The following discussion of our results of operations and financial condition should be read in conjunction with the information set forth in "Selected Financial Data" and our financial statements and the notes thereto included in this Annual Report on Form 10-K. 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 Business OverviewSynacor is a digital technology company that provides email and collaboration software, cloud-based identity management platforms, managed web and mobile portals, and advertising solutions. Our customers include communications providers, media companies, government entities and enterprises. We are their trusted partner for enterprise software platforms and monetization solutions that we deliver through public and private cloud software-as-a-service, software licensing, and professional services. Our platforms enable our clients to deepen engagement with their consumers and users. OnFebruary 10, 2021 , we had entered into a definitive agreement and plan of merger ("the Merger Agreement") withCLP SY Holding, LLC ("Parent") andSY Merger Sub Corporation an indirect wholly-owned subsidiary of Parent ("Purchaser") an affiliate ofCentre Lane Partners, LLC , aNew York -based private investment firm, to be acquired in an all-cash transaction that valuesSynacor , in the aggregate, at approximately$92 million . Pursuant to the terms of the Merger Agreement, Purchaser and Parent onMarch 3, 2021 commenced a tender offer (the "Offer") to acquire all of the outstanding common shares ofSynacor at a purchase price of$2.20 in share payable net to the seller in cash, without interest, subject to any withholding of taxes required by applicable law (such consideration as it may be amended from time to time pursuant to the terms of the Merger Agreement, the "Offer Price"). The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions, as soon as practicable following the acceptance and purchaser by Purchaser of the shares ofSynacor common stock in the Offer, Purchaser will be merged with and into the Company, with the Company continuing as the surviving corporation (the "Merger") on the terms and subject to the conditions set forth in the Merger Agreement, with the Merger to be effected pursuant to Section 251(h) of the General Corporation Law of theState of Delaware , as amended (the "DGCL"). Because the Merger will be governed by Section 251(h) of the DGCL, assuming the requirements of Section 251(h) of the DGCL are met, no vote of the stockholders of the Company will be required to consummate the Merger. As a result of, and at the effective time of the Merger, each outstanding share ofSynacor common stock not purchased in the Offer (other than (1) shares ofSynacor common stock owned by Parent, Purchaser or the Company or any direct or indirect wholly-owned subsidiary of Parent or the Company, including all shares ofSynacor common stock held by the Company as treasury stock, or (2) shares ofSynacor common stock that are held by any stockholder who is entitled to demand and properly demands appraisal in accordance with, and who complies in all respects with the provisions of, Section 262 of the DGCL with respect to such shares) will be converted into the right to receive the Offer Price from Purchaser. The Company operates its business in two reportable segments: 1) Software & Services and 2) Portal & Advertising. A summary of the major products and services of our reportable segments follows: Software & Services:Synacor's Software & Services segment is comprised of our cloud-based identity management platform and our Zimbra email & collaboration platform. Cloud-based Identity Management Our Cloud ID platform provides secure, scalable authentication and authorization that enables consumers to easily unlock access to content and services. It enables single sign-on access to services such as Over The Top (OTT) video, TV Everywhere streaming video and audio, email, web access customer account information, and other consumer and enterprise apps. Cloud ID is delivered as a platform-as-a-service through public and private cloud infrastructure. 27
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Table of Contents Email / CollaborationSynacor delivers an open and extensible email & collaboration platform used by service providers, regulated entities (government and financial institutions), enterprises, and small and medium sized businesses around the world. Branded as Zimbra, our open-standards-based email collaboration platform powers hundreds of millions of mailboxes globally through our network of more than 1,900 channel partners (value-added resellers, or VARs, and Business Service Providers, or BSPs) and about 4,000 licensed customers. Zimbra is delivered as software-as-a-service through public and private cloud infrastructure, and as licensed software. Portal & Advertising:Synacor's managed portal network and publisher-focused advertising platform reaches over 200 million monthly unique visitors. These solutions enable our customers to earn incremental revenue by monetizing media from their consumers across all popular devices. Managed Portals Our managed portal network consists of white-labeled browser