FORM 10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For The Quarterly Period Ended June 30, 2012

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: 000-51032

 

 

Market Leader, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Washington   91-1982679

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

11332 NE 122nd Way, Suite 200

Kirkland, WA

  98034
(Address of principal executive offices)   (Zip Code)

(425) 952-5500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

As of August 7, 2012, there were outstanding 26,064,652 shares of the registrant’s common stock, $0.001 par value, which is the only class of common stock of the registrant.

 

 

 


Table of Contents

Market Leader, Inc.

FORM 10-Q

Index

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Condensed Consolidated Financial Statements (unaudited)

  

Condensed Consolidated Statements of Operations for the three and six months ended June  30, 2012 and 2011

     3   

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     4   

Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2012

     5   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     18   

Item 4. Controls and Procedures

     18   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     18   

Item 6. Exhibits

     18   

SIGNATURES

     19   

 

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Market Leader, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Revenues

   $     11,074      $ 8,320      $     21,260      $     15,562   

Expenses:

        

Sales and marketing (1)

     6,999        6,710        14,027        14,143   

Technology and product development (1)

     2,762        1,890        5,101        3,730   

General and administrative (1)

     1,855        1,823        3,710        3,426   

Depreciation and amortization of property and equipment (2)

     768        646        1,412        1,257   

Amortization of acquired intangible assets

     836        262        1,659        524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     13,220        11,331        25,909        23,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (2,146     (3,011     (4,649     (7,518

Interest income and expense, net

     8        18        17        43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (2,138     (2,993     (4,632     (7,475

Income tax expense

     8        3        36        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (2,146     (2,996     (4,668     (7,481

Net loss attributable to noncontrolling interest

     —          (150     —          (290
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Market Leader

     (2,146     (2,846     (4,668     (7,191
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Market Leader—basic and diluted

   $ (0.08   $ (0.11   $ (0.18   $ (0.29
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)    Stock-based compensation is included in the expense line items above in the following amounts:

       

     2012     2011     2012     2011  

Sales and marketing

   $ 440      $ 166      $ 795      $ 326   

Technology and product development

     67        45        117        88   

General and administrative

     295        176        523        336   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 802      $ 387      $ 1,435      $ 750   
  

 

 

   

 

 

   

 

 

   

 

 

 

(2)    Depreciation and amortization of property and equipment is allocated as follows:

       

     2012     2011     2012     2011  

Technology and product development

   $ 678      $ 567      $ 1,245      $ 1,144   

General and administrative

     90        79        167        113   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 768      $ 646      $ 1,412      $ 1,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Market Leader, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)

 

     June 30,
2012
    December 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 14,234      $ 7,958   

Short-term investments

     6,993        15,141   

Trade accounts receivable, net of allowance of $60 and $36, respectively

     659        729   

Prepaid expenses and other current assets

     1,402        1,733   
  

 

 

   

 

 

 

Total current assets

     23,288        25,561   

Property and equipment, net of accumulated depreciation of $18,752 and $19,187, respectively

     4,955        4,507   

Acquired intangible assets, net of accumulated amortization of $11,645 and $9,988, respectively

     9,216        10,762   

Goodwill

     1,861        1,861   
  

 

 

   

 

 

 

Total assets

   $ 39,320      $ 42,691   
  

 

 

   

 

 

 

Liabilities, Shareholders’ Equity and Noncontrolling Interest

    

Current liabilities:

    

Accounts payable

   $ 610      $ 1,120   

Accrued compensation and benefits

     2,953        2,599   

Accrued expenses and other current liabilities

     1,610        2,224   

Deferred rent, current portion

     230        230   

Deferred revenue

     1,196        1,056   
  

 

 

   

 

 

 

Total current liabilities

     6,599        7,229   

Deferred rent, less current portion

     95        249   

Other noncurrent liabilities

     459        95   
  

 

 

   

 

 

 

Total liabilities

     7,153        7,573   

Shareholders’ equity:

    

Preferred stock, par value $0.001 per share, authorized 30,000,000 shares; none issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     —          —     

