2005, for an increase of approximately
$0.7 million, or 58%. The increase was primarily
attributable to increased trade receivables corresponding with
increased sales volumes for 2006.
Net cash used in operating activities was approximately
$1.2 million for the year ended December 31, 2005 as
compared to approximately $2.5 million for the year ended
December 31, 2004, for a decrease of approximately
$1.3 million, or 52%. The decrease was primarily the result
of increased sales volume, combined with expenses for 2005 that
were a lower percentage of net sales as compared to expenses in
2004.
We have incurred losses from operations during each of the last
three years as a result of our continued research and
development and sales and marketing activities. We anticipate
continued losses from operations in the near future until our
development efforts result in significant revenues and operating
income.
Investing
Activities, Including Capital Expenditures
For the three months ended March 31, 2007, net cash used in
investing activities was approximately $0.4 million, as
compared to net cash used in investing activities for the three
months ended March 31, 2006 of approximately
$0.2 million, representing an increase of approximately
$0.2 million. The increase was largely due to increased
purchases of property and equipment. We anticipate continuing to
expend significant amounts for fixed assets in the near future
as we continue to invest in equipment necessary for our research
and development activities. We anticipate approximately
$1.7 million, including amounts we expect to finance, of
capital expenditures in 2007.
For the year ended December 31, 2006, net cash used in
investing activities was approximately $1.9 million as
compared to net cash used in investing activities of
approximately $0.5 million for the year ended
December 31, 2005, for an increase of approximately
$1.4 million. Similarly, net cash used in investing
activities for the year ended December 31, 2005 represented
an increase of approximately $0.2 million, or 67%, over net
cash used in investing activities of approximately
$0.3 million for the year ended December 31, 2004. In
each year, the increase was largely due to increased purchases
of property and equipment, primarily computer hardware.
Financing
Activities
We have entered into a credit agreement with Bridge Bank,
pursuant to which we can borrow under a revolving credit line of
$1.5 million until February 2009. Borrowings under the
revolving line of credit accrue interest at the prime rate plus
a margin of 0.75% and must be repaid by February 2009. The
credit agreement contains provisions that allow Bridge Bank to
accelerate repayment of the borrowings on the revolving credit
line upon occurrence of a material adverse change as defined in
the agreement. The credit agreement also contains certain
financial performance and reporting covenants. There were no
outstanding borrowings under the revolving credit line as of
March 31, 2007.
For the three months ended March 31, 2007, net cash used in
financing activities was approximately $0.2 million as
compared to approximately $44,000 for the three months ended
March 31, 2006, for an increase of approximately $156,000.
This increase was largely due to payments on increased capital
lease obligations.
For the year ended December 31, 2006, net cash provided by
financing activities was approximately $16.4 million as
compared to net cash used in financing activities of
approximately $90,000 for the year ended December 31, 2005.
This increase was primarily due to the receipt of gross proceeds
of approximately $17.2 million from the sale of our
Series C preferred stock in the fourth quarter of 2006. The
primary use of cash for financing activities in the year ended
December 31, 2005 was to repay capital lease obligations
and notes payable.
For the year ended December 31, 2005, net cash used in
financing activities was approximately $90,000 as compared to
net cash provided by financing activities of approximately
$5.5 million for 2004. This change was primarily due to the
receipt of gross proceeds of approximately $5.5 million
from the sale of our Series B preferred stock in 2004.
Quantitative and
Qualitative Disclosures about Market Risk
Our cash, cash equivalents and short-term investments as of
March 31, 2007 consisted primarily of money market funds.
Our primary exposure to market risk is interest income
sensitivity, which is affected by changes in the general level
of U.S. interest rates, particularly because the majority
of our investments are in short-term marketable securities. The
primary objective of our investment activities is to preserve
principal while maximizing the income we receive from our
investments. Due to the short-term duration of our investment
portfolio and the low risk profile of our investments, an
immediate 10% change in interest rates would not have a material
effect on the fair market value of our portfolio. In general,
money market funds are not subject to market risk because the
interest paid on such funds fluctuates with the prevailing
interest rate.
Contractual
Obligations
The following table describes our long-term contractual
obligations and commitments as of December 31, 2006:
Payments Due by
Period
More than
Total
Less than
1 year
1-3 years
3-5 years
5 years
(dollars in
thousands)
Contractual commitments
$
15,191
$
7,058
$
8,133
$
—
$
—
Operating lease obligations
4,368
708
962
865
1,833
Capital lease obligations
2,265
851
1,350
64
—
Purchase obligations
—
—
—
—
—
Total
$
21,824
$
8,617
$
10,445
$
929
$
1,833
Contractual
Commitments
Contractual commitments include fixed payments that we are
required to make to certain of our customers and content
providers pursuant to our agreements with them. These payments
are typically made on monthly or quarterly basis and are not
contingent on the achievement of any revenue objectives or
subscriber or usage levels.
Operating and
Capital Lease Obligations
Our principal lease commitments consist of obligations under
leases for office space and computer and telecommunications
equipment. We finance the purchase of some of our computer
equipment under a capital lease arrangement over a period of
36 months. The capital lease obligations shown above
include the current portion of our liabilities and imputed
interest.
Our purchase orders are normally based on our current needs and
are fulfilled by our vendors within short time horizons. We do
not have significant agreements specifying minimum quantities or
set prices that exceed our expected requirements in the
short-term. We also enter into contracts for outsourced
services; however, the obligations under these contracts are not
significant and the contracts generally contain clauses allowing
for cancellation without significant penalty.
Off-Balance Sheet
Arrangements
As of March 31, 2007, we did not have any off-balance sheet
arrangements.
Recently Issued
Accounting Pronouncements
In June 2006, the FASB issued FIN 48, which clarifies the
accounting for uncertainty in income taxes and reduces the
diversity in current practice associated with the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return by defining a
more-likely-than-not threshold regarding the sustainability of
the position. Effective January 1, 2007, we adopted
FIN 48. Based upon our analysis, we believe that all of our
open tax positions are more-likely-than-not to be sustained upon
examination. Additionally, we have determined that the amount of
tax benefits recognized in the Company’s financial
statements at January 1, 2007 are already reflective of the
largest amount that is greater than 50 percent likely of
being recognized upon the ultimate settlement with a taxing
authority. Accordingly, the adoption of FIN 48 had no
impact on our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, or SAB 108. SAB 108
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of determining whether the current year’s
financial statements are materially misstated. SAB 108
became effective for us in 2006 and its adoption did not have a
material impact on our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157. SFAS 157 provides
guidance for using fair value to measure assets and liabilities.
SFAS 157 serves to clarify the extent to which companies
measure assets and liabilities at fair value, the information
used to measure fair value, and the effect that fair-value
measurements have on earnings. SFAS 157 is to be applied
whenever another standard requires or allows assets or
liabilities to be measured at fair value. We will be required to
adopt SFAS 157 effective January 1, 2008. We are
currently evaluating the impact that the adoption of
SFAS 157 will have on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115, or SFAS 159.
SFAS 159 provides entities with an option to choose to
measure eligible items at fair value at specified election
dates. If elected, an entity must report unrealized gains and
losses on the item in earnings at each subsequent reporting
date. The fair value option may be applied instrument by
instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method, is irrevocable (unless a new
election date occurs), and is applied only to entire instruments
and not to portions of instruments. We will be required to adopt
SFAS 159 effective January 1, 2008. We are currently
evaluating the impact that the adoption of SFAS 159 will
have on our financial statements.
We provide an Internet platform and a portfolio of digital
content and services that enable broadband service providers,
such as MSOs, Telcos and ISPs, to create a compelling online
experience for their subscribers. Our platform is used to create
customized Internet portals and includes integration
infrastructure, subscriber personalization capabilities, a
content management and delivery system and a customer-branded
video player and toolbar. Our platform also aggregates free and
paid digital content and value-added services, including video,
from third-party providers to create a customized and branded
Internet portal solution. We deliver a seamless subscriber
experience by integrating these services and products with
existing customer billing and management systems, thereby
allowing our customers to extend their brands and enhance their
subscriber relationships. We believe our solution assists our
customers in promoting subscriber retention, increasing ARPU and
cultivating new revenue streams.
Industry
Background
Growth of the
Internet and Broadband Access
The Internet has emerged as a global digital medium for content,
communications, advertising and commerce. According to IDC, the
number of households with Internet access in 2006 was
approximately 72.3 million in the United States and
306.7 million globally. The U.S. consumer Internet
access market has evolved from a market in which the Internet
was primarily accessed through narrowband or
dial-up
access to one in which consumers are able to access the Internet
through a variety of high-speed or broadband access
technologies. IDC estimates that the number of broadband
Internet subscribers in the United States will increase from
56.3 million in 2006 to 91.5 million in 2011, while
the total number of broadband subscribers globally will increase
from 232.7 million in 2006 to 386.6 million in 2011.
At the same time, IDC projects that narrowband subscribers in
the United States will decrease from 21.2 million in 2006
to 7.8 million in 2011. In addition, as broadband access
speeds, particularly download speeds, continue to increase, the
overall quality of the subscriber’s online experience will
improve significantly and subscribers will access and consume an
increasing amount of digital content that requires higher
bandwidth.
The broadband Internet access market in the United States
consists primarily of MSOs, offering cable modem-based broadband
Internet access, and Telcos, offering digital subscriber line,
or DSL-based broadband Internet access. A range of new
technologies and providers are also emerging that represent
future broadband access alternatives. These new technologies
include various fixed-line and wireless Internet access
standards, such as Metro Ethernet Internet Access, or MEIA,
WiMax, fixed wireless, satellite, broadband over power lines and
Wi-Fi. The table below provides recent IDC U.S. subscriber
projections for categories of Internet access technologies.
U.S. Broadband
Services Subscriptions by Technology, 2006-2011
New and
Increasing Competition for Broadband Access
Subscribers
The broadband access market has become increasingly competitive
in recent years due to the commoditization of Internet access,
pricing pressure, evolving consumer demand and the advent of
competing new access technologies. Against this backdrop and in
an attempt to increase sales, customer loyalty and
differentiation, MSOs and Telcos have expanded beyond
traditional core service offerings of television and voice,
respectively, to offer “triple-play” (fixed-line
voice, television and broadband Internet access) and, in some
cases, “quadruple-play” (fixed-line voice, television
and broadband Internet access plus mobile communications)
packages of services, which has put MSOs and Telcos in direct
competition with one another. At the same time, Internet media
and technology companies such as AOL, Google, Microsoft and
Yahoo! have assembled large, loyal online audiences, powerful
brands and growing suites of digital content and service
offerings, are competing against traditional media and
telecommunications companies for consumer loyalty and spending,
and are emerging as a potential competitive threat for incumbent
MSOs and Telcos. These competitive dynamics are further
pressuring broadband service providers to evolve from being
providers of basic voice, television and Internet access
services to becoming integrated providers of digital content and
service offerings.
Higher Demand for
Digital Content and Services
The rapid increase in Internet usage has been characterized by
the growing adoption of online communications,
e-commerce
and digital content and services. The Internet has become an
important consumption and distribution platform for digital
content and services, with Internet users spending increasing
amounts of time and money online and engaging in a broad range
of activities including entertainment, social networking,
shopping and commerce. According to Frost & Sullivan,
the U.S. residential online paid content and services
market, which includes music, online games and video, is
projected to grow from $3.1 billion in 2006 to
$8.8 billion in 2011. Content providers, including
television networks, music labels, movie studios, newspapers and
other traditional and new media companies have recognized the
growth potential of the Internet as an additional, important
distribution channel for their content. As a result, they are
increasingly focused on marketing their vast libraries of
content through the Internet by developing focused online and
digital marketing strategies.
Increased
Importance of Internet Advertising and Search
As digital media consumption, commerce and overall usage grow
across the Internet, advertisers are shifting a greater
proportion of their marketing budgets online. According to IDC,
online advertising spending in the United States reached
$16.9 billion in 2006, an increase of 35% versus 2005, and
is projected to increase to $31.4 billion by 2011,
including online search advertising revenues of
$10.1 billion. Online search and display advertising have
emerged as the largest components of online advertising, in
large part because they allow advertisers to reach a targeted
audience. Internet companies, such as Google and Yahoo!, have
taken advantage of the strong growth in search-based advertising
spending by forming advertising syndication networks that have
acquired a sizeable share of the Internet search volume. The
syndication network model has created opportunities for Internet
sites with strong web traffic to partner with online advertising
networks to monetize their traffic using many forms of
advertising, including banners, animation, streaming video,
special effects and user interactivity.
Emergence of the
Digital Home and Access to On-Demand, Cross-Platform Digital
Media
The proliferation of broadband Internet access has fundamentally
changed the way that consumers access and interact with media
content and Internet-based services. Consumers can now access
the Internet from a range of different devices including
personal computers,
television sets, personal multimedia players and mobile phones.
They are increasingly using these devices to get on-demand
access, and to download, consume, transport and share music,
video, games and other content. As a result, there is an
emerging trend towards convergence of digital media within the
residence. For broadband service providers, the challenge is no
longer about owning the viewership of one device, but rather to
“own the digital home.” They are responding to this
trend by expanding their offerings beyond their traditional
focus areas. Telcos and MSOs have invested heavily over the past
decade to upgrade their existing telecommunications and cable
networks to support enhanced voice communications, digital
television programming and broadband Internet access, and are
offering bundled packages of services and content in an attempt
to cross-sell services and products to existing customers.
Advances in home networking technologies and the increased
adoption of new media are helping accelerate the emergence of
the digital home. Consumers are increasingly using their home
networks to access multimedia, such as streaming video, music
and online content from multiple platforms, including personal
computers, stereos, home theater systems and a variety of
Internet-enabled networked devices. The network-enabled personal
computer has become a center for media, entertainment,
communication and social interaction, with user-generated
content, email, instant messaging and social networking
proliferating alongside professionally-created content and
media. The television has also evolved to become a digital
entertainment hub, enabling consumers to access a broad range of
on-demand programming through the set top box. IDC forecasts
that the number of network-enabled video devices, one of the key
building blocks of this “digital home,” will grow from
1.6 million units in the United States in 2006 to
45.3 million units in 2011, a CAGR of 96%. The market for
digital home services, such as digital television services
delivered over the Internet, or IPTV, is also expected to grow
rapidly. According to eMarketer, the worldwide number of IPTV
subscribers is projected to increase from 4.9 million in
2006 to 41.1 million in 2011, a CAGR of 53%.
Challenges for
Broadband Service Providers
Differentiating
Service Offerings in a Highly Competitive Environment
In order to maintain and grow their subscriber bases and
effectively compete in the current environment, broadband
service providers are seeking to provide a differentiated
solution—in particular, compelling digital content and
value-added online services—that can help promote
subscriber retention and increase their ARPU. The increasing
consumption of new media segments, such as the Internet, has
prompted broadband service providers to begin extending their
subscriber offerings to include a variety of online services. In
doing so, broadband service providers have found it difficult to
differentiate themselves and move from providing core Internet
access to becoming relevant to the subscriber’s online
experience, as this requires competing with well-established
Internet portals and online content providers. To succeed in
this highly competitive environment, broadband service providers
need to deliver a subscriber experience that is simple,
personalized, engaging and valuable. As a result, broadband
service providers seek to offer a broad portfolio of digital
content and services coupled with personalization and other
advanced features bundled into an integrated offering.
Offering a
Compelling Suite of Digital Content and Services
Because broadband service providers have not traditionally
focused on providing online content and services, they may not
have the expertise required to provide a seamless user
experience integrating a broad range of online offerings.
Constantly changing subscriber needs and tastes and rapidly
evolving technology, coupled with the difficulty of delivering a
digital media experience, create technical and management
challenges for companies seeking to deliver these offerings. For
example, while MSOs have benefited from a broad network of
relationships with media companies, they have not historically
been able to couple online
media offerings with their television offerings. In addition,
although MSOs have been successful in delivering content to
subscribers, they do not generally have the necessary expertise
or relationships to enable them to aggregate and deliver online
content in packages that subscribers perceive as valuable. The
volume of content offerings available on the Internet presents
an added challenge as subscribers now have a greater variety of
choices online than those offered through traditional media such
as television and radio.
Integrating
Existing Subscriber Management and Billing Systems
To provide a seamless online experience for their subscribers,
it is important for broadband service providers to achieve
integration at the user interface by making content and
subscriptions customizable across different platforms, and at
the back-end by synchronizing subscriber management and billing
systems and processes. Because the back-end processes for
traditional versus online services vary considerably, they
require a high degree of customization to achieve integration
across systems. Broadband service providers require a
carrier-grade Internet platform that easily interacts with
existing systems and reduces information technology, or IT, and
other operational costs. In order to implement efficient and
flexible solutions on a timely basis, broadband service
providers must either use solutions from third-party vendors or
develop their own solutions. As the Internet evolves and new
online technologies emerge, broadband service providers that
choose to develop their own solutions will increasingly face
challenges in keeping up with the technological changes required
to deliver online solutions while continuing to maintain
integration with the rest of their IT systems.
Acquiring
Technical Expertise and Experience
We believe that most broadband service providers lack the
necessary expertise to develop and deploy a technology platform
that can efficiently deliver a wide range of online content and
services to their subscribers. This is due, in part, to their
focus on network infrastructure, their core competency, which
prevents them from dedicating the resources necessary to develop
a scalable technology platform capable of delivering an
integrated, cost-effective package of online content and
services to multiple devices. To achieve these capabilities,
broadband service providers would need to invest significant
capital to acquire or build a technology platform, train
specialized personnel and conduct the ongoing research and
development required to keep up with technological advances.
Extending and
Strengthening Brand
Broadband service providers are challenged to extend and
strengthen their brand beyond the core Internet access market.
We believe that providing a compelling online experience is
critical to strengthening relationships with subscribers and
building and extending a brand identity as the media provider to
the digital home. Established portal providers typically insist
on co-branding or their own branded solution in order to promote
their own brands, which limits the flexibility offered to the
broadband service providers and makes it more difficult for them
to build and maintain a strong brand image. While this approach
provides the broadband service providers with a broad roster of
digital content and services, it can also result in dilution to
their brand in the online domain.
Increasing
Presence in the Digital Home
With the growing importance of the converged digital home that
utilizes access to triple- and quadruple-play services,
broadband service providers must respond to consumer demand for
on-demand access to digital content and services across various
media platforms. In order to build upon their existing
subscriber touch points and gain further penetration and
presence in the digital home, broadband service providers will
need to deploy a scaleable technology platform that can provide
digital content and services across multiple devices and
platforms
including personal computers, television sets, personal
multimedia players and mobile phones. In addition, as new
consumption patterns emerge, broadband service providers will
need the capability to bundle and cross-sell emerging forms of
bandwidth-intensive media and communication services across the
converging digital home platforms.
The Synacor
Solution
We provide an Internet platform and a portfolio of digital
content and services that enable broadband service providers to
create a compelling online experience for their subscribers. Our
solution provides our customers with the following key benefits:
Differentiation
of Broadband Service Providers’ Offerings
Our platform enables broadband service providers, domestic and
international, to differentiate their offerings by packaging and
customizing a wide variety of free and paid digital content and
value-added services for their subscribers. These offerings are
incorporated in a customer-branded, or “white label,”
Internet portal and a comprehensive content management and
delivery solution that enables our customers to aggregate and
deliver content and service offerings from diverse sources. All
of these offerings can be accessed through a single user
interface, thus creating a unified and cohesive online
experience.
Access to a
Diverse Portfolio of Digital Content and Services
We have an extensive network of relationships with digital
content and service providers. We believe that our content and
service providers value the new channels of distribution that
our technology platform and customer relationships open to them,
giving us an advantage when acquiring content and services. By
combining our technology platform with our portfolio of digital
content and services, we enable our customers to flexibly
package content and services for their subscribers, which allows
them to differentiate their brand and respond to changing
subscriber needs. In addition, we create customized bundles of
digital content and service offerings, which we make available
to our customers’ subscribers. Our portfolio of digital
content and services includes the following categories: news;
weather; family; games; music; video; entertainment; sports;
lifestyle products; email; and security. We regularly evaluate
our offerings to deliver customer and subscriber value and to
enable our customers to build a large, loyal and engaged online
audience.
Ability to
Integrate Different Technologies
Our technology is built on a standards-based platform, which is
designed for interoperability with our customers’ and our
content providers’ internal and other third-party systems.
In addition, most of our deployments with both broadband service
providers and content providers involve complex applications
that are integrated into their content management and delivery,
billing, service management, customer care and other core
systems. This approach provides a unified and cohesive user
experience for subscribers, which is an important component of
building subscriber loyalty and improving the
“stickiness” of our customers’
websites—meaning that they increase the likelihood that the
customers’ portals will remain their subscribers’
homepage. Due to our automated sign-on and authentication
process and integration with content providers, subscribers are
able to access proprietary third-party content from within the
customer-branded portal with a single sign-on and consolidated
billing. Furthermore, recognizing the need for flexibility, we
offer our customers the choice of either a hosted on-demand
solution or a non-hosted
on-site
application, as well as a number of integration methodologies.
Our scalable infrastructure also enables us to maintain
performance levels as our customers’ subscriber bases
develop, media content file sizes increase and overall online
consumption of digital media continues to grow.
Focus and
Expertise in Delivering Services and Content
Our focus and expertise have enabled us to improve significantly
the performance and reliability of the solutions we offer our
customers, and our singular focus on developing an Internet
platform and providing a portfolio of digital content and
services allows us to rapidly and efficiently deploy our
solutions. In addition, the size of our customer base, together
with their associated subscriber footprint and the depth of our
technology expertise, provides us with the ability to
continually develop and refine our solutions in a way that may
not be feasible for many of our customers on a stand-alone
basis. We have a diversified and growing customer base of
broadband service providers consisting mainly of MSOs, Telcos
and ISPs. As of March 31, 2007, our services and products
were deployed at over 30 broadband service providers, whom we
believe, based upon our own internal estimates, had over
21.0 million broadband Internet subscribers, over
5.0 million narrowband Internet subscribers and over
33.0 million household television subscribers in the United
States and the United Kingdom.
Support for
Online Branding Strategies of Broadband Service
Providers
We believe that building brand loyalty is a primary objective of
broadband service providers. Our white label solutions assist
our customers in strengthening their online brands while
enhancing their subscriber relationships. With co-branded
solutions, the solution provider could have different and
competing objectives. For example, the co-brand vendor may
promote its own brand at the expense of the broadband service
provider’s brand. In contrast, our objective is to work
with our customers on a collaborative basis and help them
strengthen their online brand awareness among their subscribers.
We believe that our solution offers broadband service providers
the ability to develop a direct communication channel with their
subscribers that they previously did not have, which helps to
improve subscriber satisfaction and loyalty.
Enhanced Customer
Presence in the Digital Home
Our solution offers our customers the ability to extend their
presence in the digital home by providing them with a flexible
technology platform that scales across multiple devices,
including personal computers, television sets, personal
multimedia players and mobile phones. Customers can incorporate
a selection of digital content and services into multiple
devices as they expand their triple- and quadruple-play
offerings. In addition, as new consumption trends emerge in the
future, we plan to enhance our platform so that it can
aggregate, customize and deliver emerging forms of
bandwidth-intensive media and communications services.
Strategy
Our goal is to accelerate the growth of our business and to
achieve long-term profitability. In order to achieve this goal,
we seek to:
Enhance Our
Technology Platform
We continue to enhance our technology platform and regularly
introduce new features and services to improve subscribers’
online experience. For example, we are developing new
personalization features that will allow subscribers to drag and
drop components, insert and remove a wide variety of components,
and generally make their homepage their “dashboard”
for digital content and services. By providing a higher degree
of customization and enhancing the features and functionality of
our solution, we believe our customers will benefit from
improved subscriber satisfaction and loyalty.
Increase
Subscriber Penetration of Paid and Packaged Online Services and
Products
We work collaboratively with our customers to understand their
subscribers’ needs, and we continually develop new content
and service provider relationships, with a view to tailoring
offerings to the diverse and changing tastes of subscribers. We
also seek new ways to bundle our content and service offerings
to help our customers deliver attractive online content to
subscribers. For example, we believe that broadband service
providers will increasingly package online offerings with their
television products in the near term, which our technology
platform can enable. The first stage of this packaging trend is
the offering of online packages on an a la carte basis to
subscribers. We currently support a variety of a la carte
offerings with a range of marketing programs to increase the
probability that they will produce significant adoption. We are
also developing packages of online content and services to
complement existing television packages. For example, we are
bundling a range of sports-oriented online paid services so that
they can be packaged with televised sports offerings and offered
to consumers as a single online/television offering.
Increase Usage
and Revenue from Traffic Generated by Our Services and
Products
We work closely with our customers to continuously improve our
technology platform and content and service offerings. We
believe this collaboration increases traffic to their websites
and optimizes the subscriber experience. We expect to drive
increased consumption of digital content and services through
our customers’ Internet portals by growing our portfolio of
offerings, better bundling various offerings and expanding our
delivery capabilities across multiple platforms. To increase the
level of and revenue from search activity, we also focus on
improving the subscriber experience while conducting online
searches through our customers’ websites and optimizing the
monetization of search results.
Our ability to serve as a profit center for our customers by
sharing revenue streams is a critical aspect of the value that
we provide our customers, and we continue to work with them to
increase monetization of our collective online offerings. For
example, we have entered into a number of relationships with
search and advertising providers to help generate revenue from
the traffic generated on our customers’ websites, a portion
of which we share with our customers. We also continue to
improve the yield of our customers’ advertising inventory
by working with advertising networks and other advertising sales
enterprises.
Broaden Our
Customer Base
We intend to expand our customer base by investing in new sales
and marketing initiatives, increasing the number of sales and
marketing personnel, strengthening our service and product
development activities, and expanding our partnerships with
digital content and service providers. We plan to acquire new
customers by targeting broadband service providers that should
benefit from our solution, including MSOs, Telcos and ISPs as
well as operators that provide Internet access through
Wi-Max,
fixed wireless, satellite, broadband over power lines, Wi-Fi and
other emerging technologies.
Expand Our
International Operations
We believe that a significant opportunity exists to increase our
net sales in international markets where broadband service
providers might not be offering Internet websites comparable to
our solution. While only a small portion of our net sales have
historically been generated abroad, as we have limited
operations in the United Kingdom, where Virgin Media has
deployed our solution to provide an Internet platform to its
subscribers, we intend to increase our international presence by
increasing our overseas sales and marketing efforts in selected
markets in Europe, Asia-Pacific and Latin America. IDC estimates
that broadband subscribers will increase from 68.6 million,
95.9 million and 7.2 million in 2006 to
109.6 million, 158.5 million and 19.0 million by
2011 in Europe, Asia-Pacific and Latin America, respectively.
Increase Support
for New Digital Platforms and Technologies
In order to enable our customers to establish and strengthen
their presence in the digital home, we intend to support
multiple platforms, such as personal computers, television sets,
personal multimedia players and mobile phones as well as
emerging technologies such as IPTV and advanced set-top boxes,
all of which are expected to continue to drive the convergence
of media within the digital home. We intend to expand our
current offerings by developing an integrated technology
solution that includes emerging digital platforms and supports
new consumer devices so that we can meet the subscriber’s
needs for on-demand access to content and services across
platforms and devices. We also believe that, by investing in and
adopting promising new digital platforms and technologies, we
can take advantage of growth in consumption of digital content
and services resulting from the emergence of the digital home.
