carg-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from _________________ to _________________

Commission File Number: 001-38233

 

CARGURUS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

04-3843478

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

2 Canal Park, 4th Floor
Cambridge, Massachusetts

02141

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (617) 354-0068

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of October 31, 2017, the registrant had 77,877,494 shares of Class A common stock, $0.001 par value per share, and 28,213,276 shares of Class B common stock, par value $0.001 per share, outstanding.

 

 

 


i


Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

1

 

 

Unaudited Condensed Consolidated Balance Sheets

1

 

 

Unaudited Condensed Consolidated Income Statements

2

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income

3

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

4

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

 

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

17

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

 

Controls and Procedures

32

 

PART II.

 

 

OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

33

Item 1A.

 

Risk Factors

33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 6.

 

Exhibits

52

Signatures

53

 


ii


SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This report contains forward‑looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward‑looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward‑looking statements because they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements contained in this report include, but are not limited to, statements about:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, and ability to achieve, and maintain, future profitability;

 

our anticipated growth and growth strategies and our ability to effectively manage that growth;

 

our ability to maintain and build our brand;

 

our ability to expand internationally;

 

the impact of competition in our industry and innovation by our competitors;

 

our ability to hire and retain necessary qualified employees to expand our operations;

 

our ability to adequately protect our intellectual property;

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;

 

the increased expenses and administrative workload associated with being a public company;

 

failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; and

 

the future trading prices of our Class A common stock.

You should not rely upon forward‑looking statements as predictions of future events. We have based the forward‑looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and growth prospects. The outcome of the events described in these forward‑looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward‑looking statements contained in this report. Further, our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make. We cannot assure you that the results, events, and circumstances reflected in the forward‑looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward‑looking statements.

The forward‑looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward‑looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.

 

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CarGurus, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

At

September 30,

2017

 

 

At

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,636

 

 

$

29,476

 

Investments

 

 

60,000

 

 

 

44,774

 

Accounts receivable, net of allowance for doubtful accounts of $141

   and $164, respectively

 

 

10,123

 

 

 

6,653

 

Prepaid income taxes

 

 

 

 

 

1,815

 

Prepaid expenses and other current assets

 

 

3,485

 

 

 

2,789

 

Total current assets

 

 

99,244

 

 

 

85,507

 

Property and equipment, net (Note 4)

 

 

16,100

 

 

 

12,780

 

Restricted cash

 

 

1,783

 

 

 

2,044

 

Deferred tax assets

 

 

371

 

 

 

 

Other long-term assets (Note 5)

 

 

4,158

 

 

 

 

Total assets

 

$

121,656

 

 

$

100,331

 

Liabilities, convertible preferred stock, and stockholders’

   deficit

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

22,737

 

 

$

16,426

 

Accrued expenses (Note 6)

 

 

9,953

 

 

 

8,384

 

Deferred revenue

 

 

4,598

 

 

 

3,330

 

Accrued income taxes

 

 

156

 

 

 

 

Deferred rent

 

 

1,144

 

 

 

910

 

Total current liabilities

 

 

38,588

 

 

 

29,050

 

Deferred rent, net of current portion

 

 

5,701

 

 

 

5,673

 

Deferred tax liabilities

 

 

 

 

 

292

 

Other non-current liabilities

 

 

969

 

 

 

590

 

Total liabilities

 

 

45,258

 

 

 

35,605

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Convertible preferred stock (Note 8)

 

 

132,698

 

 

 

132,698

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Class A common stock, $0.001 par value per share; 120,020,700 shares

   authorized, 14,107,816 and 14,022,132 shares issued and outstanding

   at September 30, 2017 and December 31, 2016, respectively.

 

 

14

 

 

 

14

 

Class B common stock, $0.001 par value per share; 80,013,800 shares

   authorized, 28,213,276 and 28,044,264 shares issued and outstanding

   at September 30, 2017 and December 31, 2016, respectively.

