10-K 1 v370896_10k.htm FORM 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2013

 

or

 

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

 

Commission File Number: 000-51002 

 

ZIPREALTY, INC.

(Exact name of registrant as specified in its charter)  

 

DELAWARE   94-3319956
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)
     

2000 POWELL STREET, SUITE 300,

EMERYVILLE, CA

  94608
(Address of principal executive offices)   (Zip Code)

 

(510) 735-2600

(Registrant’s telephone number, including area code) 

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of Each Class:    Name of Each Exchange on Which Registered:
Shares of Common Stock, $0.001 par value   The NASDAQ Stock Market

 

Securities registered pursuant to Section 12(g) of the Act: None 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

  

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

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  ¨   Smaller reporting company  x
(Do not check if a smaller reporting company)    

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates (meaning all shares not beneficially owned by directors or executive officers of the registrant or their known affiliates) was approximately $51.4 million (based on a price of $3.13 per share, which was the closing price of the registrant’s common stock on The NASDAQ Stock Market) on the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of outstanding shares of common stock of the registrant as of March 4, 2014 was 21,695,909.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Pursuant to General Instruction G(3), Part III, Items 10, 11, 12, 13 and 14 of this annual report on Form 10-K incorporate by reference information from the Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders, which will be filed with the United States Securities and Exchange Commission (the “SEC”) within 120 days of the registrant’s fiscal year ended December 31, 2013.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
PART I
Item 1. Business 7
Item 1A. Risk Factors 20
Item 1B. Unresolved Staff Comments 30
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Mine Safety Disclosures 31
   
PART II
Item 5. Market for Our Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities 32
Item 6. Selected Consolidated Financial Data 32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73
Item 9A. Controls and Procedures 73
Item 9B. Other Information 74
   
PART III
Item 10. Directors, Executive Officers and Corporate Governance 74
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75
Item 13. Certain Relationships and Related Transactions, and Director Independence 75
Item 14. Principal Accountant Fees and Services 75
   
PART IV
Item 15. Exhibits and Financial Statement Schedule 75
   
Signatures 77

 

 
 

 

Special note regarding forward-looking statements

 

This report includes forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and operations, and plans and objectives of management are forward-looking statements. The words “believe,” “may,” “will likely,” “should,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “aim,” “expect,” “plan,” “potential,” “predict,” “project,” “designed,” “provides,” “facilitates,” “assists,” “helps” or the negatives of these terms and other similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements relating to:

 

  trends in the residential real estate market, the market for mortgages, and the general economy;

 

  our future financial results;

 

  our future growth;

 

  our future advertising and marketing activities; and

 

  our future investment in technology.

 

We have based these forward-looking statements principally on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in Item 1A of Part I. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K or in materials incorporated herein by reference.

 

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by law, we do not intend to update or revise any forward-looking statement contained in this report.

 

Trademarks

 

“ZipRealty” is one of our registered trademarks in the United States. We also own the rights to the domain name “www.Real-Estate.com.” “REALTOR” and “REALTORS” are registered trademarks of the National Association of REALTORS®, or NAR. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, trade names or service marks to imply relationships with, or endorsement or sponsorship of us by, these other companies.

 

 
 

 

Internet site

 

Our Internet address is www.ziprealty.com. We make publicly available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reports of beneficial ownership filed pursuant to Section 16(a) of the Exchange Act are also available on our Internet website. Information contained on, or that can be accessed through our website does not constitute a part of this annual report on Form 10-K, and inclusions of our Internet address in this annual report on Form 10-K are inactive textual references only.

 

 Where you can find additional information

 

 We are a reporting company under the Exchange Act and we file reports, proxy statements and other information with the SEC. You may review a copy of this annual report on Form 10-K, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as ZipRealty, that file electronically with the SEC.

 

 
 

 

PART I

 

Item 1.     Business:

 

OVERVIEW

 

Our mission is to lead a movement within the residential real estate industry by offering consumers the most accurate and complete home data for the buying and selling process and providing the highest quality technology to real estate professionals and brokerages. We seek to empower real estate professionals in delivering outstanding personal service through the most effective and valuable customer service platform in the industry. We seek to provide brokerages with an operating system that enables them to transition their businesses into the digital realm.

 

General

 

We are a leading online, technology-enabled residential real estate brokerage company. Our company owned-and-operated real estate brokerage serves 19 metropolitan markets with over 1,700 licensed REALTORS®. We serve an additional 20 markets through our Powered by Zip, or PbZ, business, which provides our technology platform for acquiring and incubating new customer relationships and for managing real estate transactions. We operate ZipRealty.com, which is consistently one of the most visited real estate brokerage websites in the nation according to reports generated with Google Analytics, a website traffic analysis service. ZipRealty.com attracts approximately 2.6 million unique monthly visitors. We also provide consumers with highly rated mobile applications that offer all of the key features of our website and optimize them for all major platforms and devices.

 

Both our owned-and-operated brokerage and our Powered by Zip client platform share the same internal engine: the powerful proprietary customer service technology, known as Zap, and the online marketing capabilities that form the foundation of our business. We developed Zap over a 15 year period during which our technology team partnered with REALTORS® across the country to collaboratively develop a customer service platform that empowers real estate professionals to deliver superior customer service using a significantly more efficient approach. We refer to this innovation feedback loop as our “innovation factory” and believe that our disciplined management of this process directly led to Zap’s success in our brokerage and our Powered by Zip clients and also allows us to keep this application on the cutting-edge.

 

As the direct result of offering the most accurate, timely and comprehensive housing information, buyers using our services can quickly find relevant home listings that meet their search criteria and are well positioned when they are ready to interact with local REALTORS® affiliated with our owned-and-operated brokerage or our PbZ clients. At the same time, sellers using our system gain confidence in the pricing and marketing of their home to interested home buyers.