start pages and iOS/Android start apps that serve as daily destinations for consumers. Powered by our media and programming library which includes news, entertainment, and short and long form video, these products increase consumer engagement and generate advertising revenue. They also provide consumers with self-management capabilities for email and messaging, bill paying and other account management activities. Publisher FocusedSynacor's publisher focused advertising platform works with hundreds of publishers to deliver brand-safe monetization that leverages scale, premium brands and programmatic technology across desktop and mobile. We help publishers dynamically target different audiences by matching relevant content to the right users across multiple devices. Publishers also leverage our demand facilitation services to connect premium advertisers and brands with their target audiences on brand-safe sites. The Impact of COVID-19 on our Results and Operations At the beginning of 2020, an outbreak of COVID-19 emerged and byMarch 11, 2020 was declared a global pandemic by TheWorld Health Organization . Acrossthe United States and the world, governments and municipalities instituted measures in an effort to control the spread of COVID-19, including quarantines, shelter-in-place orders, school closings, travel restrictions and the closure of non-essential businesses. By the end of March, the macroeconomic impacts became significant, exhibited by, among other things, a rise in unemployment and market volatility. Beginningmid-March 2020 ,Synacor implemented a work from home policy for nearly all of its employees other than a few providing on-site customer technical support. Being in an industry where telecommuting is very common,Synacor has been able to perform all normal business activities with minimal impact on productivity.Synacor will continue this work from home policy until it is determined to be safe for employees to return to work in our offices. Our work from home requirement will be reassessed onJuly 5, 2021 . The global macroeconomic impacts due to the pandemic have caused some delays in closing new software subscriptions and renewals. The delays were largely seen in our third quarter results of the Software & Services segment. Our Portal & Advertising segment has been negatively impacted with advertising revenue down due to a sharp decline in advertising spending, which began inMarch 2020 and continued throughout the second quarter of 2020. Although we have seen some market improvement in advertising spending starting in the third quarter of 2020, our revenues are still significantly lower as compared to the same periods in 2019. We have, however, seen an improvement in advertising margins as we have progressed through the last half of the year which have returned back to more normal levels. To mitigate these impacts on our business,Synacor has taken actions to reduce costs and preserve liquidity, including instituting a hiring freeze, reducing discretionary spending and minimizing capital spending. We also took steps during the second quarter of 2020 to improve our advertising margins with lower CPMs (or cost-per-thousand-impressions) and an increased number of revenue share arrangements.Synacor continues to believe that the COVID-19 related impacts on our business will be temporary. 28
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Table of Contents Cost Reduction Program OnAugust 4, 2020 , the Company initiated a cost reduction program as a result of ongoing reviews of our business and operations. These actions are expected to result in approximately$10 million of annual cost savings when fully implemented. Of this total,$5.9 million relates to lower headcount and benefits costs due to position eliminations and a reduction in force, which has already been implemented. In addition, we expect$1.7 million in savings from data center closures,$1.4 million from facility reductions, and$1.0 million from other operating expense and cost of revenue reductions. In the third quarter of 2020, we recognized restructuring charges associated with this cost reduction program of$1.1 million related to severance and facilities expenses. These restructuring costs are included in technology and development ($0.6 million ), sales and marketing ($0.4 million ) and general and administrative ($0.1 million ). In the fourth quarter of 2020, we recognized restructuring charges associated with this cost reduction program of$0.3 million related to severance and facility expenses. The cost savings as a result of these actions realized in the third quarter of 2020 were$0.8 million , and in the fourth quarter of 2020 were$1.2 million . We expect to achieve 90% of the total cost savings by the end of 2021. As a result of this program, we did incur impairment charges related to operating lease right-of-use assets associated with certain leased office spaces the Company ceased using, as well as furniture and fixtures associated with those facilities. Financial Highlights Highlights and significant developments for the twelve months endedDecember 31, 2020 •Net loss was$11.6 million for the twelve months endedDecember 31, 2020 •Adjusted EBITDA* was$5.3 million , or 6.5% of revenue, for the twelve months endedDecember 31, 2020 •Operating expenses, exclusive of depreciation and amortization, decreased 28% from the prior year to$41.7 million •Cash from operating activities was$1.0 million for the twelve months endedDecember 31, 2020 The initiatives described below under "Key Initiatives" are expected to contribute to our ability to maintain and grow revenue and returnSynacor to operating profitability. * We define adjusted EBITDA as net income (loss) plus: provision (benefit) for income taxes, interest expense, other (income) expense, depreciation and amortization, asset impairments, stock-based compensation, restructuring costs, and certain legal and professional services fees. Please see "Adjusted EBITDA" below for more information and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Net loss for the year endedDecember 31, 2020 was$(11.6) million , and$(9.0) million for the year endedDecember 31, 2019 . 29
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Table of Contents Trends Affecting Our Business Software & Services Our current customers and new prospects require authentication services to manage the complexity of new business rules. With consumers having more choice for video consumption via traditional video packages to a la carte offerings and direct to consumer offerings, the demand for Cloud ID authentication across multiple platforms and providing a simplified single sign on solution for the end user is in high demand. More and more companies are leveraging highly scalable global SaaS solutions to enable staff to use the same integrated enterprise application in order to achieve massive economies of scale, while maintaining their respective security and compliance objectives. We have also reached a tipping point in the industry where businesses are more receptive to cloud-based SaaS solutions than the traditional on-premised software deployments. As such, our success is dependent on our ability to help these businesses realize improved efficiency, personalization and security brought about by recent technological advancements. Portal & Advertising Our customers in the Portal & Advertising segment, predominantly high-speed internet service providers that also offer television services, are facing increasing competition from companies that deliver video content over the internet, more commonly referred to as "over-the-top," or OTT. These competitors include a number of large companies, most notable being Google. With the increased availability of high-speed internet access and over-the-top programming, consumers' video content consumption preferences may shift away from current viewing habits. Another trend affecting our customers and our business is the proliferation of internet-connected devices, especially mobile devices. Smartphones, tablets and connected TVs have made it more convenient for consumers to access services and content online, including television programming. To remain competitive, our customers and potential customers must have the capability to deliver their services and products to consumers on all devices. Our technology enables them to extend their presence beyond traditional personal computers. Our business is also affected by growth in advertising on the internet, for which the proliferation of high-speed internet access and internet-connected devices have been and will continue to be the principal drivers. We believe we have experienced a decline in advertising revenue due to consumers' internet searching habits increasingly transitioning to mobile devices. However, our focus on publisher based advertising has resulted in an increase in advertising revenue. In addition, we believe there continue to be growth opportunities for advertising related to the video, images and text on our Managed Portals and hosted email/collaboration products. Key Initiatives Our strategy is supported by four key pillars to drive our business, with operational discipline and sound financial footing as its base. We plan to: •increase value for existing customers by optimizing consumer experience and monetization; •innovate onSynacor -as-a-platform for advanced services; •win new customers in current and related verticals; and •extend our product portfolio into emerging growth areas. 30
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Table of Contents Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity withU.