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

4,225

 

 

 

3,714

 

Accumulated deficit

 

 

(60,766

)

 

 

(71,698

)

Accumulated other comprehensive income (loss)

 

 

199

 

 

 

(30

)

Total stockholders’ deficit

 

 

(56,300

)

 

 

(67,972

)

Total liabilities, convertible preferred stock, and stockholders’

   deficit

 

$

121,656

 

 

$

100,331

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

1


CarGurus, Inc.

Unaudited Condensed Consolidated Income Statements

(in thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

82,989

 

 

$

53,136

 

 

$

226,264

 

 

$

137,377

 

Cost of revenue(1)

 

 

4,720

 

 

 

2,852

 

 

 

12,367

 

 

 

6,671

 

Gross profit

 

 

78,269

 

 

 

50,284

 

 

 

213,897

 

 

 

130,706

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

63,891

 

 

 

40,510

 

 

 

168,495

 

 

 

108,823

 

Product, technology, and development

 

 

5,796

 

 

 

2,984

 

 

 

14,153

 

 

 

8,134

 

General and administrative

 

 

5,006

 

 

 

3,101

 

 

 

14,098

 

 

 

8,719

 

Depreciation and amortization

 

 

713

 

 

 

432

 

 

 

1,909

 

 

 

1,065

 

Total operating expenses

 

 

75,406

 

 

 

47,027

 

 

 

198,655

 

 

 

126,741

 

Income from operations

 

 

2,863

 

 

 

3,257

 

 

 

15,242

 

 

 

3,965

 

Other income, net

 

 

106

 

 

 

107

 

 

 

323

 

 

 

260

 

Income before income taxes

 

 

2,969

 

 

 

3,364

 

 

 

15,565

 

 

 

4,225

 

Provision for income taxes

 

 

590

 

 

 

1,226

 

 

 

4,633

 

 

 

1,566

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Reconciliation of net income to net income

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Net income attributable to participating securities

 

 

(1,401

)

 

 

(1,260

)

 

 

(6,446

)

 

 

(1,554

)

Net income attributable to common stockholders — basic

 

$

978

 

 

$

878

 

 

$

4,486

 

 

$

1,105

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Net income attributable to participating securities

 

 

(1,345

)

 

 

(1,222

)

 

 

(6,198

)

 

 

(1,507

)

Net income attributable to common stockholders — diluted

 

$

1,034

 

 

$

916

 

 

$

4,734

 

 

$

1,152

 

Net income per share attributable to common stockholders:

   (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

0.02

 

 

$

0.11

 

 

$

0.02

 

Diluted

 

$

0.02

 

 

$

0.02

 

 

$

0.10

 

 

$

0.02

 

Weighted-average number of shares of common stock used in

   computing net income per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,262,035

 

 

 

44,692,419

 

 

 

42,168,904

 

 

 

44,665,063

 

Diluted

 

 

46,567,173

 

 

 

48,069,373

 

 

 

46,310,630

 

 

 

48,040,754

 

 

(1)

Includes depreciation and amortization expense for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 2017 and 2016 of $370, $113, $761, and $316, respectively.

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

2


CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

72

 

 

 

1

 

 

 

229

 

 

 

(18

)

Comprehensive income

 

$

2,451

 

 

$

2,139

 

 

$

11,161

 

 

$

2,641

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

 

3


CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

10,932

 

 

$

2,659

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,670

 

 

 

1,381

 

Unrealized currency loss on foreign denominated transactions

 

 

96

 

 

 

 

Deferred taxes

 

 

(663

)

 

 

204

 

Provision for doubtful accounts

 

 

544

 

 

 

334

 

Stock-based compensation expense

 

 

224

 

 

 

236

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,013

)

 

 

(568

)

Prepaid expenses, prepaid income taxes, and other current assets

 

 

1,143

 

 

 

(2,838

)

Accounts payable

 

 

6,409

 

 

 

11,485

 

Accrued expenses

 

 

(741

)

 

 

2,153

 

Deferred revenue

 

 

1,265

 

 

 

1,705

 

Deferred rent

 

 

262

 

 

 

2,049

 

Accrued income taxes

 

 

156

 

 

 

1,190

 

Other non-current liabilities

 

 

258

 

 

 

461

 

Net cash provided by operating activities

 

 

18,542

 

 

 

20,451

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,247

)