Services and
Products
We deliver our service and product offerings through our
proprietary technology platform. We insert a wide variety of
modules into our platform to enable our customers to deliver an
array of Internet functionality and capability to their
subscribers. Our technology platform is used to create
customized Internet portals and includes integration
infrastructure, subscriber personalization capabilities, a
content management and delivery system and a customer-branded
video player and toolbar. Our platform also aggregates free and
paid digital content and value-added services, including video,
from third-party providers to create customized and branded
Internet websites. We generate recurring revenues in the form of
subscriber-based fees for the use of our platform, value-added
services and paid content, which we generally collect from our
customers. We also generate revenue from the traffic that is
generated from our platform in the form of search and
advertising revenue, which we generally collect from our search
partner, Google, and our advertising network providers. We often
share a portion of this revenue with our customers.
Subscriber-Based
Services, Including Technology Platform, Value-Added Services
and Paid Content
Using our proprietary technology platform, we provide customers
with a flexible, brandable Internet portal that can deliver a
wide range of functionality, value-added services and digital
content from multiple sources on a single, customizable website.
Our customers use their portal to provide subscribers with
access to free-to-subscriber content and service offerings,
including news, sports, entertainment and weather, and paid
content and other value-added services, all from one location
and with one login. Our platform employs a highly scalable and
flexible architecture that allows us and our customers to add
features and applications regularly.
Key features of our technology platform include portal design
and development, unified registration and login, billing
integration, personalization, flexible video delivery, our
proprietary content management system and household management.
We believe that these features increase the stickiness of our
customers’ websites and, therefore, help to increase
revenue and promote subscriber retention. We also believe that
these features strengthen our customers’ online presence,
thereby reinforcing their brands.
Portal Design and Development. Using our
technology platform, we create, design and develop Internet
portal websites for our broadband service provider customers.
The portal serves as the initial homepage for their subscribers.
Our portal design typically aggregates a
broad array of resources, including free-to-subscriber content
and service offerings, value-added services and paid digital
content and search, all in one location.
Unified Registration and Login (Single
Sign-On). Our platform gives subscribers access
to all of the value-added services and paid content to which
they have subscribed from a single user ID and password.
Subscribers typically log into the portal using the same user ID
and password that they use for email. Single sign-on for
subscribers is accomplished by integrating with both our
customers and our content and value-added service partners.
Because our single sign-on technology was built flexibly to
accommodate many authentication mechanisms, we have been able to
integrate with a wide range of partners.
Billing Integration. Our platform allows our
customers to integrate billing for value-added service and paid
content purchases with other services and products provided to
their subscribers, including television and telephone service. A
customer may collect transaction fees via credit card or on the
subscriber’s service provider bill, and it may bill
transactions each time they occur or on a monthly basis using
monthly summary totals. Our system enables on-line bill
presentment, which gives subscribers access to a detailed
transaction account.
Personalization. Our platform enables the
subscriber to personalize his or her Internet experience through
localization, customization and the addition of desired content
and services to the individual’s homepage. Subscribers are
able to manage access to services and products available to each
member of the household, define a budget limit for purchases for
each member of the household and set the payment method (service
provider bill vs. credit card) for access to paid offerings.
Video Delivery Capability. Our video delivery
capability includes two primary components: a video player and a
video discovery and delivery system. The video player contains
video controls such as play, pause, fast forward and rewind and
full-screen viewing, and can be configured to play within or on
top of a page. Our video discovery and delivery system is
database-driven, supports multiple video hosting methods and
enables transcoding from a number of video formats. The system
contains a number of access control mechanisms, including the
ability to restrict access based on IP address location,
subscriber type or household management settings. The system
also permits subscribers to search videos and browse by channel,
genre or content type.
Content Management System. Our proprietary
content management system enables our customers and us to create
dynamic, customizable web pages and components with content from
various sources. Our system is comprised of an administrative
interface, a scalable content storage system and a system to
distribute content to the platform. It also includes a feed
management system for importing content. Using our system, our
or our customers’ editors can publish directly to a website
without HTML designers and display a preview of page or
component designs prior to publishing. Our system can also
automatically publish content from outside sources or assign
publishing rights, by site section, to outside vendors.
Household Management. Our household management
system puts parents in control of the content their children are
allowed to purchase or consume from their broadband service
provider. Among other things, this system allows the head of
household to specify the range of products their “child
accounts” may access and utilize and to establish pre-set
spending limits for content purchases such as music and movie
downloads.
Toolbar. We offer our customers the ability to
create branded toolbars that can be personalized by their
subscribers. The toolbar can be updated automatically as new
features become available, configured with search, weather,
television and movie listings and value-added services and paid
content packages. The toolbars can also integrate internal
services such as instant messaging, customer support and email.
Television Listings. Our platform provides
television listings and corresponding television channels, which
enables subscribers to search and browse local television
programming.
In addition to the free-to-subscriber content and service
offerings discussed above, we provide our customers with paid
content and value-added services, which are paid for by our
customers or their subscribers, individually or in bundled
packages. The following are illustrative examples of some of
these packages, which we allow our customers to customize if
they desire:
•
Variety Package. Our variety package combines
content from several Internet subscription and entertainment
products into a single package. These packages may include any
combination of games (such as Shockwave Gameblast), greeting
card services (such as American Greetings), weather services
(such as weather.com), educational elements (such as
Encyclopedia Britannica or Clever Island) and sports elements
(such as MLB or Fox Sports).
•
Portable and Non-Portable Music. Our music
offering includes download-to-own, download-to-rent,
non-portable subscriptions, portable subscriptions and streaming
music, using MusicNet’s library of over 4.5 million
songs.
•
Security. Our security offering typically
includes anti-virus, firewall and intrusion detection,
pop-up
blocker, parental controls and automatic updates all powered by
security suites, such as F-secure.
•
Email and Calendar. We provide email and
calendar solutions to our customers using Zimbra’s
collaboration suite of messaging products. We integrate these
products into our technology platform to deliver email and
family calendar to subscribers from their homepage. The system
enables us to highlight customer-related and community events on
subscriber calendars, insert advertising into the web mail
interface and provide entry to subscribers solely through our
customer portals.
•
Movies on Demand. Our platform provides
broadband service providers with movies as well as enabling
movie downloads for viewing through online distribution to the
personal computer or other home entertainment devices. Our
current provider, CinemaNow, has a library of more than 4,000
films, television programs and music concerts from over 250
licensors. The movie service currently supports
pay-per-view
download and streaming, and we expect that it will soon support
a download-to-own business model.
•
Learning
Edge.tm Our
Learning Edge package combines a number of educational products
that appeal to families with young children, which may include
offerings from Boston Test Prep, Clever Island, Encyclopedia
Britannica and IKnowThat.com.
•
GamesSomnia.tm Our
GamesSomnia package includes subscriptions to popular online
gaming services and gaming-related news sources, which may
include offerings from Classic Atari, LEGO PC Games, Yummy
Arcade, Gaming Magazines and IGN Insider.
Revenue from our technology platform, value-added services and
paid content, which we refer to as subscriber-based revenue,
contributed approximately 90.5%, 63.3% and 49.2% of our total
net sales for 2004, 2005 and 2006, respectively.
Search and
Advertising
We use Internet search and advertising technologies to generate
revenue from the traffic generated by our customers’
Internet portals. Our search and advertising offerings are
comprised of search-based advertising, which we provide through
our relationship with Google, and display advertising, which we
provide through our relationships with advertising networks.
Search-Based Advertising. We have a
revenue-sharing relationship with Google, pursuant to which we
typically include a Google-branded search tool on customer
portals. When a subscriber makes a search request using this
tool, we deliver it to Google. Google returns search results to
us that include advertiser-sponsored links. If the subscriber
clicks on a sponsored link, Google receives payment from the
sponsor of that link and shares a portion of that payment with
us. We then typically share a portion of that payment with the
applicable customer.
Display Advertising. We generate advertising
revenue when subscribers view or click on a text or display
advertisement that we delivered. We have entered into
arrangements with several advertising networks, including
advertising.com and Tribal Fusion, among others. Advertisers pay
these networks a fee to place their advertisements on various
websites. When the networks place an advertisement on one of our
customers’ websites and other web pages that we control,
the network will pay us a portion of that fee. We then typically
share a portion of that payment with the applicable customer.
Search and advertising revenue contributed approximately 9.5%,
36.7% and 50.8% of our total net sales for 2004, 2005 and 2006,
respectively. Revenue attributable specifically to our
arrangement with Google contributed 9.3%, 36.2% and 49.7% of our
total net sales 2004, 2005 and 2006, respectively.
Technology and
Operations
Technology
Platform Architecture
Our technology platform has been designed and built to support
reliability and scalability. To route traffic through our
network in the most efficient manner, we use load balancing
products, which spread work among multiple servers, and link
controllers, which monitor availability and performance of
multiple connections to our platform. Web servers are used to
deliver our portals, operate our unified logins and stream video
content. Additional servers provide user data and content and
services, and other administrative servers perform tasks such as
content gathering, report generation, backups and monitoring.
Our technology platform is fault tolerant and scalable through
the addition of more servers as usage grows.
Data Center
Facilities
We currently operate and maintain a data center, which is
staffed 24 hours a day, 7 days a week, and a network
operations center. Both our data center and network operations
center are located in a shared facility operated by
Switch & Data Facilities Company, Inc. in Buffalo, New
York. The network operations center houses all production and
development systems that represent the operations center of the
services and products delivered to our customers. All systems
are fully monitored for reporting continuity and fault
isolation. The data center and network operations center are in
a physically secure facility using monitoring, environmental
alarms, closed circuit television and redundant power sources.
Customers
Our customers principally consist of MSOs, such as Charter and
Time Warner; Telcos, such as Embarq Corporation; and other ISPs,
such as EarthLink, Inc. and United Online, Inc. Our customer
contracts typically have an initial term of two to three years
from the deployment of the customer’s website. As of
March 31, 2007, we had agreements with 25 MSO customers,
five Telco customers and three ISPs. We did not generate
subscriber-based revenues from any single customer that
accounted for 10.0% or more of our net sales in the three months
ended March 31, 2007 or the year ended December 31,2006. However, when combined with the search and advertising
revenue associated with traffic generated from their websites,
net sales from two customers, Charter and Time Warner (pursuant
to the Adelphia legacy agreement
only), together accounted for approximately 45.8% of our net
sales for the three months ended March 31, 2007 and
approximately 53.0% of our net sales for the year ended
December 31, 2006, with each of these customers accounting
for more than 10.0% in each such period. We believe we have
strong and collaborative relationships with our customers, which
is critical to our success.
Content
Providers
We license rights to the content that we provide to our
customers, including value-added services and free and paid
content offerings, from numerous third-party content providers.
To obtain content, we enter into a variety of licensing
arrangements with our content partners that typically run from
one to three years in length and may provide for per subscriber
pricing, fixed payments over time, or both. Our partners provide
a variety of content, including news and information,
entertainment, music, video, games, shopping, travel, autos,
careers and finance. We use this content to populate our
customers’ portals, as well as to provide value-added
services and paid content that subscribers may purchase for
additional fees. As of March 31, 2007, we had arrangements
with over 45 content providers, including American Greetings,
Cinema Now, Encyclopedia Britannica, Inc., Fox Sports
Interactive Media, MLB Advanced Media and MusicNet, Inc.
Since that date, we have entered into an agreement with Turner
Broadcasting System, Inc. to license CNN, Gametap and NASCAR
content.
Sales and
Marketing
Our sales and marketing efforts focus on three primary areas,
which are sales, client services and marketing. Our sales team
consists of direct sales personnel who call upon prospective
customers. Our prospective customers are typically large and
mid-sized broadband service providers. A significant amount of
time and effort is devoted to researching and analyzing the
requirements and objectives of each prospective customer. Each
bid is specifically customized for the prospective customer, and
often requires months of interaction and negotiation before an
agreement is reached.
Once an agreement is reached, our client services team takes
over management of the customer relationship. Our client
services team manages the initial deployment and integration
period, which is usually 90 days or more, when the
customer’s technology platform is assessed and, if
required, modifications are proposed to make it compatible with
our technology platform. The client services team is responsible
for the quality of the client deployment, customer relationship
management, project management associated with upgrades and
enhancements and financial elements of the customer relationship.
Our marketing team and our client services team collaborate to
deliver marketing programs that support our customers’
sales efforts. We assist the customer in developing marketing
materials, advertising and cross-channel commercials that can be
accessed by subscribers through different media outlets,
including television, Internet, print and radio. We also assist
the customer in training its customer service representatives to
introduce and sell value-added services and paid content
offerings to new and existing customers. We may also participate
in the development and funding of marketing programs that
include sales incentives to accelerate sales of bundled products.
Government
Regulation
We generally are not regulated other than under international,
federal, state and local laws applicable to the Internet or
e-commerce
or to businesses in general. Some regulatory authorities have
enacted or proposed specific laws and regulations governing the
Internet and online entertainment. These laws and regulations
cover issues such as taxation, pricing, content, distribution,
quality and delivery of services and products, electronic
contracts, intellectual property rights, user privacy and
information security.
Federal laws regarding the Internet that could have an impact on
our business include the following: the Digital Millennium
Copyright Act of 1998, which is intended to reduce the liability
of online service providers of third-party content, including
content that may infringe copyrights or rights of others; the
Children’s Online Privacy Protection Act, which imposes
additional restrictions on the ability of online services to
collect user information from minors; and the Protection of
Children from Sexual Predators Act, which requires online
service providers to report evidence of violations of federal
child pornography laws under certain circumstances.
Laws and regulations regarding user privacy and information
security impact our business because we collect and use personal
information regarding the users of our customers’ Internet
portals. We use this information to deliver more relevant
content and services and provide subscribers with a personalized
online experience. We share this information on an aggregate
basis with our customers and content providers and, subject to
confidentiality agreements, to prospective customers and content
providers. Laws such as the CAN-SPAM Act of 2003 or other user
privacy or security laws could restrict our and our
customers’ ability to market products to their subscribers,
create uncertainty in Internet usage and reduce the demand for
our services and products or require us to redesign our
customers’ Internet portals.
Intellectual
Property
We believe the protection of our intellectual property is
critical to our success. We rely on copyright and trademark
enforcement, contractual restrictions and trade secret laws to
protect our proprietary rights. We have entered into
confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with
certain parties with whom we conduct business in order to limit
access to and disclosure of our proprietary information. Our
registered trademark in the United States is
Synacor®.
We endeavor to protect our internally developed systems and
maintain our trademarks and service marks. We generally control
access to and use of our proprietary software and other
confidential information through the use of internal and
external controls, including contractual protections with
employees, contractors, customers and partners, and our software
is protected by United States and international copyright laws.
In addition to legal protections, we believe that factors such
as the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable
product support and services are essential to establishing and
maintaining a technology leadership position.
Competition
The market for Internet-based services and products in which we
operate is highly competitive and involves rapidly-changing
technologies and customer and subscriber requirements, as well
as evolving industry standards and frequent product
introductions. While we believe that our services and products
offer considerable value to our customers in that they help our
customers extend their subscriber ownership to a wide variety of
Internet-based services, we face competitors when one of our
prospective or existing customers considers another supplier for
elements of the services and products we provide.
Our technology platform, value-added services and paid content
offerings compete primarily with broadband service providers
that have internal information technology staff capable of
developing similar solutions in-house, such as Comcast and Time
Warner. In addition, we compete with companies such as Yahoo!,
InfoSpace, Ask, Google, AOL and MSN, which are capable of
delivering competing platforms for broadband service providers
to develop a co-branded Internet portal with content and service
offerings similar to ours. We also compete
with providers of paid content over the Internet, especially
companies with the capability of bundling paid content and
value-added services in much the same manner that we do, such as
RealNetworks Inc.
We believe the principal competitive factors in our markets
include a company’s ability to:
•
reinforce the brand of the broadband service provider;
•
produce products that are flexible and easy to use;
•
offer competitive fees for portal development and operation;
•
generate additional revenues for broadband service providers;
•
extend the broadband service provider’s subscriber
ownership to a wide variety of Internet-based services and
products;
•
enable broadband service providers to be involved in designing
the “look and feel” of their online presence;
•
offer services and products that meet the changing needs of
broadband service providers and their subscribers, including
emerging technologies and standards;
•
provide high-quality product support to assist the
customer’s service representatives; and
•
aggregate content to deliver more compelling bundled packages of
paid content.
We believe that we distinguish ourselves from potential
competitors in three principal ways. First, we provide a white
label solution that, unlike the co-branded approach of most of
our competitors, creates an Internet experience based upon our
customers’ brands. Second, we give broadband service
providers control over the sign-on process and billing function
for a wide range of Internet services, and content by
integrating with their internal systems. Finally, our solution
is flexible, and we can create websites that are specifically
tailored to each customer’s desired “look and
feel.”
Employees
As of June 30, 2007, we had 163 employees in the
United States and two employees in the United Kingdom. None of
our employees is represented by a labor union, and we consider
current employee relations to be good.
Facilities
Our corporate headquarters are located at 40 LaRiviere Drive,
Buffalo, New York14202. We lease approximately
31,000 square feet of office space at this address pursuant
to a sublease agreement that expires in March 2016. We may, at
our option, elect to terminate the sublease as of
November 30, 2011 upon payment of a cancellation fee and
all past-due amounts then outstanding under the lease. The
sublease agreement grants us a right of first offer over
approximately 63,000 additional square feet in the same building.
We also maintain administrative offices in Los Angeles,
California and Herndon, Virginia.
We believe that our facilities are adequate to meet our current
needs and that suitable additional or substitute space will be
available as needed.
Legal
Proceedings
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. We are not
presently involved in any legal proceedings, the outcome of
which, if determined adversely to us, would have a material
adverse affect on our business, results of operations or
financial condition.
Our executive officers, key employees and directors, and their
ages and positions as of June 30, 2007, are set forth below:
Name
Age
Position
Ron Frankel
51
President, Chief Executive Officer
and Director
Eric Blachno
45
Chief Financial Officer
George Chamoun
33
Senior Vice President of Client
Services
Ross Winston
35
Chief Technology Officer
Frank Codella
56
Vice President of Sales
Theodore May
52
Vice President of Content and
Value-Added Services
Bobbie Herbs
54
Vice President of Marketing
Julia Culkin
33
Vice President of Human Resources
Andrew Kau
45
Director
Jordan Levy
51
Director
Mark Morrissette
36
Director
M. Scott Murphy
37
Director
Joseph Tzeng
52
Director
Ron Frankel has served as a member of our board of
directors and as our President and Chief Executive Officer since
April 2001. Prior to joining us, Mr. Frankel served as
Chief Executive Officer of Perks.com, Inc. from 1998 to 2001.
From 1994 to 1998 Mr. Frankel served as President of MGM
Interactive, the interactive division of
Metro-Goldwyn-Mayer
Studios Inc. From 1993 to 1994, Mr. Frankel served as
Senior Vice President of Marketing and Sales at Kenfil
Distribution. From 1988 to 1991, Mr. Frankel served in
several executive positions at Softview, Inc., lastly as Senior
Vice President of Marketing and Sales. Mr. Frankel attended
the University of California at Berkeley and received a J.D.
from the University of Southern California Law Center.
Eric Blachno has served as our Chief Financial Officer
since April 2007. From February 2006 to March 2007,
Mr. Blachno was an independent consultant to emerging
technology companies. From November 2004 to January 2006,
Mr. Blachno served as Chief Financial Officer at Eagle
Broadband, Inc. From July 2003 to June 2004, Mr. Blachno
served as Chief Financial Officer at Cascade Microtech, Inc.
From July 2000 to June 2003, Mr. Blachno served as Chief
Financial Officer at Luminent, Inc. From 1998 to 2000,
Mr. Blachno served as managing director at PMG Capital, an
investment banking firm. From 1995 to 1998, Mr. Blachno
served as managing director and senior communications equipment
analyst at Bear, Stearns & Co. Inc. From 1986 to 1995,
Mr. Blachno held various positions at International
Business Machines Corporation. Mr. Blachno holds an M.B.A.
in Finance from the Wharton School, University of Pennsylvania,
an M.S. in Telecommunications from Pace University and a B.S.
with High Honors in Computer Science from the University of
Florida.
George Chamoun has served as our Senior Vice President of
Client Services since our acquisition of My Personal in December
2000. Prior to that time, Mr. Chamoun was
co-founder
of Chek and served as its President from January 1998 until such
acquisition. Mr. Chamoun holds a B.A. in Political Science
from the State University of New York at Buffalo.
Ross Winston has served as our Chief Technology Officer
since August 2006. Prior to that period, he served as our Vice
President of Engineering from June 1999 to August 2006. From
June 1996 to June 1999, Mr. Winston served as Campuswide
Information Systems Coordinator for the State University of New
York at Buffalo, where he managed the university’s Internet
portals and related applications. Previously, Mr. Winston
was an independent consultant and served as the lead developer
for two software and web development companies. Mr. Winston
holds B.S. and M.S. degrees in Computer Science from the
State University of New York at Buffalo.
Frank Codella has served as our Vice President of Sales
since February 2002. From September 2000 to November 2001,
Mr. Codella served as Vice President of Sales and Business
Development at Global Crossing Ltd. From July 1997 to August
2000, Mr. Codella served as President and Chief Executive
Officer at Integrated Personnel & Systems Solutions, Inc.
From 1996 to 1997, Mr. Codella served as a Sales Director
at Lucent Technologies Inc. From 1980 to 1996, Mr. Codella
held various positions, including Regional Manager in the Global
Enterprise Division, at AT&T Inc. Mr. Codella is a
co-founder and currently serves as a Director of MedRecovery
Management LLC, a technology company that provides coordination
of workers’ compensation benefits services to health
insurers. Mr. Codella holds a B.S. in Economics and
Political Science from the State University of New York at
Brockport and an M.B.A. from the Rochester Institute of
Technology. Mr. Codella also earned an Advanced Certificate
from The Wharton Business School, University of Pennsylvania.
Theodore May has served as our Vice President of Content
and Value-Added Services since July 2005. From July 1997 to
February 2005, Mr. May held various positions,
including Vice President of Broadband, at America Online Inc.
From 1987 to 1996, Mr. May served as Director of Strategic
Planning and Vice President of New Media at Cablevision Systems
Corp. From 1986 to 1987, Mr. May served as a Vice President
in the Controller’s Division at Drexel Burnham Lambert Inc.
From 1984 to 1986, Mr. May served as Associate Director of
Business Planning and Development at CBS Broadcasting Inc.
Mr. May holds a B.F.A. from The Julliard School and an
M.B.A. from New York University.
Bobbie Herbs has served as our Vice President of
Marketing since June 2006. From January 2002 to April 2006,
Ms. Herbs served as Vice President of Marketing,
Programming and Video Product Management at RCN Corporation.
From October 1998 to January 2002, Ms. Herbs served as
Owner and Marketing Consultant of Sage Marketing Resources. From
December 1994 to January 1998, Ms. Herbs served as Vice
President of Customer Marketing and Creative Services and
Director of Programming and Pay Per View at PrimeStar Inc. From
1988 to 1994, Ms. Herbs served as Director of Marketing and
Broadband Services at Greater Media Cable. From 1984 to 1988,
Ms. Herbs served as Regional Director of Marketing and
General Manager at American Cablesystems Corporation.
Ms. Herbs holds a B.S. in Biology from Lynchburg College
and an M.S. in Management from Lesley College.
Julia Culkin has served as our Vice President of Human
Resources since August 2006. Prior to that period, she served as
our Director of Human Resources from July 2005 to July 2006 and
as our Manager of Human Resources from December 2004 to July
2005. From March 2002 to November 2004, Ms. Culkin served
as an independent consultant, primarily for Towers Perrin, where
she worked on various human resource-related projects, focusing
on executive compensation. From May 2000 to December 2001,
Ms. Culkin served as a Senior Compensation Analyst at
Pitney Bowes Inc. From June 1998 to May 2000, Ms. Culkin
served as a consultant for Towers Perrin where she worked with
Fortune 1000 companies on various human resource-related
projects, including executive compensation analyses, change
management practices and human resource practices competitive
research. Ms. Culkin holds a B.S. in Business
Administration from the State University of New York at Buffalo.
Andrew Kau has been a member of our board of directors
since Chek acquired MyPersonal in December 2000. Prior to that
period, Mr. Kau served as a director of MyPersonal from
September 1999 until such acquisition. Mr. Kau has been a
managing director at Walden
International since 1994. From 1991 to 1994, Mr. Kau was
President of Chemical Technologies Ventures. Mr. Kau was a
management consultant at Strategic Planning Associates, LLC from
1989 to 1991 and at Booz, Allen and Hamilton Inc. from 1985 to
1987. From 1983 to 1985, Mr. Kau was a research scientist
at Systems Planning Corporation. Mr. Kau holds a B.S. in
Electrical Engineering from Brown University and an M.B.A. from
the University of Virginia.
Jordan Levy has been a member of our board of directors
since October 2001. Mr. Levy has been a partner at
Softbank Capital since June 2005. In October 1999, Mr. Levy
co-founded Seed Capital Partners LLC and was a managing partner
there until May 2005. In July 2007, he was appointed
Chairman of the Erie Canal Harbor Development Corporation.
Mr. Levy currently serves on the board of directors of
Lorex Technology Inc., a publicly held company. Mr. Levy
holds a B.A. in Political Science from the State University of
New York at Buffalo.
Mark Morrissette has been a member of our board of
directors since October 2006. Mr. Morrissette has been a
Managing Director at North Atlantic Capital since July 2000.
From March 1995 to December 1998, Mr. Morrissette was a
senior associate at Advent International Corporation. From
August 1993 to March 1995, Mr. Morrissette was an analyst
at CSC Index. Mr. Morrissette holds a B.A. in Economics
from Dartmouth College and an M.B.A. from Harvard Business
School.
M. Scott Murphy has been a member of our board of
directors since September 2004. Mr. Murphy is a managing
director of Advantage Capital Partners, where he has worked
since April 2001. From 1998 to 1999, Mr. Murphy served as
the Chief Operating Officer at iXL-New York. Prior to that
period, Mr. Murphy founded Small World Software, where he
worked from 1995 to 1998, when it was acquired by iXL. From 1993
to 1995, Mr. Murphy served as an associate at Bankers Trust
Company N.A. Mr. Murphy holds an A.B. in Social Studies
from Harvard University.
Joseph Tzeng has been a member of our board of directors
since Chek acquired My Personal in December 2000. Prior to that,
Mr. Tzeng served as a director of My Personal from
September 1999 until such acquisition. Mr. Tzeng has been a
managing director of Crystal Internet Ventures since January
1997. Mr. Tzeng has served as President of CIVF Management,
Ltd. since October 1996. Mr. Tzeng holds an undergraduate
degree in Computer Science and Electronics Engineering from
National Chiao-Tung University, Taiwan and an M.S. in Computer
Engineering and Information Sciences from Case Western Reserve
University.
Board
Composition
Independent
Directors
Our board of directors is currently composed of six members.
Prior to the consummation of this offering, we expect to appoint
at least one additional director to our board of directors, who
will serve as the chairman of the audit committee and be the
“audit committee financial expert” as defined in
Item 407(d) of
Regulation S-K.
Messrs. Kau, Levy, Morrissette, Murphy and Tzeng qualify as
independent directors in accordance with the published listing
requirements of The Nasdaq Global Market, or Nasdaq. The Nasdaq
independence definition includes a series of objective tests,
such as that the director is not, and has not been for at least
three years, one of our employees and that neither the director,
nor any of his family members has engaged in various types of
business dealings with us. In addition, as further required by
the Nasdaq rules, our board of directors has made a subjective
determination as to each independent director that no
relationships exist which, in the opinion of our board of
directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. In
making these determinations, our board of directors reviewed and
discussed information provided by the directors and us with
regard to each director’s business and personal activities
and relationships as they may relate to us and our management.