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that of our significant accounting policies, which are described in Note 1, The Company and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. Revenue Recognition Revenue is recognized according to ASC 606, Revenue - Revenue from Contracts with Customers. The Company generates all of its revenue from contracts with customers. Many of the Company's contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis. The Company usually expects payment within 30 to 90 days from the invoice date (fulfillment of performance obligations or per contract terms). Differences between the amount of revenue recognized and the amount invoiced are recognized as deferred revenue. None of the Company's contracts as ofDecember 31, 2020 or 2019 contained a significant financing component. The following is a description of principal activities from which the Company generates revenue in each reportable segment. Revenue is recognized when control of the promised goods or services are transferred to the Company's customers, in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. Software & ServicesSynacor's software and services segment is comprised of our cloud-based identity management platform and our Zimbra email & collaboration platform. Subscription fees and other fees are received from customers for the use of the Company's proprietary technology, including the use of, or access to, email, Cloud ID, security services, games and other premium services. Monthly subscriber levels typically form the basis for generating recurring and fee-based revenue. This revenue is typically determined by multiplying a per-subscriber per-month fee by the number of subscribers using the particular services being offered or consumed, except in the case of software licenses and support, which are based on a fixed fee. Revenue earned as subscription fees and maintenance and support fees is recognized from customers as its obligation to deliver the service is satisfied, which is when the service is delivered. Revenue is also recognized from the licensing and distribution of the Company's Email/Collaboration products and services, including licenses of intellectual property. Software license revenue is recognized up front upon delivery of the licensed product and the utility that enables the customer to access authorization keys, provided that a signed contract has been received. The Company typically sells term-based software licenses that expire, which are referred to as subscription licenses, but also sell perpetual licenses for its Email products. The software is delivered before related services are provided and is functional without professional services, updates, and technical support. 31
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Table of Contents Portal & Advertising The Company uses internet advertising to generate revenue from the traffic on its Managed Portals and Advertising solutions, categorized as search advertising and digital advertising. For search advertising, the Company has a revenue-sharing relationship withDecember 31, 2020 and 2019 are included in general and administrative expense in the consolidated statement of operations. 32
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Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented in amount (in thousands) and as a percentage of revenue for those periods. The period to period comparison of financial results is not necessarily indicative of future results. Year Ended December 31, 2020 2019 (in thousands) Revenue$ 81,362 $ 121,845 Costs and operating expenses: Cost of revenue (1) 42,236 61,990 Technology and development (1) (2) 12,007 18,273 Sales and marketing (2) 15,350 21,790 General and administrative (1) (2) 14,356 17,734 Depreciation and amortization 8,068 9,865 Total costs and operating expenses 92,017 129,652 Loss from operations (10,655) (7,807) Other income (expense), net 240 (17) Interest expense (189) (268) Loss before income taxes (10,604) (8,092) Provision for income taxes 957 929 Net loss$ (11,561) $ (9,021) Year Ended December 31, 2020 2019 Revenue 100 % 100 % Cost of revenue (1) 52 51 Technology and development (1) (2) 15 15 Sales and marketing (2) 19 18 General and administrative (1) (2) 18 15 Depreciation and amortization 10 8 Total costs and operating expenses 114 107 Loss from operations (14) (6) Other expense, net 1 - Interest expense - - Loss before income taxes (13) (7) Provision for income taxes 1 1 Net loss (14) % (7) % 33
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Table of Contents Notes: (1)Exclusive of depreciation and amortization shown separately. (2)Includes stock-based compensation expense as follows: Year Ended December 31, 2020 2019 (in thousands) Technology and development$ 218 $ 338 Sales and marketing 407 513 General and administrative 831 765$ 1,456 $ 1,616 Included in the above results of operations was the following restructuring expense: Year Ended December 31, 2020 2019 Cost of revenue $ 12$ 234 Technology and development 533 370 Sales and marketing 420 246 General and administrative 518 109 Total restructuring expense$ 1,483 $ 959 Comparison of the years endedDecember 31, 2020 and 2019 Revenue decreased by$40.5 million , or 33%, in 2020 compared to 2019, attributable to an overall decline of$0.2 million in Software & Services revenue and a decline of$40.3 million in Portal & Advertising revenue. Cost of revenue decreased$19.8 million , or 32%, in 2020 compared to 2019. The decrease in cost was primarily due to the decline in revenue, cost reductions and a change in the mix of revenues. Technology and development expenses decreased by$6.3 million , or 34%, in 2020 compared to 2019, primarily due to lower compensation expense of$5.2 million , lower software license cost of$0.8 million , and lower discretionary spending of$0.3 million . Sales and marketing expenses