 

 

(4,009

)

Capitalization of website development costs

 

 

(1,487

)

 

 

(913

)

Investments in certificates of deposit

 

 

(50,000

)

 

 

(41,774

)

Maturities of certificates of deposit

 

 

34,774

 

 

 

5,000

 

Net cash used in investing activities

 

 

(20,960

)

 

 

(41,696

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of preferred stock

 

 

 

 

 

60,000

 

Proceeds from exercise of unit options and stock options

 

 

288

 

 

 

92

 

Payment of deferred initial public offering costs

 

 

(2,128

)

 

 

 

Cash paid for repurchase of preferred stock, common stock, and vested options

 

 

 

 

 

(1,262

)

Net cash (used in) provided by financing activities

 

 

(1,840

)

 

 

58,830

 

Impact of foreign currency on cash, cash equivalents, and restricted cash

 

 

157

 

 

 

(26

)

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(4,101

)

 

 

37,559

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

31,520

 

 

 

62,863

 

Cash, cash equivalents, and restricted cash at end of period

 

$

27,419

 

 

$

100,422

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

4,220

 

 

$

6

 

Cash paid for interest

 

$

17

 

 

$

20

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

739

 

 

$

1,774

 

Unpaid deferred initial public offering costs

 

$

2,014

 

 

$

 

Unpaid preferred stock issuance costs

 

$

 

 

$

268

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4


 

CarGurus, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data, unless otherwise noted)

1. Organization and Business Description

CarGurus, Inc. (the “Company”), is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, the Company provides information and analysis that create a differentiated automotive search experience for consumers. The Company’s marketplace empowers users worldwide with unbiased third-party validation on pricing, dealer reputation, and other useful information that aids them in finding “Great Deals from Top-Rated Dealers.”

The Company is headquartered in Cambridge, Massachusetts and was incorporated in the state of Delaware on June 26, 2015. The Company operates principally in the United States and has also launched marketplaces in Canada, the United Kingdom, and Germany. The Company has wholly owned subsidiaries in the United States, Ireland, and the United Kingdom.

The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, management of international activities, protection of proprietary rights, patent litigation, and dependence on key individuals.  

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) are unaudited. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s final prospectus related to the initial public offering (“IPO”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on October 12, 2017 (the “Prospectus”).

The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2017 and December 31, 2016, results of operations for the three months and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.

The accompanying Unaudited Condensed Consolidated Financial Statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the Unaudited Condensed Consolidated Financial Statements. As of September 30, 2017, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Prospectus except as discussed below.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The guidance identifies areas for simplification involving several aspects of accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities, an option to make a policy election to recognize gross stock-based compensation expense with actual forfeitures recognized as they occur, as well as certain classification changes on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017 and elected to account for forfeitures when they occur, on a modified retrospective basis. The cumulative effect adjustment related to the Company's accounting policy change for forfeitures was not material. In accordance with the adoption of this guidance, the tax effect of differences between tax deductions related to stock compensation and the corresponding financial statement expense compensation will no longer be recorded to additional paid-in capital in the balance sheet. Instead, such amounts will be recorded to tax expense. During the three and nine months ended September 30, 2017, the Company recorded tax benefits of $267 and $640, respectively, related to differences between tax deductions related to stock compensation and the corresponding financial statement expense compensation. The Company also elected to prospectively apply the change in presentation of excess tax benefits, wherein excess tax benefits recognized on stock-based

5


 

compensation expense is now classified as an operating activity in the consolidated statements of cash flows. The Company did not adjust the classifications of excess tax benefits in its condensed consolidated statements of cash flows for the nine months ended September 30, 2016. The adoption did not have any other material impact on the Company's condensed consolidated financial statements.

Principles of Consolidation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of CarGurus, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company prepares its Unaudited Condensed Consolidated Financial Statements and related disclosures in conformity with GAAP.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in this Quarterly Report on Form 10-Q.