Common stock, par value $0.001 per share, stated at amounts paid in; authorized 120,000,000 shares; issued and outstanding 25,930,748 and 25,397,448 shares at June 30, 2012 and December 31, 2011, respectively

     75,790        74,073   

Accumulated deficit

     (43,623     (38,955
  

 

 

   

 

 

 

Total shareholders’ equity

     32,167        35,118   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 39,320      $ 42,691   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Market Leader, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)

(unaudited)

 

     Common Stock     Accumulated
Deficit
    Total
Shareholders’
Equity
 
     Shares     Amount      

Balance at December 31, 2011

     25,397,448      $ 74,073      $ (38,955   $ 35,118   

Stock option exercises and vesting of restricted stock

     790,099        835        —          835   

Stock-based compensation

     —          1,144        —          1,144   

Value of equity awards withheld for tax liability and award exercises

     (256,799     (262     —          (262

Net loss

     —          —          (4,668     (4,668
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

     25,930,748      $     75,790      $ (43,623   $ 32,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Market Leader, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

     Six months ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $     (4,668   $ (7,481

Adjustments to reconcile net loss to net cash (used in) operating activities:

    

Depreciation and amortization of property and equipment

     1,412        1,257   

Amortization of acquired intangible assets

     1,659        524   

Stock-based compensation expense

     1,435        750   

Changes in certain assets and liabilities, net of acquisitions:

    

Accounts receivable

     70        (705

Prepaid expenses and other current assets

     258        13   

Accounts payable

     (216     (397

Accrued compensation and benefits

     354        300   

Accrued expenses and other current liabilities

     (605     65   

Deferred rent

     (154     (107

Deferred revenue

     140        119   
  

 

 

   

 

 

 

Net cash (used in) operating activities

     (315     (5,662
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of short-term investments

     (6,991     (20,329

Maturities of short-term investments

     14,958        19,397   

Purchases of property and equipment

     (1,949     (1,061

Cash paid for acquisition of kwkly

     —          (750
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     6,018        (2,743
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Value of equity awards withheld for tax liability and award exercises

     (262     (37

Proceeds from exercises of stock options

     835        14   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     573        (23
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     6,276        (8,428

Cash and cash equivalents at beginning of period

     7,958        16,687   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 14,234      $ 8,259   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Market Leader, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(unaudited)

Note 1: Summary of Significant Accounting Policies

Nature of Operations

Market Leader, founded in 1999, provides innovative online technology and marketing solutions for real estate professionals across the United States and Canada. The company serves more than 100,000 real estate agents, brokerages and franchisors, offering complete end-to-end solutions that enable them to grow and manage their businesses. Market Leader’s subscription-based real estate marketing software – including websites, contact management, a marketing center, and lead generation services – helps customers generate a steady stream of prospects, plus provides the systems and training they need to convert those prospects into clients. In addition, the company’s national consumer real estate sites, including Realestate.com, give its customers access to millions of future home buyers and sellers, while providing consumers with free access to the information they seek.

Basis of Presentation

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. All adjustments that are, in the opinion of management, necessary for the fair presentation of our results of operations, financial position and cash flows have been included and are of a normal, recurring nature. Operating results for the six months ended June 30, 2012 are not necessarily indicative of results to be expected for the full year.

Consolidation — The consolidated financial statements include the financial statements of Market Leader and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Business segments — We operate a single business segment, representing marketing services provided to real estate professionals. Substantially all of our business comes from customers and operations located within the United States, and we do not have any assets located in foreign countries.

Reclassifications — Prior period financial statement amounts have been reclassified to conform to current period presentation.

Subsequent Events — We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through August 14, 2012, the day the financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, including those related to the fair value of acquired intangible assets, the useful lives and potential impairment of intangible assets and property and equipment, the value of common stock options for the purpose of determining stock-based compensation, liabilities and valuation allowances, and certain tax liabilities among others. We base our estimates on historical experience and other factors, including the current economic environment that we believe to be appropriate under the circumstances. We adjust our estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in the estimates we used to prepare these financial statements will be reflected in the financial statements in future periods.