 

Who we serve

 

Our proprietary technology, established reputation as a full service online brokerage, and Powered by Zip business, as well as our prominence both online and in mobile, allow us to serve three main constituencies in the residential real estate industry:

 

·        First and foremost, we serve serious consumers, which we define as those who expect to purchase or sell a home within the next six to eighteen months. We offer these consumers our technology and services to provide control, choice and seamless, customized service. Through ZipRealty.com and our award-winning mobile apps, we provide consumers with the most accurate and relevant data on homes currently for sale wrapped up in an easy-to-use interface and, when they are ready, connect them with knowledgeable local REALTORS® to assist them through every step of their real estate transaction.

 

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·        Second, we serve real estate professionals in our owned-and-operated brokerage business. For these professionals, who seek more productive ways to conduct business in the competitive residential real estate industry, we generate a large base of customer leads which, through an advanced algorithm developed over the course of 15 years, have been systematically matched to yield productive agent-client relationships. These leads are made even more valuable with Zap, which is a system that helps incubate customer relationships with the assistance of powerful prospecting tools and real-time data on client activity that enables agents to provide excellent anticipatory service. In October 2013, we launched a mobile Zap application, which allows agents to access the full functionality of the system via their smartphone or tablet while in the field. In the fourth quarter of 2013, 85% of our owned-and-operated brokerage agents accessed our mobile Zap application at some point. We also market ZipRealty-affiliated REALTORS® on ZipRealty.com by showcasing their local expertise and real estate transaction activity. We also provide these individuals with personalized agent profile pages accessible online and via mobile devices.

 

·        Third, we serve other real estate brokerages and their affiliated agents who seek a competitive edge in this new era in which consumers are increasingly using online services for home buying and selling. Brokerages empowered with Zap enjoy online analytical metrics on consumer behavior, and real-time visibility on their leads, transaction pipeline and brokerage operations. With a wide array of analytics, brokerages can measure productivity by agent and allocate leads and resources in a targeted manner. Further, by utilizing our SaaS-based Zap technology platform, our PbZ brokerage clients benefit from our rapid innovation cycle without the burden of expensive IT maintenance and software upgrade costs.

 

Geographic reach

 

We conduct our owned-and-operated brokerage services in 19 markets nationwide: Austin, TX; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; Houston, TX; Las Vegas, NV; Los Angeles, CA; Orange County, CA; Orlando, FL; Phoenix, AZ; Richmond, VA; Sacramento, CA; San Diego, CA; San Francisco Bay Area, CA; Seattle, WA; Portland, OR; and Washington, DC.

 

Our Powered by Zip business serves leading local brokerages in 20 markets where we do not otherwise conduct business: Atlanta, GA; Brooklyn, NY; Charlotte, NC; Greater Hudson Valley, NY; Greater Philadelphia area, PA; Harrisburg, PA; Jacksonville, FL; Long Island, NY; Miami, FL; Minneapolis, MN; Nashville, TN; Palm Beach, FL; Pittsburgh, PA; Raleigh-Durham, NC; Salt Lake City, UT; Sarasota-Naples, FL; St. Louis, MO; Tampa, FL; Tucson, AZ; and Virginia Beach, VA.

 

Our Powered by Zip clients retain over 620 agents, bringing the total agent count in the markets served by our owned-and-operated brokerage and Powered by Zip clients to nearly 2,400 local, licensed real estate agents, all of whom are independent contractors.

 

In 2013, we continued to extend our Multiple Listing Service, or MLS, coverage to include several new markets where we do not yet have a full-scale owned-and-operated presence or a PbZ client. This expanded coverage also plays a role in facilitating expansion of our PbZ client base.

 

INDUSTRY FUNDAMENTALS

 

Real estate consumers increasingly demand better data and services

 

Modern real estate consumers are seeking ways to personally conduct their home buying or selling process in addition to working with a real estate professional. We are observing a trend towards an increase in consumers’ demands for data and information services to support their housing search. Only a few years ago, online consumers could hope to obtain little more than free, easily accessible housing data, with limited expectations of data accuracy or completeness. Today’s sophisticated consumers can demand high quality listings data, presented in a format free from intrusive ads, and augmented by rich home and neighborhood information, as well as analytical tools to help them estimate the value of a home accurately. Additionally, consumers can now access all of this information via mobile applications that further enhance the data richness through the use of features unique to mobile devices such as geolocation and virtual augmentation.

 

Today’s real estate consumers rely heavily on the Internet for the home search and buying process

 

According to the NAR 2013 Profile of Home Buyers and Sellers, 92% of home buyers used the Internet to search for homes and 56% of all buyers looked online for properties for sale or for information about the home buying process as their first action in beginning a search. Among surveyed home buyers, 81% reported that online websites were “very useful,” a higher rate than any other source. According to the same survey, 43% of all home buyers ultimately found the home they purchased on the Internet. This rate has increased every year since these data were collected, growing from an 8% rate in 2001.

 

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Consumers who use the Internet for home searches demonstrate a high propensity to pursue the homes they view online

 

According to the NAR 2013 Profile of Home Buyers and Sellers, of home buyers who used the Internet in their home search, 75% indicated that their online search resulted in their driving by or viewing a home in person, and 63% indicated that it resulted in their walking through a home that they viewed online. The high ratio of in-person visits to online searches suggests that online consumers are very interested in pursuing the homes they view online. We believe real estate agents find leads to these online consumers to be very valuable.

 

Mobile devices are becoming increasingly useful and essential to the real estate industry

 

According to the REAL Trends 2013 Online Performance Study, over 30% of online real estate searches came from mobile devices. This percentage is up from 21% in 2012 and 11% in 2011. Consumers surveyed primarily used mobile devices to browse general home information, get directions to visit a home, and compare home prices. However, consumer mobile usage also drives consumers to take action: 28% of respondents called a brokerage, 21% located a listing agent, and 18% contacted a brokerage other than by calling.