Use of Estimates

In preparing its Unaudited Condensed Consolidated Financial Statements in accordance with GAAP, the Company is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, and expenses, and disclosure of contingent assets and liabilities which are reported in the Unaudited Condensed Consolidated Financial Statements and accompanying disclosures. The accounting estimates that require the most difficult and subjective judgments include revenue recognition and revenue reserves, contingent liabilities, allowances for doubtful accounts, expected future cash flows used to evaluate the recoverability of long-lived assets, the expensing and capitalization of product, technology, and development costs for website development and internal-use software, the determination of the fair value of stock awards issued, stock-based compensation expense, and the recoverability of the Company's net deferred tax assets and related valuation allowance. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from the Company’s estimates and assumptions.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company may take advantage of these exemptions until the Company is no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, its financial statements may not be comparable to companies that comply with public company effective dates. The Company may take advantage of these exemptions up until December 31, 2022 or such earlier time that it is no longer an emerging growth company. The Company would cease to be an emerging growth company if it has more than $1.07 billion in annual revenue, it has more than $700.0 million in market value of its stock held by non-affiliates (and it has been a public company for at least 12 months, and has filed one annual report on Form 10-K), or it issues more than $1.0 billion of non-convertible debt securities over a three-year period.

Concentration of Credit Risk

The Company has no significant off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade accounts receivable. The Company maintains its cash, cash equivalents, and investments principally with accredited financial institutions of high credit standing. Although the Company deposits its cash and investments with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

Credit risk with respect to accounts receivable is dispersed due to the large number of customers. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company's accounts receivable.

6


 

For the nine months ended September 30, 2017 and the year ended December 31, 2016, no individual customer accounted for more than 10% of total revenue.

As of September 30, 2017, three customers accounted for 17%, 15%, and 10% of net accounts receivable, respectively. As of December 31, 2016, two customers accounted for 24% and 15% of net accounts receivable, respectively. No other individual customer accounted for more than 10% of net accounts receivable at September 30, 2017 or December 31, 2016.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company on or prior to the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification (“ASC”) Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, and various other revenue accounting standards for specialized transactions and industries. ASU 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity at the date of adoption.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company has developed an implementation plan to adopt this new guidance. As part of this plan, the Company is currently assessing the impact of the new guidance on its results of operations. Based on the Company’s procedures performed to date, nothing has come to its attention that would indicate that the adoption of ASU 2014-09 will have a material impact on its revenue recognition; however, further analysis is required and the Company will continue to evaluate this assessment throughout 2017 and 2018. While the Company is still evaluating the impact that this guidance will have on its financial statements and related disclosures, the Company’s preliminary assessment is that there will be an impact relating to the accounting for costs to acquire a contract. Under ASU 2015-14, the Company will be required to capitalize certain costs, primarily commission expense to sales representatives, on its consolidated balance sheet and amortize such costs over the period of performance for the underlying customer contracts. The Company is still evaluating the impact of capitalizing costs to execute a contract.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For public entities, the new standard is effective for interim and annual periods beginning on or after January 1, 2019, with early adoption permitted. For non-public entities, the new standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact this guidance may have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. For public entities, the guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. For non-public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating the impact and timing of adoption of ASU 2016-15 on its consolidated financial statements.

7


 

 

3. Fair Value of Financial Instruments Including Cash, Cash Equivalents and Investments

ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1 — Quoted unadjusted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.

The valuation techniques that may be used to measure fair value are as follows:

Market Approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Income Approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option pricing models, and excess earnings method.

Cost Approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The following tables present, for each of the fair value levels, the Company’s assets that are measured at fair value on a recurring basis at September 30, 2017 and at December 31, 2016:

 

 

 

At September 30, 2017

 

 

 

Quoted Prices

in Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant Other

Observable Inputs

(Level 2 Inputs)

 

 

Significant

Unobservable Inputs

(Level 3 Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,627

 

 

$

 

 

$

 

 

$

10,627

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

60,000

 

 

 

 

 

 

60,000

 

Total

 

$

10,627

 

 

$

60,000

 

 

$

 

 

$

70,627

 

 

 

 

At December 31, 2016

 

 

 

Quoted Prices

in Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant Other

Observable Inputs

(Level 2 Inputs)

 

 

Significant

Unobservable Inputs

(Level 3 Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

44,774

 

 

$

 

 

$

44,774

 

Total

 

$

 

 

$

44,774

 

 

$

 

 

$

44,774

 

 

8


 

The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the nine months ended September 30, 2017 or the year ended December 31, 2016.

