TABLE OF CONTENTS
Page No. | ||
Independent Auditors' Report | 1 | |
Balance Sheets December 31, 2009 and 2008 and September 30, 2010 (unaudited) | 2 | |
Statements of Operations for the years ended December 31, 2009 and 2008 and nine months period ended September 30, 2010 and 2009 (unaudited) | 3 | |
Statements of Shareholders' Equity for years ended December 31, 2009 and 2008 | 4 | |
Statements of Cash Flows for the years ended December 31, 2009 and 2008 and nine months period ended September 30, 2010 and 2009 (unaudited) | 5 | |
Notes to Financial Statements | 6-16 |
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Potrero Media Corporation
San Francisco, California
We have audited the accompanying balance sheets of Potrero Media Corporation (the "Company") as of December 31, 2009 and 2008, and the related statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estim ates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Potrero Media Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
ARMANINO McKENNA LLP
San Jose, California
Balance Sheets | ||||||||||||||
(In thousands, except share data) | ||||||||||||||
ASSETS | ||||||||||||||
September 30, | December 31, | |||||||||||||
2010 | 2009 | 2008 | ||||||||||||
Current assets | (Unaudited) | |||||||||||||
Cash and cash equivalents | $ 1,490 | $ 1,130 | $ 1,571 | |||||||||||
Accounts receivable, net of allowances of $25, $8 and $204 | ||||||||||||||
as of September 30, 2010, December 31, 2009 and 2008, respectively | 1,133 | 838 | 866 | |||||||||||
Prepaid expenses and other current assets | 99 | 73 | 21 | |||||||||||
Restricted cash | - | 500 | - | |||||||||||
Total current assets | 2,722 | 2,541 | 2,458 | |||||||||||
Property and equipment, net | 24 | 23 | 18 | |||||||||||
Other intangible assets, net | 17 | 19 | 27 | |||||||||||
Goodwill | 382 | 371 | 268 | |||||||||||
Restricted cash | - | - | 501 | |||||||||||
Other assets | 31 | 32 | 31 | |||||||||||
Total assets | $ 3,176 | $ 2,986 | $ 3,303 | |||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
Current liabilities | ||||||||||||||
Accounts payable | 1,249 | $ 751 | $ 754 | |||||||||||
Accrued expenses | 110 | 53 | 60 | |||||||||||
Deferred revenue | 39 | 85 | 73 | |||||||||||
Accrued obligation to ERPP participants, current | 461 | - | - | |||||||||||
Total current liabilities | 1,859 | 889 | 887 | |||||||||||
Accrued obligation to ERPP participants, net of current portion | 504 | - | - | |||||||||||
Shareholders' equity | ||||||||||||||
Common stock, no par value; 40,000,000 shares authorized; | ||||||||||||||
30,000,000 shares issued and outstanding as of September 30, 2010, December 31, 2009 and 2008 | 383 | 383 | 383 | |||||||||||
Retained earnings | 430 | 1,714 | 2,033 | |||||||||||
Total shareholders' equity | 813 | 2,097 | 2,416 | |||||||||||
Total liabilities and shareholders' equity | $ 3,176 | $ 2,986 | $3,303 |
The accompanying notes are an integral part of these financial statements.
Statements of Operation | ||||||||||
(In thousands,) | ||||||||||
Nine Months Ended | Year Ended | |||||||||
September 30, | December 31, | |||||||||
2010 | 2009 | 2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||||
Revenues | $ 10,747 | $ 9,271 | $ 12,342 | $ 9,925 | ||||||
Cost of revenues and operating expenses: | ||||||||||
Direct marketing | 7,249 | 6,380 | 8,657 | 6,912 | ||||||
Sales and marketing | 1,508 | 1,086 | 1,427 | 1,104 | ||||||
Technology | 680 | 540 | 750 | 784 | ||||||
General and administrative | 1,993 | 525 | 729 | 722 | ||||||
Total operating expenses | 11,430 | 8,531 | 11,563 | 9,522 | ||||||
Income (loss) from operations | (683) | 740 | 779 | 403 | ||||||
Other income | ||||||||||
Interest income | 12 | 18 | 22 | 59 | ||||||
Other income, net | - | - | - | 16 | ||||||
Total other income | 12 | 18 | 22 | 75 | ||||||
Income (loss) before provision for income taxes | (671) | 758 | 801 | 478 | ||||||
Provision for income taxes | 10 | 11 | 12 | 8 | ||||||
Net income (loss) | $ (681) | $ 747 | $ 789 | $ 470 |
The accompanying notes are an integral part of these financial statements.