Revenue Recognition

We generate the majority of our revenues from the services we provide to real estate professionals. In our agreements with agent and broker customers, we generally charge a one-time set-up fee and a monthly fixed fee for a monthly bundle of services. While some of the components may be sold on a standalone basis, all services are provided on a monthly basis and are included in the monthly fee.

Our agreements with larger enterprises have multiple elements, and we recognize revenue by determining whether each element can be separated into a unit of accounting based on the following criteria: (1) the delivered item(s) have value to the customer on a stand-alone basis; and (2) if the arrangement includes a right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) that is probable and within our control. If the criteria are not met, elements included in an arrangement are accounted for as a single unit of accounting. If the criteria for separation are met resulting in two or more units of accounting, we use the relative selling price method to allocate arrangement consideration to the individual units of accounting, subject to a limitation that the amount allocable to the delivered unit or units of accounting is limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions.

 

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We recognize revenue when persuasive evidence of an agreement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Revenue is recognized on a gross basis because for the services we provide to our customers, we are the primary obligor, have latitude in establishing price, and have discretion in supplier selection. Initial set-up fees are recognized as revenue on a straight-line basis over the estimated customer life or the life of the contract, whichever is longer, and payments received in advance of services being rendered are recognized on a straight-line basis over the service period. We provide software-as-a-service based products, where the customer does not have the contractual right to take possession of the software during the subscription period, and therefore software revenue recognition guidance is not applicable.

Concentration of risk

One customer accounted for 81% and 79% of the Company’s total accounts receivable balance as of June 30, 2012 and December 31, 2011, respectively.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. We use a fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

   

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

 

   

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

   

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We had $11,782 and $5,585 in money market funds as of June 30, 2012 and December 31, 2011 respectively, which were classified within the fair value hierarchy as Level 1 assets and accounted for at fair value.

The carrying amounts of accounts receivable, accounts payable and other current liabilities approximate fair value because of their short-term maturities.

Commitments and Contingencies

From time to time, we may become involved in litigation relating to claims arising from the ordinary course of our business, including actions relating to employment issues. While the results of such litigation cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on the consolidated balance sheets or statements of operations.

Note 2: Acquisition

RealEstate.com Acquisition

On September 16, 2011 we acquired the assets of RealEstate.com for $8.25 million in cash. RealEstate.com provides real estate information, tools, and advice to consumers seeking to buy or sell homes. Our acquisition of the RealEstate.com assets allows us to leverage the strong domain name and traffic to extend our marketing solutions.

The transaction was accounted for as a business combination, and accordingly, all of the assets of RealEstate.com were measured at fair value on the acquisition date. The following table summarizes the consideration paid for the identifiable assets acquired and their respective weighted average lives:

 

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     Amount      Weighted
Average

Life
 

Trademarks/Domain Names

   $     7,051         5.0 years   

Developed technology

     1,199         3.0 years   
  

 

 

    

 

 

 
   $ 8,250         4.7 years   
  

 

 

    

 

 

 

These fair values were based on estimates as of the closing date of the acquisition. We used the income approach to value the identified trademarks/domain names and the cost-to-create method to value the developed technology. Under the income approach, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820.

SharperAgent Acquisition

On August 1, 2011, we acquired SharperAgent, LLC (“SharperAgent”), for $1.74 million in cash plus assumed liabilities. SharperAgent is a leading provider of online and print marketing suites to the real estate industry with more than 30,000 real estate agent users across North America. Our acquisition of SharperAgent allows us to integrate SharperAgent’s marketing campaign, design, and print capabilities with our premium product offerings as a continued expansion of our business and marketing platform for real estate professionals.

The transaction was accounted for as a business combination, and accordingly, all of the assets and liabilities of SharperAgent were measured at fair value on the acquisition date. The following tables summarize the consideration paid for SharperAgent and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

 

Cash Paid

   $ 1,737   

Less: Total identifiable net assets

     (1,608
  

 

 

 

Total Goodwill

   $ 129   
  

 

 

 

Cash

   $ 81   

Trade Receivables

     136   

Property and Equipment

     277   

Identifiable intangible assets

     1,403   

Other assets

     16   

Trade payables and other liabilities

     (305
  

 

 

 

Total identifiable net assets

   $ 1,608   
  

 

 

 

The intangible assets acquired and their respective weighted average lives are as follows:

 

     Amount      Weighted
Average
Life
 

Developed technology

   $     1,078         3.0 years   

Customer base

     325         3.0 years   
  

 

 

    

 

 

 
   $ 1,403         3.0 years   
  

 

 

    

 

 

 

These fair values were based on estimates as of the closing date of the acquisition. We used the income approach to value the identified intangible assets. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820. Under the income approach, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. The valuation of the developed technology was based on the relief-from-royalty method and the existing customer relationships were valued using the discounted cash flow method.

Goodwill of $129 primarily consists of the benefit of acquiring new expertise and enhanced service offerings that we can leverage into both our existing customer base and in acquiring new customers. The goodwill recognized is expected to be deductible for income tax purposes.

 

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KWKLY Acquisition

On January 7, 2011, we acquired substantially all of the assets of KWKLY, LLC (“kwkly”). kwkly is a mobile software-as-a-service lead generation platform that provides home buyers with real-time access to property information on their Web-enabled phones, while at the same time connecting real estate professional customers of kwkly with those home buyers. Our acquisition of kwkly expands the offerings that the Company can make available through its business and marketing platform for real estate professionals.

The transaction was accounted for as a business combination, and accordingly, all of the assets of kwkly were measured at fair value on the acquisition date.

We paid cash consideration of $750, issued 222,222 shares of stock that were valued based on the closing stock price on January 7, 2011 of $1.80, and granted a fully vested non-qualified stock option to purchase 250,000 shares which was valued using a Black-Scholes fair value of $0.7936 per share.

Below is a summary of the total consideration transferred:

 

Cash

   $ 750   

Stock

     400   

Stock options

     198   
  

 

 

 
   $     1,348   
  

 

 

 

The recognized amount of identifiable assets acquired:

 

Identifiable intangible assets

   $ 570   

Goodwill

     778   
  

 

 

 
   $     1,348   
  

 

 

 

The intangible assets acquired and their respective weighted average lives are as follows:

 

     Amount      Weighted
Average
Life
 

Developed technology

   $ 445         3.0 years   

Customer relationships

     50         3.0 years   

Home listings Datafeeds

     75         1.0 years   
  

 

 

    

 

 

 
   $ 570         2.7 years   
  

 

 

    

 

 

 

These fair values were based on estimates as of the closing date of the acquisition. We used the income approach to value the customer relationships. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820. Under the income approach, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. The valuations of the developed technology and the home listings data feeds were based on the cost to recreate method. These fair value measurements were also based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820.

Goodwill of $778 primarily consists of the benefit of acquiring new expertise and a new product in the mobile space that we can leverage into our existing customer base. The goodwill recognized is expected to be deductible for income tax purposes.

For comparability purposes, the following table presents our unaudited pro forma revenue and loss had the Realestate.com, SharperAgent, and kwkly acquisitions occurred on January 1, 2011:

 

     Six months ended
June 30, 2011
(Unaudited)
 

Revenues

   $ 17,924   
  

 

 

 

Net loss attributable to Market Leader

   $ (14,466
  

 

 

 

 

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Included in the pro forma net loss is a $5 million asset impairment loss associated with RealEstate.com.

Note 3: Loss per Share

Basic loss per share is computed using the weighted average number of shares outstanding during the period. Diluted loss per share uses the weighted average common shares outstanding plus dilutive stock options, stock appreciation rights, and unvested restricted stock units using the treasury method. Because we have reported losses for the periods presented, none of our stock options or stock appreciation rights are included in the diluted per share calculations.

Restricted stock units are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. Stock options, stock appreciation rights, and unvested restricted stock units are excluded from the dilutive earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested restricted stock units are considered contingently issuable and are excluded from weighted average common shares outstanding.

The following table sets forth the computation of basic and diluted loss per share:

 

Shares in thousands

   Three months ended
June 30,
    Six months ended
June 30,
 
   2012     2011     2012     2011  

Net loss attributable to Market Leader

   $ (2,146   $ (2,846   $ (4,668   $ (7,191

Weighted average common shares outstanding

     25,741        25,133        25,592        25,117   

Dilutive effect of equity-based awards

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted shares

     25,741        25,133        25,592        25,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.08   $ (0.11   $ (0.18   $ (0.29
  

 

 

   

 

 

   

 

 

   

 

 

 

Antidilutive equity-based awards

     6,882        6,158        6,882        6,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unvested restricted stock units

     839        686        839        686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 4: Cash, Cash Equivalents and Short-Term Investments

At June 30, 2012, cash, cash equivalents, and short-term investments consisted of the following:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair

Value
 

Cash

   $ 2,452       $ —         $ 2,452   

Money market account

     11,782         —           11,782   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

   $ 14,234       $ —         $     14,234   
  

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair Value
 

U.S. Treasury bills

   $ 6,993       $ —         $ 6,993   
  

 

 

    

 

 

    

 

 

 

Short-Term investments

   $ 6,993       $ —         $ 6,993   
  

 

 

    

 

 

    

 

 

 

 

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At December 31, 2011, cash, cash equivalents, and short-term investments consisted of the following:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair
Value
 

Cash

   $ 2,373       $ —         $ 2,373   

Money market account

     5,585         —           5,585   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

   $ 7,958       $ —         $ 7,958   
  

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair
Value
 

U.S. Treasury bills

   $ 10,183       $ 6       $     10,189   

Certificate of Deposit

     4,958         2         4,960   
  

 

 

    

 

 

    

 

 

 

Short-Term investments

   $ 15,141       $ 8       $ 15,149   
  

 

 

    

 

 

    

 

 

 

Our U.S. Treasury bills and certificates of deposit are classified as held-to-maturity and the U.S. Treasury bills are carried at amortized cost. The estimated fair value of the U.S. Treasury bills is based on quoted market prices for identical investments and we classify these investments within the fair value hierarchy as a Level 1 asset. The estimated fair value of the certificate of deposit is based on a CD pricing model and we classify this investment within the fair value hierarchy as a Level 2 asset. All of our investments have contractual maturities of one year or less.

We have not realized any gains or losses on our short-term investments in the periods presented.

Note 5: Supplemental Disclosure of Cash Flow Information

 

     Six months ended
June 30,
 
         2012              2011      

Cash paid during the period for income taxes

   $ 12       $ 6   

Non-cash investing and financing activities:

     

Increase in payables for property and equipment

   $ 6       $ 9   

Equity issued in acquisition of kwkly

   $ —         $ 598  

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking statements relating to our anticipated plans, products, services, and financial performance. The words “believe,” “expect,” “anticipate,” “intend” and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, those discussed under the heading Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward-looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

Our Business

Market Leader, founded in 1999, provides innovative online technology and marketing solutions for real estate professionals across the United States and Canada. We serve more than 100,000 real estate agents, brokerages and franchisors, offering complete end-to-end solutions that enable them to grow and manage their businesses. Our subscription-based real estate marketing software – including websites, contact management, a marketing center, and lead generation services – helps customers generate a steady stream of prospects, plus provides the systems and training they need to convert those prospects into clients. In addition, our national consumer real estate sites, including Realestate.com, give our customers access to millions of future home buyers and sellers, while providing consumers with free access to the information they seek.

Review of Second Quarter 2012

We drove revenue growth again this quarter, representing the tenth sequential quarter of improved revenue and the second largest increase in sequential quarterly revenue in more than six years. This revenue growth was driven by demand for our software-as-a-service products and our continued ability to leverage our relationships with more than 100,000 customers to drive additional sales of premium software and marketing solutions.

As a result of growth in the business and costs associated with the businesses we acquired over the past year, operating expenses have increased. Despite this, a significant improvement in our net loss resulted in our achievement of Adjusted EBITDA profitability for the second quarter, and demonstrated leverage in our operating model.

Our goal is to return to profitable growth over time, and we believe that to do so requires continued investment in cost-effective customer acquisition to drive and sustain revenue growth. Our strategy includes initiatives to build and maintain sales and marketing channel partnerships with major franchise networks and large brokerage companies. These strategic relationships enable us to tap into the influence, credibility, and existing sales and marketing infrastructure of these franchise networks to cost-effectively acquire high-value customers.

Under these strategic agreements, we typically provide a base level version of our software to agents and brokers enterprise-wide in exchange for specified contractual revenue over a number of years. These enterprise customers have a business incentive to partner with us and drive broad platform adoption of our software-as-a-service solutions, because it helps foster success and performance improvements within their agent base. Our strategy is to leverage the resulting broad adoption to sell recurring subscriptions to premium services, including both software upgrades and marketing services. This strategy has contributed to our strong revenue growth, and we expect to extend our success in the enterprise space with the two additional major franchise agreements, signed earlier this year.

In addition to the franchise-driven growth, Market Leader’s ActiveRain community, a real estate social networking platform, has continued to expand its membership. Together with our software customer base, ActiveRain membership gives us access to one out of every three real estate professionals in North America. This broad access provides us what we believe to be a unique and competitive advantage, and one that will serve as a low cost distribution channel for the company’s premium services.

We are leveraging our distribution to gain traction with two new premium services. During the second quarter, we broadened our software platform by providing our customers with an integrated consumer marketing system that includes more than 4,000 online and offline marketing campaigns. We acquired this consumer marketing software with our acquisition of SharperAgent in the third quarter of last year. The integration of this application with our software-as-a-service platform adds new value for existing customers while enhancing their productivity. As a result, we expect this major upgrade to help drive improved customer loyalty over time as well as sales to new customers in upcoming quarters.

 

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We also demonstrated traction with RealEstate.com, our newest premium service, which contributed to our revenue growth this quarter. Since acquiring RealEstate.com in the third quarter of 2011, we have created a number of important enhancements to the site and plan to deliver further enhancements in the coming months. We integrated RealEstate.com with our software platform and are now providing our customers with the opportunity to leverage RealEstate.com to drive new business and differentiate themselves in their local markets.

Results of Operations

Revenues

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  

Revenues (in thousands)

   $     11,074       $     8,320       $     21,260       $     15,562   

Revenues increased 33% and 37% for the three and six month periods ended June 30, 2012 compared to the same periods in 2011. We drove this revenue growth with the sales of premium products, including our new RealEstate.com service and our newly integrated consumer marketing system. In addition, SharperAgent contributed revenue of $1.0 million and $1.9 million for the three and six month periods ended June 30, 2012.

Based upon our view of the business today, we expect similar sequential quarterly revenue growth to continue in the second half of 2012. Revenue from new enterprise agreements signed earlier this year are expected to begin driving revenue in the fourth quarter.

Sales and Marketing

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Total sales and marketing expense (in thousands)

   $     6,999      $     6,710      $     14,027      $     14,143   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total sales and marketing expense as a % of revenue

     63     81     66     91
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales and marketing expense increased for the three month period and decreased for the sixth month period ended June 30, 2012 compared to the same periods in 2011. Sales and marketing expense has improved significantly as a percentage of revenue in 2012. Costs have remained relatively steady, while revenue has increased over 30%. Our customer servicing costs decreased significantly reflecting continued operational improvements in advertising. The lower customer servicing costs were offset by an increase in customer acquisition costs related to costs associated with last year’s strategic acquisitions as well as increased staffing and marketing targeted towards franchise network relationships.

For the remainder of 2012, we expect to continue to invest in customer acquisition to support our plans for revenue growth. In addition, customer support costs will increase modestly as we grow our customer base and continue to expand our product with features such as the marketing campaign, design, and print capabilities. We expect total sales and marketing expense to decrease as a percentage of revenue throughout the second half of 2012.

Technology and Product Development

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Total technology and product development expense (in thousands)

   $     2,762      $     1,890      $     5,101      $     3,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total technology and product development expense as a % of revenue

     25     23     24     24
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Technology and product development expense increased for the three and six month periods ended June 30, 2012 compared to the same periods in 2011. The increase reflects growth in the business and the pace of our product innovation as well as the inclusion of costs for the businesses we acquired last year.

For the remainder of 2012, we expect our technology and product development expenses to decrease in the second half of the year primarily due to the expiration of a software licensing contract effective June 30, 2012 pursuant to which we were paying $300,000 per quarter.

General and Administrative

 

                                                                   
     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Total general and administrative expense (in thousands)

   $ 1,855      $ 1,823      $ 3,710      $ 3,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expense as a % of revenue

     17     22     17     22
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expense for the three and six month periods ended June 30, 2012 increased when compared to the same periods in 2011, primarily due to the inclusion of costs for the businesses we acquired last year.

We expect quarterly general and administrative expenses to remain fairly consistent for the remainder of 2012, and to decrease as a percentage of revenue as our revenue increases.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment increased for the three and six month periods ended June 30, 2012 compared to the same periods in 2011 due to additional depreciation expense on capitalized software development and the inclusion of depreciation from property and equipment acquired through business combinations in the prior year.

Amortization of Acquired Intangible Assets

Amortization of intangible assets increased for the three and six month periods ended June 30, 2012 compared to the same periods in 2011, due to the intangibles acquired through business combinations in 2011.

Interest Income and Expense, Net

Interest income, net decreased for the three and six month periods ended June 30, 2012 compared to the same periods in 2011, due to decreased rates of return on investments and lower investment balances.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We include a discussion of our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Quarterly Consolidated Statements of Income and Operational Data

The following table presents unaudited operational data pertaining to our operations for the six quarters ended June 30, 2012. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

 

                                                                             
     June 30,
2012
    Mar 31,
2012
    Dec. 31,
2011
    Sept. 30,
2011
    June 30,
2011
    Mar. 31,
2011
 
     (in thousands)  

Operations Data:

            

Revenues

   $ 11,074      $ 10,186      $ 9,484      $ 8,979      $ 8,320      $ 7,242   

Expenses:

            

Sales and marketing

     6,999        7,028        6,638        6,976        6,710        7,433   

Technology and product development

     2,762        2,339        2,272        2,207        1,890        1,840   

General and administrative

     1,855        1,855        1,757        1,657        1,823        1,603   

Depreciation and amortization of property and equipment

     768        644        625        655        646        611   

Amortization of acquired intangible assets

     836        823        890        374        262        262   

Loss on asset disposition

     —          —          —          174        —          —     

Contract termination charge

     —          —          1,450        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     13,220        12,689        13,632        12,043        11,331        11,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (2,146     (2,503     (4,148     (3,064     (3,011     (4,507

Interest income and expense, net

     8        9        1        15        18        26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (2,138     (2,494     (4,147     (3,049     (2,993     (4,481

Income tax expense

     8        28        (36     3        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (2,146     (2,522     (4,111     (3,052     (2,996     (4,484

Net loss attributable to noncontrolling interest

     —          —          (17     (91     (150     (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Market Leader

   $ (2,146   $ (2,522   $ (4,094   $ (2,961   $ (2,846   $ (4,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 260      $ (403   $ (771   $ (1,524   $ (1,716   $ (3,271
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Adjusted EBITDA is a non-GAAP financial measure provided as a complement to results in accordance with accounting principles generally accepted in the United States. Adjusted EBITDA is not a substitute for measures determined in accordance with GAAP, and may not be comparable to Adjusted EBITDA as reported by other companies. Our use of the term “Adjusted EBITDA” refers to a financial measure defined as earnings or loss before net interest, income taxes, depreciation, amortization, loss on asset disposition,contract termination charges, net loss attributable to noncontrolling interest, and stock-based compensation. We believe Adjusted EBITDA to be relevant and useful information to our investors as this measure is an integral part of our internal management reporting and planning process and is the primary measure used by our management to evaluate operating performance. See the table below for a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP measure.