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities less than one year from the balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase, and re-evaluates such determination at each balance sheet date.

Cash and cash equivalents primarily consist of cash on deposit with banks, and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.

The following is a summary of cash, cash equivalents, and investments as of September 30, 2017 and December 30, 2016.

 

 

 

 

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents due in 90 days or less

 

$

25,636

 

 

$

 

 

$

 

 

$

25,636

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit due in one year or less

 

 

60,000

 

 

 

 

 

 

 

 

 

 

$

60,000

 

Total cash, cash equivalents, and investments

 

$

85,636

 

 

$

 

 

$

 

 

$

85,636

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents due in 90 days or less

 

$

29,476

 

 

$

 

 

$

 

 

$

29,476

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit due in one year or less

 

 

44,774

 

 

 

 

 

 

 

 

 

 

$

44,774

 

Total cash, cash equivalents, and investments

 

$

74,250

 

 

$

 

 

$

 

 

$

74,250

 

 

Certificates of deposit at September 30, 2017 had maturity dates ranging from nine to twelve months. Certificates of deposit at December 31, 2016 had maturity dates ranging from six to twelve months.

4. Property and Equipment, Net

Property and equipment consists of the following:

 

 

 

At

September 30,

2017

 

 

At

December 31,

2016

 

Computer equipment

 

 

3,009

 

 

 

2,001

 

Capitalized software

 

 

174

 

 

 

114

 

Website development costs

 

 

4,167

 

 

 

2,680

 

Furniture and fixtures

 

 

4,461

 

 

 

3,386

 

Leasehold improvements

 

 

10,646

 

 

 

8,202

 

Construction in progress

 

 

35

 

 

 

119

 

 

 

 

22,492

 

 

 

16,502

 

Less accumulated depreciation

 

 

(6,392

)

 

 

(3,722

)

Property and equipment, net

 

$

16,100

 

 

$

12,780

 

 

Depreciation and amortization expense on property and equipment for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 2017 and 2016 was $1,083, $545, $2,670, and $1,381 respectively.

9


 

 

5. Other Long-Term Assets

Other long-term assets consists of the following:

 

 

 

At

September 30,

2017

 

 

At

December 31,

2016

 

Deferred IPO issuance costs

 

$

4,142

 

 

$

 

Other long-term assets

 

 

16

 

 

 

 

 

 

$

4,158

 

 

$

 

 

Deferred IPO issuance costs, which primarily consist of direct incremental legal and accounting fees relating to the IPO, are capitalized. The deferred issuance costs will be offset against IPO proceeds upon the completion of the Company's IPO, which occurred in October 2017. As of September 30, 2017, $4,142 of deferred IPO issuance costs were recorded in other long-term assets in the accompanying unaudited condensed consolidated balance sheet. As of December 31, 2016, there were no deferred IPO issuance costs recorded.

 

6. Accrued Expenses

Accrued expenses consists of the following:

 

 

 

At

September 30,

2017

 

 

At

December 31,

2016

 

Accrued bonuses

 

$

5,086

 

 

$

4,662

 

Accrued commissions

 

 

1,520

 

 

 

1,305

 

Other accrued expenses

 

 

3,347

 

 

 

2,417

 

 

 

$

9,953

 

 

$

8,384

 

 

7. Commitments and Contingencies

Operating Leases

The Company’s lease obligations consist of various leases for office space in Massachusetts and Dublin with various lease terms through January 2024. The terms of the Company’s Massachusetts lease agreements provide for rental payments that increase on an annual basis. The Company recognizes rent expense on a straight-line basis over the lease period. The Company does not have any debt or material capital lease obligations as of December 31, 2016 and all of the Company’s property, equipment, and software have been purchased with cash. The Company has no material long-term purchase obligations outstanding with any vendors or third parties.

As of September 30, 2017, there were no material changes in the Company’s contractual obligations and commitments from those disclosed in the Prospectus filed with the SEC, other than as discussed below.

On September 26, 2017, the Company entered into a lease for approximately 13,326 square feet of rentable office space located at Upper Hatch Street, Dublin, Ireland. The lease ends on August 11, 2023. Excluding operating costs, rent payments for the first year is $0.5 million.  In August 2018, the rent amount is subject to a national rent review, which will establish the rent payments for the remainder of the lease.

At September 30, 2017 and December 31, 2016, restricted cash was $1,783 and $2,044, respectively. Restricted cash for both periods was held at a financial institution in an interest-bearing cash account as collateral for two letters of credit related to the contractual provisions of the Company's building leases that require security deposits.

Legal Matters

The Company, from time to time, is party to litigation arising in the ordinary course of business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company based on the status of proceedings at this time.

10


 

Guarantees and Indemnification Obligations

In the ordinary course of business, the Company enters into agreements with its customers that are consistent with industry practice with respect to licensing, infringement, indemnification, and other standard provisions. The Company does not, in the ordinary course, agree to indemnification obligations for the Company under its contracts with customers. Based on historical experience and information known at September 30, 2017 and December 31, 2016, the Company has not incurred any costs for guarantees or indemnities.

8. Convertible Preferred Stock and Stockholders’ Equity

On June 21, 2017, the Company amended and restated its Certificate of Incorporation pursuant to the Third Amended and Restated Certificate of Incorporation. Under the Third Amended and Restated Certificate of Incorporation, the total number of shares of all classes of stock which the Company shall have authority to issue is (i) 120,020,700 shares of Class A common stock, par value $0.001 per share, (ii) 80,013,800 shares of Class B common stock, par value $0.001 per share, and (iii) 11,091,782 shares of Preferred Stock, par value $0.001 per share, of which 3,333,000 shares are designated Series A Preferred Stock, 3,329,497 shares are designated Series B Preferred Stock, 1,648,978 shares are designated Series C Preferred Stock, 1,673,105 shares are designated Series D convertible preferred stock, or Series D Preferred Stock, and 1,107,202 shares are designated Series E convertible preferred stock, or Series E Preferred Stock. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, and Series E Preferred Stock are referred to collectively as the Preferred Stock.

Upon the effectiveness of the Third Amended and Restated Certificate of Incorporation, (i) each share of Class A common stock issued and outstanding was recapitalized, reclassified, and reconstituted into two (2) fully paid and non-assessable shares of outstanding Class A common stock and four (4) fully paid and non-assessable shares of outstanding Class B common stock, and (ii) each share of Class B common stock of the Corporation issued and outstanding was recapitalized, reclassified, and reconstituted into two (2) fully paid and non-assessable shares of outstanding Class A common stock and four (4) fully paid and non-assessable shares of outstanding Class B common stock.

Further, upon the effectiveness of the Third Amended and Restated Certificate of Incorporation, the number of shares of common stock as to which each outstanding option to purchase common stock is exercisable for and each outstanding restricted stock unit (“RSU”) is convertible into was adjusted such that upon exercise of outstanding stock options or vesting of outstanding RSUs, each holder will receive two (2) fully paid and non-assessable shares of Class A common stock and four (4) fully paid and non-assessable shares of Class B common stock in respect of each share of common stock previously underlying such option or RSU. The exercise price per share of common stock underlying each outstanding option was adjusted upon the effectiveness of the Third Amended and Restated Certificate of Incorporation to be one-sixth of the exercise price per share in effect immediately prior to such adjustment and the fair market value per share of common stock issuable upon settlement of such RSU was adjusted to be one-sixth of the fair market value per share in effect immediately prior to the recapitalization.

All share and per share data shown in the accompanying Unaudited Condensed Consolidated Financial Statements and related notes have been retroactively revised to reflect the share recapitalization.

On October 16, 2017, in connection with the closing of the Company’s IPO, each share of Preferred Stock was converted into approximately six shares of Class A common stock pursuant to the terms of the Third Amended and Restated Certificate of Incorporation. Immediately following the closing of the Company’s IPO and the conversion of the Preferred Stock, the Company’s Fourth Amended and Restated Certificate of Incorporation became effective. Under the Fourth Amended and Restated Certificate of Incorporation, the capital structure of the Company was adjusted.  See Note 12 to these Unaudited Condensed Consolidated Financial Statements for additional information regarding the conversion of the Preferred Stock and the impact of the effectiveness of the Company’s Fourth Amended and Restated Certificate of Incorporation.  