decreased by$6.4 million , or 30%, in 2020 compared to 2019, primarily the result of lower compensation expenses of$4.9 million , lower travel costs of$0.8 million , and lower professional services fees of$0.4 million . General and administrative expenses decreased by$3.4 million , or 19%, in 2020 compared to 2019, primarily the result of lower compensation expense of$0.9 million , lower impairment charges of$1.0 million , lower facilities costs of$0.7 million , lower travel costs of$0.3 million , lower bad debt expense of$0.4 million , and lower professional services fees of$0.4 million , offset by higher computer software costs of$0.3 million . Depreciation and amortization decreased by$1.8 million , or 18%, in 2020 compared to 2019, driven by lower costs related to data centers. Other income (expense), net consists of interest income and foreign currency transaction gains and losses related to our international operations. The decrease in expense of$0.3 million for the year endedDecember 31, 2020 compared to the same period in 2019 was due to unrealized foreign currency transaction gains. Interest expense decreased by$0.1 million for the year endedDecember 31, 2020 , when compared to 2019 primarily due to lower interest incurred on finance leases. 34
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Table of Contents Provision for income taxes of$1.0 million for the year endedDecember 31, 2020 and$0.9 million for the year endedDecember 31, 2019 respectively, is comprised primarily of current foreign income tax expense, including foreign withholding taxes, offset by deferred income tax benefit. Segment Results of Operations The Company operates its business in two reportable segments: 1) Software & Services and 2) Portal & Advertising. The following are Revenue, Segment Adjusted EBITDA (in thousands) and Segment Adjusted EBITDA Margin by reportable segment for the twelve months endedDecember 31, 2020 and 2019. Segment Adjusted EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other non-recurring income and expenses. Total Segment Adjusted EBITDA is equal to Adjusted EBITDA, which is a metric that is not presented in accordance withU.S. GAAP. Refer to "Adjusted EBITDA" below for a definition of Adjusted EBITDA and a reconciliation to net loss, the most directly comparableU.S. GAAP measure. Segment Adjusted EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment Adjusted EBITDA Margin is defined as Segment Adjusted EBITDA as a percent of Segment Revenue. Net loss for the year endedDecember 31, 2020 was$(11.6) million , and$(9.0) million for the year endedDecember 31, 2019 . Year Ended December 31, 2020 2019 Revenue: Software & Services$ 44,280 $ 44,485 Portal & Advertising 37,082 77,360 Total Revenue$ 81,362 $ 121,845 Segment Adjusted EBITDA: Software & Services$ 14,340 $ 12,531 Portal & Advertising 2,168 10,657 Corporate Unallocated Expense (11,190) (13,685) Total Segment Adjusted EBITDA$ 5,318 $ 9,503 Segment Adjusted EBITDA Margin: Software & Services 32.4 % 28.2 % Portal & Advertising 5.8 % 13.8 % Total Segment Adjusted EBITDA Margin 6.5 % 7.8 % Software & Services Revenue in 2020 remained essentially flat when compared to 2019, decreasing by$0.2 million . Recurring revenue (revenue recognized over time) decreased$1.0 million , primarily due to COVID-19 related declines in consumer email accounts and a video product line which was discontinued in the second quarter of 2019. Non-recurring revenue (revenue recognized at a point in time) increased$0.8 million primarily due to higher professional services revenue of$1.7 million , which more than offset COVID-19 related impacts on email license and maintenance revenue. Segment Adjusted EBITDA in 2020 increased by$1.8 million to$14.3 million , or 14%, compared to 2019. The increase was primarily due to lower operating expenses due to cost reductions implemented during the year, which more than offset the impact of lower revenue. As a result, the Segment Adjusted EBITDA Margin increased to 32.4% compared to 28.2% in 2019. 35
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Table of Contents Portal & Advertising Revenue in 2020 decreased by$40.3 million , or 52%, when compared to 2019. Recurring revenue was down$2.0 million primarily due to the expected decline in portal and premium service fees. Non-recurring revenue was down$38.2 million of which$26.6 million was due to the loss of a significant portal customer at the end of the third quarter of 2019. In addition, advertising revenue declined when compared to last year due to the impact of the COVID-19 pandemic. Segment Adjusted EBITDA in 2020 decreased$8.5 million , or 80%, compared to 2019. The decrease was primarily due to the impact of lower revenue which was only partially offset by lower operating expenses. As a result, the Segment Adjusted EBITDA Margin decreased to 5.8% compared to 13.8% in 2019. Corporate Unallocated Expense Corporate Unallocated Expense primarily includes corporate overhead costs, such as payroll and related benefit costs, rent expense and professional services fees which are not directly attributable to an individual segment. Corporate Unallocated Expense decreased for the