 

Consumers are beginning to use the Internet to find REALTORS®

 

According to the NAR 2013 Profile of Home Buyers and Sellers, the number one way in which consumers found an agent was through a referral by friend, neighbor of relative, with 42% of all buyers and 39% of all sellers connecting with agents in this way. Internet websites ranked third at 9% for buyers, and for sellers, the proportion was even lower at 4%. Among home buyers who used the Internet in their home search, 30% indicated that their online search resulted in their finding an agent to assist them in searching for or buying a home. We believe that consumers will increasingly use the Internet to find an agent just as they do for finding their new home.

 

Consumers demand high responsiveness from REALTORS®

 

Consumer expectations of customer service, possibly influenced by increased responsiveness of Internet-based services, are higher than ever. According to The REAL Trends 2013 Online Performance Study, 45% of consumers expect an agent to respond to initial contact within 15 minutes, and 56% of consumers expect a response within 30 minutes. Approximately nine out of ten consumers surveyed stated that response time was very important when choosing their agent.

 

Real estate consumers still value the assistance of REALTORS®

 

Despite advances in technology, consumers still want the help of a real estate professional when buying or selling a home. According to the NAR 2013 Profile of Home Buyers and Sellers, 88% of home buyers and 88% of home sellers used a real estate agent or broker. By contrast, in 2001, only 69% of home buyers used an agent. Consumers rely upon agents for a better understanding of the home transaction process, opinions on the condition of the homes under consideration, experience with service providers, knowledge of the local markets, and negotiating the terms of transactions. We believe that consumers will continue to rely upon brokers and agents for home buying and selling expertise for the foreseeable future.

 

REALTORS® face strong challenges to make real estate their primary livelihood

 

The real estate profession is characterized by low barriers to entry for new agents, and in recent years the reported real estate agent population has increased relative to the number of homes sold. From 1997 to 2006, NAR membership surged 90%, while the total annual sales of new and existing homes increased by only 45%. Following the onset of the housing crisis, NAR membership shrank by 21% from 2006 to 2010 while total annual home sales declined by 31% in the same period. This fragmentation of the market can be observed in the trend of sales volume per agent over the 1997 to 2013 period. In 1997, there were 14 transactions per agent; by 2013, this ratio fell to 11. Another means of measuring fragmentation is through comparison of NAR membership with the U.S. population. U.S. census data for 2012 shows that there is approximately one real estate agent for every 230 people in the United States aged 18 to 75. With so many agents available to conduct a transaction, it is harder now than ever for new agents to establish themselves in their local markets and gain market share. 

 

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This intense competition makes it difficult for many REALTORS® to earn a wage that allows them to focus exclusively on their profession. In the 2013 NAR Member Profile survey, respondents had a median gross income of $43,500 in 2012, before paying the marketing, technology, transportation and other expenses typical in this profession.

 

REALTORS® have not fully embraced emerging technology in the real estate industry

 

Despite fierce competition for customers and transactions, many REALTORS® still struggle to be responsive in contacting online leads. The REAL Trends 2013 Online Performance Study found that surveyed agents responded to online customer leads 55% of the time, but only 23% of those agents followed up with a phone call. Of those agents who did respond to leads, the average response time was over eight hours. These response metrics do not appear to meet prevailing consumer expectations of receiving a response in under 30 minutes. We believe one explanation for this lack of adequate responsiveness is that most agents do not have the technology required to effectively interact with and serve online customer leads. We believe that many agents either do not recognize the importance and usefulness of customer service technology, cannot afford to acquire it, or do not have access to training on how to use technology efficiently and effectively in their business.

 

Support for this specific explanation comes from a 2013 NAR Member Profile poll showing that 36% of all REALTORS® do not have a website. Of these agents, 78% have no plans to have one in the future.

 

Brokerage profit margins are under pressure due to competition for talent

 

Brokerages historically retained a higher percentage of homesale commissions as compared to today’s industry standards. In return, the brokerages provided their agents with corporate services such as training, office space, advertising and marketing. The office presence, listing signs and radio, television and print advertising gave the brokerage local prominence that it leveraged to generate listing and sale opportunities for agents. The 1980’s saw the emergence of new brokerage models that offered agents higher commission splits. By 2011, the average residential real estate brokerage retained just 27% of homesale commissions, according to the REAL Trends 2012 Brokerage Performance Report. As a result of this trend toward less favorable splits on commissions, the average brokerage office generated a net income margin on their real estate brokerage operations of just 0.8%.

 

Brokerages increasingly struggle to drive transaction volume for their agents

 

Faced with their relatively modest profit margins, many brokerages are increasingly challenged to provide the support, systems and client leads that most agents need to be successful full-time real estate professionals. Brokerage marketing spending trends reflect these pressures: According to the Newspaper Association of America, between 2006 and 2012, annual newspaper real estate classified advertising expenditures fell by an estimated $4.4 billion, which translates to a drop in ad spending of over $600 per home sale during that period reported by NAR. The 2012 estimated figure of $157 in newspaper real estate classified advertising expenditure per home sale is 76% lower than that in 1995. In 2011, the average brokerage office spent just $117 per agent per month on advertising and marketing, according to the REAL Trends 2012 Brokerage Performance Report.

  

Brokerages are not investing sufficiently to meet consumers’ use of online technology

 

The pressure on brokerage profit margins makes it more difficult for brokerages to easily invest in technology. The REAL Trends 2012 Brokerage Performance Report found that the average brokerage office spent just $10 per agent per month on Internet advertising, including Search Engine Optimization, or SEO, and Search Engine Marketing, or SEM, to generate online leads. The fact this amount rose just $0.50 from the prior year indicates that the average sales office is not keeping up with the growth of online traffic in the residential real estate category.