Potrero Media Corporation | |||||||
Statements of Shareholders' Equity | |||||||
(In thousands, except share data) | |||||||
Total | |||||||
Common Stock | Retained | Shareholders' | |||||
Shares | Amount | Earnings | Equity | ||||
Balance as of December 31, 2007 | 30,000,000 | $ 383 | $ 1,989 | $ 2,372 | |||
Net income | - | - | 470 | 470 | |||
Shareholder distributions | - | - | (426) | (426) | |||
Balance as of December 31, 2008 | 30,000,000 | 383 | 2,033 | 2,416 | |||
Net income | - | - | 789 | 789 | |||
Shareholder distributions | - | - | (1,108) | (1,108) | |||
Balance as of December 31, 2009 | 30,000,000 | $ 383 | $ 1,714 | $ 2,097 |
The accompanying notes are an integral part of these financial statements.
Potrero Media Corporation | |||||||||||
Statements of Cash flows | |||||||||||
Nine Months Ended | Year Ended | ||||||||||
September 30, | December 31, | ||||||||||
2010 | 2009 | 2009 | 2008 | ||||||||
Cash flows from operating activities | (Unaudited) | (Unaudited) | |||||||||
Net income (loss) | $ (681) | $ 747 | $ 789 | $ 470 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||
Depreciation and amortization | 19 | 16 | 22 | 27 | |||||||
Provision for doubtful accounts | 38 | 23 | 31 | 27 | |||||||
Net changes in operating assets and liabilities | |||||||||||
Accounts receivable | (333) | (231) | (3) | (234) | |||||||
Prepaid expenses and other current assets | (26) | (60) | (52) | 421 | |||||||
Other assets | 1 | - | - | (27) | |||||||
Accounts payable | 498 | 319 | (3) | 15 | |||||||
Accrued expenses | 37 | (14) | (19) | (8) | |||||||
Obligation to ERPP participants | 965 | - | - | - | |||||||
Deferred revenue | (46) | (24) | 12 | 40 | |||||||
Net cash provided by operating activities | 472 | 776 | 777 | 731 | |||||||
Cash flows from investing activities | |||||||||||
Change in restricted cash | 500 | 1 | 1 | (501) | |||||||
Purchase of property and equipment | (14) | (15) | (19) | (5) | |||||||
Purchase of intangible assets | (4) | (2) | (23) | (36) | |||||||
Net cash paid in connection with acquisition | - | - | (69) | (237) | |||||||
Net cash provided by (used in) in investing activities | 482 | (16) | (110) | (779) | |||||||
Cash flows from financing activities | |||||||||||
Distributions to shareholders | (594) | (508) | (1,108) | (426) | |||||||
Net cash used in financing activities | (594) | (508) | (1,108) | (426) | |||||||
Net increase (decrease) in cash and cash equivalents | 360 | 252 | (441) | (474) | |||||||
Cash and cash equivalents, beginning of year | 1,130 | 1,571 | 1,571 | 2,045 | |||||||
Cash and cash equivalents, end of year | ��$ 1,490 | $ 1,823 | $ 1,130 | $ 1,571 | |||||||
Supplemental disclosures of cash flow information | |||||||||||
Cash paid during the year | |||||||||||
Income taxes | $ 10 | $ 11 | $ 12 | $ 1 | |||||||
Supplemental Information | |||||||||||
Non-cash shareholder distribution | $ 9 | - | - | - |
The accompanying notes are an integral part of these financial statements.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
1. Organization and Summary of Significant Accounting Policies
Potrero Media Corporation (the "Company"), a California S Corporation headquartered in San Francisco, California, was founded in 2003. The Company is a leading performance-based marketing agency specializing in search marketing, lead generation, and online publishing services for insurance companies worldwide.