Common Stock

Each share of Class A common stock entitles the holder to one (1) vote for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings. Each share of Class B common stock entitles the holder to ten votes for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings.

Holders of common stock are entitled to receive dividends, when and if declared by the Board.

At September 30, 2017, each share of Class B common stock was convertible into one share of Class A common stock at the option of the holder at any time. Automatic conversion was to occur upon the occurrence of a Transfer, as was defined in the Third

11


 

Amended and Restated Certificate of Incorporation, of such share of Class B common stock. Upon either the death or voluntary termination of the Company’s Chief Executive Officer, all shares of Class B common stock will automatically be converted into one share of Class A common stock.

Upon the effectiveness of the Company’s Fourth Amended and Restated Certificate of Incorporation, additional terms of conversion and transfer were implemented. See Note 12 to these Unaudited Condensed Consolidated Financial Statements for additional information regarding the current conversion and transfer terms of the Company’s common stock.    

Preferred Stock

On August 23, 2016, the Company completed a Series E Preferred Stock financing in the amount of $59,732, net of issuance costs of approximately $268. In connection with this issuance, the Company used the proceeds received to repurchase and retire certain outstanding shares of Series A, Series B, and Series C Preferred Stock and common stock, as well as certain vested stock options and RSUs, from existing stockholders in the fourth quarter of 2016. The difference between the amount implicitly paid to repurchase the various classes of Preferred Stock and the corresponding carrying value of the underlying shares ($32,087) was treated as a deemed dividend and was recorded against retained earnings. As the shares of common stock were repurchased for constructive retirement in the fourth quarter of 2016, the excess purchase price over the corresponding par value was charged directly to retained earnings.

The Company’s Preferred Stock at both September 30, 2017 and December 31, 2016 was as follows:

 

 

 

Original

Issue Price

Per Share

 

 

Shares

Authorized

 

 

Issued and Outstanding

 

 

Liquidation

Amount

 

 

Carrying

Value

 

Series A Preferred Stock

 

$

0.525053

 

 

 

3,333,000

 

 

 

2,824,703

 

 

$

1,483

 

 

$

1,483

 

Series B Preferred Stock

 

$

0.780899

 

 

 

3,329,497

 

 

 

2,938,486

 

 

 

2,295

 

 

 

2,295

 

Series C Preferred Stock

 

$

0.849012

 

 

 

1,648,978

 

 

 

1,550,612

 

 

 

1,316

 

 

 

1,316

 

Series D Preferred Stock

 

$

40.642989

 

 

 

1,673,105

 

 

 

1,673,105

 

 

 

68,000

 

 

 

67,872

 

Series E Preferred Stock

 

$

54.190650

 

 

 

1,107,202

 

 

 

1,107,202

 

 

 

60,000

 

 

 

59,732

 

 

 

 

 

 

 

 

11,091,782

 

 

 

10,094,108

 

 

$

133,094

 

 

$

132,698

 

 

At both September 30, 2017 and December 31, 2016, 20,188,226 shares of Class A common stock and 40,376,452 shares of Class B common stock were reserved for conversion of the outstanding Preferred Stock.

9. Stock-based Compensation

For the three months ended September 30, 2017 and 2016 total stock-based compensation expense was $74 and $88, respectively. For the nine months ended September 30, 2017 and 2016 total stock-based compensation expense was $224 and $236, respectively. All stock-based compensation expense for these periods related to stock options.

On January 1, 2017, the Company adopted ASU 2016-09 and elected to account for forfeitures when they occur, on a modified retrospective basis. The cumulative effect adjustment related to the Company's accounting policy change for forfeitures was not material.