year endedDecember 31, 2020 by$2.5 million , or 18%, compared to the year endedDecember 31, 2019 . The decrease in Corporate Unallocated Expense is primarily a result of lower professional service fees of$0.7 million , lower facilities costs of$1.0 million , lower travel costs of$0.2 million and lower compensation costs of$0.8 million , partially offset by higher computer software costs of$0.2 million . Adjusted EBITDA To provide investors with additional information regarding our financial results, we have disclosed within this Annual Report on Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Our use of adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are: •although depreciation and amortization and asset impairments are non-cash charges, the assets being depreciated, amortized or impaired may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditure requirements; •adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; •adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; •adjusted EBITDA does not reflect the impact of tax payments that may represent a reduction in cash available to us; •adjusted EBITDA does not reflect the impact of principal or interest payments required to service our finance leases or long-term debt borrowings (if any); •adjusted EBITDA does not reflect the impact of the cost of business acquisitions on the cash available to us; •adjusted EBITDA does not reflect the impact of non-recurring items, such as the costs associated with reductions in workforce on the cash available to us: and •other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure. 36
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Table of Contents
Because of these limitations, adjusted EBITDA should be considered alongside
other financial performance measures, including net loss and our other
Twelve Months Ended December 31, 2020 2019 Reconciliation of Adjusted EBITDA: Net loss$ (11,561) $ (9,021) Provision for income taxes 957 929 Interest expense 189 268 Other income (expense), net (240) 17 Depreciation and amortization 10,294 11,251 Long-lived asset impairment* 806 1,751 Stock-based compensation expense 1,456 1,616 Restructuring costs** 1,483 959 Certain legal and professional services fees*** 1,934 1,733 Adjusted EBITDA$ 5,318 $ 9,503 Notes:
* "Long-lived asset impairment" includes impairment charges related to property, plant and equipment, capitalized software and leased assets. ** "Restructuring costs" include severance expense, contract termination costs and other exit or disposal costs. "Certain legal and professional services fees" includes legal fees and other related expenses outside the ordinary course of business, as well as fees and *** expenses related to merger and acquisition activities. 37
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Table of Contents 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 cash from the exercise of stock options are insufficient to fund our future activities, we may need to raise additional funds through public or private equity offerings or debt financings. InAugust 2019 , we entered into a Loan and Security Agreement, (the "Agreement"), withSilicon Valley Bank (the "Lender"). The Lender agreed to provide a$12.0 million secured revolving line of credit (the "credit facility"). The credit facility is available for cash borrowings, subject to a Borrowing Base formula based upon eligible accounts receivable. The maturity of the Agreement is two years from the date of the Agreement. Any borrowings under the Agreement bear interest, based on an interest rate dependent on cash liquidity for the relevant period. Cash liquidity is defined as cash plus (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base minus (b) the outstanding principal balance of any Advances, (each as defined in the Agreement). If cash liquidity is greater than$20.0 million then the interest rate is the greater of the "prime rate" as published inThe Wall Street Journal (WSJ) for the relevant period plus 0.50%, which as ofDecember 31, 2020 would be 5.50%. If cash liquidity is less than$20.0 million then the interest rate is the greater of WSJ prime rate plus 1.00% which as ofDecember 31, 2020 would be 6.00%. The Agreement requires compliance with certain reporting requirements, conditions, and covenants. The financial covenants require that we must maintain a Minimum Liquidity Coverage (as defined in the Agreement) greater than or equal to 2.25:1.00. Additionally, when cash liquidity falls below$20.0 million , the Agreement includes certain trailing six month Free Cash Flow requirements, tested on a quarterly basis. Free Cash Flow is defined in the Agreement as (a) Adjusted EBITDA, minus (b) capital expenditures determined in accordance with GAAP, minus (c) capitalized software expenses, determined in accordance with GAAP, and minus (d) cash taxes, determined in accordance with GAAP. As ofDecember 31, 2020 , we had no outstanding borrowings under the Agreement, and we had$8.2 million of availability based upon the borrowing formula under the Agreement. OnApril 30, 2020 , the Company entered into the First Amendment (the "Amendment") to the Agreement. The Amendment changed the date fromApril 30, 2020 toMay 31, 2020 for which the minimum Free Cash Flow target proposed by the Lender is to be agreed upon by the Company, as defined by the Agreement, with respect to any period fromSeptember 30, 2020 through and includingDecember 31, 2020 . OnMay 27, 2020 , we entered into the Second Amendment to the Agreement, which reset the Free Cash Flow covenant level for the period endedJune 30, 2020 and set the Free Cash Flow covenant levels for the periods endingSeptember 30, 2020 andDecember 31, 2020 . Our obligations to the Lender are secured by a first priority security interest in all our assets, including our intellectual property. The Agreement contains customary events of default, including non-payment of principal or interest, violations of covenants, material adverse changes, cross-default, bankruptcy and material judgments. Upon the occurrence of an event of default, the Lender may accelerate repayment of any outstanding balance. The Agreement also contains certain financial covenants and other agreements that are customary in loan agreements of this type, including restrictions on paying dividends and making distributions to our stockholders. As ofDecember 31, 2020 , we were in compliance with the covenants and anticipate continuing to be so. We began taking advantage of the option to defer remittance of the employer portion of social security tax at the end ofApril 2020 as provided for under the Coronavirus Aid, Relief, and Economic Security Act, ("CARES Act"). This deferral enabled us to retain approximately$0.6 million in cash during 2020, which would otherwise have been remitted to the federal government. Under the terms of the CARES Act, half of the cumulative deferred tax payment amount for 2020 will be remitted at the end of 2021 with the remaining half at the end of 2022. As ofDecember 31, 2020 , we had approximately$5.7 million of cash and cash equivalents. We believe that our existing cash and cash equivalents, along with cash flows from operations and availability under our revolving credit line, will be sufficient to meet our anticipated working capital, interest payments, capital lease payment obligations and capital expenditure requirements for at least the next 12 months. 38
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Table of Contents Cash Flows Year Ended December 31, 2020 2019 (in thousands) Statements of Cash Flows Data: Net cash provided by operating activities$ 1,038 $ 2,459 Net cash used in investing activities$ (3,053) $ (3,772) Net cash used in financing activities$ (3,159) $ (3,459) Cash Provided by Operating Activities Net cash provided by operating activities for the fiscal year 2020 of$1.0 million was primarily driven by a net loss of$11.6 million , cash used in working capital and other net assets of$0.1 million offset by$12.7 million of non-cash charges including depreciation, amortization, and stock-based compensation expense. Net cash provided by operating activities for the fiscal year 2019 of$2.5 million was primarily driven by a net loss of$9.0 million , cash used in working capital and other net assets of$3.5 million offset by$15.0 million of non-cash charges including depreciation, amortization, and stock-based compensation expense. Cash Used in Investing Activities Our primary investing activities have consisted of capitalized software and purchases of computer equipment. We expect to continue to make significant investments in software development and computer equipment in 2021 and thereafter. Net cash used in investing activities totaled$3.1 million in 2020, as compared to$3.8 million in 2019. Cash Used in Financing Activities Net cash used by financing activities totaled$3.2 million in 2020. We made$3.1 million in payments for finance lease obligations and used$0.1 million related to the purchase of treasury stock and shares received to satisfy minimum tax withholdings. Net cash used by financing activities totaled$3.5 million in 2019. We made$3.4 million in payments for finance lease obligations and paid$0.1 million for debt issue costs related to our line of credit.
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Table of Contents Off-Balance Sheet Arrangements AtDecember 31, 2020 , we did not have any off-balance sheet arrangements other than the contract commitments listed below under Contractual Obligations, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by theSEC , that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenue, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Contractual Obligations We lease office space and data center space under operating lease agreements and certain equipment under finance lease agreements. The following table sets forth our future contractual obligations as ofDecember 31, 2020 (in thousands): Payments Due by Period 2021 2022 2023 2024 2025 Total Operating lease obligations$ 2,290 $ 1,134 $ 446 $ 38 $ -$ 3,908 Finance lease obligations 1,070 765 328 29 2 2,194 Total$ 3,360 $ 1,899 $ 774 $ 67 $ 2 $ 6,102
Impact of Applicable Recent Accounting Pronouncements
In the normal course of business, we evaluate pronouncements issued by the
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