Through its network of proprietary websites, the Company offers comprehensive content to consumers looking for all types of insurance, and specializes in providing a high-quality consumer experience that insurance carriers and agents appreciate. Leveraging the proprietary technology and marketing expertise it has refined over the years, the Company helps shoppers find the coverage they need at a price they can afford, with an emphasis on providing high quality results for its clients.
The Company focuses its efforts in generating health and life insurance leads to U.S. based insurance companies and agents in order to be able to offer true comparative online shopping for this important segment of the insurance market.
Interim Financial Information
The unaudited interim financial statements as of September 30, 2010 and for the nine month periods ended September 30, 2010 and 2009 have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and entries) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid instruments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents. The Company maintains the majority of its cash balance at two financial institutions. The balances in these accounts were in excess of federally insured limits as of September 30, 2010, December 31, 2009 and December 31, 2008.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
Organization and Summary of Significant Accounting Policies (continued) |
Accounts receivable and allowance for doubtful accounts |
The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers and generally does not require collateral. The Company evaluates the collectability of its accounts receivable based on a combination of factors. When the Company believes collectability issues exist with respect to a specific receivable, the Company records an allowance to reduce that receivable to the amount that it believes to be collectible. The allowance for doubtful accounts was $25 (unaudited), $8 and $204 as of September 30, 2010, December 31, 2009 and December 31, 2008, respectively.
Customer concentration |
The Company had two customers that accounted for 38% (unaudited), 34% and 25% of total accounts receivable as of September 30, 2010, December 31, 2009 and 2008, respectively. The Company had three customers that accounted for 38% (unaudited), 31% and 46% of total revenues during the nine months ended September 30, 2010, and years ended December 31, 2009 and 2008, respectively.
The Company is subject to all of the risks inherent in the electronic commerce industry and special risks related to the online insurance industry. These risks include, but are not limited to, uncertain economic conditions, the changing nature of the internet, variations in the availability and cost of acquiring consumer traffic, unpredictability of future revenues, reliance on key customers who are themselves subject to volatility. These risks and uncertainties, among others, could cause the Company's actual results to differ materially from historical results or those currently anticipated.
Property and equipment |
Property and equipment are stated at cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. When assets are retired or disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are included in other income. Repairs and maintenance costs are charged to expense in the period incurred.
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identifiable intangible assets acquired. Goodwill also includes other intangible assets consisting of a portfolio of generic domain names on the accompanying balance sheets. This portfolio of domain names has been determined to have an indefinite life and as a result is not amortized. There was $49 (unaudited), $58 and $36 of such
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
Organization and Summary of Significant Accounting Policies (continued)
Goodwill (continued)
domain names included within goodwill on the accompanying balance sheets as of September 30, 2009, December 31, 2009 and 2008, respectively.
The Company reviews goodwill and other intangible assets with indefinite lives annually for impairment and when events or changes in circumstances indicate the carrying value may not be recoverable. An impairment charge is recorded if the carrying value exceeds the assets' fair value. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions including revenue growth rates and forecasted operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. There were no impairment charges recorded during the years ended December 31, 2009 and 2008.
Impairment of long-lived assets
Long-lived assets, such as property and equipment and purchased intangibles with finite lives (subject to amortization), are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than its carrying amount. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated lives of its long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods.