Total stock-based compensation expense was allocated as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenue

 

$

6

 

 

$

6

 

 

$

16

 

 

$

14

 

Sales and marketing expense

 

 

35

 

 

 

43

 

 

 

108

 

 

 

119

 

Product, technology, and development expense

 

 

24

 

 

 

28

 

 

 

72

 

 

 

76

 

General and administrative expense

 

 

9

 

 

 

11

 

 

 

28

 

 

 

27

 

Total

 

$

74

 

 

$

88

 

 

$

224

 

 

$

236

 

 

As of September 30, 2017, there was approximately $0.5 million of unrecognized stock-based compensation expense related to stock options which is expected to be recognized over 2.1 years.

12


 

In addition to stock options, the Company has historically granted RSUs which are subject to both a service-based vesting and a performance-based vesting condition achieved upon a liquidity event, defined as either a change of control or an IPO. As of September 30, 2017, total unrecognized stock-based compensation expense related to these RSUs was approximately $10.1 million and is expected to be recognized over 3.1 years. As of September 30, 2017, the Company had not recognized compensation cost related to stock-based awards with these performance conditions as the liquidity event had not occurred. The Securities and Exchange Commission’s declaration of effectiveness of the Company’s registration statement on Form S-1 on October 11, 2017 satisfied the liquidity event performance condition. The cumulative unrecognized stock-based compensation expense related to these awards was $2.5 million through October 11, 2017.

 

10. Earnings Per Share

Net income per share information is determined using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and other securities that participate in dividends (a participating security). The Company considers the convertible Preferred Stock to be participating securities because they include rights to participate in dividends with the common stock.

Under the two-class method, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share attributable to common stockholders is computed using the more dilutive of (1) the two-class method or (2) the if-converted method. The Company allocates net income first to preferred stockholders based on dividend rights under the Company’s certificate of incorporation and then to preferred and common stockholders based on ownership interests. Net losses are not allocated to preferred stockholders as they do not have an obligation to share in the Company’s net losses.

For all periods presented and as of the date of this Current Report on Form 10-Q, the Company had and has two classes of common stock outstanding: Class A common stock and Class B common stock. As more fully described in Note 8, the rights of the holders of Class A and Class B common stock were and are identical, except with respect to voting and conversion. Each share of Class A common stock was and is entitled to one (1) vote per share and each share of Class B common stock was and is entitled to ten (10) votes per share. Each share of Class B common stock was and is convertible into one share of Class A common stock at the option of the holder at any time. In addition, each share of Class B common stock was and is automatically convertible into one share of Class A common stock upon any transfer of such share, which is defined to include entering into a voting agreement, whether or not for value, except for certain transfers described in both the Company’s Third Amended and Restated Certificate of Incorporation and Fourth Amended and Restated Certificate of Incorporation, including, without limitation, transfers to certain family members of the transferor stockholder. Upon either the death or voluntary termination of the Company’s Chief Executive Officer, all shares of Class B common stock were and are automatically convertible into one share of Class A common stock. Upon the effectiveness of the Company’s Fourth Amended and Restated Certificate of Incorporation, additional terms of conversion and transfer were implemented. See Note 12 to these Unaudited Condensed Consolidated Financial Statements for additional information regarding the current conversion and transfer terms of the Company’s common stock.

Diluted net income (loss) per share gives effect to all potentially dilutive securities. Potential dilutive securities consist of shares of common stock issuable upon the exercise of stock options, shares of common stock issuable upon the vesting of RSUs, and shares of common stock issuable upon the conversion of the outstanding convertible preferred stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method; however, outstanding RSUs, which are contingently issuable upon the achievement of a liquidity event have been excluded from the dilutive share calculation as it was not probable the vesting criteria for these awards would be met in any of the periods presented.

For the three and nine months ended September 30, 2017 and 2016, the two-class method was used in the computation of diluted net income per share, as the result was more dilutive.

13


 

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Net income attributable to participating securities

 

 

(1,401

)

 

 

(1,260

)

 

 

(6,446

)

 

 

(1,554

)

Net income attributable to common

   stockholders — basic

 

$

978

 

 

$

878

 

 

$

4,486

 

 

$

1,105

 

Net income

 

$

2,379

 

 

$

2,138

 

 

$

10,932

 

 

$

2,659

 

Net income attributable to participating securities

 

 

(1,345

)