 

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Further, brokerages have not allocated resources to manage online leads. According to the REAL Trends 2013 Online Performance Study, only 42% of brokerages established what the industry terms an e-Team, meaning a subset of the brokerage’s agents who receive and service all online leads not associated with the brokerage’s listings. Of those brokerages that do field an e-Team, only 5% of their total agent base serves on this team. Nearly half of the e-Teams operated without rules requiring response times, and for those e-Teams with response time rules, the response time averaged 27 minutes. From this data, we surmise that less than one-quarter of brokerages have established the infrastructure to meet the expectations of a majority of online consumers, despite the report’s finding that the average e-Team agent increased productivity by 1.5 transactions per year.

 

Market Opportunity

 

ZipRealty competes in the U.S. residential real estate market by serving both buyers and sellers of new and existing homes. Residential real estate brokerage companies typically generate revenue by charging a commission, sometimes in combination with a flat fee, on the value of the home transaction.

 

Based upon preliminary data from the U.S. Census Bureau, the total housing inventory for the United States was 132.9 million units in the fourth quarter of 2013. With the sharp increase in home prices during 2013, our current estimate of the total value of the U.S. housing stock is in excess of $25 trillion. The turnover of this housing stock is what fuels the real estate industry. Since 1970, total home sales have represented approximately 4.4% of total housing stock. In 2013, we estimate that U.S. housing stock turnover rate was 4.3% based upon a preliminary home sales estimate of 5.7 million units. Based upon NAR research, we estimate the value of the residential real estate market in 2013 to have been approximately $1.1 trillion, with total commissions estimated at over $50 billion.

 

If our estimate is accurate, the 2013 transaction volume represents an approximate decline of 32% from the U.S. historical record of 8.4 million recorded transactions, which was set in 2005. It would also reflect a 27% volume increase from the 4.5 million transactions recorded in 2011, which marked a 16-year low in transaction volume. Between 2005 and 2013, the home ownership rate dropped from 69% of households to 65%. These data points highlight the depth of the previous housing market slump, as well as the more recent improvement in the industry. However, two sets of data may indicate that the housing recovery is pausing in the short term. For example, 2013 is the second consecutive year in which home ownership rates remained in the 65.0% to 65.4% range. NAR’s Housing Affordability Index for the first three quarters of 2013 registered consecutive declines, which correspond to increasing home sales prices and a concurrent increase in mortgage interest rates. The NAR Housing Affordability Index did show growth in the fourth quarter of 2013, but it is forecasted to be in the range of 128 to 164 over the next four quarters, which indicates that home ownership rates may continue at their current level.

 

Market Fragmentation

 

The market for residential real estate: The residential real estate industry is considered to be highly fragmented, with participation by thousands of brokerages, over one million agents, and a wide variety of technology vendors all vying for a portion of the significant commission dollars generated by homesale transactions. According to a report produced by REAL Trends, the top 1,337 brokerage firms by unit volume, operating with a total of 328,046 agents out of 7,522 offices, conducted 3.0 million homesale transaction sides in 2012. This volume represents only 30% of the total for that year and the associated agent count is approximately one-third of the entire NAR membership.

 

The market for residential real estate technology: The technology vendor market for residential real estate is heavily fragmented as well, with a wide variety of business models serving some portion of the activities that comprise the residential real estate industry value chain. Branded consumer-facing websites focused primarily on presenting home listings data and generating leads for real estate agents have built strong consumer mindshare in a relatively short timeframe. Their success has brought them closer to competition with traditional real estate brands, which still command the highest awareness among consumers. The emergence of large, independent real estate websites has also spawned an increase in the number of technology vendors seeking to sell a wide variety of services to the real estate industry.

 

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·Lead generation and information tools: The list of real estate technology services offered is extensive. Thousands of websites with real estate terms in their Uniform Resource Locator, or URL, text string generate online consumer leads for sale or distribution to brokerages and agents. Other media properties connect with the MLS to display listings data, often for a certain region, and likewise generate leads for sale or provide agent websites populated with local listings. For media properties with listings data, numerous vendors offer end-user experience enhancements for home buyers with data services such as localized information on neighborhood amenities, school ratings, public transit access and walk scores, as well as online features to rank and opine on local real estate agents. Other companies offer home seller tools such as Automated Valuation Metrics, or AVM, and selling process guides.

 

·Marketing tools: As with many e-commerce categories, our industry includes a myriad of third-party technology vendors, some of which are solely real estate focused, providing web analytics, SEO consulting, and SEM services. The recent dramatic increase in mobile device penetration has given rise to mobile website and application developer vendors. Agents often seek to utilize social media as a channel for garnering awareness in their communities; therefore, social media vendors can be considered industry participants as well.

 

·Productivity tools: With online activities capturing a growing share of home buyers and sellers and generating an increasing number of consumer leads, we believe productivity tools for agents and brokerages are more important than ever before. Agents can meet this need with a wide variety of vendor tools, ranging from a well-organized paper-based filing system, to basic spreadsheet and database software, to software integrating website hosting, email marketing tools, and on-demand printing services, to advanced Customer Relationship Management, or CRM, systems with full vertical integration. The market for agent productivity tools is less mature than that for other technology services, as the need developed only after the explosive growth in online leads. The development of brokerage productivity tools generally lags behind that of agent productivity tools, as brokerages have not allocated significant resources toward capturing and servicing online consumers. Although investments in this area have been insufficient to fully implement technological advancements, they are increasing. Several companies serve this market with tools for smaller brokerages and for agent teams, none of which is now the readily identified, leading or dominant brokerage operating system provider. 

 

OUR SOLUTION

 

We offer a full, start-to-finish residential real estate transaction solution. Our solution begins with a consumer’s first home search or listing appointment from a desktop computer, tablet or a mobile device, extends to the first client-and-agent interaction that typically occurs six to eighteen months later, and continues even after a home transaction has closed to include the incubation of repeat and referral business. Our solution is built on the following core competitive advantages:

 

The Best Information - Accurate, Timely and Relevant Data on Homes for Sale

 

Through our website and mobile applications, consumers and real estate professionals can freely access information on all broker-listed homes in the MLS in markets that we serve either through our owned-and-operated brokerage or our PbZ business. The MLS is a database of local listings shared by brokers. Because we are a licensed broker ourselves and we serve other licensed brokers directly via PbZ, we are able to access and show all MLS listings except in rare cases when the sellers specifically request that their listings not be published on the Internet. We update our website at a rate of once every two minutes to ensure that we quickly add new listings to our online sites and remove listings as soon as homes are sold or taken off the market. By contrast, national portals and data aggregators rely heavily on multiple third-party data providers, and sometimes show homes that appear for sale but which actually have been sold already, while some other active listings are not shown at all.

 

We show information from all of the standard MLS data fields, such as the number of bedrooms, property type, and square footage, along with ZipRealty-enhanced data such as local school district information, comparable home sales data, maps and driving directions, Walk Score®, online popularity, and neighborhood-related content including weather and demographic data and vacancy, owner-occupied and rental rates.

 

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REALTORS® in our owned-and-operated brokerage and Powered by Zip business also represent an integral part of our data experience and provide exclusive user-generated content. Our affiliated real estate agents visit far more for-sale homes than does the typical real estate consumer, and through a feature called Agent Comments we have made it easy for agents to leave notes on properties they visit, along with neighborhood-specific information, which is then presented to consumers on our website and mobile apps. To date, these agents have posted over 35,000 comments, telling website and mobile app users not only about the condition of the property, but also adding color such as commentary about the coffee shop around the corner, the park down the street, or the apartment building next door. Agent Comments also provide these REALTORS® with a platform to showcase their relevant professional knowledge broadly and usefully in front of serious real estate consumers.

 

The Highest Quality Technology - World-Class Website and Award-Winning Mobile Apps

 

We have developed and operate a world-class website at www.ziprealty.com and award-winning mobile apps for the iOS and Android platforms with which consumers can access and analyze our information. Our website and mobile apps feature user-friendly interfaces to provide today’s consumers with data in a format free from intrusive ads.

 

We offer our users the ability to personalize their real estate experience by saving homes to their profiles, saving searches for any neighborhood or zip code, sharing listings via email, Facebook or Twitter, and receiving email alerts that notify them each time that a property meeting their desired search criteria is up for sale.

 

Our website and mobile apps also allow users to quickly and easily schedule showing appointments, request additional information, and connect with real estate professionals. On our cutting-edge mobile apps, users can use StreetScan to determine whether a home is for sale simply by pointing their phone’s camera at it, or to draw a search area right on the map for a completely flexible and customized home search.

 

With a rapid upgrade cycle, we continually enhance our technology on the web and in our mobile apps, and our users are responding well: Throughout 2013, our website’s Net Promoter Score, or NPS, continually scored above +50. NPS is a widely used customer loyalty metric developed by Fred Reichheld, Bain & Company, and Satmetrix. It is generally considered that a positive NPS is good and an NPS greater than 50 is considered excellent and world-class.

 

Zap - Designed to be the Most Effective Customer Service Platform in the Real Estate Industry

 

Zap is the proprietary technological engine that is deeply integrated with our consumer-facing website and mobile apps, and it allows us to serve our three primary constituents - serious home buyers and sellers, REALTORS® and brokerages - efficiently and effectively. We believe that Zap is the most technologically advanced platform in the residential real estate market, and it features the following benefits within its online and mobile agent-user experiences:

 

Predictive - After users register with us by providing their email addresses and agreeing to our terms of use, Zap begins to track their online behavior and determines the users’ propensity to successfully complete a real estate transaction, as well as the expected timeframe for completion. Zap summarizes this data into a single score called the ZipScore, which is made available exclusively to the agent and is provided expressly for the purpose of providing excellent customer service.

 

Prescriptive - Zap incorporates proprietary tools and functionality that enable real estate agents to manage their databases of clients, and it guides agents with ways to connect with their customers most productively.

 

Intuitive - Our recently launched major upgrade of Zap was designed to streamline customer service enabling agents to spend more of their time with clients. Using 15 years of data collected on agent-to-client communications and engagements, we built the Zap application that organizes clients into separate pools and prompts our agents to focus on clients based on meaningful activities and priorities. In 2013, we also released a mobile-optimized version of Zap that provides agents with ready access to key client information at the time of their choosing on the device of their choosing – at home, in the office and on-the-go.

 

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Integrated - Zap is a true end-to-end system that integrates user contact information and online behavior, along with all agent communications and easy-to-use marketing tools such as monthly newsletters and bulk email capability from everywhere the agent works – mobile, tablet, or desktop.

 

Powerful Lead Generation and Online Marketing Engine

 

The popularity of our website and mobile apps brings real estate consumers directly to us. At the same time, consumers find us through our other marketing channels, including search engine optimization, social media, and search engine marketing. As our agents interact with clients through their own personal and professional networks, consumers may also find us through word of mouth. We then help these consumers find the right REALTOR® through effective agent marketing across our website and our proprietary agent-client matching functionality.

 

We display agent photos, contact information, and relevant activity on our highly trafficked home detail and search result pages. Agents receive thousands of impressions per month from these placements. We also offer our agents the opportunity to further enhance their online presence by posting information on their profile pages, by commenting on properties they visit using the Agent Comments feature and by participating in our Agent Ratings and Reviews program. Our website also offers consumers the capability to search our complete directory of agents and narrow their search based on factors including the agent’s neighborhood specialization, professional experience or credentials.

 

In addition to agent marketing, we connect REALTORS® and consumers through our agent-client matching functionality. This feature is designed to match consumers and their search preferences with local ZipRealty or Powered by Zip REALTORS® who are best suited to serve their needs, and distributes leads to agents in meaningful volume. Each of our agents in our owned-and-operated brokerage received approximately 25 leads per month in 2013, and nearly half of our business came from company-generated leads.

 

Our lead generation and online marketing engine is complimented by Zap, as described above.

 

Experienced, Locally Knowledgeable and Responsive REALTORS®

 

In both our owned-and-operated brokerage and our Powered by Zip business, we connect serious real estate consumers with experienced, locally knowledgeable and responsive REALTORS®. These REALTORS® are independent contractors who use Zap to provide superior customer service and achieve rapid response times, which consumers regard as an important indicator of service quality. Unlike media portals, which do not retain REALTORS® to close real estate transactions, our REALTORS® enable us to monetize the real estate transaction and reduce our reliance on display advertising. We consider this distinction to be a key differentiator and competitive advantage for us, particularly with the proliferation of advertising inventory and the shift from desktop advertising to the more disruptive mobile advertising. Similarly, our business model is not reliant upon ancillary services, which is a volatile revenue stream exposed to macroeconomic trends, monetary policy and regulatory risks. Finally, our proximity to transactions gives us valuable insight on consumer behavior at all stages of the real estate process, which our data scientists and product managers rely on to continually enhance our client matching algorithm and Zap functionality.

 

REALTORS® are also active participants in the research and development process of our technology products. For 15 years, our product development and engineering teams have developed and refined our website, mobile apps, and Zap to specifications and feedback provided by agents. Their participation in this process has been instrumental in the effectiveness of Zap.

 

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Powered By Zip - a Uniquely Effective Customer Service Platform for Brokerages

 

The residential real estate market is highly fragmented, with vast numbers of brokerages engaged in fierce competition for the most productive agents. Over the past decade, brokerages have competed for talent by offering higher commission splits, which has forced brokerages to cut overhead expenditures to maintain profitability. In this environment, we believe that technology innovation and adoption has suffered.

 

In 2011, we launched Powered by Zip to address this market need. Powered by Zip is a software-as-a-service, or SaaS, solution that allows other real estate brokerages to utilize the robust technology that we have built and fielded in our owned-and-operated brokerage. Powered by Zip is currently delivered as a referral business through a co-branded website and placement on our mobile apps. We are beginning to add a white-label SaaS platform solution product line to this business. Most importantly, Powered by Zip clients are given access to Zap, which integrates all of these services seamlessly.

 

In today’s changing real estate market, the Powered by Zip solution enables brokers and their agents to meet consumer demands for the highest quality information, web and mobile tools, to provide greater customer service, to give them the competitive edge they need to help more clients buy and sell more homes, and to gain more market share in their local markets.

 

COMPETITION

 

We compete for mindshare among serious real estate consumers with companies that have developed or could develop national and local real estate websites and mobile applications.

 

Our owned-and-operated brokerage competes with local and regional residential real estate brokerages to attract consumers and recruit REALTORS®.

 

Our Powered by Zip business competes with lead generation websites, technology vendors such as search engine optimization, or SEO, search engine marketing, or SEM, and customer relationship management, or CRM, providers, and local or regional residential real estate brokerages.

 

In both businesses, we compete primarily on the basis of the quality of home information, the ease-of-use of the products we provide and the quality of our agents - including our ability to attract, retain, and incentivize agents who are locally knowledgeable, are highly responsive and deliver outstanding customer service. We believe that our solution is well-positioned in our competitive landscape.

 

RESEARCH AND DEVELOPMENT

 

Our ability to compete successfully depends upon our ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. We continue to develop new products and services and enhance existing ones through research and development and the licensing of third-party technology. Our research and development expenses were $7.6 million and $7.0 million in 2013 and 2012, respectively, which included stock-based compensation expense of $0.1 million and $0.1 million, respectively.

 

DEVELOPMENT OF OUR BUSINESS

 

Our business was incorporated under the laws of the state of California in 1999 and was reincorporated as a Delaware corporation in August 2004.

 

Expansion of the Powered by Zip business: We are a consistent technology innovator, known in the industry for testing and launching ground-breaking products, and for using the live feedback of agents and consumers to improve those ideas and deliver even better, more relevant solutions. Our technology progress helped to drive success in our Powered by Zip business, which offers all of Zap’s functionality to third party brokerages. In 2013, we added seven new clients to our Powered by Zip business, bringing the total number of brokerages served to 20. Additionally, two of our existing clients broadened the geographic footprint of our relationship in 2013. Our clients’ brands include Coldwell Banker, Prudential/Berkshire Hathaway Home Services, Better Homes & Gardens, Century 21, and ERA as well as several independent brokerages with strong regional brands. Over the past year, we continued to gain experience serving our clients and their agents, which translated into increased adoption of our technology. Of the PbZ clients that we have served for more than 12 months, we grew agent count by 28% versus the prior year as additional agents signed on to PbZ teams. With the addition of new clients, we grew agent count by 69% by the end of the fiscal year as compared to the agent count at the prior year end.

 

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Also in 2013, Mr. Xavier Zang joined ZipRealty to serve as President of Powered by Zip. While Mr. Zang continued to drive growth in both clients and agents, he also began to refine and evolve the PbZ operating model based upon feedback from current and prospective PbZ clients, as well as established industry sources. His research led to the repositioning of Zap as a digital operating system and toward a strong embrace of our clients’ established real estate brands. We believe that these changes will continue to support the growth of this business outside our owned-and-operated service areas. Our primary objective for our PbZ business is to make our technology available to brokerages who seek to earn greater income through more timely and detailed management of their business, and agents who seek to earn greater income through increased productivity and world-class customer service.

 

Recent advances in technology: We made several advancements in our consumer and agent facing technology during 2013. The most significant milestone was our development of Mobile Zap and its successful launch in October of 2013. Mobile Zap offers agents in both our owned-and-operated business and our PbZ business the full functionality of the desktop version, augmented with mobile-specific features such as geolocation and one-touch click to call functionality. Mobile Zap provides productivity enhancements over the desktop version with crisp data visualization designed to improve filtering and sorting capabilities for effective and efficient client platform management. Communication is improved with notifications now linked to SMS as well as email to enable an agent to respond more rapidly, which is a metric that we believe resonates well with consumers. The “Quick Add” feature of Mobile Zap allows agents to add new contacts, showing appointments, tasks and calendar items while in the field. The showings option includes a field to capture comments on the home during the visit. Data provided by Agent Comments highlights the agents’ local insight, knowledge and experience to online consumers. We expect that the Mobile Zap launch will increase the number, timeliness and quality of Agent Comments.

 

We continued to drive innovation on our website to improve its SEO drawing power. Recognizing the increasing importance of social media to consumer behavior as well as to relevance with respect to search engine algorithms, we developed social sharing buttons on home detail pages, enabling agents to link to their social profiles from their profiles on ZipRealty.com, and opening up social sharing of Agent Reviews. These efforts resulted in social referral traffic that was up 94% year-over-year in the fourth quarter of 2013. In addition, Agent Comments continue to be a significant driver for SEO. Over 30% of all visit requests resulted in an Agent Comment in 2013. We expect that Mobile Zap will increase the volume of Agent Comments through increased participation by agents and a higher number of comments per agent.

 

All of these technology advances benefited from the close collaboration between our technology team and our agents. These continuing advances demonstrate our conviction that this innovation factory serves as one of our core competencies, helping us maintain our technology leadership in the residential real estate industry.

 

Restructuring and realignment: In early 2011, we began a restructuring to refocus on our core strengths in technology, online marketing and on our most attractive local real estate markets. To that end, we closed our owned-and-operated offices in twelve markets in the first quarter of 2011, two markets in the fourth quarter of 2011, and two markets in the first half of 2012. In fourteen of those markets, we either transitioned our local operations to third-party brokerages in our Powered by Zip business, or we added brokerages to our Powered by Zip business after we had discontinued our local operations. In addition, in early 2012, we reorganized our corporate structure by realigning our organization to operate more efficiently and to refocus our resources on the highest value priorities. We combined our product and marketing functions, and we separated our brokerage operations from our technology and marketing functions. We conducted a further reorganization of our field sales team later in the year, which has empowered our local offices and real estate professionals to make decisions that are better tailored to the dynamics of their particular markets, with the goal of increasing productivity and customer service levels.

 

REGULATORY MATTERS

 

The real estate industry is highly regulated. In the conduct of our business, we must monitor and comply with a wide variety of applicable laws, rules and regulations of both the government and private organizations.

 

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Government regulation

 

The most extensive government regulations applicable to our business are at the state level and are typically overseen by state agencies dedicated to real estate matters, but the residential real estate industry is also regulated by federal and local authorities.

 

State regulation: Real estate licensing laws vary from state to state, but generally all individuals and entities acting as real estate brokers or salespersons must be licensed in the state in which they conduct business. A person licensed as a broker may either work independently or may work for another broker in the role of an associate broker, conducting business on behalf of the sponsoring broker. A person licensed as a salesperson, also known as an agent, must be affiliated with a broker in order to engage in licensed real estate brokerage activities. Generally, a corporation engaged in the real estate brokerage business must obtain a corporate real estate broker license (although in some states the licenses are personal to individual brokers). In order to obtain this license, most jurisdictions require that an officer of the corporation be licensed individually as a real estate broker in that jurisdiction. If applicable, this officer-broker is responsible for supervising the licensees and the corporation’s real estate brokerage activities within the state. Real estate licensees, whether they are brokers, salespersons, individuals or entities, must follow the state’s real estate licensing laws and regulations. These laws and regulations generally prescribe minimum duties and obligations of these licensees to their clients and the public, as well as standards for the conduct of business, including contract and disclosure requirements, record keeping requirements, requirements for local offices, trust fund handling, agency representation, advertising regulations and fair housing requirements. In each of the states and the District of Columbia where our operations so require, we have designated one of our officers as the individually licensed broker and, where applicable, we hold a corporate real estate broker’s license.

 

In addition, some states have enacted legislation similar to (and in some cases more restrictive than) the federal legislation discussed below.

 

Federal regulation: In addition to state regulations, several federal laws and regulations govern the real estate brokerage business. The applicable federal regulations include the Real Estate Settlement Procedures Act of 1974, as amended, or RESPA, and federal fair housing laws. RESPA, as applicable to us, is intended to provide for more effective advance disclosures to home buyers and sellers of settlement costs and the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services. While RESPA has broad-reaching impact on a variety of services associated with the purchase or sale of real estate, including lending, title insurance and other settlement services, its principal application to the real estate brokerage business is to restrict payment of referral fees or the inappropriate splitting of fees (including through arrangements designed to disguise any such illegal payments as legitimate marketing fees), and to require additional consumer disclosures. Generally, it is illegal under RESPA to pay or receive a referral fee or other non-service-related fee, kickback or anything of value in a real estate transaction involving a federally related mortgage loan for the referral of business. RESPA generally restricts us to the receipt of, or payment for, the reasonable market value of services, goods or information actually and permissibly provided in the settlement of such transactions. While RESPA does not prohibit us from entering into legitimate marketing relationships, it does limit the type of business relationships that we can enter into for acquiring client leads or otherwise, as well as the referral of clients to other service providers. RESPA also limits the manner in which we can provide other services to clients. Federal fair housing laws generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. Other federal regulations protect the privacy rights of consumers, which affects our opportunities to solicit new clients.

 

Local regulation: Local regulations also govern the conduct of the real estate brokerage business. Local regulations generally require additional disclosures by the parties to a real estate transaction or their agents, or the receipt of reports or certifications, often from the local governmental authority, prior to the closing or settlement of a real estate transaction.

 

Federal and state labor regulation: In addition to the real estate regulations discussed above, we are subject to federal and state regulations relating to our employment and compensation practices. For the agents who serve in our owned-and-operated brokerage, all of whom are classified as independent contractors, we are subject to Internal Revenue Service and state law guidelines as they apply to this classification. See “Legal proceedings” under “Note 6. Commitments and Contingencies” of our consolidated financial statements for a discussion of complaints filed by former employee agents and the California State Labor Commission alleging violations of these regulations.

 

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Federal and state laws relating to privacy and consumer protection: We are subject to a variety of federal and state laws relating to our collection, use and disclosure of data collected from our website and mobile users. Additionally, we are subject to regulations relating to the manner and circumstances under which we or third parties may contact those users. These laws include FTC regulations and other state and federal laws regarding data protection and retention, privacy and consumer protection, which are continuously evolving and developing.

 

Third-party rules

 

In addition to governmental regulations, we are subject to rules established by private real estate trade organizations, including, among others, local MLSs, NAR, state Associations of REALTORS®, and local Associations of REALTORS®. The rules of the various MLSs to which we belong vary, and specify, among other things, how we as a broker member can use MLS listing data, including specifying, in some cases, the use and display of this data on our website. For example, the rules of the various MLSs often limit the home listings information that can be presented on a website or portion of a website that does not meet the requirements of a Virtual Office Website, or VOW, including user registration. We operate a password-protected VOW on a portion of our website, which allows us to show the most comprehensive MLS data directly to consumers without their having to visit an agent. Pursuant to an agreement between NAR, the dominant trade organization in the residential real estate industry, and the U.S. Department of Justice, NAR and its affiliated MLSs must treat brokers that operate VOWs the same as brokerages that do not operate VOWs. Specifically, brokers must be permitted to distribute the same listing information on a VOW as brokers are permitted to distribute by hand, fax or email, brokers may not opt-out from showing listings on VOWs, and NAR-affiliated MLSs are prohibited from restricting the listing information provided to VOWs. However, homeowners may opt-out of displaying their home listing information on the Internet, including on VOW and non-VOW websites.

 

NAR, as well as the state and local Associations of REALTORS®, also have codes of ethics and rules governing the actions of members in dealings with other members, clients and the public. We are bound to abide by these codes of ethics and rules by virtue of our membership in these organizations.

 

INTELLECTUAL PROPERTY

 

We rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We currently have trademarks registered or pending in the United States for our name and certain words and phrases that we use in our business. We also rely on copyright laws to protect computer programs relating to our website, our proprietary database and Zap. We have registered numerous Internet domain names related to our business to protect our proprietary interests, and we hold a patent issued in the United States, which expires in 2019, that covers certain processes and methodologies related to transacting residential real estate on the Internet. In addition, we have pending four patent applications and one provisional patent application with the U.S. Patent Office to seek protection for various aspects of our unique technology, which creates a network that connects our mobile tools, website and CRM tools to enhance communication among and information available to real estate professionals and clients. We also enter into confidentiality and invention assignment agreements with our employees, and consultants and confidentiality agreements with other third parties, and we strictly control access to our proprietary technology.

 

From time to time, we may encounter disputes over rights and obligations concerning intellectual property. For example, please see “Item 3. Legal Proceedings,” for a discussion of complaints filed against us alleging that our mobile applications infringe upon patents held by others. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, and our ability to compete. Additionally, protecting our intellectual property rights could be costly and time consuming.

 

SEASONALITY

 

The residential real estate market traditionally has experienced seasonality; please see “Item 1A. Risk Factors” of this report under “Our operating results are subject to seasonality and vary significantly among quarters during each calendar year, making meaningful comparisons of successive quarters difficult.”

 

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EMPLOYEES AND SALES AGENTS

 

As of March 1, 2014, we employed 165 people, of which 155 were full-time employees, and retained 1,773 real estate sales agents, who are exclusive independent contractors. Some of these independent contractors are retained through third-party entities they have formed for their business purposes. Our sales agents are classified as independent contractors under state and IRS guidelines. As such, we do not pay for the agent’s expenses or benefits or withhold payroll taxes. They are paid from the commissions earned by us upon the closing of a transaction, and do not earn a salary from which taxes are withheld.

 

EXECUTIVE OFFICERS

 

The following table sets forth certain information about our executive officers as of March 5, 2014:

 

Name   Age   Position
Charles C. (Lanny) Baker   47   Chief Executive Officer, President and Director
Eric L. Mersch   46   Senior Vice President, Chief Financial Officer and Chief Accounting Officer
Franklin (Van) Davis   55   President of Brokerage Operations
Xavier Y. Zang   49   President of Powered by Zip
Samantha E. Harnett   38   Senior Vice President of Business Development, General Counsel and Secretary
James D. Wilson   39   Senior Vice President of Technology

 

Charles C. (Lanny) Baker has served as our Chief Executive Officer and President and a member of our Board of Directors since October 2010. From December 2008 until October 2010, Mr. Baker served as our Executive Vice President and Chief Financial Officer. From March 2005 to June 2007, Mr. Baker served as Senior Vice President and Chief Financial Officer of Monster Worldwide, Inc., an online recruitment services company. From June 1993 to March 2005, Mr. Baker served in positions of increasing responsibility in the Equity Research department at Smith Barney, a division of Citigroup, Inc., serving as Managing Director from January 2000 to March 2005. Prior to joining Smith Barney, Mr. Baker spent two years as an Equity Research Analyst at Morgan Stanley & Co. and two years in research assistant positions at Donaldson, