SYNACOR, INC. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and future expectations of ours and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties, including uncertainty regarding the duration and scope of the impact of the COVID-19 pandemic on our business, results of operation and financial condition and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These forward-looking statements include statements in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Factors that could cause or contribute to such differences include, but are not limited to, those in our otherSecurities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . 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. 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. Email / CollaborationSynacor delivers an open and extensible email & collaboration platform used by service providers, regulated entities (government & 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. 20 -------------------------------------------------------------------------------- Table of Contents 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.Synacor has a diverse portal customer base but lost a key portal customer in the third quarter of 2019. See further discussion in our "Segment Results of Operations". 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. Beginning mid-March,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. Although the global macroeconomic impacts due to the pandemic have caused some delays in closing new software subscriptions and renewals, the overall impact onSynacor's Software & Services segment has been minimal. However, our Portal & Advertising segment has been negatively impacted with advertising revenue down significantly 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 in the beginning of 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 second quarter, which were depressed near the end of the first quarter of 2020 caused by the rapid imbalance of supply and demand. To mitigate these impacts on our business,Synacor has taken actions to reduce costs and preserve liquidity, including instituting a hiring freeze and a reduction in workforce during the third quarter, 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. AlthoughSynacor believes that the COVID-19 related impacts on our business will be temporary, due to the continued uncertainty surrounding the duration and pace of recovery, we have decided to continue suspension of our quarterly guidance updates until visibility improves. With the actions we have taken to reduce costs and improve our advertising margins, at the present time, we continue to operate our business with the expectation of delivering positive Adjusted EBITDA throughout 2020. 21 -------------------------------------------------------------------------------- Table of Contents Termination of Merger Agreement with Qumu Corporation As previously disclosed, onFebruary 11, 2020 , the Company, Qumu Corporation, aMinnesota corporation ("Qumu"), andQuantum Merger Sub I, Inc. , aMinnesota corporation and a direct, wholly owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") for a proposed "merger of equals" transaction. The Merger Agreement provided that, subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Qumu (the "Merger"), with Qumu surviving the Merger as a wholly owned subsidiary of the Company. OnJune 29, 2020 ,Synacor , Qumu and Merger Sub entered into a mutual termination agreement pursuant to which the parties mutually agreed to terminate the Merger Agreement (the "Mutual Termination Agreement"). Under the terms of the Mutual Termination Agreement, Qumu agreed to immediately paySynacor a fee in the amount of$250,000 , and has also agreed to paySynacor an additional fee in the amount of$1,450,000 if Qumu enters into a binding definitive agreement for an acquisition transaction within 15 months of the date of the Mutual Termination Agreement, and which is ultimately consummated. The Mutual Termination Agreement also includes mutual releases of known and unknown claims amongSynacor , Merger Sub and Qumu arising out of, relating to, or in connection with the Merger Agreement and the Merger. Results of Operations The following tables set forth our results of operations for the periods presented in amount (in thousands) and as a percentage of revenue for those periods. The period to period comparison of financial results is not necessarily indicative of future results. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue$ 18,176 $ 31,849 $ 38,759 $ 63,673 Cost of revenue (1) 9,036 17,152 19,765 33,658 Technology and development (1) (2) 2,943 4,577 6,051 9,123 Sales and marketing (2) 3,803 5,550 8,171 11,541 General and administrative (1) (2) 3,274 3,955 7,740 8,420 Depreciation and amortization 2,225 2,567 4,439 5,002 Total costs and operating expenses 21,281 33,801 46,166 67,744 Loss from operations (3,105) (1,952) (7,407) (4,071) Other income (expense), net 175 (207) 342 9 Interest expense (50) (55) (109) (119) Loss before income taxes (2,980) (2,214) (7,174) (4,181) Provision for income taxes 202 273 533 550 Net loss$ (3,182) $ (2,487) $ (7,707) $ (4,731) Notes: (1) Exclusive of depreciation and amortization shown separately (2) Includes stock-based compensation, as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Technology and development$ 56 $ 92 $ 113 $ 195 Sales and marketing 103 111 204 226 General and administrative 224 121 443 234 Total stock-based compensation expense$ 383 $ 324 $ 760 $ 655 22
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Table of Contents
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Revenue 100 % 100 % 100 % 100 %
Cost of revenue (1) 49.7 53.9 51.0 52.9
Technology and development (1) (2) 16.2 14.4 15.6 14.3
Sales and marketing (2) 20.9 17.4 21.1 18.1
General and administrative (1) (2) 18.0 12.4 20.0 13.2
Depreciation and amortization 12.2 8.1 11.5 7.9
Total costs and operating expenses 117.0 106.2 119.2 106.4
Loss from operations (17.1) (6.1) (19.1) (6.4)
Other income (expense), net 1.0 (0.6) 0.9 -
Interest expense (0.3) (0.2) (0.3) (0.2)
Loss before income taxes (16.4) (7.0) (18.5) (6.6)
Provision for income taxes 1.1 0.9 1.4 0.9
Net loss (17.5) % (7.9) % (19.9) % (7.5) %
Notes:(1) Exclusive of depreciation and amortization shown separately
(2) Includes stock-based compensation
Comparison of the three and six months endedJune 30, 2020 and 2019: Revenue decreased by$13.7 million , or 43%, for the three months endedJune 30, 2020 as compared to the same period in 2019, attributable to an overall increase of$0.3 million in Software & Services revenue and a decline of$14.0 million in Portal & Advertising revenue. Revenue decreased by$24.9 million , or 39%, for the six months endedJune 30, 2020 as compared to the same period in 2019, attributable to an overall increase of$0.2 million in Software & Services revenue and a decline of$25.1 million in Portal & Advertising revenue. Cost of revenue decreased$8.1 million , or 47%, for the three months endedJune 30, 2020 as compared to the same period in the prior year. Cost of revenue decreased$13.9 million , or 41%, for the six months endedJune 30, 2020 as compared to the same period in 2019. The decrease in cost for the three months and six months endedJune 30, 2020 compared to the same periods in 2019 was primarily due to the decline in revenue, cost reductions and favorable mix. Technology and development expenses decreased by$1.6 million , or 36%, in the three months endedJune 30, 2020 as compared to the same period in 2019, primarily as a result of lower compensation expenses of$1.6 million . Technology and development expenses decreased$3.1 million , or 34%, for the six months endedJune 30, 2020 as compared to the same period in 2019, driven by lower compensation expenses of$2.8 million , lower software license costs of$0.2 million and lower discretionary spending of$0.1 million . Sales and marketing expenses decreased by$1.7 million , or 31%, in the three months endedJune 30, 2020 as compared to the same period in 2019, primarily the result of lower compensation expenses of$1.3 million , lower travel costs of$0.3 million and lower software license costs of$0.1 million . Sales and marketing expenses decreased$3.4 million , or 29%, for the six months endedJune 30, 2020 as compared to the same period in 2019, driven by lower compensation expenses of$2.9 million , lower travel costs of$0.3 million and lower software license costs of$0.1 million . General and administrative expenses decreased by$0.7 million , or 17%, for the three months endedJune 30, 2020 as compared to the same period in 2019, primarily the result of lower compensation expenses of$0.3 million , lower facilities costs of$0.2 million and lower professional services fees of$0.1 million . General and administrative expenses decreased$0.7 million , or 8%, for the six months endedJune 30, 2020 as compared to the same period in 2019. The decrease was a result of lower compensation expenses of$0.6 million , lower facilities costs of$0.2 million and the absence of impairment charges in the current year versus a$0.2 million charge in 2019. These reductions were offset by higher professional services fees of$0.4 million , which included$1.8 million of merger and acquisition related costs. 23 -------------------------------------------------------------------------------- Table of Contents Depreciation and amortization decreased by$0.3 million , or 13%, for the three months endedJune 30, 2020 as compared to the same period in 2019. Depreciation and amortization decreased by$0.6 million , or 11%, for the six months endedJune 30, 2020 as compared to the same period in 2019. Other income (expense), net consists of interest income and foreign currency transaction gains and losses related to our international operations.Synacor reported income of$0.2 million for the three months endedJune 30, 2020 and expense of$0.2 million for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we reported income of$0.3 million and nominal income for the six months endedJune 30, 2019 . Interest expense consists of interest on finance leases. Interest expense remained flat for the three months and six months endedJune 30, 2020 when compared to the same periods in 2019. Provision for income taxes of$0.2 million and$0.3 million for the three months endedJune 30, 2020 andJune 30, 2019 , respectively, is comprised primarily of current foreign income tax expense, including foreign withholding taxes, offset by deferred income tax benefit. The provision for income taxes is$0.5 million for the six months endedJune 30, 2020 and$0.6 million for the six months endedJune 30, 2019 . Segment Results of Operations The Company operates its business in two reportable segments: 1) Software & Services and 2) Portal & Advertising. Following are Revenue, Segment Adjusted EBITDA (in thousands) and Segment Adjusted EBITDA Margin by reportable segment for the three and six months endedJune 30, 2020 and 2019. Segment Adjusted EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other non-recurring income and expenses. Total Segment Adjusted EBITDA is equal to Adjusted EBITDA, which is a metric that is not presented in accordance withU.S. GAAP. Refer to "Adjusted EBITDA" below for a definition of Adjusted EBITDA and a reconciliation to net loss, the most directly comparableU.S. GAAP measure. Segment Adjusted EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment Adjusted EBITDA Margin is defined as Segment Adjusted EBITDA as a percent of Segment Revenue. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue: Software & Services$ 10,915 $ 10,588 $ 21,977 $ 21,746 Portal & Advertising 7,261 21,261 16,782 41,927 Total Revenue$ 18,176 $ 31,849 $ 38,759 $ 63,673 Segment Adjusted EBITDA: Software & Services$ 3,718 $ 2,794 $ 7,246 $ 5,588 Portal & Advertising (403) 2,534 (644) 5,155 Corporate Unallocated Expense (2,860) (3,713) (5,834) (7,424) Total Segment Adjusted EBITDA$ 455 $ 1,615 $ 768 $ 3,319 Segment Adjusted EBITDA Margin: Software & Services 34.1 % 26.4 % 33.0 % 25.7 % Portal & Advertising (5.6) % 11.9 % (3.8) % 12.3 % Total Segment Adjusted EBITDA Margin 2.5 % 5.1 % 2.0 % 5.2 % 24 -------------------------------------------------------------------------------- Table of Contents Software & Services Revenue in the second quarter of 2020 increased by$0.3 million , or 3%, when compared to the second quarter of 2019. Recurring revenue (revenue recognized over time) decreased$0.3 million . This was primarily driven by removal of dormant email accounts by some of our ISP customers. Non-recurring revenue (revenue recognized at a point in time) increased by$0.7 million when compared with the same three month period in 2019. This was primarily due to higher professional services revenue. Revenue in the first half of 2020 increased by$0.2 million , or 1%, when compared to the first half of 2019. Recurring revenue (revenue recognized over time) decreased$0.9 million , comprised of$0.4 million related to a discontinued video product line and removal of dormant email accounts. Non-recurring revenue (revenue recognized at a point in time) increased$1.1 million , primarily due to higher professional services revenue. Segment Adjusted EBITDA in the second quarter of 2020 increased by$0.9 million to$3.7 million compared to$2.8 million in the second quarter of 2019. The increase was primarily due to improved software margins and lower operating expenses. As a result, the Segment Adjusted EBITDA Margin increased to 34.1% compared to 26.4% in the second quarter of 2019. Segment Adjusted EBITDA in the first half of 2020 increased by$1.7 million to$7.2 million compared to$5.6 million in the first half of 2019. The increase was primarily due to improved software margins and lower operating expenses. As a result, the Segment Adjusted EBITDA Margin increased to 33.0% compared to 25.7% in the first half of 2019. Portal & Advertising Revenue in the second quarter of 2020 decreased by$14.0 million , or 66%, when compared to the second quarter of 2019. Recurring revenue was down$0.3 million primarily due to lower portal fees and the expected, continual decline in premium service fees. Non-recurring revenue was down$13.7 million , of which$9.7 million was due to the loss of a significant portal customer at the end of the third quarter of 2019. In addition, Portal & Advertising revenue declined during the second quarter of 2020 by$4.0 million primarily related to the effects of COVID-19 pandemic. Revenue in the first half of 2020 decreased by$25.1 million , or 60%, when compared to the first half of 2019. Recurring revenue was down$0.6 million primarily due to lower portal fees and the expected, continual decline in premium service fees. Non-recurring revenue was down$24.5 million , of which$18.2 million was due to the loss of a significant portal customer at the end of the third quarter of 2019. In addition, Portal & Advertising revenue declined during the first half of 2020 by$4.3 million primarily related effects of the COVID-19 pandemic. Segment Adjusted EBITDA in the second quarter of 2020 decreased by$2.9 million to$(0.4) million compared to the second quarter of 2019. The decrease was primarily due to COVID-19 related impacts on our publisher based advertising business and lost margin from the departure of a significant portal customer in third quarter of 2019, which was partially offset by lower operating expenses. As a result, the Segment Adjusted EBITDA Margin decreased to (5.6)% compared to 11.9% in the second quarter of 2019. Segment Adjusted EBITDA in the first six months of 2020 decreased by$5.8 million to$(0.6) million compared to the first six months of 2019. The decrease was primarily due to COVID-19 impacts on our publisher based advertising business and lost margin from the departure of a significant portal customer in third quarter of 2019, which was partially offset by lower operating expenses. As a result, the Segment Adjusted EBITDA Margin decreased to (3.8)% compared to 12.3% in the first six months of 2019. Corporate Unallocated Expense Corporate Unallocated Expense primarily includes corporate overhead costs, such as facilities, compensation costs and professional services fees, which are not directly attributable to any individual segment. Corporate Unallocated Expense decreased in the second quarter of 2020 by$0.9 million , or 23%, compared to the second quarter of 2019. The decrease in expense is primarily a result of lower compensation costs of$0.5 million , lower professional services fees of$0.3 million and lower facilities expenses of$0.1 million . Corporate Unallocated Expense decreased in the first half of 2020 by$1.6 million , or 21%, compared to the first half of 2019. The decrease in expense is primarily a result of lower compensation costs of$0.8 million , lower professional services fees of$0.5 million , lower discretionary spending of$0.1 million and lower facilities expenses of$0.1 million . 25 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. 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. Actual results may differ from these estimates. 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 condensed consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the condensed consolidated financial statements. For a discussion of our critical accounting policies and estimates, see "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." Adjusted EBITDA To provide investors with additional information regarding our financial results, we have disclosed within this Quarterly Report on Form 10-Q Adjusted EBITDA, a non-U.S. GAAP financial measure. 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 expense , restructuring costs, and certain unusual or non-recurring items. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparableU.S. GAAP financial measure. We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q 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. 26 -------------------------------------------------------------------------------- Table of Contents Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including net loss and our otherU.S. GAAP results. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Reconciliation of Adjusted EBITDA: Net loss$ (3,182) $ (2,487) $ (7,707) $ (4,731) Provision for income taxes 202 273 533 550 Interest expense 50 55 109 119 Other income (expense), net (175) 207 (342) (9) Depreciation and amortization 2,765 2,986 5,497 5,473 Asset impairment - - - 226 Stock-based compensation expense 383 324 760 655 Restructuring costs 60 - 120 - Certain legal and professional services fees* 352 257 1,798 1,036 Adjusted EBITDA$ 455 $ 1,615 $ 768 $ 3,319 Notes:
* "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.
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 has 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% or 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% or 6.00%. The Agreement maintains 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 ofJune 30, 2020 , we had no outstanding borrowings under the Agreement, and we had$5.6 million of availability based upon the borrowing formula under the Agreement. 27
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Table of Contents 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 endingJune 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 ofJune 30, 2020 , we were in compliance with these covenants. 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"). We estimate that this deferral will enable us to retain approximately$0.8 million in cash during the remainder of 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 ofJune 30, 2020 , we had approximately$6.0 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 credit facility, will be sufficient to meet our anticipated working capital and capital expenditure needs along with fixed obligations, for at least the next 12 months. This expectation is a forward-looking statement based upon currently available information and we will continue to monitor the effects of COVID-19 on our working capital needs. To the extent that operating cash flows are lower than current levels or there are potential disruptions in the capital markets caused by the COVID-19 pandemic, it could make financing more difficult and/or expensive and we may not be able to obtain such financing on terms acceptable to us or at all.
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