 

     June 30,
2012
    Mar. 31,
2012
    Dec. 31,
2011
    Sept. 30,
2011
    June 30,
2011
    Mar. 31,
2011
 
     (in thousands)  

Reconciliation of GAAP Measurement to Adjusted EBITDA:

            

Net loss attributable to Market Leader

   $ (2,146   $ (2,522   $ (4,094   $ (2,961   $ (2,846   $ (4,344

Less: Interest income, net

     (8     (9     (1     (15     (18     (26

Add:

            

Net loss attributable to noncontrolling interest

     —          —          (17     (91     (150     (140

Depreciation and amortization of property and equipment

     768        644        625        655        646        611   

Amortization of intangible assets

     836        823        890        374        262        262   

Loss on asset disposition

     —          —          —          174        —          —     

Contract termination charge

     —          —          1,450        —          —          —     

Stock-based compensation

     802        633        412        337        387        363   

Income tax expense (benefit)

     8        28        (36     3        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 260      $ (403   $ (771   $ (1,524   $ (1,716   $ (3,271
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments as well as the cash flow that we may generate from our operations. At June 30, 2012, our cash, cash equivalents and short-term investments totaled $21.2 million compared to $20.6 million at March 31, 2012.

Liquidity and security of principal continue to be core to our investment strategy, which results in low rates of return. As of June 30, 2012, we have invested in cash equivalents consisting of money market funds that hold U.S. Treasury securities with short-term weighted average duration. Short-term investments are comprised of U.S. Treasury bills and notes and FDIC-insured certificates of deposit with terms of one year or less.

The following table presents summary cash flow data:

 

     Six months
Ended June 30,
 
     2012     2011  
     (dollars in thousands)  

Cash (used in) from operating activities

   $ (315   $ (5,662

Cash used in investing activities

     6,018        (2,743

Cash used in financing activities

     573        (23

Operating Activities

Net cash used in operating activities consists of our net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation and the effects of changes in working capital. We used $0.3 million in cash from operations during the first six months of 2012, a decrease of $5.3 million compared to the same period in 2011. The decrease was primarily due a decrease in our net loss that included increased amounts of non-cash charges, amortization and stock compensation expense.

Investing Activities

Cash provided by investing activities for the first six months of 2012 was $6.0 million compared to $2.7 million used in investing activities for the same period in 2011. During the first six months of 2012, we had net maturities of short-term investments of $8.0 million compared to net purchases of $0.9 million in the same period in 2011.

 

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Financing Activities

Cash provided by financing activities during the first six months of 2012 increased when compared to the same period last year primarily due to increased proceeds from the exercise of employee stock options.

Purchase and Retirement of Common Stock

In October 2006, our Board of Directors authorized a share repurchase program to purchase and retire up to two million shares of our common stock. We did not make any purchases pursuant to the share repurchase program during the second quarter of 2012. At June 30, 2012, 928,043 shares remain available for purchase under the share repurchase program.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal and liquidity without incurring significant risk. Because of ongoing market uncertainties, we continue to evaluate the security of our investments and the institutions where we hold our investments. As of June 30, 2012, we invested in U.S. Treasury securities money market funds with short-term weighted average duration and directly in U.S. Treasury securities. A hypothetical 10% increase/decrease in interest rates would not significantly increase/decrease our annual interest income and cash flows.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. With the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the second fiscal quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We intend to continue to refine our internal control over financial reporting on an ongoing basis as we deem appropriate with a view towards continuous improvement.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in litigation relating to claims arising from the ordinary course of our business, including actions relating to employment issues. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.

Item 6. Exhibits

 

Exhibit
Number
  

Description of Document

31.1+    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2+    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1+    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101    The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited), (ii) Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited), (iii) Condensed Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2012 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MARKET LEADER, INC.
By:   /s/ JACQUELINE DAVIDSON
  Jacqueline Davidson
  Chief Financial Officer
  Authorized Officer and Principal Financial
  Officer and Principal Accounting Officer

Date: August 14, 2012

 

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