See “Transactions with Related Persons, Promoters and
Certain Control Persons.”
Our current directors were elected pursuant to a voting
agreement that we entered into with certain holders of our
common and preferred stock. This voting agreement will terminate
upon the closing of this offering and there will be no further
contractual obligations regarding the election of our directors.
Our directors hold office until their successors have been
elected and qualified or their earlier death, resignation or
removal.
Classified
Board
Our amended and restated certificate of incorporation and our
amended and restated bylaws that will become effective
immediately prior to the closing of this offering will provide
for a classified board of directors consisting of three classes
of directors, each serving a staggered three-year term. As a
result, only one class of our board of directors will be elected
each year from and after the closing. Our amended and restated
certificate of incorporation and amended and restated bylaws
that will become effective immediately prior to the closing of
this offering will provide that the number of authorized
directors may be changed only by resolution of a number of
directors that is more than half of the number of directors then
authorized (including any vacancies), and that, except as
otherwise required by law or by resolution of the board, any
vacancies or new directorships on the board may be filled only
by vote of the directors and not by stockholders. The
classification of the board of directors may have the effect of
delaying or preventing changes in control of our company.
Board
Committees
We currently have a compensation committee, and prior to the
consummation of this offering, we will establish an audit
committee and a corporate governance and nominating committee.
Our board of directors and its committees will set schedules to
meet throughout the year and also can hold special meetings and
act by written consent under certain circumstances. The
independent members of our board of directors will also
regularly hold separate executive session meetings at which only
independent directors are present. Our board of directors will
delegate various responsibilities and authority to its
committees as generally described below. The committees will
regularly report on their activities and actions to the full
board of directors. Each member of each committee of our board
of directors will qualify as an independent director in
accordance with the Nasdaq standards described above. Each
committee of our board of directors will adopt a written
charter. Upon the effectiveness of the registration statement of
which this prospectus forms a part, copies of each charter will
be posted on our website at www.synacor.comunder the
Investor Relations section. The inclusion of our website address
in this prospectus does not include or incorporate by reference
the information on our website into this prospectus.
Audit
Committee
The members of our audit committee have not yet been appointed.
We intend to appoint at least three members that are
“independent” under the rules and regulations of the
SEC and the listing standards of Nasdaq. The audit committee of
our board of directors will oversee our accounting practices,
system of internal controls, audit processes and financial
reporting processes. Among other things, our audit committee
will be responsible for reviewing our disclosure controls and
processes and the adequacy and effectiveness of our internal
controls. It also will discuss the scope and results of the
audit with our independent auditors, will review with our
management and our independent auditors our interim and year-end
operating results and, as appropriate, will initiate inquiries
into aspects of our financial affairs. Our audit committee will
have oversight for our code of business conduct and will be
responsible for establishing procedures for the receipt,
retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters, or matters
related to our code of
business conduct, and for the confidential, anonymous submission
by our employees of concerns regarding such matters. In
addition, our audit committee will have sole and direct
responsibility for the appointment, retention, compensation and
oversight of the work of our independent auditors, including
approving services and fee arrangements. Our audit committee
also will be responsible for reviewing and approving all related
party transactions in accordance with our related party
transactions approval policy.
Compensation
Committee
The current members of our compensation committee are Messrs.
Kau, Morrissette, Murphy and Tzeng, each of whom is
“independent” under the rules and regulations of the
SEC and the listing standards of Nasdaq. Following the
consummation of this offering, the purpose of our compensation
committee will be to have primary responsibility for discharging
the responsibilities of our board of directors relating to
executive compensation policies and programs. Among other
things, specific responsibilities of our compensation committee
will include evaluating the performance of our chief executive
officer and determining our chief executive officer’s
compensation. In consultation with our chief executive officer,
it also will determine the compensation of our other executive
officers. In addition, our compensation committee will
administer our equity compensation plans and will have the
authority to grant equity awards and approve modifications of
such awards under our equity compensation plans, subject to the
terms and conditions of any equity award policy adopted by our
board of directors. Our compensation committee also will review
and approve various other compensation policies and matters.
Corporate
Governance and Nominating Committee
The members of our corporate governance and nominating committee
have not yet been appointed. We intend to appoint at least three
members that are “independent” under the rules and
regulations of the SEC and the listing standards of Nasdaq. The
corporate governance and nominating committee of our board of
directors will oversee the nomination of directors, including,
among other things, identifying, evaluating and making
recommendations of nominees to our board of directors, and will
evaluate the performance of our board of directors and
individual directors. Our corporate governance and nominating
committee also will be responsible for reviewing developments in
corporate governance practices, evaluating the adequacy of our
corporate governance practices and making recommendations to our
board of directors concerning corporate governance matters.
Code of Business
Conduct
Our code of business conduct applies to all of our employees,
officers and directors. Upon the effectiveness of the
registration statement of which this prospectus forms a part,
the full text of our code of business conduct will be posted on
our website at www.synacor.comunder the Investor
Relations section. We intend to disclose future amendments to
certain provisions of our code of business conduct, or waivers
of such provisions, at the same location on our website
identified above and also in public filings. The inclusion of
our website address in this prospectus does not include or
incorporate by reference the information on our website into
this prospectus.
Compensation
Committee Interlocks and Insider Participation
Compensation decisions during the year ended December 31,2006 pertaining to executive officer compensation were made by
our board of directors.
As noted above, the compensation committee of our board of
directors currently consists of Messrs. Kau, Morrissette, Murphy
and Tzeng. None of our executive officers has ever served
or will serve as a member of the board of directors or
compensation committee (or committee serving a similar function)
of any other entity that has or has had one or more executive
officers serving as a member of our board of directors or our
compensation committee.
Limitation of
Liability and Indemnification
Prior to the consummation of this offering, we will enter into
indemnification agreements with each of our directors and
executive officers and certain other key employees. The form of
agreement provides that we will indemnify each of our directors,
executive officers and such key employees against any and all
expenses incurred by that director, executive officer or key
employee because of his or her status as one of our directors,
executive officers or key employees, to the fullest extent
permitted by Delaware law, our amended and restated certificate
of incorporation and our amended and restated bylaws (except in
a proceeding initiated by such person without board approval).
In addition, the form agreement provides that, to the fullest
extent permitted by Delaware law, we will advance all expenses
incurred by our directors, executive officers and such key
employees in connection with a legal proceeding in which they
may be entitled to indemnification.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions relating to
the limitation of liability and indemnification of directors and
officers. The amended and restated certificate of incorporation
will provide that our directors will not be personally liable to
us or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability:
•
for any breach of the director’s duty of loyalty to us or
our stockholders;
•
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
•
in respect of unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of
the Delaware General Corporation Law; or
•
for any transaction from which the director derives any improper
personal benefit.
Our amended and restated certificate of incorporation also will
provide that if Delaware law is amended after the approval by
our stockholders of the certificate of incorporation to
authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent
permitted by Delaware law.
Our amended and restated bylaws will provide that we will
indemnify our directors and officers to the fullest extent
permitted by Delaware law, as it now exists or may in the future
be amended, against all expenses and liabilities reasonably
incurred in connection with their service for or on our behalf.
Our amended and restated bylaws will provide that we shall
advance the expenses incurred by a director or officer in
advance of the final disposition of an action or proceeding. Our
amended and restated bylaws also will authorize us to indemnify
any of our employees or agents and permit us to secure insurance
on behalf of any officer, director, employee or agent for any
liability arising out of his or her action in that capacity,
whether or not Delaware law would otherwise permit
indemnification.
Compensation
Discussion and Analysis
Compensation
Philosophy and Objectives
Our overall compensation philosophy is designed to attract
executive officers with the skills, talent, judgment and
dedication to help us achieve our business goals and to retain
and reward those officers who continue to perform at or above
our expectations and contribute to our long-term success. The
various elements of compensation are linked to individual and
corporate performance in achieving our financial and business
goals. The executive officers discussed in this Compensation
Discussion and Analysis, and included in the compensation tables
below, are Messrs. Frankel, Chamoun, Rusak and Winston
(referred to below as the “named executive officers”)
and Mr. Blachno, our current chief financial officer.
Our compensation committee’s objectives are to align
executive compensation with the achievement of long-term and
short-term financial and business goals and to ensure that the
compensation of each named executive officer reflects his own
contribution to our company and his performance. Each
compensation component is based in part, but not exclusively, on
our view of internal equity and consistency, individual
performance and other information we deem relevant, such as the
competitive survey data described below. All decisions on
compensation for our executive officers are based primarily upon
assessment of each individual’s performance and potential
to enhance long-term stockholder value. We rely upon judgment
and not rigid guidelines or formulas in determining the amount
and mix of compensation elements for each executive officer. Our
compensation committee has not adopted any formal or informal
policies or guidelines for allocating compensation between cash
and non-cash compensation or among different forms of non-cash
compensation. This is due to the need to tailor each executive
officer’s compensation package to attract and retain that
officer. Factors affecting our judgment include the executive
officer’s performance compared to the strategic goals
established for the individual and the company at the beginning
of the year, the nature and scope of the officer’s
responsibilities, and his effectiveness in leading initiatives
to achieve corporate goals.
In 2006, our board of directors assessed compensation levels and
approved compensation plans in light of corporate performance,
principally our revenue growth, individual performance and the
competitive market for talent. In the future, the compensation
committee intends to review relevant market data periodically
and take into account any changes in our company, our industry
and other factors.
Our philosophy is to maintain base salaries at or below the
50th percentile
of comparable companies while providing the opportunity to be
well rewarded through variable compensation and equity programs,
if we achieve our short-term and long-term goals. When we make
our annual compensation decisions, we review individual and
corporate performance. The board of directors has measured our
performance against the specific goals established at the
beginning of the fiscal year and determined the overall budget
and targeted compensation for our executive officers. Our chief
executive officer, as the manager of the executive team,
assessed each other executive officer’s contributions to
departmental as well as individual goals and made a
recommendation to the board of directors with respect to any
merit increase in salary or target bonus and any stock option
replenishment grant for that executive officer. The board of
directors evaluated, discussed and modified or approved those
recommendations and conducted a similar evaluation of the chief
executive officer’s own contributions to the corporate
goals. No individual goals were established for the chief
executive officer.
Role of
Compensation Committee, Executive Officers and Compensation
Consultant
Prior to this offering, our board of directors made the final
decisions on the compensation of our executive officers,
although the compensation committee frequently made
recommendations to the board of directors. After this offering,
the compensation committee will make the final determinations
regarding executive officer compensation.
Our chief executive officer and vice president of human
resources supported our board of directors in its work by
providing information relating to our financial plans,
performance assessments of our executive officers and other
personnel-related data, and they will support the compensation
committee in a similar manner in the future. As described above,
the chief executive officer also made recommendations to our
board with respect to the compensation
of other executive officers but did not participate in the
determination of his own compensation. The compensation
committee has the authority under its charter to engage the
services of outside advisors and experts, and it will retain a
compensation consultant to assist it in connection with the 2008
compensation review. Our board of directors did not use outside
consultants for prior compensation reviews.
Principal
Elements of Executive Compensation
Our executive compensation program consists of the three
components discussed below. In general, the determination of the
board of directors with regard to one component did not affect
its determinations with regard to the other components.
Base Salaries. We subscribe to various surveys
and databases and review them when we review executive
compensation and when making an important executive hiring
decision. The salaries of our chief executive officer and our
other named executive officers are established based on the
scope of their responsibilities, taking into account competitive
market compensation. We attempt to set the base salaries of our
executive officers at or near the 50th percentile level
when compared to the salaries of executives in similar positions
and with similar responsibilities at comparable companies. We
believe that salaries at this level enable us to hire and retain
individuals in a competitive environment. In instances where an
executive officer is particularly important to our success, our
board of directors or the compensation committee may provide
compensation above the 50th percentile, and the board has
done so in the case of Mr. Frankel.
Base salaries are reviewed annually and adjusted as needed. Any
salary adjustments will be based on competitive conditions,
individual performance, our overall financial performance,
changes in job duties and responsibilities, and our overall
budget for base salary increases. Our compensation levels
reflect consideration of our stockholders’ interest in
paying what is necessary, but not significantly more than
necessary, to achieve our corporate goals while conserving cash
and equity as much as practical.
In the fall of 2006, the compensation committee and our board of
directors analyzed the base salary of each named executive
officer, based on the 2006 Towers Perrin Executive Compensation
Survey and the 2006 Dow Jones Compensation Pro survey. The
market data indicated that the base salary amounts of
Messrs. Frankel, Chamoun and Winston were below the level
necessary to achieve our compensation objectives, based on
companies in our geographic region and technology companies
throughout the United States. We believe that this occurred
because our base salaries generally were established during the
first few years of our operation, when our revenue was lower.
Therefore, the board increased the salaries of
Messrs. Frankel, Chamoun and Winston. Mr. Rusak
resigned in October 2006. The salary actually paid in 2006 to
each named executive officer is reflected in the 2006 Summary
Compensation Table below, and his current annual base salary is
as follows:
•
Mr. Frankel: $270,000
•
Mr. Blachno: $200,000
•
Mr. Chamoun: $150,000
•
Mr. Winston: $150,000
Annual Incentive Compensation. Cash bonuses
are intended to reward individual performance during the year
and can be highly variable from year to year. A target bonus is
set for each executive officer and is stated in terms of a
percentage of base salary for the year. The 2006 target bonus
amount for Mr. Frankel was 50% of his salary at the rate in
effect as of the end of the fiscal year. For each of
Messrs. Chamoun and Winston, the 2006 target bonus amount
was 25% of salary at the rate in effect as of the end of the
fiscal year. The maximum
bonus payable under our management bonus plan for each of
Messrs. Frankel, Chamoun and Winston was two times their
target bonus amount if such officer exceeded his target
objectives or our board of directors determined, in its sole
discretion, that an officer earned additional bonus amounts as a
result of his individual performance. The board retained
complete discretion to increase or decrease variable
compensation based on a variety of factors, such as
accomplishing a specific business objective not included in the
goals for the year, if it had a material impact on our financial
results or business operations, assuming responsibility beyond
the scope of the executive officer’s position, or
accomplishing goals in a way that contributed materially to
exceeding the financial targets for the year or generating
revenue in future years.
Under our management bonus plan, annual cash incentives for the
executive officers and other key employees were designed to
reward short-term performance that contributes to meeting key
corporate goals. For 2006, Mr. Frankel’s target bonus
was payable if our revenue exceeded $25 million in fiscal
2006. Because we exceeded this goal, the compensation committee
approved paying Mr. Frankel’s bonus at the target
level, with an additional $18,750 bonus above his target amount
in recognition of our exceeding the revenue target for 2006 and
for Mr. Frankel’s business generation that should
significantly impact future revenue. Mr. Chamoun’s
target bonus was payable if he achieved his goals related to
client services, including increasing the revenue generated by
our current clients. Our board of directors approved paying
Mr. Chamoun the maximum bonus permissible under our
management bonus plan, which was equal to two times his target
bonus amount, in recognition of the additional responsibility he
accepted in 2006, his key contribution in exceeding targeted
financial results and his business generation that should
significantly impact future revenue. Mr. Chamoun was also
offered a $25,000 commission by our chief executive officer if
he closed a material transaction that was not in our goals for
the year, and our board of directors approved this commission
for Mr. Chamoun because he played an instrumental role in
closing the transaction. Mr. Winston’s target bonus
amount was payable if he achieved his goals related to the
timely development and completion of our new products. Our board
of directors approved paying Mr. Winston his target bonus
amount and an additional $7,500 for his contribution in the
development of new product offerings. The total amount actually
paid to each named executive officer is reflected in the 2006
Summary Compensation Table below.
For 2007, our board of directors has decided to adopt a
discretionary bonus program for all named executive officers. We
currently find ourselves in a rapidly changing business
environment, and the board concluded that a bonus program with
predetermined performance objectives would be unduly rigid at
this time. We believe that discretionary bonuses, when
thoughtfully administered by a compensation committee of
independent directors, can achieve the goals outlined above for
our annual bonus program. On the basis of the peer group data
described above, the board of directors determined that the
target bonuses of Messrs. Frankel, Blachno, Chamoun and
Winston will be as follows:
•
Mr. Frankel: 70% of base salary
•
Mr. Blachno: 25% of base salary
•
Mr. Chamoun: 25% of base salary
•
Mr. Winston: 25% of base salary
Long-Term Incentive Compensation. Our
long-term equity incentive compensation is typically awarded in
the form of options to acquire shares of our common stock,
because we believe that stock options offer the greatest
leverage and, therefore, the greatest incentive to increase the
value of our business. Our equity incentive plans were
established to provide our employees, including our executive
officers, with incentives to support our long-term success and
growth. Authority to make equity grants to executive officers
will rest with our
compensation committee, although it is expected that the
compensation committee will consider the recommendations of our
chief executive officer for executive officers other than
himself.
A significant stock option grant is typically made in the year
that an executive officer commences employment. Thereafter,
option grants may be made at varying times and in varying
amounts at the discretion of our compensation committee or our
board of directors. We do not have any program or obligation
that requires us to grant equity compensation to any executive
officer on specified dates. The size of each grant was generally
set at a level that our board of directors deemed appropriate to
create a meaningful opportunity for stock ownership while
reflecting the individual’s position with us and the
individual’s potential for future responsibility. Like the
other components of our compensation program, our option grants
generally were intended to have a value near the
50th percentile level when compared to the awards of
similar companies included in the surveys mentioned above. The
relative weight given to each performance element varied from
individual to individual at the discretion of our board of
directors, and adjustments were made as the board of directors
deemed reasonable to attract highly qualified candidates in the
competitive environment where we operate.
In the absence of a public trading market for our common stock,
our board of directors determined the fair market value of our
common stock in good faith using factors it considered
appropriate, which more recently included a written report
prepared by an independent valuation firm retained by our board
of directors in 2006. All 2006 equity awards to our employees,
including named executive officers, had an exercise price equal
to the fair market value of our common stock on the grant date,
determined in accordance with the report of the independent
valuation firm. Following this offering, we expect the exercise
price of our options to be equal to the closing price of our
common stock on the date of the grant.
Under our 2006 Stock Plan, assuming the employee has provided
continuous service to us through each vesting date, the option
will generally vest as to 25% of the shares on the anniversary
date of the first day of the month following the date of hire
for the initial grant to an employee and the first day of the
month following the date of grant for subsequent grants, and
then as to 1/48th of the shares each month thereafter. The
vesting schedule is designed to provide a meaningful incentive
to remain in our employ and to reflect the prevailing practice
among comparable companies. An option will provide a return to
the employee only if he or she remains in our employ, and then
only if the market price of our common stock appreciates over
the option term.
To date we have not granted additional options to employees on
an annual basis, although we evaluate employee performance on an
annual basis. Instead, additional options have been granted to
employees we deem critical to our success and those who have
made significant contributions in achieving our goals. The
amount of the additional grants was determined in the discretion
of the board of directors, based on the recommendation of the
chief executive officer. In exercising this judgment, we
considered the individual’s existing stock holdings, the
degree of vesting in future years and the individual’s
overall performance. In April 2007, the compensation committee
recommended to the board of directors that an additional option
grant be made to Mr. Frankel based, among other factors, on
his exceptional performance to date, his existing stock holdings
and the degree of remaining vesting in future years. An option
grant covering 115,150 shares was made at the then fair
market value of our common stock, based on a written report
prepared by our independent valuation firm.
We generally do not use restricted stock awards because we
believe that options offer a more powerful incentive; however,
our board of directors or the compensation committee may
consider the grant of restricted shares of our common stock in
appropriate circumstances. Restricted shares are subject to a
risk of forfeiture that lapses in accordance with a vesting
schedule determined by the compensation committee or board of
directors. In April 2007, the chief executive officer
recommended to our board of directors that Mr. Blachno be
offered the opportunity to purchase shares of restricted stock
upon hire as part of his negotiated compensation package. The
chief executive officer also recommended an additional
restricted stock award in lieu of a relocation package for
Mr. Blachno. In the aggregate, Mr. Blachno purchased
180,000 restricted shares at the fair market value at the time
of purchase.
Stock Ownership
Guidelines
We currently do not require our directors or executive officers
to own a particular amount of our common stock. The compensation
committee is satisfied that stock and option holdings among our
directors and executive officers are sufficient at this time to
provide motivation and to align this group’s interests with
those of our stockholders.
Perquisites
Our executive officers participate in the same group insurance
and employee benefit plans as our other salaried employees. At
this time, we do not provide special benefits or other
perquisites to our executive officers.
Employment
Agreements
We have entered into letter agreements with
Messrs. Frankel, Chamoun, Blachno and Rusak that provide
severance benefits in certain circumstances. All of
Mr. Blachno’s compensation, as set forth in his offer
letter, as amended, was determined based on his negotiations
with us when he became our chief financial officer.
Mr. Frankel’s letter agreement provides for a cash
severance payment and 12 months of vesting acceleration
with respect to his equity awards in the event that he is
terminated by us without cause. Each letter agreement with
Messrs. Blachno and Rusak provides for a cash severance
payment in the event that the officer is terminated by us
without cause or permanent disability. Mr. Chamoun’s
letter agreement provides for a cash severance payment in the
event that he is terminated by us without cause or he resigns
after our material breach of his employment agreement or there
are certain adverse changes to his job following a change of
control. In addition, in the event of a change of control and
certain reductions or changes with respect to the
executive’s position or compensation, additional vesting
acceleration applies. These protections are intended to preserve
employee morale and productivity and encourage retention in the
face of the disruptive impact of an actual or rumored change of
control of the company. Please see
“Management—Employment Agreements and Offer
Letters” and “Management—Potential Payments upon
Termination or Change of Control” below for more details.
Financial
Restatement
Our compensation committee has not adopted a policy on whether
or not we will make retroactive adjustments to any cash or
equity-based incentive compensation paid to executive officers
(or others) where the payment was predicated upon the
achievement of financial results that were subsequently the
subject of a restatement. Our compensation committee believes
that this issue is best addressed when the need actually arises,
when all of the facts regarding the restatement are known.
Tax and
Accounting Treatment of Compensation
Section 162(m) of the Internal Revenue Code places a limit
of $1 million per person on the amount of compensation that
we may deduct in any one year with respect to each of our named
executive officers. There is an exemption from the
$1 million limitation for performance-based compensation
that meets certain requirements. All grants of options or stock
appreciation rights
under our 2007 Equity Incentive Plan are intended to qualify for
the exemption. See “Management—Equity Incentive Plan:
2007 Equity Incentive Plan” for more details. Grants of
restricted shares or stock units under our 2007 Equity Incentive
Plan may qualify for the exemption if vesting is contingent on
the attainment of objectives based on the performance criteria
set forth in the plan and if certain other requirements are
satisfied. Grants of restricted shares or stock units that vest
solely on the basis of service cannot qualify for the exemption.
Our current cash incentive plan is not designed to qualify for
the exemption. To maintain flexibility in compensating officers
in a manner designed to promote varying corporate goals, our
compensation committee has not adopted a policy requiring all
compensation to be deductible. Although tax deductions for some
amounts that we pay to our named executive officers as
compensation may be limited by section 162(m), that
limitation does not result in the current payment of increased
federal income taxes by us due to our significant net operating
loss carry-forwards. Our compensation committee may approve
compensation or changes to plans, programs or awards that may
cause the compensation or awards to exceed the limitation under
section 162(m) if it determines that such action is
appropriate and in our best interests.
We account for equity compensation paid to our employees under
the rules of SFAS 123R, which requires us to estimate and
record an expense for each award of equity compensation over the
service period of the award. Accounting rules also require us to
record cash compensation as an expense at the time the
obligation is accrued. We have not tailored our executive
compensation program to achieve particular accounting results.
Executive
Compensation
2006 Summary
Compensation Table
The following table sets forth the total compensation awarded
to, earned by, or paid to our named executive officers for all
services rendered in all capacities to us in 2006.
Non-Equity
Option
Incentive Plan
All Other
Name and
Principal Position
Year
Salary
Awards (2)
Compensation (3)
Compensation
Total
Ron Frankel
President and Chief Executive Officer
2006
$
232,292
(1)
$
9,373
$
143,750
$
—
$
385,415
Robert Rusak
Chief Financial Officer
2006
150,000
18,777
—
53,278
(4)
222,055
George Chamoun
Senior Vice President of Client Services
2006
131,340
(5)
2,797
100,000
(6)
—
234,137
Ross Winston
Chief Technology Officer
2006
130,298
(7)
1,404
45,000
9,615
(8)
186,317
(1)
Mr. Frankel’s salary was
increased to $250,000, effective as of September 16, 2006.
(2)
The amounts in this column
represent the dollar amount recognized for financial statement
reporting purposes with respect to the fiscal year in accordance
with SFAS 123R, excluding forfeiture estimates. See
Note 9 of the notes to our consolidated financial
statements included elsewhere in this prospectus for a
discussion of our assumptions in determining the SFAS 123R
values of our option awards.
(3)
Reflect payments pursuant to our
management bonus plan.
(4)
Reflects severance payments, COBRA
premiums and accrued vacation payout. Mr. Rusak resigned
effective as of October 31, 2006.
(5)
Mr. Chamoun’s salary was
increased to $150,000, effective as of September 1, 2006.
(6)
$25,000 of these payments was made
pursuant to a commission program with Mr. Chamoun.
(7)
Mr. Winston’s salary was
increased to $150,000, effective as of September 16, 2006.
Pursuant to the separation agreement signed by Mr. Rusak in
October 2006, his option for 115,000 shares of our common
stock was amended to accelerate the vesting with respect to
2,396 shares and to extend the term of his option from
30 days until three months following his resignation date.
The dollar amount recognized for these option modifications for
financial statement reporting purposes with respect to the
fiscal year in accordance with SFAS 123R was $17,717. See
“Management—Potential Payments upon Termination or
Change of Control” below for more details.
“Salary” and “Non-Equity Incentive Plan
Compensation” accounted for the following percentages of
the “total compensation” of our named executive
officers:
Non-Equity
Incentive Plan
Name
Salary
Compensation
Ron Frankel
60
%
37
%
Robert Rusak
68
%
0
%
George Chamoun
50
%
43
%
Ross Winston
70
%
24
%
2006 Grants of
Plan-Based Awards
The following table sets forth the plan-based non-equity
incentive awards granted to our named executive officers during
the 2006 fiscal year. No plan-based equity incentive awards were
made to our named executive officers during the 2006 fiscal year.
The amounts shown in the “Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards” for Messrs. Frankel
and Winston reflect each officer’s participation in our
management bonus plan and for Mr. Chamoun, his
participation in our management bonus plan and a commission
program. For 2006, Mr. Frankel’s target bonus was
payable if in fiscal 2006 our revenue exceeded $25 million.
Because we exceeded this goal, the compensation committee
approved paying Mr. Frankel’s bonus at the target
level, with an additional $18,750 bonus above his target amount
in recognition of our exceeding the revenue target for 2006 and
for Mr. Frankel’s business generation that should
significantly impact future revenue. Mr. Chamoun’s
target bonus was payable if he achieved his goals related to
client services, including increasing the revenue generated by
our current clients. Mr. Chamoun was paid the maximum bonus
permissible under our management bonus plan, which was equal to
two times his target bonus amount, in recognition of the
additional responsibility he accepted in 2006, his key
contribution in exceeding targeted financial results and his
business generation that should significantly impact future
revenue. Mr. Chamoun was also offered a $25,000 commission
if he closed a material contract that was not in our goals for
the year, and Mr. Chamoun earned the commission by playing
an instrumental role in closing the contract.
Mr. Winston’s target bonus amount was payable if he
achieved his goals related to the timely development and
completion of our new products. Mr. Winston was paid his
target bonus amount and an additional $7,500 for his
contribution in the development of new product offerings.
Estimated
Possible Payouts Under
Non-Equity
Incentive Plan Awards
Name
Target
Maximum
Ron Frankel
125,000
250,000
Robert Rusak
—
—
George Chamoun
37,500
100,000
Ross Winston
37,500
75,000
On April 3, 2007, we granted Ron Frankel an option to
purchase 115,150 shares of our common stock at an exercise
price of $1.39 per share. The option may be exercised at any
time
with respect to 71,942 of the shares subject to the option, with
the remaining 43,208 shares subject to the option becoming
exercisable at any time after December 31, 2007.
Twenty-five percent of the option shares will vest when
Mr. Frankel completes 12 months of continuous service
after April 3, 2007. An additional 1/48th of the
option shares will vest when Mr. Frankel completes each
additional month of service thereafter. The vesting of such
shares is subject to acceleration, as described in
“Management—Potential Payments upon Termination or
Change of Control” below.
On April 19, 2007, Eric Blachno, our current chief
financial officer, purchased a total of 180,000 restricted
shares of our common stock at a purchase price of $1.39 per
share. Unvested shares are subject to repurchase by us if
Mr. Blachno terminates his service with us. Twenty-five
percent of the shares will vest when Mr. Blachno completes
12 months of continuous service after April 16, 2007,
and an additional 1/48th of the shares will vest when he
completes each month of continuous service thereafter. The
vesting of such shares is subject to acceleration, as described
in “Management—Potential Payments upon Termination or
Change of Control” below.
Outstanding
Equity Awards at 2006 Fiscal Year-End
The following table sets forth information regarding each
unexercised option held by each of our named executive officers
as of December 31, 2006. The number of option shares and
the option exercise prices that appear below reflect all
adjustments as a result of the Company’s capitalization
adjustments. As of December 31, 2006, our named executive
officers did not hold any exercised shares.
The options granted to our named executive officers are
exercisable in accordance with each of the respective stock
option grant notices, as described below in the footnotes. Where
no footnote is provided, all of the granted options have fully
vested and are immediately exercisable. For a description of the
acceleration of vesting provisions applicable to the unvested
options held by our executive officers, please see
“Management—Potential Payments upon Termination or
Change of Control” below.
Number of
Securities
Underlying
Unexercised
Option
Option
Options (#)
Exercise
Expiration
Name
Vested
Unvested
Price
Date
Ron Frankel
2,834
—
$
150.00
3/31/2011
Ron Frankel
2,684
—
150.00
1/31/2011
Ron Frankel (1)
771,470
—
0.06
3/12/2013
Ron Frankel (2)
134,994
105,015
0.30
11/17/2014
Robert Rusak (3)
40,730
74,270
0.30
8/1/2015
George Chamoun (4)
231,442
—
0.06
3/12/2013
George Chamoun (5)
38,999
33,004
0.30
11/17/2014
Ross Winston
100
—
1,351.36
12/1/2009
Ross Winston
60
—
1,450.00
8/15/2010
Ross Winston
40
—
1,450.00
8/15/2010
Ross Winston
100
—
150.00
7/18/2011
Ross Winston
115,720
—
0.06
3/12/2013
Ross Winston (6)
20,250
15,751
0.30
11/17/2014
(1)
Mr. Frankel exercised options
representing 150,000 of these shares on April 19, 2007.
(2)
All of the 240,009 option shares
are immediately exercisable, subject to our right of repurchase
with respect to unvested shares. Our right of repurchase of
unvested option shares lapses with respect to 2.083% of the
total number of option shares at the conclusion of each month of
continuous service provided by Mr. Frankel.
As of October 31 2006,
Mr. Rusak’s last date of employment with us, 38,334
option shares were vested. Pursuant to the terms of his
separation agreement dated October 24, 2006, the vesting of
2,396 additional option shares was accelerated when
Mr. Rusak signed this agreement, which contained a release
of claims. On January 26, 2007, Mr. Rusak exercised
all of the vested 40,730 option shares. The remaining 74,270
unvested option shares were forfeited by him upon his
resignation date.
(4)
Mr. Chamoun exercised options
representing 40,000 of these shares on June 1, 2007.
(5)
All of the 72,003 option shares are
immediately exercisable, subject to our right of repurchase with
respect to unvested shares. Our right of repurchase of unvested
option shares lapses with respect to 2.083% of the total number
of option shares at the conclusion of each month of continuous
service provided by Mr. Chamoun.
(6)
All of the 36,001 option shares are
immediately exercisable, subject to our right of repurchase with
respect to unvested shares. Our right of repurchase of unvested
option shares lapses with respect to 2.083% of the total number
of option shares at the conclusion of each month of continuous
service provided by Mr. Winston.
2006 Option
Exercises and Stock Vested
Our named executive officers did not exercise any of their
options during fiscal year 2006 and did not hold any shares of
restricted stock as of the end of 2006.
Employment
Agreements and Offer Letters
Ron Frankel. We entered into a letter
agreement with Mr. Frankel in July 2007, which ratified the
severance benefit and vesting acceleration that were initially
offered to Mr. Frankel when he commenced employment with us
in 2001. See “Management—Potential Payments upon
Termination or Change of Control” for a description of that
benefit and acceleration.
George Chamoun. We entered into an employment
agreement with Mr. Chamoun in December 2000, which set
forth his base salary of $125,000 per year and his eligibility
for a bonus at the discretion of the compensation committee of
our board of directors. In September 2006, we entered into a
letter agreement with Mr. Chamoun that increased his base
salary rate by 20% to $150,000 per year, effective as of
September 1, 2006. See “Management—Potential
Payments upon Termination or Change of Control” for a
description of Mr. Chamoun’s severance benefits.
Ross Winston. We entered into a letter
agreement with Mr. Winston in September 2006 pursuant to
which his base salary was increased by 20% to $150,000 per year,
effective as of September 16, 2006.
Eric Blachno. We entered into an offer letter
with Mr. Blachno, our current chief financial officer, in
April 2007. Pursuant to this offer letter, Mr. Blachno
receives a base salary of $200,000 per year, subject to
adjustment pursuant to our compensation policies in effect from
time to time. Mr. Blachno is also eligible to receive an
incentive bonus for each of our fiscal years, with a target
bonus amount equal to 25% of his base salary, based on objective
or subjective criteria established by our chief executive
officer and approved by our board of directors.
Mr. Blachno’s bonus will be prorated for 2007, the
fiscal year in which his employment began, and he must be
employed by us at the time of payment to receive any bonus.
Additionally, Mr. Blachno was granted the right to, and
did, purchase 140,000 restricted shares of our common stock and,
in lieu of relocation reimbursement, an additional 40,000
restricted shares of our common stock, as described under
“Management—2006 Grants of Plan-Based Awards”
above. See “Management—Potential Payments upon
Termination or Change of Control” below for a description
of Mr. Blachno’s severance benefits and vesting
acceleration.
Robert Rusak. We entered into an offer letter
with Mr. Rusak, our former chief financial officer, in June
2005, which set forth his initial base salary of $180,000 per
year and an annual target bonus equal to 35% of such base
salary. The bonus for any fiscal year was payable only if
Mr. Rusak was employed by the Company at the time of such
payment. If, after one year of continuous employment or
subsequent to any change of control, we terminated his
employment for any reason other than cause or permanent
disability, we agreed to continue to pay Mr. Rusak’s
base salary at the rate then in effect for six months.
Mr. Rusak was also granted an option to purchase
115,000 shares of the Company’s common stock, with a
4-year
vesting schedule in which 25% of the option shares vested upon
the completion of 12 months of continuous service and
1/48th of the option shares vested upon the completion of
each month of continuous service thereafter. This option was
subject to acceleration under certain conditions in the event of
a change of control; however, because Mr. Rusak resigned
before we were subject to a change of control, no such vesting
acceleration was triggered.
Potential
Payments upon Termination or Change of Control
Ron Frankel. According to the letter agreement
we entered into with Mr. Frankel in July 2007, if we
terminate Mr. Frankel’s employment without cause, he
will receive a lump-sum severance payment equal to
12 months of his then-current base salary.
“Cause” is defined as:
•
Mr. Frankel’s intentional failure to substantially
perform the duties assigned to him by our board of directors,
following at least 30 days’ written notice of such
failure;
•
Mr. Frankel’s commission of any act of fraud,
embezzlement, felony, or other willful misconduct that causes
material injury to us;
•
Mr. Frankel’s intentional unauthorized use or
disclosure of any of our proprietary information or trade
secrets or any other party’s proprietary information or
trade secrets to whom Mr. Frankel owes an obligation of
nondisclosure as a result of his relationship with us, which
unauthorized use of disclosure causes material harm to
us; or
•
Mr. Frankel’s willful breach of his obligations under
any written covenant or agreement with us, which breach is not
cured within 30 days following written notice thereof and
which causes material harm to us.
With respect to Mr. Frankel’s currently unvested
options for 105,015 shares of our common stock granted on
November 18, 2004, 100% of such unvested options will vest
upon a change of control if the acquirer or successor entity
does not assume such options in full, if Mr. Frankel’s
compensation is reduced below his rate of compensation as of
immediately prior to the change of control, if his place of
employment is relocated more than 35 miles from its
location immediately prior to the change of control or if his
duties and responsibilities are reduced as a result of or
following such change of control. If Mr. Frankel is
terminated without cause at any time, he will receive an
additional 12 months of accelerated vesting.
With respect to Mr. Frankel’s option for
115,150 shares of our common stock granted to
Mr. Frankel on April 3, 2007, if he is terminated
without cause at any time, he will receive an additional
12 months of accelerated vesting. In the event of a change
of control, 100% of his unvested options will vest if the
acquirer or successor entity does not assume such options in
full, if Mr. Frankel’s compensation is reduced below
his rate of compensation as of immediately prior to the change
of control, if his place of employment is relocated more than
35 miles from its location immediately prior to the change
of control or if his duties and responsibilities are reduced as
a result of or following such change of control. If, in
connection with, or within 12 months following, a change of
control in which the acquiring or succeeding entity assumes the
option or makes a substitution for it, Mr. Frankel is
subject to an involuntary termination, he will receive an
additional 12 months of accelerated vesting. For this
purpose, “involuntary termination” is defined as
termination without cause or voluntary termination by
Mr. Frankel within 30 days following a material
reduction in his job responsibilities, relocation of his work
site to a facility or location more than 50 miles from his
principal work site at the time of the change of control, or a
reduction in his then-current base salary by at least 10% (other
than an across-the-board reduction in the salary level of all
other similarly situated employees by the same percentage as
part of a general salary level reduction).
George Chamoun. Pursuant to the employment
agreement with Mr. Chamoun entered into in December 2000,
if Mr. Chamoun’s employment is terminated without
cause by us, Mr. Chamoun terminates his employment as a
result of our material breach of his employment agreement
45 days after we receive written notice of such breach or,
following a change of control, Mr. Chamoun’s
employment is either terminated by him because he is not offered
a position with the same responsibilities or he is relocated or
is terminated by us in contemplation of the change of control,
we will continue to pay Mr. Chamoun’s base salary at
the rate then in effect for six months. “Cause” is
defined as dishonesty, commission of a felony, willful violation
of his fiduciary duties or a material violation of the terms of
his employment agreement that remains uncured 45 days after
written notice of such violation.
Eric Blachno. Pursuant to the offer letter
signed in April 2007, if we terminate Mr. Blachno’s
employment for any reason other than cause or permanent
disability, he will be entitled to receive continued payments of
his base salary at the rate then in effect for six months
following the termination of his employment. “Cause”
is defined as unauthorized use or disclosure of our confidential
information or trade secrets by Mr. Blachno that causes
material harm to us; material breach of any agreement between
Mr. Blachno and us; material failure by Mr. Blachno to
comply with our written policies or rules;
Mr. Blachno’s conviction of, or plea of guilty or no
contest to, a felony under the laws of the United States or of
any state; gross negligence or willful misconduct; continuing
failure by Mr. Blachno to perform his assigned duties after
receiving written notification of such failure from our board of
directors; or Mr. Blachno’s failure to cooperate in
good faith with a governmental or internal investigation of us
or of our directors, officers or employees, if we request such
cooperation. “Permanent disability” means that
Mr. Blachno is unable to perform the essential functions of
his position, with or without reasonable accommodation, for at
least 120 consecutive days, because of a physical or mental
impairment.
With respect to Mr. Blachno’s 180,000 restricted
shares, if Mr. Blachno is subject to an involuntary
termination in connection with, or within 12 months
following, a change of control, all of the shares will become
fully vested immediately prior to the effective date of the
termination of Mr. Blachno’s service. Additionally, if
we terminate Mr. Blachno’s service for any reason
other than cause or permanent disability, all of the
40,000 shares granted in lieu of relocation reimbursement
will become fully vested immediately prior to the effective date
of the termination of Mr. Blachno’s service.
“Involuntary termination” is defined as termination
without cause or voluntary resignation within 30 days
following a material reduction in job responsibilities;
relocation of the participant’s work site to a new facility
or location more than 50 miles from the previous work site;
or a reduction in base salary by at least 10%, except for an
across-the-board reduction in salary of all other employees in
similar positions by the same percentage amount. For this
purpose, “cause” is defined as a willful failure to
perform assigned duties and responsibilities or a deliberate
violation of one of our policies; commission of any act of
fraud, embezzlement, dishonesty or any other willful misconduct
that has caused or is reasonably expected to result in material
injury to us; unauthorized use or disclosure of any of our
proprietary information or trade secrets; or willful breach of
any obligations under any written agreement or covenant with us.
Robert Rusak. We entered into a separation
agreement with Mr. Rusak in October 2006, pursuant to which
he resigned, effective as of October 31, 2006. On the
effective date of his resignation, Mr. Rusak received an
amount representing all of his salary earned through the
resignation date plus all of his accrued but unused vacation
time. In consideration for his execution of this separation
agreement, which contained a release of claims, we paid or
provided to him the following severance benefits:
•
base salary continuation equal to $30,000;
•
cost of his COBRA premiums in the amount of $2,355;
extension of the term of Mr. Rusak’s option from
30 days until three months following his resignation date.
Estimated
Benefits and Payments Upon Termination of Employment
The following table describes the potential payments and
benefits upon termination of our named executive officers’
employment or certain change of control events, as described
above, as if each officer’s employment terminated or other
vesting acceleration event occurred on December 31, 2006.
However, Mr. Rusak’s payments and benefits set forth
in the table below are equal to the amounts paid to him as a
result of his resignation, effective as of October 31,2006, and execution of a separation agreement containing a
release of claims.
Frankel Non-
Assumption
of Option or
Chamoun
Certain
Termination
Terminations
Reductions
Voluntary
without Cause
that Trigger
After Change
Name
Benefit
Resignation
at any
time
Severance (2)
of
Control (3)
Ron Frankel
Severance
$
—
$
270,000
(1)
$
—
$
—
Option Acceleration
—
—
Vacation Payout
28,846
28,846
—
—
Total Value
$
28,846
—
Robert Rusak
Severance
$
50,000
$
—
$
—
$
—
Option Acceleration
2,612
—
—
—
COBRA Premiums
2,355
—
—
—
Vacation Payout
923
—
—
—
Total Value
$
55,890
—
—
—
George Chamoun
Severance
$
—
$
75,000
$
75,000
$
—
Vacation Payout
15,000
15,000
15,000
—
Total Value
$
15,000
$
90,000
$
90,000
$
—
Ross Winston
Vacation Payout
9,807
9,807
—
—
(1)
Mr. Frankel’s severance
amount was calculated, based on his base salary rate in effect
on January 1, 2007.
(2)
If (a) Mr. Chamoun
terminates his employment as a result of our material breach of
his employment agreement 45 days after we received written
notice of such breach or (b) following a change of control,
Mr. Chamoun’s employment is terminated by him because
he is not offered a position with the same responsibilities or
he is relocated or his employment is terminated by us in
contemplation of the change of control, we will continue to pay
Mr. Chamoun’s base salary at the rate then in effect
for six months.
(3)
In the event of a change of
control, 100% of Mr. Frankel’s unvested options will
vest if the acquirer or successor entity does not assume such
options in full, if his compensation is reduced below his rate
of compensation as of immediately prior to the change of
control, if his place of employment is relocated more than
35 miles from its location immediately prior to the change
of control or if his duties and responsibilities are reduced as
a result of or following such change of control.
For purposes of valuing the vacation payments in the table
above, we used each executive’s base salary in effect at
the end of 2006 (except that for Mr. Frankel, we used his
base salary effective as of January 1, 2007) and the
number of accrued but unused vacation days at the end of 2006.
However, with respect to Mr. Rusak, we used the number of
accrued but unused vacation days as of his last date of
employment of October 31, 2006.
The value of option acceleration shown in the table above was
calculated based on the assumption that the vesting acceleration
event occurred on December 31, 2006. For purposes
of the valuing the option acceleration, we also assumed that the
fair market value of our common stock on December 31, 2006
was $ , which represents the
midpoint of the range of the initial public offering price set
forth on the cover page of this prospectus. The value of the
vesting acceleration was calculated by multiplying the number of
unvested shares subject to each option by the difference between
the fair market value of our common stock as of
December 31, 2006 and the exercise price of the option.
However, for Mr. Rusak, the value of the option
acceleration was calculated by multiplying the 2,396 unvested
shares whose vesting was accelerated by the difference between
the fair market value of our common stock on his last date of
employment, which was $1.39 per share, and his exercise price of
$0.30 per share.
2006 Director
Compensation
Our directors who are not executive officers did not receive any
cash compensation, options to purchase shares of our common
stock or any other equity award during fiscal year 2006. We have
a policy of reimbursing our directors for their reasonable
out-of-pocket expenses incurred in attending board and committee
meetings.
Only Mr. Levy has been granted our equity awards.
Mr. Levy is the only director who is neither an employee of
the company nor affiliated with our venture fund investors, and
the options were granted to retain his services as a director.
With respect of his outstanding options to purchase shares of
our common stock, the following table sets forth the dollar
amount recognized for financial statement reporting purposes
with respect to fiscal year 2006 in accordance with
SFAS 123R.
Name
Option
Awards (1)
Joseph Tzeng
—
Andrew Kau
—
Jordan Levy
$
943
M. Scott Murphy
—
Mark Morrissette
—
(1)
The amount in this column
represents the dollar amount recognized for financial statement
reporting purposes with respect to the fiscal year in accordance
with SFAS 123R, excluding forfeiture estimates. See
Note 9 of the notes to our consolidated financial
statements included elsewhere in this prospectus for a
discussion of our assumptions in determining the SFAS 123R
values of our option awards.
Equity Benefit
Plans
2007 Equity
Incentive Plan
We expect that our 2007 Equity Incentive Plan will be adopted by
our board of directors and approved by our stockholders prior
to, and will become effective on, the effective date of the
registration statement of which this prospectus is a part. Our
2007 Equity Incentive Plan will replace the 2006 Stock Plan. No
further grants will be made under our 2006 Stock Plan after this
offering. However, the options outstanding after this offering
under the 2006 Stock Plan will continue to be governed by their
existing terms.
Share Reserve. We have
reserved shares
of our common stock for issuance under the 2007 Equity Incentive
Plan. The number of shares reserved for issuance under the plan
will be increased automatically on January 1 of each fiscal
year, starting with fiscal 2009, by a number equal to the
smallest of:
•
% of the shares of common stock
outstanding at that time;
•
shares
of our common stock; or
•
the number of shares determined by our board of directors.
In general, to the extent that awards under the 2007 Equity
Incentive Plan are forfeited or lapse without the issuance of
shares, those shares will again become available for awards. All
share numbers described in this summary of the 2007 Equity
Incentive Plan (including exercise prices for options and stock
appreciation rights) are automatically adjusted in the event of
a stock split, a stock dividend, or a reverse stock split.
Administration. The compensation committee of
our board of directors will administer the 2007 Equity Incentive
Plan. The committee has the complete discretion to make all
decisions relating to the plan and outstanding awards.
Eligibility. Employees, members of our board
of directors who are not employees and consultants are eligible
to participate in our 2007 Equity Incentive Plan.
Types of Award. Our 2007 Equity Incentive Plan
provides for the following types of awards:
•
incentive and nonstatutory stock options to purchase shares of
our common stock;
•
stock appreciation rights;
•
restricted shares of our common stock; and
•
stock units.
Options and Stock Appreciation Rights. The
exercise price for options granted under the 2007 Equity
Incentive Plan may not be less than 100% of the fair market
value of our common stock on the option grant date. Optionees
may pay the exercise price by using:
•
cash;
•
shares of common stock that the optionee already owns;
•
an immediate sale of the option shares through a broker approved
by us; or
•
a promissory note, if permitted by applicable law.
All forms of payment other than cash require the consent of the
compensation committee. A participant who exercises a stock
appreciation right receives the increase in value of our common
stock over the base price. The base price for stock appreciation
rights may not be less than 100% of the fair market value of our
common stock on the grant date. The settlement value of a stock
appreciation right may be paid-in cash or shares of common
stock, or a combination of both. Options and stock appreciation
rights vest at the time or times determined by the compensation
committee. In most cases, they will vest over a four-year period
following the date of grant. Options and stock appreciation
rights also expire at the time determined by the compensation
committee, but in no event more than 10 years after they
are granted. They generally expire earlier if the
participant’s service terminates earlier. No participant
may receive options or stock appreciation rights under the 2007
Equity Incentive Plan covering more
than shares
in any fiscal year, except that a new employee may receive
options or stock appreciation rights covering up
to shares
in the fiscal year in which his or her employment starts.
Restricted Shares and Stock Units. Restricted
shares and stock units may be awarded under the 2007 Equity
Incentive Plan in return for any lawful consideration, and
participants who receive restricted shares or stock units
generally are not required to pay for their awards in cash. In
general, these awards will be subject to vesting. Vesting may be
based on length of service, the attainment of performance-based
milestones, or a combination of both, as determined by the
compensation committee. No participant may receive restricted
shares or stock units with performance-based vesting covering
more
than shares
in any fiscal year, except that a new employee may receive
restricted shares or stock units covering up
to shares
in the fiscal year in which his or her employment starts.
Settlement of vested
stock units may be made in the form of cash, shares of common
stock, or a combination of both.
Change of Control. The compensation committee
may determine that options or stock appreciation rights granted
under the 2007 Equity Incentive Plan will become exercisable on
an accelerated basis if a change of control of Synacor occurs or
if the participant is subject to an involuntary termination
after the change of control. The compensation committee may
determine that restricted shares or stock units granted under
the 2007 Equity Incentive Plan will become vested on an
accelerated basis if a change of control of Synacor occurs or if
the participant is subject to an involuntary termination after
the change of control. However, in the case of an incentive
stock option, acceleration of exercisability may not occur
without the written consent of the option holder. Awards may
also be subject to accelerated vesting or exercisability in the
event of a reorganization, as described below.
A change of control includes:
•
a merger or consolidation after which our own stockholders own
less than 50% of the surviving corporation or its parent;
•
a sale, transfer or other disposition of all or substantially
all of our assets;
•
a proxy contest that results in the replacement of more than 50%
of our directors over a
24-month
period; or
•
an acquisition of 50% or more of our outstanding stock by any
person or group, other than a person related to Synacor (such as
a holding company owned by our stockholders or a trustee or
other fiduciary holding securities under an employee benefit
plan of ours or of our parent or of a subsidiary of ours).
Reorganizations. If we experience a merger or
consolidation, awards granted under the 2007 Equity Incentive
Plan will be subject to the merger or consolidation agreement,
which may provide that the awards are continued, assumed,
substituted with awards that have substantially the same terms,
become fully exercisable with respect to options and stock
appreciation rights and fully vested with respect to shares
underlying such options and stock appreciation rights; or
cancellation of outstanding options, stock appreciation rights
and stock units in exchange for a cash payment (which payment
may be deferred until the options, stock appreciation rights or
stock units would have become exercisable or common shares
underlying them would have become vested).
Amendments or Termination. Our board of
directors may amend or terminate the 2007 Equity Incentive Plan
at any time. If our board of directors amends the plan, it does
not need to ask for stockholder approval of the amendment unless
required by applicable law. The 2007 Equity Incentive Plan will
continue in effect for 10 years from its adoption date,
unless our board of directors decides to terminate the plan
earlier.
2006 Stock
Plan
Our 2006 Stock Plan was adopted by our board of directors on
December 5, 2006, and our stockholders approved it on
April 4, 2007. The most recent amendment to the 2006 Stock
Plan was adopted by our board of directors on July 31, 2007
and we will obtain stockholder approval of such amendment. Our
2006 Stock Plan replaced our 2000 Stock Plan. No further awards
will be made under our 2006 Stock Plan after this offering. The
awards outstanding after this offering under the 2006 Stock Plan
will continue to be governed by their existing terms.
Share Reserve. We have reserved
966,915 shares of our common stock for issuance under the
2006 Stock Plan, all of which may be issued as incentive stock
options. In general, if options or shares awarded under the 2006
Stock Plan are reacquired or repurchased by us or
otherwise forfeited by a 2006 Stock Plan participant, then those
shares or option shares will again become available for awards
under the 2006 Stock Plan.
Administration. Our board of directors
administered the 2006 Stock Plan before this offering, and the
compensation committee of our board of directors will administer
this plan after this offering. Before this offering, our board
of directors had, and after this offering, our compensation
committee will have, complete discretion to make all decisions
relating to our 2006 Stock Plan.
Eligibility. Employees, members of our board
of directors who are not employees and consultants are eligible
to participate in our 2006 Stock Plan.
Types of Award. Our 2006 Stock Plan provides
for the following types of awards:
•
incentive and nonstatutory stock options to purchase shares of
our common stock; and
•
direct award or sale of shares of our common stock, including
restricted shares (subject to a right of repurchase by us upon
the participant’s termination with respect to unvested
shares).
Options and restricted shares vest at the times determined by
our board of directors. Both options and restricted shares
generally vest over a four-year period following the date of
grant. In most cases, our options are immediately exercisable,
subject to our right to repurchase unvested shares. Options
expire not more than 10 years after they are granted but
generally expire earlier if the participant’s service
terminates earlier.
Payment. The exercise price for options
granted under the 2006 Stock Plan may not be less than 100% of
the fair market value of our common stock on the option grant
date. Participants may pay the exercise price of options, or the
purchase price of shares, by using:
•
cash or cash equivalents;
•
a full-recourse promissory note, against which the purchased
shares are pledged as security for payment of the principal
amount of, and interest on, the note;
•
shares of common stock that the optionee already owns; or
•
an immediate sale of the option shares through a broker
designated by us.
Shares may also be awarded under the 2006 Stock Plan in
consideration of services rendered to us prior to the grant date
of a stock award. To date, no participant under the 2006 Stock
Plan has been permitted to pay the purchase price or exercise
price with a promissory note.
Change of Control. If a participant is subject
to an involuntary termination in connection with or within
12 months following a change of control, then the
participant’s option or share award will receive an
additional 12 months of vesting acceleration.
A change of control includes:
•
a merger or consolidation of the company with or into another
corporation, after which our stockholders who owned more than
50% of our capital stock immediately before the transaction will
own 50% or less of the total voting power of the surviving
corporation or entity; or
•
a sale of all or substantially all of our assets.
“Involuntary termination” is defined in the 2006 Stock
Plan as termination without cause or voluntary resignation
within 30 days following a material reduction in job
responsibilities; relocation of the participant’s work site
to a new facility or location more than 50 miles from the
previous work site; or a reduction in base salary by at least
10%, except for an across-the-
board reduction in salary of all other employees in similar
positions by the same percentage amount.
“Cause” is defined in the 2006 Stock Plan as a willful
failure to perform assigned duties and responsibilities or a
deliberate violation of one of our policies; commission of any
act of fraud, embezzlement, dishonesty or any other willful
misconduct that has caused or is reasonably expected to result
in material injury to us; unauthorized use or disclosure of any
of our proprietary information or trade secrets; or willful
breach of any obligations under any written agreement or
covenant with us.
Amendments or Termination. Our board of
directors may amend or terminate the 2006 Stock Plan at any
time. If our board of directors amends the plan, it does not
need to ask for stockholder approval of the amendment unless the
amendment increases the number of shares available for issuance,
materially changes the class of persons eligible to receive
incentive stock options or is otherwise required by applicable
law. The 2006 Stock Plan will continue in effect for
10 years from the later of its adoption date or the date of
approval of the latest share increase, unless our board of
directors decides to terminate the plan earlier.
2000 Stock
Plan
Our 2000 Stock Plan was adopted by our board of directors and
approved by our stockholders on December 5, 2000. The most
recent amendment to the 2000 Stock Plan was adopted by our board
of directors on July 31, 2007, and the most recent amendment
that required stockholder approval was approved by our
stockholders on October 19, 2006. No further awards will be
made under our 2000 Stock Plan. The awards outstanding after
this offering under the 2000 Stock Plan will continue to be
governed by their existing terms.
Share Reserve. Pursuant to the 2000 Stock Plan
and subsequent amendments, we have reserved
2,358,270 shares of our common stock for issuance under the
2000 Stock Plan, all of which may be issued as incentive stock
options.
Administration. Our board of directors
administers the 2000 Stock Plan before this offering and the
compensation committee of our board of directors will administer
this plan after this offering. Before this offering, our board
of directors and after this offering, our compensation committee
has complete discretion to make all decisions relating to our
2000 Stock Plan.
Eligibility. Employees, members of our board
of directors who are not employees and consultants are eligible
to participate in our 2000 Stock Plan.
Types of Award. Our 2000 Stock Plan provides
for the following types of awards:
•
incentive and nonstatutory stock options to purchase shares of
our common stock; and
•
restricted shares.
Options and restricted shares vest at the times determined by
the board of directors. Both options and restricted shares
generally vest over a four-year period following the date of
grant.
In most cases, our options are exercisable for all of the shares
subject to such options at any time six months after the date of
grant, subject to our right to repurchase unvested shares.
Options expire not more than 10 years after they are
granted but generally expire earlier if the participant’s
service terminates earlier. The compensation committee of our
board of directors or our board of directors may at any time
offer to buy out for payment in cash or shares of our common
stock an option previously granted under the 2000 Stock Plan.
Payment. The exercise price for incentive
stock options granted under the 2000 Stock Plan may not be less
than 100% of the fair market value of our common stock on the
option grant date. The exercise price for nonstatutory stock
options granted under the 2000 Stock Plan
may not be less than 85% of the fair market value of our common
stock on the option grant date. The purchase price for
restricted shares may not be less than 85% of the fair market
value of our common stock on the date of the award.
Participants may pay the exercise price of options or stock
purchase rights by using:
•
cash or check;
•
promissory note;
•
cancellation of indebtedness;
•
shares of common stock that the optionee already owns (provided
such shares have been owned for more than 6 months on the
date of surrender); or
•
an immediate sale of the option shares through a broker
designated by us.
Change of Control. If a participant is subject
to an involuntary termination in connection with or within
24 months following a change of control that occurs after
our stock is listed on a national securities exchange, then the
participant’s option or share award will receive an
additional 24 months of vesting acceleration. Such
accelerated vesting may be limited if it constitutes a parachute
payment within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or the Code, and would be
subject to the excise tax under Code Section 4999.
A change of control includes:
•
a merger or consolidation of the company with or into another
corporation, other than a merger or consolidation in which the
holders of more than 50% of our capital stock immediately before
the transaction continue to hold more than 50% of the total
voting power of the surviving corporation or entity after such
transaction; or
•
a sale of all or substantially all of our assets.
“Involuntary termination” is defined in the 2000 Stock
Plan as termination without cause or voluntary resignation
within 30 days following a material reduction in job
responsibilities; relocation of the participant’s work site
to a new facility or location more than 50 miles from the
previous work site; or a reduction in base salary by at least
10%, except for an across-the-board reduction in salary of all
other employees in similar positions by the same percentage
amount.
“Cause” is defined in the 2000 Stock Plan as a willful
failure to perform assigned duties and responsibilities or a
deliberate violation of one of our policies; commission of any
act of fraud, embezzlement, dishonesty or any other willful
misconduct that has caused or is reasonably expected to result
in material injury to us; unauthorized use or disclosure of any
of our proprietary information or trade secrets; or willful
breach of any obligations under any written agreement or
covenant with us.
Amendments or Termination. Our board of
directors may amend or terminate the 2000 Stock Plan at any
time. If our board of directors amends the plan, it does not
need to ask for stockholder approval of the amendment unless
required by applicable law. The 2000 Stock Plan will continue in
effect for 10 years from its adoption date by the board of
directors, unless our board of directors decides to terminate
the plan earlier.
In addition to the compensation arrangements with directors and
executive officers and the registration rights described
elsewhere in this prospectus, the following is a description of
each transaction since January 1, 2004 and each currently
proposed transaction in which:
•
we have been or are to be a participant;
•
the amount involved exceeds $120,000; and
•
any of our directors, executive officers or holders of more than
5% of our capital stock, or any immediate family member of or
person sharing the household with any of these individuals
(other than tenants or employees), had or will have a direct or
indirect material interest.
Private Placement
Financings
In connection with a series of private placement financings, we
entered into various agreements with respect to our stock. The
following is a summary of material provisions of these
agreements. This summary does not purport to be complete and is
qualified in its entirety by reference to the respective
agreements, a copy of each of which is filed as an exhibit
hereto. Each of the following agreements resulted from
negotiations between our management and our significant
stockholders. We believe the terms and conditions set forth in
such agreements are reasonable and customary for transactions of
this type.
Series B
Preferred Stock Financing
In October 2004 through January 2005, we sold an aggregate of
2,737,500 shares of our Series B convertible preferred
stock at a price of $2.00 per share to various investors,
including an entity affiliated with Advantage Capital Partners,
Intel Capital (Cayman) Corporation (formerly known as Intel
Capital Corporation), entities affiliated with each of Crystal
Ventures and Walden International, an entity affiliated with
Mr. Jordan Levy and various other entities and individuals.
Each of the investors in this financing are parties to the third
amended and restated investors’ rights agreement, or the
investors’ rights agreement, the third amended and restated
stock restriction, first refusal and co-sale agreement and the
third amended and restated voting agreement, each of which are
described below. See “Principal Stockholders” for more
details regarding the shares held by these entities.
Series C
Preferred Stock Financing
In October 2006 through November 2006, we sold an aggregate of
2,740,407 shares of our Series C convertible preferred
stock at a price of $6.34 per share to various investors,
including Intel Capital (Cayman) Corporation (formerly known as
Intel Capital Corporation), entities affiliated with each of
Advantage Capital Partners, Crystal Ventures, Walden
International and North Atlantic Capital, an entity affiliated
with Mr. Jordan Levy and various other entities and
individuals. Each of the investors in this financing are parties
to the investors’ rights agreement, the third amended and
restated stock restriction, first refusal and co-sale agreement
and the third amended and restated voting agreement, each of
which are described below. See “Principal
Stockholders” for more details regarding the shares held by
these entities.
In October 2006, we entered into the investors’ rights
agreement with several of our significant stockholders,
including Intel Capital (Cayman) Corporation (formerly known as
Intel Capital Corporation), entities affiliated with each of
Advantage Capital Partners, Crystal Ventures, Walden
International and North Atlantic Capital, an entity affiliated
with Mr. Jordan Levy
and various other entities and individuals. Pursuant to this
agreement, we granted stockholders certain registration rights.
For more information regarding this agreement, see
“Description of Capital Stock—Registration
Rights.” In addition to the registration rights, the
investors’ rights agreement also provides for, among other
things, certain information and inspection rights as well as the
right of first offer to certain stockholders with respect to
future sales of our equity securities by us. The provisions of
the investors’ rights agreement described above, other than
those relating to registration rights, shall terminate
automatically upon the consummation of this offering.
Third Amended and
Restated Stock Restriction, First Refusal and Co-Sale
Agreement
In October 2006, we entered into the third amended and restated
stock restriction, first refusal and co-sale agreement with
several of our significant stockholders, including Intel Capital
(Cayman) Corporation (formerly known as Intel Capital
Corporation), entities affiliated with each of Advantage Capital
Partners, Crystal Ventures, Walden International and North
Atlantic Capital, an entity affiliated with Mr. Jordan Levy
and various other entities and individuals. Pursuant to this
agreement, each stockholder granted to the company and to the
other stockholders certain rights of first refusal and co-sale
rights related to certain proposed sales of shares of the
Company. This agreement shall terminate automatically upon the
consummation of this offering and be of no further force or
effect.
Third Amended and
Restated Voting Agreement
In October 2006, we entered into the third amended and restated
voting agreement with several of our significant stockholders,
including Intel Capital (Cayman) Corporation (formerly known as
Intel Capital Corporation), entities affiliated with each of
Advantage Capital Partners, Crystal Ventures, Walden
International and North Atlantic Capital, an entity affiliated
with Mr. Jordan Levy and various other entities and
individuals. Pursuant to this agreement, each of the
stockholders agreed to vote their shares to elect directors
nominated by certain of our significant stockholders. This
agreement shall terminate automatically upon the consummation of
this offering and be of no further force or effect.
Other
Transactions with our Executive Officers, Directors, Key
Employees and
Significant Stockholders
Stock Option
Grant to Ron Frankel
In April 2007, in connection with his service as our chief
executive officer, we granted Ron Frankel an option to
purchase 115,150 shares of our common stock at an exercise
price of $1.39 per share, pursuant to the 2006 Stock Plan. In
addition, in November 2004, we granted Mr. Frankel an
option to purchase 240,009 shares of our common stock at an
exercise price of $0.30 per share, pursuant to the 2000 Stock
Plan. See “Principal Stockholders” for more details
regarding the shares held by Mr. Frankel.
Restricted Stock
Purchase By Eric Blachno
In April 2007, in connection with his service as our chief
financial officer, Eric Blachno purchased 180,000 restricted
shares of our common stock pursuant to the 2006 Stock Plan. See
“Principal Stockholders” for more details regarding
the shares held by Mr. Blachno.
Stock Option
Grant to George Chamoun
In November 2004, we granted George Chamoun an option to
purchase 72,003 shares of our common stock at an exercise
price of $0.30 per share, pursuant to the 2000 Stock Plan. See
“Principal Stockholders” for more details regarding
the shares held by Mr. Chamoun.
In November 2004, we granted Ross Winston an option to purchase
36,001 shares of our common stock at an exercise price of
$0.30 per share, pursuant to the 2000 Stock Plan. See
“Principal Stockholders” for more details regarding
the shares held by Mr. Winston.
Stock Option
Grant to Jordan Levy
In November 2004, we granted Jordan Levy an option to purchase
24,001 shares of our common stock at an exercise price of
$0.30 per share, pursuant to the 2000 Stock Plan. See
“Principal Stockholders” for more details regarding
the shares held by Mr. Levy.
Indemnification
Agreements
We entered into indemnification agreements with each of our
directors and executive officers and certain other key
employees. See “Management—Limitation of Liability and
Indemnification.”
Review, Approval
or Ratification of Transactions with Related Parties
Our board of directors has adopted certain written policies and
procedures with respect to related party transactions. These
policies and procedures require that certain transactions,
subject to specified exceptions and other than ones that involve
compensation, between us and any of our directors, executive
officers or beneficial holders of more than 5% of our capital
stock, or any immediate family member of, or person sharing the
household with, any of these individuals, be consummated only if
approved in advance by our audit committee and only if the terms
of the transaction are comparable to those that could be
obtained in arm’s length dealings with an unrelated
third-party. Our policies and procedures with respect to related
party transactions also apply to certain charitable
contributions by us or our executive officers and to the hiring
of any members of the immediate family of any of our directors
or executive officers as our permanent full-time employees. The
approval of our compensation committee will be required to
approve any transaction that involves compensation to our
directors and executive officers. Transactions entered into
prior to the completion of this offering were not subject to
these policies and procedures. Upon the effectiveness of the
registration statement of which this prospectus forms a part,
copies of these policies and procedures will be posted on our
website at www.synacor.comunder the Investor Relations
section. The inclusion of our website address in this prospectus
does not include or incorporate by reference the information on
our website into this prospectus.
The following table provides information concerning beneficial
ownership of our common stock as of March 31, 2007, and as
adjusted to reflect the sale of shares of common stock in this
offering, by:
•
each stockholder, or group of affiliated stockholders, known by
us to beneficially own more than 5% of our outstanding common
stock;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
The following table lists the number of shares and percentage of
shares beneficially owned based on 11,800,955 shares of
common stock outstanding as of March 31, 2007. This number
reflects:
•
204,196 shares of common stock;
•
the conversion of 5,548,508 shares of Series A
convertible preferred stock into 5,548,508 shares of common
stock upon the closing of this offering;
•
the conversion of 570,344 shares of
Series A-1
convertible preferred stock into 570,344 shares of common
stock upon the closing of this offering;
•
the conversion of 2,737,500 shares of Series B
convertible preferred stock into 2,737,500 shares of common
stock upon the closing of this offering; and
•
the conversion of 2,740,407 shares of Series C
convertible preferred stock into 2,740,407 shares of common
stock upon the closing of this offering.
The table also lists the applicable percentage beneficial
ownership based
on shares
of common stock outstanding upon completion of this offering,
assuming no exercise of the underwriters’ option to
purchase up to an aggregate
of shares
of our common stock.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting power
and/or
investment power with respect to the securities held. Shares of
common stock subject to options currently exercisable or
exercisable within 60 days of March 31, 2007 are
deemed outstanding and beneficially owned by the person holding
such options for purposes of computing the number of shares and
percentage beneficially owned by such person, but are not deemed
outstanding for purposes of computing the percentage
beneficially owned by any other person. Except as indicated in
the footnotes to this table, and subject to applicable community
property laws, the persons or entities named have sole voting
and investment power with respect to all shares of our common
stock shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the
stockholders below is
c/o Synacor,
Inc., 40 La Riviere Drive, Suite 300, Buffalo, NewYork14202.
Shares
Beneficially
Shares
Beneficially
Owned Prior to
the
Owned After
the
Offering
Offering
Name and Address
of Beneficial Owner
Number
Percent
Number
Percent
5% Stockholders
Entities associated with Walden
International (1)
One California Street, Suite 2800 San Francisco, CA94111
3,068,528
26.0
%
3,068,528
%
Entities associated with Crystal
Internet Ventures (2)
1120 Chester Avenue, Suite 418 Cleveland, OH44114
2,659,025
22.5
%
2,659,025
%
Entities associated with Advantage
Capital Partners (3)
909 Poydras Street
Suite 2230 New Orleans, LA70112
1,863,759
15.8
%
1,863,759
%
Intel Corporation (4)
2200 Mission College Boulevard Santa Clara, CA95052
1,391,438
11.8
%
1,391,438
%
Entities associated with North
Atlantic Capital (5)
2 City Center, 5th Floor Portland, ME04105
946,373
8.0
%
946,373
%
Rand Capital SBIC, L.P. (6)
2200 Rand Building Buffalo, NY14203
657,458
5.4
%
657,458
%
Directors and Executive
Officers (15)
Ron Frankel (7)
1,016,997
7.9
%
1,016,997
%
Andrew Kau (8)
c/o Walden
International
361 Lytton Avenue, 2nd Floor Palo Alto, CA94301
3,068,528
26.0
%
3,068,528
%
Joseph Tzeng (9)
c/o Crystal
Internet Ventures
1120 Chester Avenue, Suite 418 Cleveland, OH44114
2,659,025
22.5
%
2,659,025
%
M. Scott Murphy (10)
c/o Advantage
Capital Partners
909 Poydras Street
Suite 2230 New Orleans, LA70112
1,863,759
15.8
%
1,863,759
%
Mark Morrissette (11)
c/o North
Atlantic Capital
2 City Center, 5th Floor Portland, ME04105
946,373
8.0
%
946,373
%
Jordan Levy (12)
50 Fountain Plaza, Suite 1320 Buffalo, NY14202
Represents 50,235 shares held
by Pacven Walden Ventures IV Associates Fund, L.P.
(“Pacven IV Associates Fund”),
2,694,865 shares held by Pacven Walden Ventures IV,
L.P. (“Pacven IV”), 161,714 shares held by
WIIG-TDF Partners LLC (“WIIG-TDF”) and
161,714 shares held by Walden EDB Partners II, L.P.
(“EDB II”). The general partner of Pacven IV
Associates Fund and Pacven IV is Pacven Walden
Management II, L.P. (“Pacven
Management II”). The general partner of EDB II is
Walden Management, LLC. The general partner of Pacven
Management II is Pacven Walden Management Co., Ltd.
(“Pacven Walden Management”). The manager of Walden
Management, LLC is Pacven Walden Management.
Lip-Bu Tan
is the sole director of Pacven Walden Management and he shares
voting and investment power with respect to the shares held by
Pacven IV, Pacven IV Associates Fund and EDB II
with the other members of the investment committee of Pacven
Walden Management. Andrew Kau (who is also a member of our board
of directors) is a member of the investment committee of Pacven
Walden Management. The directors of
WIIG-TDF are
WIIG Management Co. Ltd. and TDF Global Co. Ltd.
Lip-Bu Tan
is the sole director of WIIG Management Co. Ltd. and shares
voting and investment power with respect to the shares held by
WIIG-TDF
with the director of TDF Global Co. Ltd. Each of the individuals
named above disclaims beneficial ownership of such shares except
to the extent of his or her individual pecuniary interest
therein.
(2)
Represents 183,784 shares held
by Crystal Internet Venture Fund II (BVI), Crystal Vision,
L.P. (“CVLP”), and 2,475,241 shares held by
Crystal Internet Venture Fund II (BVI), L.P.
(“CIVF”). The general partner of CVLP and CIVF is
Crystal Venture II, Ltd. (“CVII”). The Class A
members of CVII, which have all voting rights of CVII, are
Daniel Kellogg and Joseph Tzeng. By virtue of their voting power
over the membership interests of CVII, each of these individuals
may be deemed to have voting and investment power with respect
to the shares held of record by CVLP and CIVF. Each of these
individuals disclaims beneficial ownership of such shares except
to the extent of his individual pecuniary interest therein.
(3)
Represents 1,548,301 shares
held by Advantage Capital New York Partners I, L.P.
(“Advantage I”) and 315,458 shares held by
Advantage Capital New York Partners II, L.P. (“Advantage
II”). The sole general partner of Advantage I is Advantage
Capital New York GP-I, LLC (“Advantage GP I”), and the
sole general partner of Advantage II is Advantage Capital
New York GP-II, LLC (“Advantage GP II”). Advantage GP
I and Advantage GP II, in their respective capacities as general
partner of Advantage I and Advantage II, exercise investment
discretion and control of the shares beneficially owned by
Advantage I and Advantage II. Steven T. Stull holds a majority
of the ownership interests, including voting interests, of
Advantage GP I and Advantage GP II and, therefore, may be deemed
to have voting and investment power with respect to the shares
held of record by Advantage I and Advantage II. Mr. Stull
disclaims beneficial ownership of the shares held of record by
Advantage I and Advantage II except to the extent of his
pecuniary interest therein. M. Scott Murphy is a manager of each
of Advantage GP I and Advantage GP II, but in such capacity does
not exercise voting and investment power with respect to the
shares held of record by Advantage I and Advantage II.
Mr. Murphy disclaims beneficial ownership of such shares.
All of the shares that are held of record by Advantage I
and Advantage II are pledged as security for loans made to
Advantage I and Advantage II.
(4)
Represents 1,391,438 shares
held by Intel Capital (Cayman) Corporation (formerly known as
Intel Capital Corporation), a wholly-owned subsidiary of Intel
Corporation.
(5)
Represents 394,322 shares held
by North Atlantic Venture Fund III, L.P. (“NAVF”)
and 552,051 shares held by North Atlantic SBIC IV, L.P.
(“NASBIC”). The general partner of NAVF is North
Atlantic Investors III, LLC. The general partner of NASBIC is
North Atlantic Investors SBIC IV, LLC. The managers of North
Atlantic Investors III, LLC and North Atlantic Investors SBIC
IV, LLC are David M. Coit and Mark J. Morrissette. Each of these
individuals exercises shared voting and investment power over
the shares held of record by NAVF and NASBIC and disclaims
beneficial ownership of such shares except to the extent of his
individual pecuniary interest therein.
(6)
Includes 299,146 shares
issuable upon exercise of a warrant exercisable within
60 days of March 31, 2007. The general partner of Rand
Capital SBIC, L.P. (“Rand”) is Rand Capital
Management, LLC (“RCM”). The sole member of RCM is
Rand Capital Corporation. The members of the Management
Committee of RCM are Allen F. Grum and Daniel P. Penberthy, and
in such capacity they have the power to make investment
decisions on behalf of Rand. Each of Mr. Grum and
Mr. Penberthy disclaims beneficial ownership of the shares
held of record by Rand except to the extent of his individual
pecuniary interest therein.
(7)
Represents 1,016,997 shares
issuable upon exercise of stock options exercisable within
60 days of March 31, 2007, 90,004 of which shares
remained subject to vesting as of March 31, 2007. On
April 20, 2007, Mr. Frankel exercised 150,000 of such
options. The shares set forth in the table do not include
115,150 shares issuable upon exercise of stock options
granted to Mr. Frankel on April 3, 2007.
See footnote (1) regarding
Mr. Kau’s relationship with Walden International.
Mr. Kau disclaims beneficial ownership of the shares held
of record by the entities affiliated with Walden International
referenced in footnote (1) above except to the extent of
his individual pecuniary interest therein.
(9)
See footnote (2) regarding
Mr. Tzeng’s relationship with Crystal Internet
Ventures. Mr. Tzeng disclaims beneficial ownership of the
shares held of record by the entities affiliated with Crystal
Internet Ventures referenced in footnote (2) above except
to the extent of his individual pecuniary interest therein.
(10)
See footnote (3) regarding
Mr. Murphy’s relationship with Advantage Capital
Partners. Mr. Murphy disclaims beneficial ownership of the
shares held of record by the entities affiliated with Advantage
Capital Partners referenced in footnote (3) above except to
the extent of his individual pecuniary interest therein.
(11)
See footnote (5) regarding
Mr. Morrissette’s relationship with North Atlantic
Capital. Mr. Morrissette disclaims beneficial ownership of
the shares held of record by the entities affiliated with North
Atlantic Capital referenced in footnote (5) above except to
the extent of his individual pecuniary interest therein.
(12)
Includes 101,149 shares
issuable upon exercise of stock options exercisable within
60 days of March 31, 2007, 9,001 of which shares
remained subject to vesting as of March 31, 2007. Also
includes 76,238 shares held of record by JoRon Management
LLC (“JoRon”) and 1,140 shares issuable upon
exercise of stock options issued to JoRon exercisable within
60 days of March 31, 2007. Jordan Levy and Ron
Schreiber are the managers of JoRon and may therefore be deemed
to beneficially own the shares and options held of record by
JoRon. Mr. Levy disclaims beneficial ownership of the
shares and options held by JoRon except to the extent of his
individual pecuniary interest therein.
(13)
Includes 303,445 shares
issuable upon exercise of stock options exercisable within
60 days of March 31, 2007, 27,002 of which shares
remained subject to vesting as of March 31, 2007. On
June 1, 2007, Mr. Chamoun exercised 40,000 of such
options.
(14)
Represents 152,021 shares
issuable upon exercise of stock options exercisable within
60 days of March 31, 2007, 13,501 of which shares
remained subject to vesting as of March 31, 2007.
(15)
Represents 1,574,752 shares
issuable upon exercise of stock options exercisable within
60 days of March 31, 2007, 139,508 of which shares
remained subject to vesting as of March 31, 2007. The
shares set forth in the table do not include the
40,730 shares listed as being held by Robert Rusak because
Mr. Rusak was no longer an executive officer of the company
as of March 31, 2007.
(16)
The shares set forth in the table
do not include 180,000 restricted shares of common stock that
were purchased by Eric Blachno, our current chief financial
officer on April 19, 2007.
The following is a summary of our capital stock and certain
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, as they will be
in effect upon the closing of this offering. This summary does
not purport to be complete and is qualified in its entirety by
the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, copies of which
have been filed as exhibits to the registration statement of
which this prospectus is a part.
Following the closing of this offering, our authorized capital
stock will consist
of shares
of common stock, par value $ per
share,
and shares
of preferred stock, par value $0.01 per share. Immediately after
the consummation of the offering, we will
have shares
of common stock issued and outstanding and no shares of
preferred stock issued and outstanding.
Common
Stock
As of March 31, 2007, there were 11,800,955 shares of
common stock outstanding held of record by approximately 89
stockholders. This number of shares has been adjusted to reflect:
•
204,196 shares of common stock;
•
the conversion of 5,548,508 shares of Series A
convertible preferred stock into 5,548,508 shares of common
stock upon the closing of this offering;
•
the conversion of 570,344 shares of
Series A-1
convertible preferred stock into 570,344 shares of common
stock upon the closing of this offering;
•
the conversion of 2,737,500 shares of Series B
convertible preferred stock into 2,737,500 shares of common
stock upon the closing of this offering; and
•
the conversion of 2,740,407 shares of Series C
convertible preferred stock into 2,740,407 shares of common
stock upon the closing of this offering.
There will
be shares
of common stock outstanding, assuming no exercise of the
underwriters’ option to purchase additional shares in the
offering and assuming no exercise after March 31, 2007 of
outstanding options and warrants, after giving effect to the
sale of the shares of common stock to the public offered in this
prospectus.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. The holders
of common stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the board of
directors out of funds legally available, subject to preferences
that may be applicable to preferred stock, if any, then
outstanding. See “Dividend Policy.” In the event of a
liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and
non-assessable.
Preferred
Stock
Concurrently with the closing of this offering, outstanding
shares of Series A convertible preferred stock will be
converted into 5,548,508 shares of common stock,
outstanding shares of
Series A-1
convertible preferred stock will be converted into
570,344 shares of common stock, outstanding shares of
Series B convertible preferred stock will be converted into
2,737,500 shares of common stock and outstanding shares of
Series C convertible preferred stock will be converted into
2,740,407 shares of common stock.
After the completion of this offering, our board of directors
will be authorized, without further stockholder approval, to
issue preferred stock in one or more series, to establish the
number of shares to be included in each such series and to fix
the designation, powers, preferences and rights of such shares
and any qualifications, limitations or restrictions thereof. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of our company
without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to
others. At present, we have no plans to issue any preferred
stock.
Registration
Rights
After the completion of this offering, holders of
11,671,891 shares of common stock will be entitled to
rights with respect to the registration of those shares under
the Securities Act. Under the terms of the investors’
rights agreement between us and the holders of these registrable
securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the
account of other security holders exercising registration
rights, these holders are entitled to notice of registration and
are entitled to include their shares of common stock in the
registration. Certain holders of these registrable securities
are also entitled to specified demand registration rights under
which they may require us to file a registration statement under
the Securities Act at our expense with respect to our shares of
common stock, and we are required to use our commercially
reasonable efforts to effect this registration. Further, the
holders of these registrable securities may require us to file
additional registration statements on
Form S-3.
All of these registration rights are subject to conditions and
limitations, among them the right of the underwriters of an
offering to limit the number of shares included in the
registration and our right not to effect a requested
registration within six months following the initial offering of
our securities, including this offering. All registration rights
in connection with this offering have been waived. The foregoing
summary is not a complete description of the investors’
rights agreement and is qualified in its entirety by the full
text of the investors’ rights agreement, a copy of which is
filed as Exhibit 4.3 to the registration statement of which
this prospectus is a part.
Some provisions of Delaware law and our amended and restated
certificate of incorporation and amended and restated bylaws
could make the following transactions more difficult:
•
acquisition of our company by means of a tender offer, a proxy
contest or otherwise; and
•
removal of our incumbent directors and officers.
These provisions, summarized below, are expected to discourage
and prevent coercive takeover practices and inadequate takeover
bids. These provisions are designed to encourage persons seeking
to acquire control of our company to first negotiate with our
board of directors. They are also intended to provide our
management with the flexibility to enhance the likelihood of
continuity and stability if our board of directors determines
that a takeover is not in the best interests of our
stockholders. These provisions, however, could have the effect
of discouraging attempts to acquire us, which could deprive our
stockholders of opportunities to sell their shares of common
stock at prices higher than prevailing market prices.
Our amended and restated certificate of incorporation and our
amended and restated bylaws contain provisions that establish
specific procedures for appointing and removing members of the
board of directors. Under our amended and restated certificate
of incorporation and amended and restated bylaws, our board will
be classified into three classes of directors and, under our
amended and restated bylaws, directors will be elected by a
plurality of the votes cast in each election. Only one class
will stand for election at each annual meeting, and directors
will be elected to serve three-year terms. In addition, our
amended and restated certificate of incorporation and amended
and restated bylaws will provide that vacancies and newly
created directorships on the board of directors may be filled
only by a majority of the directors then serving on the board
(except as otherwise required by law or by resolution of the
board). Under our amended and restated certificate of
incorporation and amended and restated bylaws, directors may be
removed only for cause.
Special
Stockholder Meetings
Under our amended and restated certificate of incorporation and
amended and restated bylaws, only the chairman of the board, our
chief executive officer and our board of directors may call
special meetings of stockholders.
Requirements for
Advance Notification of Stockholder Nominations and
Proposals
Our amended and restated bylaws establish advance notice
procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware
Anti-Takeover Law
Following this offering, we will be subject to Section 203
of the Delaware General Corporation Law, which is an
anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three
years following the date that the person became an interested
stockholder, unless the business combination or the transaction
in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a business combination
includes a merger, asset or stock sale, or another transaction
resulting in a financial benefit to the interested stockholder.
Generally, an interested stockholder is a person who, together
with affiliates and associates, owns 15% or more of the
corporation’s voting stock. The existence of this provision
may have an anti- takeover effect with respect to transactions
that are not approved in advance by our board of directors,
including discouraging attempts that might result in a premium
over the market price for the shares of common stock held by
stockholders.
Elimination of
Stockholder Action by Written Consent
Our amended and restated certificate of incorporation and
amended and restated bylaws eliminate the right of stockholders
to act by written consent without a meeting after this offering.
No Cumulative
Voting
Under Delaware law, cumulative voting for the election of
directors is not permitted unless a corporation’s
certificate of incorporation authorizes cumulative voting. Our
amended and restated certificate of incorporation and amended
and restated bylaws do not provide for cumulative voting in the
election of directors. Cumulative voting allows a minority
stockholder
to vote a portion or all of its shares for one or more
candidates for seats on the board of directors. Without
cumulative voting, a minority stockholder will not be able to
gain as many seats on our board of directors based on the number
of shares of our stock the stockholder holds as the stockholder
would be able to gain if cumulative voting were permitted. The
absence of cumulative voting makes it more difficult for a
minority stockholder to gain a seat on our board of directors to
influence our board’s decision regarding a takeover.
Undesignated
Preferred Stock
The authorization of undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of our company.
The amendment of most of the above provisions in our amended and
restated certificate of incorporation and amended and restated
bylaws requires approval by holders of at least two-thirds of
our outstanding capital stock entitled to vote generally in the
election of directors.
These and other provisions could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the
effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
best interests.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock
is .
Its telephone number
is .
Listing on The
Nasdaq Global Market
We intend to apply to have our common stock listed on The Nasdaq
Global Market under the symbol “SYNC.”
Prior to this offering, there has been no public market for our
common stock, and we cannot assure you that a significant public
market for our common stock will develop or be sustained after
this offering. Other than as described below, no shares
currently outstanding will be available for sale immediately
after this offering due to certain contractual and securities
law restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse
could cause the prevailing market price to decline and limit our
ability to raise equity capital in the future.
Upon completion of this offering, we will have issued and
outstanding an aggregate
of shares
of common stock, assuming no exercise of the underwriters’
option to purchase additional shares and no exercise of options
or warrants to purchase common stock that were outstanding as of
March 31, 2007. The shares of common stock being sold in
this offering will be freely tradable without restriction or
further registration under the Securities Act unless purchased
by our “affiliates” as that term is defined in
Rule 144 under the Securities Act.
The remaining 11,800,955 shares of common stock held by
existing stockholders are “restricted securities” as
that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Section 4(1) or Rules 144, 144(k) or 701
promulgated under the Securities Act. We describe these rules in
greater detail below.
Subject to any applicable vesting restrictions, the following
table shows approximately when the 11,800,955 shares of our
common stock that are not being sold in this offering, but which
will be outstanding when this offering is complete, will be
eligible for sale in the public market:
Shares
Eligible
Days After Date
of this Prospectus
for
Sale
Explanation
Upon effectiveness
Shares sold by us in the offering
Upon effectiveness
7,128
Freely tradable shares saleable
under Rule 144(k) that are not subject to the lock-up
90 days
—
Shares saleable under Rules 144
and 701 that are not subject to a lock-up
180 days
11,793,827
Lock-up released, subject to
extension; shares saleable under Rules 144 and 701
At various times thereafter
—
Restricted securities held for one
year or less
Resale of 8,613,923 of the restricted shares that will become
available for sale in the public market starting 180 days
after the effective date (or longer period described below) will
be limited by volume and other resale restrictions under
Rule 144 because the holders of those shares are our
affiliates.
Lock-Up
Agreements
Our directors, executive officers, holders of substantially all
of our common stock and holders of options and warrants to
purchase our stock have agreed with the underwriters, subject to
certain exceptions, not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period through the
date 180 days after the date of this prospectus, except
with the prior written consent of Deutsche Bank Securities Inc.
In addition, substantially all of the holders of our common
stock and options to purchase our common stock have previously
entered
agreements with us not to sell or otherwise transfer any of
their common stock or securities convertible into or
exchangeable for shares of common stock for a period through the
date 180 days after the date of this prospectus.
The 180-day
restricted period under the agreements with the underwriters
described in the preceding paragraph will be automatically
extended if: (1) during the last 17 days of the
180-day
restricted period we release earnings results or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the release of the earnings results or
material news or the occurrence of a material event relating to
us.
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, and
subject to the restrictions contained in the
lock-up
agreements described above, a person who has beneficially owned
“restricted” shares for at least one year, including
the holding period of any prior owner except an affiliate of
ours, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
•
1% of the number of shares of common stock then outstanding,
which will equal
approximately shares
immediately after the completion of this offering, assuming no
exercise of the underwriters’ over-allotment
option; and
•
the average weekly trading volume of the common stock on the
open market during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability
of current public information about us.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner except an affiliate of ours,
is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice
provisions of Rule 144. Therefore, unless otherwise
restricted, “144(k) shares” may be sold immediately
upon the closing of the offering.
Rule 701
Rule 701, as currently in effect, permits resales of shares
in reliance upon Rule 144 but without compliance with
certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or
consultant to us who purchased shares under a written
compensatory plan or contract may be entitled to rely on the
resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides
that non-affiliates may sell such shares in reliance on
Rule 144 without having to comply with the holding period,
public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this
prospectus before selling such shares. All
Rule 701 shares are, however, subject to
lock-up
agreements and will only become eligible for sale upon the
expiration of the contractual
lock-up
agreements.
Registration
Rights
After the completion of this offering, the holders of
11,671,891 shares of our common stock will be entitled to
the registration rights described in “Description of
Capital Stock—
Registration Rights.” All such shares are covered by
lock-up
agreements. Following the expiration of the applicable
lock-up
period, registration of these shares under the Securities Act
would result in the shares becoming freely tradable without
restriction under the Securities Act immediately upon the
effectiveness of the registration, except for shares purchased
by our affiliates.
Form S-8
Registration Statements
Following the consummation of this offering, we intend to file
one or more registration statements on
Form S-8
under the Securities Act to register the shares of our common
stock that are issuable pursuant to our 2007 Equity Incentive
Plan, 2006 Stock Plan and 2000 Stock Plan. See
“Management—Equity Benefit Plans.” Subject to the
lock-up
agreements described above and any applicable vesting
restrictions, shares registered under these registration
statements will be available for resale in the public market
immediately upon the effectiveness of these registration
statements, except with respect to Rule 144 volume
limitations that apply to our affiliates.
Subject to the terms and conditions of the underwriting
agreement, the underwriters named below, through their
representative Deutsche Bank Securities Inc., have severally
agreed to purchase from us the following respective number of
shares of common stock at a public offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus:
Number
Underwriters
of
Shares
Deutsche Bank Securities Inc.
Bear, Stearns & Co.
Inc.
Thomas Weisel Partners LLC.
Canaccord Adams Inc.
Montgomery & Co.,
LLC.
Total
The underwriting agreement provides that the obligations of the
several underwriters to purchase the shares of common stock
offered hereby are subject to certain conditions precedent and
that the underwriters will purchase all of such shares of common
stock, other than those covered by the over-allotment option
described below, if any of these shares are purchased.
We have been advised by the representative of the underwriters
that the underwriters propose to offer the shares of common
stock to the public at the public offering price set forth on
the cover of this prospectus and to dealers at a price that
represents a concession not in excess of
$ per share under the public
offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than
$ per share to other dealers.
After the initial public offering, the representative of the
underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option, exercisable not
later than 30 days after the date of this prospectus, to
purchase up
to additional
shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriters may exercise this
option only to cover over- allotments made in connection with
the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to conditions, to
purchase approximately the same percentage of these additional
shares of common stock as the number of shares of common stock
to be purchased by it in the above table bears to the total
number of shares of common stock offered by this prospectus. We
will be obligated, pursuant to the option, to sell these
additional shares of common stock to the underwriters to the
extent the option is exercised. If any additional shares of
common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which
the shares
are being offered.
The underwriting discounts and commissions per share are equal
to the public offering price per share of common stock less the
amount paid by the underwriters to us per share of common stock.
The underwriting discounts and commissions
are % of the initial public
offering price. We have agreed to pay the underwriters the
following discounts and commissions, assuming either no exercise
or full exercise by the underwriters of the underwriters’
over-allotment option:
In addition, we estimate that our share of the total expenses of
this offering, excluding underwriting discounts and commissions,
will be approximately $ .
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and
to contribute to payments the underwriters may be required to
make in respect of any of these liabilities.
Our directors, executive officers, holders of substantially all
of our common stock and holders of options and warrants to
purchase our stock have agreed with the underwriters, subject to
certain exceptions, not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period through the
date that is 180 days after the date of this prospectus,
except with the prior written consent of Deutsche Bank
Securities Inc. In addition, substantially all of the holders of
our common stock and options to purchase our common stock have
previously entered agreements with us not to sell or otherwise
transfer any of their common stock or securities convertible
into or exchangeable for shares of common stock for a period
through the date 180 days after the date of this prospectus.
The 180-day
restricted period under the agreements with the underwriters
described in the preceding paragraph will be automatically
extended if: (1) during the last 17 days of the
180-day
restricted period we release earnings results or material news
or a material event relating to us occurs; or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the release of the earnings results or
material news or the occurrence of a material event relating to
us.
The representative of the underwriters has advised us that the
underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
In connection with the offering, the underwriters may purchase
and sell shares of our common stock in the open market. These
transactions may include short sales, purchases to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional shares of common stock from us in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option.
Naked short sales are any sales in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if underwriters are concerned that
there may be downward pressure on the price of the shares in the
open market prior to the completion of the offering.
Stabilizing transactions consist of various bids for or
purchases of our common stock made by the underwriters in the
open market prior to the completion of the offering.
The underwriters may impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a
portion of the underwriting discount received by it because the
representative of the underwriters has repurchased shares sold
by or for the account of that underwriter in stabilizing or
short covering transactions.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or slowing a decline in the
market price of our common stock. Additionally, these purchases,
along with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
These transactions may be effected on The Nasdaq Global Market,
in the over-the-counter market or otherwise.
A prospectus in electronic format is being made available on
Internet websites maintained by one or more of the lead
underwriters of this offering and may be made available on
websites maintained by other underwriters. Other than the
prospectus in electronic format, the information on any
underwriter’s website and any information contained in any
other website maintained by an underwriter is not part of the
prospectus or the registration statement of which the prospectus
forms a part.
Prior to this offering, there has been no public market for our
common stock. Consequently, the initial public offering price of
our common stock will be determined by negotiation between us
and the representative of the underwriters. Among the primary
factors that will be considered in determining the public
offering price are the following:
•
prevailing market conditions;
•
our results of operations in recent periods;
•
the present stage of our development;
•
the market capitalizations and stages of development of other
companies that we and the representative of the underwriters
believe to be comparable to our business; and
•
estimates of our business potential.
Some of the underwriters or their affiliates may provide
investment banking services to us in the future. They will
receive customary fees and commissions for these services.
The validity of the common stock being offered hereby will be
passed upon for the company by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, New York,
New York, and for the underwriters by Simpson
Thacher & Bartlett LLP, New York, New York.
The consolidated financial statements as of and for the year
ended December 31, 2006 included in this prospectus and the
related financial statement schedule included elsewhere in the
registration statement have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as
experts in accounting and auditing.
Freed Maxick & Battaglia, CPAs, PC, an independent
registered public accounting firm, has audited our consolidated
financial statements as of December 31, 2005 and for the
years ended December 31, 2004 and 2005, as set forth in
their report. We have included our consolidated financial
statements in the prospectus and elsewhere in the registration
statement in reliance on the report from Freed
Maxick & Battaglia, CPAs, PC, given on their authority
as experts in accounting and auditing.
In November 2006, we engaged Deloitte & Touche LLP as
our independent accountants in place of Freed Maxick &
Battaglia, CPAs, PC following approval by our board of
directors. This change in independent accountants was made as a
result of our desire to retain a firm with experience in SEC
reporting and accounting matters. There were no disagreements at
any time, through November 2006, between Freed
Maxick & Battaglia, CPAs, PC and us on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedures. Deloitte &
Touche LLP has audited our consolidated financial statements for
the year ended December 31, 2006 which are included
elsewhere in this prospectus.
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock we are offering. This prospectus, which constitutes part
of the registration statement, does not contain all of the
information set forth in the registration statement. For further
information about us and the common stock we propose to sell in
this offering, we refer you to the registration statement and
the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit
to the registration statement are not necessarily complete. If a
contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract
or document that has been filed.
You may inspect a copy of the registration statement and the
exhibits and schedules to the registration statement without
charge at the offices of the SEC at 100 F Street,
N.E., Washington, D.C. 20549. You may obtain copies of all
or any part of the registration statement from the Public
Reference Room maintained by the SEC located at
100 F Street, N.E., Washington, D.C. 20549
upon the payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements and other information
regarding registrants like us that file electronically with the
SEC. You can also inspect our registration statement on this
website.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act. The periodic reports and other information that we file
with the SEC will be available for inspection and copying at the
SEC’s public reference facilities and on the website of the
SEC referred to above.
We have audited the accompanying consolidated balance sheet of
Synacor, Inc. and subsidiary (the “Company”) as of
December 31, 2006 and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the
year then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such 2006 consolidated financial statements
present fairly, in all material respects, the financial position
of Synacor, Inc. and subsidiary as of December 31, 2006,
and the results of their operations and their cash flows for the
year then ended in conformity with accounting principles
generally accepted in the United States of America.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors of
Synacor, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of
Synacor, Inc. and subsidiary as of December 31, 2005 and
2004, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Synacor, Inc. and subsidiary as of December 31,2005 and 2004, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
Common stock; $0.01 par
value—authorized 20,000,000 shares, issued and
outstanding 87,582 and 162,998 shares at December 31,2005 and 2006, respectively
1
2
Convertible, redeemable preferred
stock (liquidation value of $5,239,510 at December 31,2006), $0.01 par value—authorized
Series A—5,709,638 shares, issued and outstanding
5,530,150 and 5,548,508 shares at December 31, 2005
and 2006, respectively
5,055
5,077
Convertible preferred stock
(liquidation value of $750,000 at December 31, 2006),
$0.01 par value—authorized
Series A-1—570,344 shares,
issued and outstanding 570,344 shares at December 31,2005 and 2006
730
730
Convertible preferred stock
(liquidation value of $5,475,000 at December 31, 2006),
$0.01 par value—authorized
Series B—3,500,000 shares, issued and outstanding
2,737,500 shares at December 31, 2005 and 2006
5,401
5,401
Convertible preferred stock
(liquidation value of $17,374,180 at December 31, 2006),
$0.01 par value—authorized
Series C—2,740,407 shares, issued and outstanding
2,740,407 shares at December 31, 2006
(in thousands except for share
and per share data)
1.
Business and
Summary of Significant Accounting Policies
Principles of Consolidation and Business. The
accompanying consolidated financial statements include the
results of operations of Synacor, Inc. and its wholly owned
subsidiary, MyPersonal.com, Inc. (collectively, the
“Company”). All intercompany accounts and transactions
have been eliminated in consolidation. As of December 31,2003, MyPersonal.com had no assets and no further ongoing
activities and subsequent to December 31, 2006, has been
dissolved.
The Company provides an Internet platform and a portfolio of
digital content and services that enable broadband service
providers to create a compelling online experience for their
subscribers, principally in the United States. The
Company’s platform is used to create customized Internet
portals and includes integration infrastructure, subscriber
personalization capabilities, a content management and delivery
system and a customer-branded video player and toolbar. The
platform also aggregates free and paid digital content and
value-added services, including video, from third-party
providers to create a customized and branded Internet portal
solution. The Company delivers a seamless subscriber experience
by integrating these services and products with existing
customer billing and management systems, thereby allowing its
customers to extend their brands and enhance their subscriber
relationships. The Company believes that its solution assists
its customers in promoting subscriber retention, increasing
average revenue per user, or ARPU, and cultivating new revenue
streams.
Significant accounting policies are as follows:
Cash and Cash Equivalents.The Company
considers investments with original maturities of three months
or less to be cash equivalents.
Trade Receivables. Credit is granted to
substantially all customers. The Company carries its accounts
receivable at amounts billed, less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful
accounts based on a history of past write-offs, collections and
current credit conditions. The Company does not accrue interest
on past due invoices.
Content Fees Advances, Prepaid Expenses and Other Current
Assets.The Company enters into various content
distribution contracts with vendors and recognizes the cost of
any fixed payments stipulated in the contracts over the life of
the contract. Any additional monthly content fees are recognized
in the month incurred. Management reviews each contract on a
regular basis to determine the proper amounts for content fees
advances and accruals. Prepaid expenses and other current assets
consist of prepaid services, insurance, maintenance contracts
and refundable deposits. Prepayments are expensed on a
straight-line basis over the corresponding life of the
underlying agreement.
Property and Equipment. Property and equipment
are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated
useful lives of the assets as follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the assets. Repairs
and maintenance charges are expensed as incurred.
Other Assets. Other assets consist of
long-term prepaid maintenance contracts and long-term refundable
deposits. Prepaid maintenance costs are expensed over the
corresponding term of the related agreement on a straight-line
basis.
Long-Lived Assets.The Company reviews the
carrying value of its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. For purposes of
evaluating and measuring impairment, the Company groups a
long-lived asset or assets with other assets and liabilities at
the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs to sell. No
impairment charge for long-lived assets has been recorded in the
accompanying consolidated financial statements for the years
ended December 31, 2004, 2005 or 2006. The carrying amounts
of our financial instruments, including capital leases,
approximate fair value due to the implied interest rates of the
leases, which are comparable with estimated current rates.
Revenue Recognition.The Company recognizes
net sales in accordance with Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 104,
Revenue Recognition, or SAB 104. SAB 104
requires that four basic criteria must be met prior to revenue
recognition: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or the services have
been rendered, (iii) the fee is fixed and determinable and
(iv) collection of the resulting receivable is reasonably
assured.
Certain of the Company’s arrangements contain multiple
elements, consisting of the various services it offers. Multiple
element arrangements typically consist of the use of the
Company’s technology platform to deliver an Internet portal
combined with the delivery of its value-added services and paid
content. These arrangements are accounted for in accordance with
Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21.
In such arrangements, the Company has historically determined
that each of the services made available to its customers
constitutes a separate unit of accounting pursuant to the
guidance set forth in
EITF 00-21.
In accordance with
EITF 00-21,
arrangement consideration is then allocated to each unit based
on its relative fair value. The Company has historically
concluded that the stated rates charged for its services have
been an accurate reflection of their fair values based on its
own market knowledge and that of its customers and partners.
Accordingly, the Company has utilized these stated rates for the
purposes of allocating arrangement consideration to each of the
accounting units. Although its process for the determination of
stated rates is generally consistent among its various customer
arrangements, its identification of accounting units and their
relative fair value is separately made for each of its customer
arrangements. Applicable revenue recognition criteria are
separately considered for each unit of accounting once it, and
its relative fair value have been defined.
The Company derives its net sales from two categories:
subscriber-based revenues; and revenues generated from search
and advertising activities.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
Subscriber-Based
Revenues
The Company defines subscriber-based revenues as fees and
subscription amounts that it receives from its customers. These
fees and subscription amounts are for subscriber-based
activities, including the use of the Company’s proprietary
technology platform and the use of, or access to, value-added
services and paid content. The Company’s technology
platform is used to create customized Internet portals and
includes integration infrastructure, subscriber personalization
capabilities, a content management and delivery system and a
customer-branded video player and toolbar. Value-added services
include hosted email services, which are designed to meet both
consumer and small business client needs, and online security
services, such as anti-virus protection, firewall and intrusion
detection and
pop-up
blockers. Paid content includes premium online offerings from
third parties, such as games and streaming and downloadable
music and movies.
Monthly subscriber levels typically form the basis for
calculating and generating subscriber-based revenues. They
generally are determined by multiplying a per-subscriber
per-month fee by the number of subscribers applicable to the
particular services being offered or consumed. In certain cases,
the Company charges a fixed monthly fee for specific services
provided to the customer to form a base fee for the customer, in
addition to the per-subscriber fees.
Subscriber-based revenues are recognized on a monthly basis as
the applicable services or content is consumed by, or made
available to, subscribers. The Company generally determines
subscriber levels in conjunction with its customers. Several
methodologies may be used to determine the number of subscribers
in a particular month, including, for example, the number of
subscribers on a particular day of the month or the average
number of subscribers during the month. The Company typically
follows the methodology its customers use to determine their own
subscriber levels, and the Company then reconciles those levels
with its own databases to determine the accurate subscriber
levels for billing purposes. The Company’s processes for
determining subscriber levels are consistent across all of its
subscriber-based services, including use of the technology
platform, value-added services and paid content.
Search and
Advertising Revenues
The Company uses Internet search and advertising technologies to
generate revenue from the traffic generated by its
customers’ Internet portals. In the case of searches, the
Company has a revenue-sharing relationship with Google, pursuant
to which it typically includes a Google-branded search tool on
its customer’s portals. When a subscriber makes a search
request using this tool, the Company delivers it to Google.
Google returns search results to the Company that include
advertiser-sponsored links. If the subscriber clicks on a
sponsored link, Google receives payment from the sponsor of that
link and shares a portion of that payment with the Company. The
Company then typically shares a portion of that payment with the
applicable customer. The Company recognizes its revenue share
from Google monthly.
The Company generates advertising revenue when subscribers view
or click on a text or display advertisement that it delivered.
The Company typically recognizes the revenue monthly from its
advertising network partners, who manage the placement of
advertising into the websites of the Company’s customers
and other web pages that the Company controls. Depending on the
relationship between its advertising network partners and their
advertisers, the revenue may be calculated on a cost per
impression basis, which means the advertiser pays based on the
number of times its advertisements appear, a cost per click
basis, which means that an advertiser pays only when a
subscriber clicks on one of its advertisements, or another
methodology agreed upon by its partners and the Company.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
As with search, the Company generally pays a share of the
advertising revenue to those customers who make their web sites
available for the delivery of these advertisements. The
revenue-sharing amounts to be paid by the Company generally take
the form of variable payments based on a percentage of its
advertising revenues and are paid monthly or quarterly in
arrears. Revenue-sharing amounts are expensed as incurred.
Revenue Sharing. As discussed below, the
Company generally pays its customers a portion of the revenue
generated from search and advertising. In accordance with
Emerging Issues Task Force Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, the revenue derived from these arrangements that
involve traffic supplied by customers is reported on a gross
basis because the Company is the primary obligor in the
arrangements, is involved in the determination of the service
specifications, has discretion in supplier selection and bears
credit risk.
Cost of Sales. Cost of sales consists of
revenue-share costs, vendor content acquisition costs and
infrastructure costs. Revenue-share and vendor content
acquisition costs may be based on a percentage of the
Company’s revenue, on a fixed fee schedule, on the number
of subscribers per month or any combination of the foregoing.
Percentage of revenue arrangements are expensed as incurred
based on the revenue earned during the relevant accounting
period. Fixed fee arrangements are expensed ratably over the
term of the contract or on a forecasted per subscriber use
basis. Fees based on the number of subscribers are expensed
based on the number of subscribers having access to the specific
content during the relevant accounting period.
Research and Development. Research and
development expenses include costs incurred for product
development, including the development of and enhancements to
our technology platform and related infrastructures, and
customer and content integration. These expenses consist
primarily of compensation and related costs for personnel
associated with research and development activities.
Sales and Marketing. Sales and marketing
expenses consist primarily of salaries, benefits, commissions
and bonuses paid to our direct sales and marketing personnel, as
well as costs related to advertising, industry conferences,
promotional materials and other sales and marketing programs.
Advertising expense was approximately $22, $43 and $494 for the
years ended December 31, 2004, 2005 and 2006, respectively.
The Company expenses advertising as incurred.
General and Administrative. General and
administrative expenses consist primarily of salaries and
related expenses for executive management, finance, accounting,
human resources and other administrative functions, as well as
professional fees, overhead, rent and expenses incurred for
general corporate purposes.
Stock-Based Compensation. On January 1,2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, or
SFAS 123R, which revised Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, and superseded Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25. SFAS 123R requires the
measurement of the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide
service in exchange for the award. The Company
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
adopted SFAS 123R using the modified prospective transition
method and, therefore, has not restated results for prior
periods. Under this transition method, stock-based compensation
expense is recorded for the unvested portion of previously
issued awards that remain outstanding at January 1, 2006
using the same estimate of grant date fair value and the same
attribution method previously used to determine the pro forma
disclosure under SFAS 123. Stock-based compensation expense
for all awards granted on or after January 1, 2006 is based
on the grant date fair value estimated in accordance with
SFAS 123R. The Company recognizes these compensation costs
ratably over the requisite service period of the award.
SFAS 123R also requires an entity to calculate the pool of
excess tax benefit available to absorb tax deficiencies
recognized subsequent to adoption of SFAS 123R (“APIC
pool”). The Company has evaluated its APIC pool and has
determined that it was immaterial as of January 1, 2006.
SFAS 123R also amends Statement of Financial Accounting
Standards No. 95, Statement of Cash Flows, to
require that excess tax benefits that had been reflected as
operating cash flows be reflected as financing cash flows. Prior
to the adoption of SFAS 123R, the Company accounted for
stock-based compensation cost using the intrinsic value method
of accounting prescribed by APB 25, and had adopted the
disclosure-only provisions of SFAS 123, as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock- Based Compensation-Transition
Disclosure. See Note 9 for additional information on
stock-based compensation.
Other Income. Other income consists primarily
of interest income on cash deposits.
Income Taxes.The Company accounts for income
taxes using the liability method in accordance with the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, or
SFAS 109. Under SFAS 109, deferred income tax assets
and liabilities are determined based on temporary differences
between the financial statement and income tax bases of assets
and liabilities and net operating loss and credit carryforwards
using enacted income tax rates in effect for the year in which
the differences are expected to reverse. A valuation allowance
is established to the extent necessary to reduce deferred income
tax assets to amounts that more likely than not will be
realized. The Company has recorded a 100% valuation allowance
against its net deferred tax assets due to the uncertainty of
their ultimate realization.
Unaudited Pro Forma Net Loss Per Share. If the
offering contemplated by this prospectus results in a
post-offering valuation of the Company’s common stock on a
fully diluted basis of at least $150 million and the
proceeds are not less than $25 million, all
11,596,759 shares of convertible preferred stock will be
mandatorily converted into shares of common stock on a 1:1
ratio. The unaudited pro forma loss per common share data for
the year ended December 31, 2006 has been prepared assuming
that the conversion of preferred stock occurred on
January 1, 2006.
Accounting Estimates. The process of preparing
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires the use of estimates and assumptions regarding certain
types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events
as of the date of the consolidated financial statements.
Accordingly, actual results may differ from estimated amounts.
Concentration of Credit Risk. Financial
instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and
cash equivalents. The Company places its cash primarily in
checking and money market accounts with high credit quality
financial institutions, which, at times, have exceeded federally
insured limits. At
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
December 31, 2006, the Company had cash of $15,849 at
financial institutions in excess of the federally insured limits.
The Company performs ongoing credit evaluations of its
customers’ financial condition and, generally, requires no
collateral from its customers. Receivables from five customers
represented approximately 55% and 79% of accounts receivable at
December 31, 2006 and 2005, respectively.
Fair Value of Financial Instruments. The
carrying amounts of the company’s capital leases
approximates fair value of these obligations based upon
management’s best estimates of interest rates that would be
available for similar debt obligations at December 31, 2006.
Recently Issued Accounting Standards. In June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB
Statement No 109, or FIN 48. FIN 48 clarifies
the accounting for uncertainty in income taxes and reduces the
diversity in current practice associated with the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return by defining a
“more-likely-than-not” threshold regarding the
sustainability of the position. Effective January 1, 2007,
we adopted FIN 48. Based upon the Company’s analysis,
it believes that all of its open tax positions are
more-likely-than-not to be sustained upon examination.
Additionally, the Company has determined that the amount of tax
benefits recognized in the Company’s financial statements
at January 1, 2007 are already reflective of the largest
amount that is greater than 50 percent likely of being
recognized upon the ultimate settlement with a taxing authority.
Accordingly, the adoption of FIN 48 had no impact on the
Company’s consolidated financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, or SAB 108. SAB 108
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of determining whether the current year’s
financial statements are materially misstated. SAB 108
became effective for the Company in 2006 and its adoption did
not have a material impact on the Company’s consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157. SFAS 157 provides
guidance for using fair value to measure assets and liabilities.
SFAS 157 serves to clarify the extent to which companies
measure assets and liabilities at fair value, the information
used to measure fair value, and the effect that fair-value
measurements have on earnings. SFAS 157 is to be applied
whenever another standard requires or allows assets or
liabilities to be measured at fair value. The Company will be
required to adopt SFAS 157 effective January 1, 2008.
The Company is currently evaluating the impact that the adoption
of SFAS 157 will have on its consolidated financial
statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115, or SFAS 159.
SFAS 159 provides entities with an option to choose to
measure eligible items at fair value at specified election
dates. If elected, an entity must report unrealized gains and
losses on the item in earnings at each subsequent reporting
date. The fair value option may be applied instrument by
instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method, is irrevocable (unless a new
election date occurs), and is applied only to entire instruments
and not to portions of
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
instruments. The Company will be required to adopt SFAS 159
effective January 1, 2008. The Company is currently
evaluating the impact that the adoption of SFAS 159 will
have on its financial statements.
Capital lease payable to Cisco
Systems, Capital CRP requiring monthly payments of $4, including
interest of approximately 9% per annum through November 2008,
secured by equipment
$
138
$
80
Capital lease payable to HP
Financial Services requiring monthly payments of $4, including
interest of approximately 15% per annum through September 2007,
secured by equipment
79
34
Capital lease payable to Dolphin
Capital requiring monthly payments of $2, including interest of
approximately 13% per annum through June 2008, secured by
equipment
43
27
Capital lease payable to US
Express Leasing requiring monthly payments of $2, including
interest of approximately 13% per annum through June 2008,
secured by equipment
43
27
Capital lease payable to Highline
Capital requiring monthly payments of $2, including interest of
approximately 14% per annum through May 2008, secured by
equipment
42
27
Capital lease payable to GE
Capital requiring monthly payments of $2, including interest of
approximately 13% per annum through November 2007, secured by
equipment
42
22
Capital lease payable to VA
Resources, Inc. requiring monthly payments of $2, including
interest of approximately 16% per annum through November 2007,
secured by equipment
39
20
Capital lease payable to Highline
Capital requiring monthly payments of $1, including interest of
approximately 16% per annum through November 2007, secured by
equipment
30
15
Capital lease payable to De Lage
Landen requiring monthly payments of $1, including interest of
approximately 10% per annum through February 2008, secured by
equipment
—
9
Capital lease payable to Cisco
Systems, Capital CRP requiring monthly payments of $3, including
interest of approximately 8% per annum through August 2011,
secured by equipment
—
150
Capital lease payable to IBM
Credit LLC requiring monthly payments of $50, including interest
of approximately 8% per annum through December 2009, secured by
equipment
—
1,598
Total
456
2,009
Less current portion
194
712
Total
$
262
$
1,297
The assets under the capital lease obligations as of
December 31, 2005 and 2006 are as follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
Depreciation expense on assets under capital lease amounted to
$8, $45 and $162 for the years ended December 31, 2004,
2005 and 2006, respectively.
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of
the minimum lease payments as of December 31, 2006:
Buffalo and Erie County Industrial
Land Development Corporation (“ECIDA”)—A $350
convertible promissory note that accrues interest at a rate of
10%. The unpaid accrued interest of the Note may be converted,
at the option of ECIDA, in whole or in part, into shares of
Series A Preferred Stock upon written notice to the Company
at any time. The number of shares of Series A Preferred
Stock to be issued upon such conversion shall be equal to the
quotient (rounded down to the nearest whole number) obtained by
dividing the unpaid accrued interest on the promissory note to
be converted on the date of conversion, by the Conversion Price.
The remainder resulting from such division shall be paid to the
ECIDA in cash simultaneously with the issuance of the shares of
Series A Preferred Stock. In connection with this note
agreement, the Company granted the ECIDA warrants to purchase
299,146 shares of Common Stock at an exercise price of
$1.17. These warrants vest immediately and expire in November
2007. The value of the detachable warrants, recorded as a note
discount, amounted to $45, resulting in amortization of $9, $9
and $8 during the years ending December 31, 2004, 2005 and
2006, respectively. On October 19, 2006 the note was fully
paid
$
336
$
—
Rand Capital Corporation
(“Rand”)—A $350 convertible promissory note which
accrues interest at a rate of 10%. The unpaid accrued interest
of the Note may be converted, at the option of Rand, in whole or
in part, into shares of Series A Preferred Stock upon
written notice to the Company at any time. The number of shares
of Series A Preferred Stock to be issued upon such
conversion shall be equal to the quotient (rounded down to the
nearest whole number) obtained by dividing the unpaid accrued
interest on the promissory note to be converted on the date of
conversion by the Conversion Price. The remainder resulting from
such division shall be paid to Rand in cash simultaneously with
the issuance of the shares of Series A Preferred Stock.
Rand converted accrued interest of $21 into 18,358 shares
of Series A Preferred Stock at September 30, 2006. In
connection with this note agreement, the Company granted Rand
warrants to purchase 299,146 shares of Common Stock at an
exercise price of $1.17. These warrants vest immediately and
expire in November 2007. The value of the detachable warrants,
recorded as a note discount, amounted to $45, resulting in
amortization of $9, $9 and $8 during the years ended
December 31, 2004, 2005 and 2006, respectively. On
October 19, 2006 the note was fully paid
336
—
Total
$
672
$
—
Deferred financing costs are being amortized over the term of
the notes payable of five years. Amortization expense was $2, $2
and $4 for the years ended December 31, 2004, 2005 and
2006, respectively. These costs were fully amortized in 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
5.
Income
Taxes
The income tax effects of significant temporary differences and
carryforwards that give rise to deferred income tax assets and
liabilities as of December 31, 2005 and 2006 are as follows:
2005
2006
Deferred income tax assets:
Stock and other compensation
expense
$
487
$
467
Net operating loss carryforwards
12,510
13,160
Other
205
198
Gross deferred income tax assets
13,202
13,825
Valuation allowance
(13,079
)
(13,550
)
Net deferred income tax assets
123
275
Deferred income tax liabilities:
Fixed assets
(112
)
(248
)
Other
(11
)
(27
)
Gross deferred income tax
liabilities
(123
)
(275
)
Net deferred income tax assets
$
—
$
—
Income tax expense for each of the years ended December 31,2004, 2005 and 2006 differs from the expected income tax benefit
calculated using the statutory U.S. Federal income tax rate
as follows:
The Company had federal and state net operating loss
carryforwards (“NOLs”) of approximately $33,100 and
$18,900, respectively, at December 31, 2006 available to
reduce future
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
taxable income. The NOLs will begin to expire in 2018 and are
subject to change of control limitations that generally restrict
the utilization of the NOLs on an annual basis. Due to the
uncertainty as to the Company’s ability to generate
sufficient taxable income in the future and utilize the NOLs
before they expire, the Company has recorded a valuation
allowance to reduce the net deferred income tax asset to zero.
The Company’s tax provision includes only the income tax
expense attributable to its operations outside of the United
States which was $14 in 2006.
6.
Segment
Information
The Company operates in one business segment, the provision of
value-added services to Internet service providers. The
Company’s chief operating decision maker reviews financial
information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. The
consolidated financial information does report periodic revenue
by major class of product, but the Company has no segment or
product line managers who are held accountable for operations,
operating results and plans for products or components below the
consolidated level. Revenue information regarding these products
is as follows:
For the years ended December 31, 2004, 2005 and 2006 the
Company’s net sales included $176, $527 and, $1,179,
respectively, of sales made into the United Kingdom. All other
net sales are made domestically. All long-lived assets of the
Company are in the United States.
For each of the years ended December 31, 2004, 2005 and
2006, a single customer accounted for approximately 9%, 36% and
50%, respectively, of total net sales. At December 31, 2005
and 2006, this same customer comprised 36% and 34%, respectively
of trade receivables. No other customer accounted for more than
ten percent of total net sales in any of these years.
7.
Commitments and
Contingencies
Operating leases.The Company leases office
space under operating lease agreements. In addition, the Company
leases certain equipment under non-cancelable operating leases.
Rent expense was approximately $97, $210 and $543 for the years
ended December 31, 2004, 2005
Contract Commitments. Fixed payments required
according to contractual commitments are approximately
$7.1 million, $6.5 million and $1.6 million for
the years ending 2007, 2008 and 2009, respectively.
Certain of our customer and content provider contracts contain
Service Level Agreements (“SLA”) provisions. These SLA
provisions provide remedies to the customer or content provider
in the event that system availability targets, primarily based
on time, are not met. These remedies typically take the form of
credits to be applied to the pertinent period of time. As of
December 31, 2006, the Company has not been responsible for
any such remedies.
8.
Convertible
Preferred Stock
The Company’s restated certificate of incorporation
authorizes the issuance of up to 5,709,638 shares of
$.005 par value Series A preferred stock. At
December 31, 2005 and 2006, there were 5,530,150 and
5,548,508 shares issued and outstanding, respectively.
The Company’s restated certificate of incorporation
authorizes the issuance of up to 2,740,407 shares of
$.01 par value Series C preferred stock. In October
and November, 2006 the Company issued a total of
2,740,407 shares of Series C preferred stock at $6.34
per share totaling $17,374 of additional financing. Offering
costs related to this transaction were $150 resulting in net
proceeds of $17,224 to the Company. At December 31, 2006
there were 2,740,407 shares issued and outstanding.
Conversion. Each share of Series A,
A-1, B and C
is convertible at the option of the holder at any time into
common stock. The conversion rate is the quotient obtained by
dividing the original issue price of the Series A,
A-1, B or C
shares by the conversion price, which initially is the original
issue price. The conversion price is subject to adjustment as
set forth in the restated certificate of incorporation for
certain dilutive issuances, splits and combinations, as therein
defined. Conversion is automatic upon either the consent of the
holders or 66% of the outstanding shares of preferred stock or
the effective date of a firm commitment underwritten public
offering of the Company’s common stock in which the post
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
offering valuation on a fully diluted basis is at least
$150 million and the proceeds are not less than
$25 million.
Voting. Each share of A,
A-1, B and C
preferred stock has voting rights, on an as-if converted basis,
identical to common stock and votes together as one class with
the common stock.
Dividends. The holders of Series C
preferred stock shall be entitled to receive dividends, out of
any assets legally available therefore, prior and in preference
to any declaration or payment of any dividend on the
Series A preferred stock,
Series A-1
preferred stock, Series B preferred stock and common stock
of the Company. The holders of Series B preferred stock
shall be entitled to receive dividends, out of any assets
legally available therefore, prior and in preference to any
declaration or payment of any dividend on the Series A
preferred stock,
Series A-1
preferred stock and common stock of the Company. The holders of
Series A preferred stock and
Series A-1
preferred stock shall be entitled to receive dividends, on a
pari passu basis, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any
dividend on the common stock of the Company. Dividends are
payable when, as and if declared by the Board of Directors. Such
dividends are not cumulative.
Redemption. The Series A,
A-1, B and C
preferred stock is not redeemable at the option of the holder.
Liquidation. In the event of any liquidation,
dissolution or winding down of the Company, either voluntary or
involuntary, including a merger, acquisition or sale of assets
where the beneficial owners of the Company’s common stock
and convertible preferred stock own less than 50% of the
resulting voting power (“Liquidation Event”), the
holders of shares of Series C preferred stock shall be
entitled to receive, prior and in preference to any distribution
of the proceeds of such Liquidation Event to the holders of
Series A,
A-1 and B
preferred stock and common stock by reason of their ownership
thereof, an amount equal to 100% per share of the original issue
price for each share of Series C preferred stock then held
by them, plus declared but unpaid dividends on such share. Upon
completion of the distribution required to Series C
stockholders, the holders of shares of Series B preferred
stock shall be entitled to receive, prior and in preference to
any distribution of the proceeds of such Liquidation Event to
the holders of Series A and
A-1
preferred stock and common stock by reason of their ownership
thereof, an amount equal to 100% per share of the original issue
price for each share of Series B preferred stock then held
by them, plus declared but unpaid dividends on such share. Upon
completion of the distribution required to Series B
stockholders, the Series A and
A-1
stockholders are entitled to receive 100% per share of the
original issue price, plus any declared but unpaid dividends
prior and in preference to any distribution to the common
stockholders. Upon completion of the distribution required to
Series B, A and
A-1
stockholders, the holders of common stock are entitled to
receive an amount per share equal to declared but unpaid
dividends. After payment of the above distributions, the
remaining assets of the Company shall be distributed to the
common and Series C, B, A and
A-1
stockholders pro rata based on the number of common shares held
by each (on an as-if converted basis).
9.
Stock-Based
Compensation
Prior to the adoption of SFAS 123R, the Company accounted
for employee stock options using the intrinsic value method in
accordance with APB 25. Accordingly, no compensation expense was
recognized for stock options issued to employees as long as the
exercise price was greater than or equal to the market value of
the common stock at the date of grant. On January 1, 2006,
the Company adopted the provisions of SFAS 123R using the
modified
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
prospective transition method. Under this method, the Company is
required to record compensation expense for all stock based
awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding as
of the beginning of the adoption. The Company has not restated
its financial statements for prior periods. Under
SFAS 123R, compensation expense related to stock based
payments are recorded over the requisite service period based on
the grant date fair value of the awards. Had the Company adopted
the provisions of SFAS 123R on January 1, 2004, the
net loss for the years ended December 31, 2004 and 2005,
would have been $15 and $22 higher, respectively. For the year
ended December 31, 2006, the Company recorded $58 of
stock-based compensation. The adoption of SFAS 123R did not
have an impact on cash flows from investing or financing
activities. No income tax deduction is allowed for incentive
stock options (“ISO’s”). Accordingly no deferred
income tax asset is recorded for the expense related to these
options.
Stock Option Plans.The Company has adopted
three stock option plans, which authorize the grant of up to
3,078,239 options to officers and other key employees to
purchase the Company’s common stock, subject to the terms
of the plans. The options generally vest ratably over four
years. Grants under these plans are made at an exercise price of
not less than 100% of the market value on the date of grant. The
options may be exercised in specified increments usually
beginning one year after the date of grant, and generally expire
ten years from their respective grant dates or earlier if
employment is terminated.
A summary of the status of options granted under all option
plans is presented below:
The weighted average remaining contractual life of the options
outstanding and expected to vest were 7.7 and 6.9 years as
of December 31, 2005 and 2006, respectively. The aggregate
intrinsic value for outstanding, expected to vest, and
exercisable shares were $1,120, $1,062, and $745, respectively,
as of December 31, 2006. The total intrinsic value of
options exercised during the year ended December 31, 2006
was $98. The aggregate intrinsic value represents the total
pretax intrinsic value (the difference between the
Company’s stock price on
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
December 31, 2006 and the exercise price, multiplied by the
number of in-the-money stock options) that would have been
received by the stock option holders had all stock option
holders exercised their stock options on December 31, 2006.
This amount will change based on the fair market value of the
Company’s stock.
The Company determines the fair value of each option award on
the date of grant using the Black-Scholes option-pricing model.
The Company determined that as a private company it was not
practicable to estimate the volatility of its share price, based
on the Company’s low frequency of price observations.
Therefore, expected volatilities were based on a volatility
factor computed based upon an external peer group analysis of
publicly traded companies based in the United States within a
predetermined market capitalization range (“public
comparables”). The analysis provided historical and implied
volatilities of the public comparables and developed an estimate
of constant expected volatility for the Company. For periods
prior to May 1, 2006, the Company performed an internal
valuation analysis to determine the fair value of its common
stock from time to time in connection with granting stock
options to employees. This analysis used the Company’s
projected future cash flows, discounted at a rate that reflects
both the Company’s weighted average cost of capital and the
lack of liquidity of the Company’s stock, and an implied
market value analysis based on the stock price performance of
the Company’s most comparable public peers (as determined
by management) within the Internet service provider enabler
industry. Beginning May 1, 2006, the Company determined the
fair value of its common stock with the assistance of valuations
by an unrelated valuation specialist. The valuations used the
valuation methods commonly used in the valuation of private
company equity securities for purposes of estimating the fair
value of their common stock. The expected term for options prior
to January 1, 2006 is 10 years. For options granted
subsequent to December 31, 2005, the expected term is
6.5 years consistent with the simplified method. The risk
free interest rate is based on the implied yield available at
the time the options were granted on U.S. Treasury zero
coupon issues with a remaining term equal to the expected term
of the option. The expected dividend yield is 0% for all periods
presented, based upon the Company’s historical practice of
electing not to declare or pay cash dividends on its common
stock.
For options granted during the years ended December 31,2005 and 2006, the weighted average fair value of the stock
options granted, estimated on the date of the grant using the
Black-Scholes option-pricing model was $0.20 and $0.78,
respectively, (no value was assigned to options in
2004) using the following assumptions:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
The following table summarizes stock option information at
December 31, 2006:
Weighted-
Weighted-
Range of
Number of
Average
Number of
Average
Exercise
Options
Exercise
Options
Exercise
Prices
Outstanding
Price
Exercisable
Price
$0.06
1,461,796
$
0.06
1,451,010
$
0.06
0.30
656,291
0.30
326,329
0.30
1.39
256,625
1.39
—
1.39
150 - 1,450
7,238
215.23
7,238
215.23
2,381,950
$
0.92
1,784,577
$
0.98
As of December 31, 2006, the unrecognized compensation cost
related to non-vested options granted, for which vesting is
probable, under the plan was approximately $241. These costs are
expected to be recognized over a weighted average period of
1.6 years. The total fair value of shares vested during the
years ended December 31, 2004, 2005 and 2006 was $111, $237
and $401, respectively.
Warrants. The majority of warrants for the
common shares were issued in conjunction with obtaining
long-term debt financing as disclosed in Note 4. In
accordance with Accounting Principles Board Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, the warrants were initially recorded at
their fair values in relation to the proceeds received on the
date of issuance and recorded as a debt discount.
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value (the difference between the
Company’s stock price on December 31, 2006 and the
exercise price, multiplied by the number of in-the-money
warrants) that would have been received by the warrant holders
had all warrant holders exercised their warrants on
December 31, 2006. This amount will change based on the
fair market value of the Company’s stock. There were no
warrants exercised during the year ended December 31, 2006.
The following table summarizes warrant information as of
December 31, 2006:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
Warrants
Outstanding
Warrants
Exercisable
Number of
Exercise
Number of
Exercise
Exercise
Prices
Warrants
Price
Warrants
Price
$ 1.17
598,292
$
1.17
598,292
$
1.17
705.17
300
705.17
300
705.17
598,592
$
1.52
598,592
$
1.52
Unless exercised, outstanding warrants expire in November 2007.
10.
Net Loss Per
Common Share Data
The Company calculates net loss per share in accordance with
SFAS No. 128, Earnings Per Share. The Company
has determined that its Series A,
A-1, B and C
convertible preferred stock represent participating securities
because they participate with common stock in dividends and
unallocated income. Historically, the Company has not paid
dividends. Net losses are not allocated to the Series A,
A-1, B or C
convertible preferred stockholders. The Series A,
A-1, B and C
convertible preferred stock, stock options and warrants are not
considered for diluted earnings per share for the periods
presented as their effect is anti-dilutive.
The following equivalent shares were excluded from the
computation of diluted loss per share for the periods presented
as their impact would have had an anti-dilutive effect:
Potentially dilutive weighted
average securities excluded from loss per share (1):
Options to purchase common
stock (2)
1,146,296
2,181,008
2,239,296
Warrants (3)
—
—
598,392
Convertible preferred stock (as
converted basis)
8,837,994
8,837,994
11,596,759
(1)
Defined as having an exercise price
lower than the average Company stock price for the period. These
securities are excluded from earnings per share as their
inclusion would decrease the loss per share.
(2)
Does not include options with an
exercise price higher than the average Company stock price for
the period as follows: 472,020, 7,562 and 264,163 for 2004, 2005
and 2006, respectively.
(3)
Does not include warrants with an
exercise price higher than the average Company stock price for
the period as follows: 598,616, 598,592, and 300 warrants for
2004, 2005 and 2006, respectively.
11.
Employee Benefit
Plan
The Company sponsors a 401(k) profit sharing plan that covers
substantially all employees. Under the Plan, eligible employees
are permitted to contribute a portion of gross compensation not
to exceed standard limitations provided by the Internal Revenue
Service. The Company maintains the right to match employee
contributions; however, no matching contributions were made
during the years ended December 31, 2004, 2005 and 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS —(Concluded)
12.
Subsequent
Events
Subsequent to the year ended December 31, 2006, the Company
modified its existing business financing agreement, pursuant to
which the Company can borrow under a revolving credit line of
$1,500 that is extended for 24 months from agreement
execution. The Company executed this agreement on
February 23, 2007. Any borrowings under the revolving line
of credit accrue interest at the prime rate plus a margin of
0.75% and must be repaid by February 2009. The revolving credit
line agreement contains provisions that allow the lender to
accelerate repayment of the borrowings on the revolving credit
line upon occurrence of a material adverse change as defined in
the agreement. The revolving credit line agreement contains
certain financial performance and reporting covenants.
In April 2007, the Company’s board of directors approved
the grants of an aggregate of 170,150 stock options and the
Company issued and sold 180,000 restricted shares of common
stock to various employees of the Company.
Common stock; $0.01 par
value—authorized 20,000,000 shares, issued and
outstanding 162,998 and 204,196 shares at December 31,2006 and March 31, 2007, respectively
2
2
$
59
Convertible, redeemable preferred
stock, $0.01 par value—authorized
Series A—5,709,638 shares, issued and outstanding
5,548,508 shares at December 31, 2006 and
March 31, 2007
5,077
5,077
—
Convertible preferred stock,
$0.01 par value—authorized
Series A-1—570,344 shares,
issued and outstanding 570,344 shares at December 31,2006 and March 31, 2007
730
730
—
Convertible preferred stock,
$0.01 par value—authorized
Series B—3,500,000 shares, issued and outstanding
2,737,500 shares at December 31, 2006 and
March 31, 2007
5,401
5,401
—
Convertible preferred stock,
$0.01 par value—authorized
Series C—2,740,407 shares, issued and outstanding
2,740,407 shares at December 31, 2006 and
March 31, 2007
17,224
17,224
—
Additional paid-in capital
40,651
40,683
69,058
Accumulated deficit
(51,477
)
(52,297
)
(52,297
)
Total stockholders’ equity
17,608
16,820
$
16,820
Total liabilities and
stockholders’ equity
$
24,212
$
23,565
Pro forma stockholders’ equity as of March 31, 2007
gives effect to the automatic conversion of all outstanding
shares of preferred stock into common stock concurrently with
the closing of this offering.
See notes to condensed consolidated financial statements.
Principles of Consolidation and Business. The
accompanying consolidated financial statements include the
results of operations of Synacor, Inc. and its wholly owned
subsidiary, MyPersonal.com, Inc. (collectively, the
“Company”). All intercompany accounts and transactions
have been eliminated in consolidation. As of December 31,2003, MyPersonal.com had no assets and no further ongoing
activities and was dissolved in May 2007.
The Company provides an Internet platform and a portfolio of
digital content and services that enable broadband service
providers to create a compelling online experience for their
subscribers, principally in the United States. The
Company’s platform is used to create customized Internet
portals and includes integration infrastructure, subscriber
personalization capabilities, a content management and delivery
system and a customer-branded video player and toolbar. The
platform also aggregates free and paid digital content and
value-added services, including video, from third-party
providers to create a customized and branded Internet portal
solution. The Company delivers a seamless subscriber experience
by integrating these services and products with existing
customer billing and management systems, thereby allowing its
customers to extend their brands and enhance their subscriber
relationships. The Company believes that its solution assists
its customers in promoting subscriber retention, increasing
average revenue per user, or ARPU, and cultivating new revenue
streams.
Basis of Presentation. The accompanying
interim condensed consolidated financial statements are
unaudited and have been prepared by the Company’s
management in accordance with Generally Accepted Accounting
Principles (GAAP) within the United States of America. In the
opinion of management, all significant adjustments, which
include all normal recurring adjustments, considered necessary
for the fair presentation of the unaudited condensed
consolidated financial statements have been included, and the
unaudited condensed consolidated financial statements present
fairly the financial position and results of operations for the
interim periods presented. These unaudited condensed
consolidated financial statements should be read in conjunction
with the audited financial statements and related footnotes of
the Company included elsewhere in this prospectus. Results of
operations and cash flows for the interim period are not
necessarily indicative of future results.
2.
Summary of
Certain Significant Accounting Policies
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN 48, an interpretation of SFAS 109. This
interpretation clarifies the accounting for income taxes by
prescribing that a company should use a more-likely-than-not
recognition threshold based on the technical merits of the tax
position taken. Tax provisions that meet the
more-likely-than-not recognition threshold should be measured as
the largest amount of tax benefits, determined on a cumulative
probability basis, which is more likely than not to be realized
upon ultimate settlement in the financial statements.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting for interim
periods, disclosure and transition, and explicitly excludes
income taxes from the scope of Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies.
FIN 48 is effective for fiscal years beginning after
December 15, 2006, and was adopted by us on January 1,2007. As of March 31, 2007, we had gross unrecognized tax
benefits of approximately $300,000, which may reduce our NOLs in
the future. We file income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. For
income tax returns
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
filed by us, we are no longer subject to U.S. federal,
state and local tax examinations by tax authorities for years
before 2002, although carryforward tax attributes that were
generated prior to 2002 may still be adjusted upon
examination by tax authorities if they either have been or will
be utilized. It is our policy to recognize interest and
penalties related to income tax matters in income tax expense.
As of March 31, 2007, there was no accrued interest or
penalties related to uncertain tax positions.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS 157. SFAS 157 provides
guidance for using fair value to measure assets and liabilities.
SFAS 157 serves to clarify the extent to which companies
measure assets and liabilities at fair value, the information
used to measure fair value, and the effect that fair-value
measurements have on earnings. SFAS 157 is to be applied
whenever another standard requires or allows assets or
liabilities to be measured at fair value. The Company will be
required to adopt SFAS 157 effective January 1, 2008.
The Company is currently evaluating the impact that the adoption
of SFAS 157 will have on its consolidated financial
statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115, or SFAS 159.
SFAS 159 provides entities with an option to choose to
measure eligible items at fair value at specified election
dates. If elected, an entity must report unrealized gains and
losses on the item in earnings at each subsequent reporting
date. The fair value option may be applied instrument by
instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method, is irrevocable (unless a new
election date occurs), and is applied only to entire instruments
and not to portions of instruments. The Company will be required
to adopt SFAS 159 effective January 1, 2008. The
Company is currently evaluating the impact that the adoption of
SFAS 159 will have on its financial statements.
3.
Pro Forma
Stockholders’ Equity and Loss Per Common Share
Data
If the offering contemplated by this prospectus results in a
post-offering valuation of the Company’s common stock on a
fully diluted basis of at least $150 million and the
proceeds are not less than $25 million, all
11,596,759 shares of convertible preferred stock will be
mandatorily converted into shares of common stock on a 1:1
ratio. The pro forma stockholders’ equity as of
March 31, 2007 and the pro forma loss per common share data
for the three-months ended March 31, 2007 has been prepared
assuming that the conversion of preferred stock occurred
January 1, 2006.
4.
Capital Lease
Obligations and Bank Borrowing Arrangements
In January 2007, the Company acquired network equipment under a
three-year capital lease agreement that provides for monthly
payments of $18, including interest at an annual rate of 7.6%,
over the term of the lease. The amount of obligation recorded
was $561.
On February 23, 2007, the Company modified its existing
business financing agreement, pursuant to which the Company can
borrow under a revolving credit line of $1,500 for an extended
term of 24 months from agreement execution. Any borrowings
under the revolving line of credit accrue interest at the prime
rate plus a margin of 0.75% and must be repaid by February 2009.
The revolving credit line agreement contains provisions that
allow the lender to accelerate repayment of the borrowings on
the revolving credit line upon occurrence of a
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS —(Continued)
material adverse change as defined in the agreement. The
revolving credit line agreement contains certain financial
performance and reporting covenants. There were no borrowings on
the revolving credit line as of March 31, 2007.
5.
Income
Taxes
The Company does not expect to record an income tax provision
for the year ending December 31, 2007. Accordingly, no
provision has been reflected in the three-months ended
March 31, 2007. The Company’s net operating loss
carryforwards (“NOLs”) will begin to expire in 2018
and are subject to change of control limitations that generally
restrict the utilization of the NOLs on an annual basis. The
full amount of deferred tax assets, which include the NOL,
continue to be subject to a full valuation allowance at
March 31, 2007.
6.
Segment
Information
The Company operates in one business segment, the provision of
value-added services to Internet service providers. The
Company’s chief operating decision maker reviews financial
information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. The
consolidated financial information does report periodic revenue
by major class of product, but the Company has no segment or
product line managers who are held accountable for operations,
operating results and plans for products or components below the
consolidated level. Revenue information regarding these products
are as follows:
For the three months ended March 31, 2006 and 2007 the
Company’s net sales included $41 and $744, respectively, of
sales made into the United Kingdom. All other net sales are made
domestically. All long-lived assets of the Company are in the
United States.
For each of the three months ended March 31, 2006 and 2007,
a single customer accounted for approximately 43% and 46%,
respectively, of total net sales. At March 31, 2006 and
2007, this same customer comprised 35% and 27%, respectively of
trade receivables. No other customer accounted for more than ten
percent of total net sales in any of these periods.
The weighted average remaining contractual life of the options
outstanding and expected to vest were 6.9 and 6.6 years as
of December 31, 2006 and March 31, 2007, respectively.
The aggregate intrinsic value for outstanding, expected to vest,
and exercisable options were $1,060, $1,015 and $760,
respectively, as of March 31, 2007. The total intrinsic
value of options exercised during the quarter ended
March 31, 2007 was $45. The aggregate intrinsic value
represents the total pretax intrinsic value (the difference
between the Company’s stock price and the exercise price,
multiplied by the number of in-the-money stock options) that
would have been received by the stock option holders had all
stock option holders exercised their stock options on the
balance sheet dates. This amount will change based on the fair
market value of the Company’s stock.
The Company determines the fair value of each option award on
the date of grant using the Black-Scholes option-pricing model.
The Company determined that as a private company it was not
practicable to estimate the volatility of its share price, based
on the Company’s low frequency of price observations.
Therefore, expected volatilities were based on a volatility
factor computed based upon an external peer group analysis of
publicly traded companies based in the United States within a
predetermined market capitalization range (“public
comparables”). The analysis provided historical and implied
volatilities of the public comparables and developed an estimate
of constant expected volatility for the Company. For periods
prior to May 1, 2006, the Company performed an internal
valuation analysis to determine the fair value of its common
stock from time to time in connection with granting stock
options to employees. This analysis used the Company’s
projected future cash flows, discounted at a rate that reflects
both the Company’s weighted average cost of capital and the
lack of liquidity of the Company’s stock, and an implied
market value analysis based on the stock price performance of
the Company’s most comparable public peers (as determined
by management) within the Internet service provider enabler
industry. Beginning May 1, 2006, the Company determined the
fair value of its common stock with the assistance of valuations
by an unrelated valuation specialist. The valuations used the
valuation methods commonly used in the valuation of private
company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS —(Concluded)
equity securities for purposes of estimating the fair value of
their common stock. The expected term for options prior to
January 1, 2006 is 10 years. For options granted
subsequent to December 31, 2005, the expected term is
6.5 years consistent with the simplified method. The risk
free interest rate is based on the implied yield available at
the time the options were granted on U.S. Treasury zero
coupon issues with a remaining term equal to the expected term
of the option. The expected dividend yield is 0% for all periods
presented, based upon the Company’s historical practice of
electing not to declare or pay cash dividends on its common
stock.
For options granted during the year ended December 31, 2006
and the quarter ended March 31, 2007, the weighted average
fair value of the stock options granted, estimated on the date
of the grant using the Black-Scholes option-pricing model was
$0.78 using the following assumptions:
Expected life of options (in years)
6.25
Risk-free interest rate
4.76
%
Expected volatility
52
%
Expected dividend yield
0
%
The following table summarizes stock option information at
March 31, 2007:
Weighted-
Weighted-
Range of
Number of
Average
Number of
Average
Exercise
Options
Exercise
Options
Exercise
Prices
Outstanding
Price
Exercisable
Price
$0.06
1,461,796
$
.06
1,454,903
$
.06
0.30
611,061
0.30
348,210
0.30
1.39
274,625
1.39
—
1.39
150 - 1,450
7,238
215.23
7,238
215.23
2,354,720
$
0.94
1,810,351
$
0.97
As of March 31, 2007, the unrecognized compensation cost
related to non-vested options granted, for which vesting is
probable, under the plan was approximately $445. These costs are
expected to be recognized over a weighted average period of
1.3 years. The total fair value of shares vested during the
year ended December 31, 2006 and three months ended
March 31, 2007 were $401 and $36, respectively.
In February 2007, 300 warrants to purchase a like number of
shares of common stock expired. At March 31, 2007, warrants
to purchase 598,292 shares of common stock at an exercise
price of $1.17 remained outstanding. All of these outstanding
warrants were exercisable at that date. The aggregate intrinsic
value of these remaining warrants at March 31, 2007 was
$132. Outstanding and exercisable warrants are scheduled to
expire in November 2007.
8.
Net Loss Per
Common Share Data
The Company calculates net loss per share in accordance with
Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The Company has determined that its
Series A,
A-1, B and C
Convertible Preferred Stock represent participating securities
because they participate with common stock in dividends and
unallocated income. Historically, the Company has not paid
dividends. Net losses are not allocated to the Series A,
A-1, B or C
Convertible Preferred Stockholders. The Series A,
A-1, B and C
convertible preferred stock, stock options and warrants are not
considered for diluted earnings per share for the periods
presented as their effect is anti-dilutive.
For the three-months ended March 31, 2006 and 2007, the
following equivalent shares were excluded from the calculation
of diluted loss per share as their impact would have been
anti-dilutive:
Potentially dilutive securities
excluded from loss per share (1):
Options to purchase common
stock (2)
2,305,547
2,353,862
Warrants (3)
598,292
598,292
Convertible preferred stock (as
converted basis)
8,837,994
11,596,759
(1)
Defined as having an exercise price
lower than the average Company stock price for the period. These
securities are excluded from earnings per share as their
inclusion would decrease the loss per share.
(2)
Does not include 7,238 options with
an exercise price higher than the average Company stock price
for the three months ended March 31, 2006 and 2007.
(3)
Does not include 300 warrants with
an exercise price higher than the average Company stock price
for the three months ended March 31, 2006.
9.
Subsequent
Events
In April, July and August 2007, the Company’s board of
directors approved grants of an aggregate of 291,150 stock
options and 180,000 shares of restricted stock to various
employees of the Company.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide information
different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
Until ,
2007 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer’s obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
The following table presents the costs and expenses, other than
underwriting discounts and commissions, payable by us in
connection with the sale of common stock being registered. All
amounts are estimates except the SEC registration fee, the NASD
filing fees and The Nasdaq Global Market listing fee.
SEC Registration fee
$
2,648
NASD filing fee
9,125
Nasdaq Global Market listing fee
100,000
Printing and engraving expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
*
Custodian and transfer agent fees
*
Miscellaneous fees and expenses
*
Total
$
*
*
To be furnished by amendment.
Item 14.
Indemnification
of Directors and Officers
Our amended and restated certificate of incorporation and
amended and restated bylaws contain provisions relating to the
limitation of liability and indemnification of directors and
officers. The amended and restated certificate of incorporation
provides that our directors will not be personally liable to us
or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability:
•
for any breach of the director’s duty of loyalty to us or
our stockholders;
•
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
•
in respect of unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of
the Delaware General Corporation Law; or
•
for any transaction from which the director derives any improper
personal benefit.
Our amended and restated certificate of incorporation also
provides that if Delaware law is amended after the approval by
our stockholders of the certificate of incorporation to
authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent
permitted by Delaware law.
Our amended and restated bylaws provide that we will indemnify
our directors and officers to the fullest extent permitted by
Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in
connection with their service for or on our behalf. Our amended
and restated bylaws provide that we shall advance the expenses
incurred by a director or officer in advance of the final
disposition of an action or proceeding. The bylaws also
authorize us to indemnify any of our employees or agents and
permit us to secure insurance on behalf of any officer,
director, employee or agent for any
liability arising out of his or her action in that capacity,
whether or not Delaware law would otherwise permit
indemnification.
Prior to the completion of this offering, we expect to enter
into indemnification agreements with each of our directors and
executive officers and certain other key employees, a form of
which is attached as Exhibit 10.1. The form of agreement
will provide that we will indemnify each of our directors,
executive officers and such other key employees against any and
all expenses incurred by that director, executive officer or
other key employee because of his or her status as one of our
directors, executive officers or other key employees, to the
fullest extent permitted by Delaware law, our amended and
restated certificate of incorporation and our amended and
restated bylaws (except in a proceeding initiated by such person
without board approval). In addition, the form agreement
provides that, to the fullest extent permitted by Delaware law,
we will advance all expenses incurred by our directors,
executive officers and other key employees in connection with a
legal proceeding.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or
persons controlling us pursuant to the foregoing provisions, we
have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Reference is made to
Section
of the underwriting agreement contained in Exhibit 1.1 to
this registration statement, indemnifying our directors and
officers against limited liabilities. In addition,
Section 1.9 of our investors’ rights agreement
contained in Exhibit 4.3 to this registration statement
provides for indemnification of certain of our stockholders
against liabilities described in our investors’ rights
agreement.
We maintain directors’ and officers’ liability
insurance for our officers and directors.
Item 15.
Recent Sales
of Unregistered Securities
Since January 1, 2004, we have issued the following
securities that were not registered under the Securities Act:
1. On October 14, 2005, we issued and sold
20 shares of our common stock at a purchase price of $0.30
per share to an individual service provider under our 1999
Option Plan.
2. From March 30, 2004 through August 1, 2006, we
granted stock options to purchase an aggregate of
1,023,253 shares of our common stock at exercise prices
ranging from $0.06 to $1.89 per share to employees, consultants,
directors and other service providers under our 2000 Option
Plan. We subsequently re-priced the options with an exercise
price of $1.89 to an exercise price of $1.39 per share.
3. From September 2005 through June 2007, we issued and
sold an aggregate of 364,463 shares of our common stock at
exercise prices of $0.06 and $0.30 per share upon the exercise
of stock options that were granted under our 2000 Option Plan.
4. From December 15, 2006 through May 31, 2007,
we granted stock options to purchase an aggregate of
384,150 shares of our common stock at an exercise price of
$1.39 per share to employees, consultants, directors and other
service providers under our 2006 Option Plan.
5. On April 19, 2007, we issued and sold
180,000 restricted shares of our common stock at a purchase
price of $1.39 per share to an employee of the Company under our
2006 Option Plan.
6. On July 31, 2007 and August 2, 2007, we
granted stock options to purchase an aggregate of
121,000 shares of our common stock at an exercise price of
$7.40 per share to employees under our 2006 Option Plan.
7. On November 18, 2004, we issued an aggregate of
59,828 shares of our Series A convertible preferred
stock at a price of $1.17 per share to two institutional
investors upon the conversion of accrued interest on outstanding
promissory notes.
8. On October 19, 2006, we issued 18,358 shares
of our Series A convertible preferred stock at a price of
$1.17 per share to one institutional investor upon the
conversion of accrued interest on an outstanding promissory note.
9. On October 1, 2004 and on January 25, 2005, we
issued and sold an aggregate of 2,737,500 shares of our
Series B convertible preferred stock to certain
institutional and individual investors for an aggregate purchase
price of approximately $5,475,000.
10. On October 19, 2006 and on November 2, 2006,
we issued and sold an aggregate of 2,740,407 shares of our
Series C convertible preferred stock to certain
institutional and individual investors for an aggregate purchase
price of approximately $17,374,000.
The sale of securities described in Items 15(1) through
(6) were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) of the
Securities Act or Rule 701 promulgated under the Securities
Act. The sale of securities described in Items 15(7)
through (10) were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of
the Securities Act or Regulation D promulgated thereunder
as transactions by an issuer not involving any public offering.
The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only
and not with a view to or for sale in connection with any
distribution and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had
adequate access, through their relationships with us, to
information about us.
Form of Amended and Restated
Bylaws to be effective upon closing
4
.1
Reference is made to Exhibits 3.1,
3.2, 3.3 and 3.4
4
.2*
Form of certificate for common
stock
4
.3
Third Amended and Restated
Investors’ Rights Agreement by and among Synacor, Inc.,
certain stockholders and the investors listed on the signature
pages thereto
4
.4
Third Amended and Restated Stock
Restriction, First Refusal and Co-Sale Agreement by and among
Synacor, Inc., certain stockholders and the investors listed on
the signature pages thereto
4
.5
Third Amended and Restated Voting
Agreement by and among Synacor, Inc., certain stockholders and
the investors listed on the signature pages thereto
5
.1*
Opinion of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP
10
.1
Form of Indemnification Agreement
between the Registrant and each of its directors and executive
officers and certain key employees
Separation Agreement dated October24, 2006 with Robert Rusak
10
.12
Series B Preferred Stock Purchase
Agreement dated October 1, 2004 by and among Synacor, Inc.
and the investors listed on the signature pages thereto
10
.13
Series C Preferred Stock Purchase
Agreement dated October 19, 2006 by and among Synacor, Inc. and
the investors listed on the signature pages thereto
10
.14.1*
Google Services Agreement dated
June 30, 2004 between Google, Inc. and Synacor, Inc.
10
.14.2*
Google Services Agreement Order
Form dated June 25, 2004 by and between Google, Inc. and
Synacor, Inc.
10
.14.3*
Amendment Number One to Google
Services Agreement Order Form dated November 1, 2004 by and
between Google, Inc. and Synacor, Inc.
10
.14.4*
Amendment Number Two to Google
Services Agreement Order Form dated December 16, 2005 by and
between Google, Inc. and Synacor, Inc.
10
.14.5*
Amendment Number Four to Google
Services Agreement Order Form dated July 31, 2006
10
.15.1*
Master Services Agreement No.
MSAX063015TPS dated December 4, 2006 by and between Synacor,
Inc. and Embarq Management Company
10
.15.2*
Contract Order No. COXX063016TPS
to Master Services Agreement MSAX063015TPS dated December 4,2006 by and between Synacor, Inc. and Embarq Management Company
10
.16.1*
Synacor Master Services Agreement
dated September 30, 2004 by and between Synacor, Inc. and
Charter Communications Holding Company, LLC
10
.16.2*
Schedule F — First
Renewal to Synacor Master Services Agreement dated July 1, 2005
by and between Synacor, Inc. and Charter Communications Holding
Company, LLC
10
.16.3*
Amendment to Master Services
Agreement dated September 30, 2005 by and between Synacor, Inc.
and Charter Communications Holding Company, LLC
10
.16.4*
Amendment to Master Services
Agreement dated August 16, 2006 by and among Synacor, Inc.,
Charter Communications Operating, LLC and Charter Communications
Holding Company, LLC
Content Distribution Addendum to
Synacor Master Services Agreement dated September 30, 2004 by
and between Synacor, Inc. and Charter Communications Holding
Company, LLC
10
.17.1*
Letter Agreement dated July 27,2006 by and among Synacor, Inc. and Time Warner Cable Inc.
10
.17.2*
Synacor Master Services Agreement
dated July 13, 2004 by and among Synacor, Inc. and ACC
Operations, Inc.
10
.17.3*
Amendment No. 1 to Synacor Master
Services Agreement dated December 28, 2004 by and among Synacor,
Inc. and ACC Operations, Inc.
10
.17.4*
Amendment No. 2 to Synacor Master
Services Agreement dated October 26, 2005 by and among Synacor,
Inc. and ACC Operations, Inc.
10
.17.5*
Content Distribution Addendum to
Synacor Master Services Agreement dated July 21, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.6*
Content Attachment No. 1 to
Content Distribution Addendum dated November 21, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.7*
Amendment No. 1 to Attachment
Content No. 1 dated June 1, 2005 by and among Synacor, Inc. and
ACC Operations, Inc.
10
.17.8*
Content Attachment No. 2 to
Content Distribution Addendum to Synacor Master Services
Agreement dated June 6, 2005 by and among Synacor, Inc. and ACC
Operations, Inc.
10
.17.9*
Search Revenue Sharing Addendum to
Synacor Master Services Agreement dated November 18, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.10*
Search Revenue Sharing Addendum
No. 2 to Synacor Master Services Agreement dated October 26,2005 by and among Synacor, Inc. and ACC Operations, Inc.
10
.17.11*
Search Revenue Sharing Addendum
No. 3 to Synacor Master Services Agreement dated October 26,2005 by and among Synacor, Inc. and ACC Operations, Inc.
10
.18.1
Sublease dated March 3, 2006
between Ludlow Technical Products Corporation and Synacor, Inc.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
2. For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Buffalo, State of New
York, on this 2nd day of August, 2007.
SYNACOR, INC.
By:
/s/ Ron
Frankel
Ron Frankel
President and Chief Executive Officer
POWER OF
ATTORNEY
In accordance with the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates stated. Each person whose
signature appears below constitutes and appoints Ron Frankel and
Eric Blachno, and each of them severally, as his or her true and
lawful attorney-in-fact and agent, each acting alone with full
power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to
sign any or all amendments (including post-effective amendments)
and exhibits to the Registration Statement on
Form S-1,
and to any registration statement filed under Commission
Rule 462, and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
Signature
Title
Date
/s/ Ron
Frankel
Ron
Frankel
President, Chief Executive Officer
and Director (Principal Executive Officer)
Form of Amended and Restated
Bylaws to be effective upon closing
4
.1
Reference is made to Exhibits 3.1,
3.2, 3.3 and 3.4
4
.2*
Form of certificate for common
stock
4
.3
Third Amended and Restated
Investors’ Rights Agreement by and among Synacor, Inc.,
certain stockholders and the investors listed on the signature
pages thereto
4
.4
Third Amended and Restated Stock
Restriction, First Refusal and Co-Sale Agreement by and among
Synacor, Inc., certain stockholders and the investors listed on
the signature pages thereto
4
.5
Third Amended and Restated Voting
Agreement by and among Synacor, Inc., certain stockholders and
the investors listed on the signature pages thereto
5
.1*
Opinion of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP
10
.1
Form of Indemnification Agreement
between the Registrant and each of its directors and executive
officers and certain key employees
10
.2.1
1999 Stock Option Plan
10
.2.2
Amendment to 1999 Stock Option Plan
10
.3.1
2000 Stock Plan
10
.3.2
First Amendment to 2000 Stock Plan
10
.3.3
Second Amendment to 2000 Stock Plan
10
.3.4
Third Amendment to 2000 Stock Plan
10
.4.1
2006 Stock Plan
10
.4.2
Amendment No. 1 to 2006 Stock
Plan
10
.5*
2007 Equity Incentive Plan
10
.6
Management Bonus Plan
10
.7
Letter Agreement dated July 31,2007 with Ron Frankel
Master Services Agreement No.
MSAX063015TPS dated December 4, 2006 by and between Synacor,
Inc. and Embarq Management Company
10
.15.2*
Contract Order No. COXX063016TPS
to Master Services Agreement MSAX063015TPS dated December 4,2006 by and between Synacor, Inc. and Embarq Management Company
10
.16.1*
Synacor Master Services Agreement
dated September 30, 2004 by and between Synacor, Inc. and
Charter Communications Holding Company, LLC
10
.16.2*
Schedule F — First
Renewal to Synacor Master Services Agreement dated July 1, 2005
by and between Synacor, Inc. and Charter Communications Holding
Company, LLC
10
.16.3*
Amendment to Master Services
Agreement dated September 30, 2005 by and between Synacor, Inc.
and Charter Communications Holding Company, LLC
10
.16.4*
Amendment to Master Services
Agreement dated August 16, 2006 by and among Synacor, Inc.,
Charter Communications Operating, LLC and Charter Communications
Holding Company, LLC
10
.16.5*
Content Distribution Addendum to
Synacor Master Services Agreement dated September 30, 2004 by
and between Synacor, Inc. and Charter Communications Holding
Company, LLC
10
.17.1*
Letter Agreement dated July 27,2006 by and among Synacor, Inc. and Time Warner Cable Inc.
10
.17.2*
Synacor Master Services Agreement
dated July 13, 2004 by and among Synacor, Inc. and ACC
Operations, Inc.
10
.17.3*
Amendment No. 1 to Synacor Master
Services Agreement dated December 28, 2004 by and among Synacor,
Inc. and ACC Operations, Inc.
10
.17.4*
Amendment No. 2 to Synacor Master
Services Agreement dated October 26, 2005 by and among Synacor,
Inc. and ACC Operations, Inc.
10
.17.5*
Content Distribution Addendum to
Synacor Master Services Agreement dated July 21, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.6*
Content Attachment No. 1 to
Content Distribution Addendum dated November 21, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.7*
Amendment No. 1 to Content No. 1
Attachment dated June 1, 2005 by and among Synacor, Inc. and ACC
Operations, Inc.
10
.17.8*
Content Attachment No. 2 to
Content Distribution Addendum to Synacor Master Services
Agreement dated June 6, 2005 by and among Synacor, Inc. and ACC
Operations, Inc.
10
.17.9*
Search Revenue Sharing Addendum to
Synacor Master Services Agreement dated November 18, 2004 by and
among Synacor, Inc. and ACC Operations, Inc.
10
.17.10*
Search Revenue Sharing Addendum
No. 2 to Synacor Master Services Agreement dated October 26,2005 by and among Synacor, Inc. and ACC Operations, Inc.
10
.17.11*
Search Revenue Sharing Addendum
No. 3 to Synacor Master Services Agreement dated October 26,2005 by and among Synacor, Inc. and ACC Operations, Inc.
10
.18.1
Sublease dated March 3, 2006
between Ludlow Technical Products Corporation and Synacor, Inc.
Report of
Independent Registered Public Accounting Firm
To the Board of Directors of
Synacor, Inc. and Subsidiary
Buffalo, New York
We have audited the consolidated financial statements of
Synacor, Inc. and subsidiary (the “Company”) as of and
for the year ended December 31, 2006, and have issued our
report thereon dated June 4, 2007 (August 2, 2007 as
to Note 6 and 10) (included elsewhere in this Registration
Statement). Our audit also included the consolidated financial
statement schedule listed in Item 16 of this Registration
Statement. This consolidated financial statement schedule is the
responsibility of the Company’s management. Our
responsibility is to express an opinion based on our audit. In
our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Report of
Independent Registered Public Accounting Firm
To the Board of Directors of
Synacor, Inc. and Subsidiary
Buffalo, New York
We have audited the consolidated financial statements of
Synacor, Inc. and subsidiary (the “Company”) as of and
for the years ended December 31, 2005 and 2004, and have
issued our report thereon dated April 11, 2006
(July 31, 2007 as to Note 5, 6 and 10) (included
elsewhere in this Registration Statement). Our audit also
included the consolidated financial statement schedule listed in
Item 16(b) of this Registration Statement. This
consolidated financial statement schedule is the responsibility
of the Company’s management. Our responsibility is to
express an opinion based on our audit. In our opinion, such
consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the
information set forth therein.