Revenue recognition
The Company generates revenue from the following sources: (1) Lead generation - utilizing the Company's internally designed and developed lead generation platform, the Company delivers information to customers by providing opportunities to contact qualified and interested potential consumers, (2) Online publishing - the Company manages a network of web properties that provide some of the targeted consumer content on the Web, and (3) Search management - a marketing channel facilitated through sales relationships with leading search engines. The Company's principal source of revenues is the transaction fees from participating insurance providers, either directly from an insurance company, from a large insurance broker, or from a local insurance agent. While quotes and other information obtained through the Company's o nline insurance marketplace are provided to consumers free of charge, the Company earns revenues from participating insurance companies or agents based on the delivery of qualified leads. These fees are earned, generally, from the delivery of a lead to a participating insurance provider or local agent. In certain instances, consumers are provided the opportunity to link directly to a third-party insurance provider's website. In these situations, the consumer will complete the third-party company's online application, and the Company will be paid a fee for that consumer transaction or "click-through."
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
Organization and Summary of Significant Accounting Policies (continued)
Revenue recognition (continued)
The Company recognizes revenue when persuasive evidence of an arrangement between the Company and the customer exists, delivery of the "lead" or "click-through" has occurred or service has been provided to the customer, the price to the customer is fixed or determinable, and collectability of the sales price is reasonably assured.
The Company is considered the primary obligor to its customers. It separately negotiates each sales or unit pricing contract independent of any publisher arrangements, assumes the credit risk for amounts invoiced to its customers, and has discretion in the publisher selection. Therefore, it generally recognizes revenues on a gross basis. Advertising expenses that are directly related to a revenue-generating event are recorded as a component of direct marketing expense.
Direct marketing expense
The Company's marketing strategy is designed to increase consumer traffic to its network of websites and to drive awareness of its customers. The Company employs various means of advertising, which consist primarily of online advertising, sponsored search, portal advertising,
e-mail campaigns and strategic partnerships with high-profile online companies that can drive significant traffic to its site. Online advertising payments based on per unit transactions are expensed in the period the transaction occurs.
Costs related to general advertising and promotions of products are charged to sales and marketing expense as incurred.
Income taxes
The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, the financial statements do not include a provision for federal income taxes. Instead, its earnings and losses are included in the shareholders' personal income tax returns and are taxed based on the shareholders' personal tax situation. Provision has been made for state franchise tax equal to 1.5% of taxable income. The Company recorded a provision for income taxes of $10 (unaudited), $12 and $8 for the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008, respectively.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
2. | Restricted Cash |
The Company had $500 and $501 in money market funds which represent collateral for credit card charges as of December 31, 2009 and 2008, respectively. The collateral value of the securities
account should be no less than the Company's $500 credit limit. The entire collateral value became unrestricted by the credit institution in 2010.
3. | Property and Equipment |
Property and equipment consisted of the following as of December 31,
2009 2008
Computer and office equipment $ 75 $ 61
Leasehold improvements 5 -_
80 61
Less accumulated depreciation and amortization (57) (43)
$ 23 $ 18
As of September 30, 2010 (unaudited), property and equipment, net was $24, which consisted of computer and office equipment and leasehold improvements for $89 and $5 respectively, less accumulated depreciation and amortization of $70.
Depreciation and amortization expense totaled $13 (unaudited), $14 and $24 for the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008, respectively.
4. | Acquisition |
On August 31, 2008, the Company acquired all of the assets of Mariposa Media LLC ("Mariposa"), an online marketing company, for $225 in cash plus eight quarterly contingent payments calculated based on 4.5% of the gross profit derived by the Company from the acquired business subsequent to the acquisition date through August 30, 2010. The Asset Purchase Agreement ("Agreement") provides for a portion of the purchase price to be placed in escrow as a hold-back in order to protect the Company against risk of indemnity obligations resulting from the acquisition. The hold-backs accrue interest at 2% per annum.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
4. | Acquisition (continued) |
The total purchase price was allocated to Mariposa's tangible and intangible assets based upon fair values as of August 31, 2008. The excess purchase price over the value of the net assets including identifiable intangible assets was recorded as goodwill. The purchase price in the transaction was allocated as follows:
Amount
Upfront cash consideration $ 225
Transaction costs 9
Total contingent payments through December 31, 2009 109
Total consideration $ 343
Estimated
Amount Useful Life
Identifiable intangible assets:
Domain names $ 3 indefinite
Customer relationship 10 4
Non-compete agreements 20 4
Goodwill 310 & #160; indefinite
Total consideration $ 343
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
5. Goodwill and Other Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill and other intangibles assets with indefinite lives:
Balance as of December 31, 2007 $ -
Acquisition of Mariposa 0; 232
Domain names purchased from vendors 36
Balance as of December 31, 2008 268
Contingent payments for acquisition of Mariposa 81
Domain names purchased from vendors 22
Balance as of December 31, 2009 371
Contingent payments for acquisition of Mariposa (unaudited) �� 20
Distribution of domain names to Shareholders (unaudited) (9)
Balance as of September 30, 2010 (unaudited) $ 382
Acquired intangible assets, subject to amortization, were as follows:
As of December 31, 2009
Accumulated
Cost Amortization Net
Customer relationship $ 10 $ 4 $ 6
Non-compete agreements 20 7 0; 13
$ 30 $ 11 $ 19
As of December 31, 2008
Accumulated
Cost Amortization Net
Customer relationship $ 10 $ 1 $ 9
Non-compete agreements 20 2 160; 18
$ 30 $ 3 $ 27
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
5. Goodwill and Other Intangible Assets (continued)
Amortization expense related to the acquired intangible assets was $6, $8 and $3 for the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, the Company expects the amortization expense in future periods to be:
Customer Non-Compete
Relationship Agreements Total
Year Ending December 31,
2010 $ 2 $ 5 $ 7
2011 2 5 60; 7
2012 2 3 60; 5
$ 6 $ 13 60; $ 19
6. Equity Participation Rights Plan
The Company established an equity participation plan (the "Plan") on January 4, 2007. Under the Plan, one or more Participation Rights ("Units") may be awarded at the discretion of the Board to employees and consultants of the Company who are designated to be participants under the Plan. Each award entitles participants to receive a bonus amount from the Company equal to a portion of the value of the net shareholder proceeds based on the vested portion of the participant's award ("Units"), solely in the event of a liquidity event. No bonuses will be paid on any awards unless there is an occurrence of a liquidity event.
The bonuses to be paid under this Plan can be in the form of cash or other such consideration approved by the Board. Awards generally vest one-forth (1/4th) after a participant has completed one year of continuous service and thereafter one-forty-eighth (1/48th) each month. All vesting ceases upon the date of the liquidity event, and any unvested portion of the award as of the date of the liquidity event shall be forfeited. Further, the Plan may require that employees continue service as an employee through a transition period of up to twelve months following the liquidity event as a condition for payment. If the continuous service of a pa rticipant terminates prior to the date of a liquidity event, then the participant shall not be entitled to any payment under this Plan. However, at the sole discretion of the Company, a participant who terminates his or her continuous service with vested ("Units"), and executes a release of claims, and executes and abides by a non-competition agreement with terms and in a form as required by the Company, may be offered the right to receive some or all of the bonus payments the participant would otherwise have been entitled to had the participant not terminated his or her continuous service, in the event of a liquidity event within two years of termination.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
6. Equity Participation Rights Plan (continued)
The following table summarizes Participation Rights ("Units") activity:
Units outstanding as of December 31, 2007 2,436,233
Granted 683,500
Forfeited (581,689)
Units outstanding as of December 31, 2008 2,538,044
Granted 604,000
Forfeited (518,997)
Units outstanding as of December 31, 2009 2,623,047
There were 1,870,016 and 1,392,891 ("Units") vested as of December 31, 2009 and 2008, respectively, under the Plan.
The bonus amount to be paid to participants with respect to the vested number of Participation Rights ("Units") is equal to:
(Number of Vested Units) x (1/35,294,118) x (Sales Proceeds net of transaction related cost). |
The Board may suspend or terminate the Plan at any time and for any reason. The suspension or termination of the Plan shall not impair rights and obligations under any awards of a participant that are granted while the Plan is in effect, while such awards are outstanding.
As payments under the Plan are contingent on the occurrence of a liquidation event, as defined in the Plan, which the Company did not consider to be probable or estimable as of December 31, 2009, no liability has been recognized. On August 31, 2010, the Company signed a Stock Purchase Agreement to sell to InsWeb Corporation all of the Company's issued and outstanding shares for an aggregate purchase price of $12,000, of which $3,000 is contingent upon a future event (See Note 8). Further, the Company agreed to accelerate vesting for all active participants effective upon closing of the transaction.
For the nine months ended, September 30, 2010, the Company had recognized compensation expense of $965 (unaudited) under the Plan, which was recorded in general and administrative expenses and included in current and long term portions of accrued obligations to ERPP participants, of which $252 is subject to the Company meeting certain earnout provisions of the Stock Purchase Agreement.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
7. Commitments and Contingencies
Related party operating lease
The Company leases its office building under a six-year operating lease agreement from Mission Potrero Properties LLC ("Mission Potrero"), a related party, at a monthly rate of $12 through September 2014. The lease is renewable in four 5-year increments through 2034.
The Company's shareholders also own 100% of Mission Potrero. Mission Potrero paid $1,967 for the building including improvements and has $1,465 in loans collateralized by the property.
The loans on the building are guaranteed by the Company and the two shareholders. The monthly rent payment under the lease approximates market value. The Company believes the related party lease terms have not been significantly affected by the fact that the Company and the lessor are related.
Contractual lease commitments as of December 31, 2009 are summarized as follows:
Years ending December 31,
2010 $ 150
2011 150
2012 150
2013 150
2014 112
$712
Rent expense was $151 and $84 during 2009 and 2008, respectively.
Contingencies
The Company is subject to certain legal proceedings and claims arising in the normal course of business. The Company is involved in a legal proceeding which, in the opinion of management, is not expected to have a material effect on the Company's financial position, results of operations, or liquidity.
8. Subsequent Events
On August 31, 2010, the Company and InsWeb Corporation (the "Buyer" or "InsWeb") entered into a Stock Purchase Agreement whereby the Company is to sell all of its issued and outstanding shares to the Buyer at an aggregate purchase price of $12,000 including cash and stock consideration. The purchase price includes contingent consideration subject to the Company meeting certain performance criteria based on an adjusted EBITDA targets for 2011-2013.
POTRERO MEDIA CORPORATION
Notes to Financial Statements
December 31, 2009 and 2008, September 30, 2010 (unaudited) and the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
(In thousands, except per share data)
8. Subsequent Events (continued)
The Company also decided to accelerate vesting for all ("Units") outstanding as of August 31, 2010 before the closing of the sale with InsWeb. As of September 30, 2010, the $965 (unaudited) amount (see footnote 6) had been included in the Company’s financial statements and was included in the current and long term portions of obligations to ERPP participants.
Management evaluated subsequent events for possible impact on the financial statements as of December 31, 2009 and 2008 and for the years then ended, through September 17, 2010, the date the December 31, 2009 financial statements were available for issuance.
On September 29, 2010 (unaudited), the Company entered into Amendment Two of the Stock Purchase Agreement with InsWeb. On October 1, 2010, all of the common stock of the Company was acquired by InsWeb at an aggregate purchase price of $12,844 of which $12,000 is a combination of cash and stock consideration and $844 is related to an adjustment in working capital.
In October 2010 (unaudited), the Company was released as a guarantor on the Mission Potrero loans.
Management has further evaluated subsequent events for possible impact on the unaudited interim financial statements as of September 30, 2010 and the nine month period then ended through December 14, 2010, the date the September 30, 2010 financial statements were available for issuance.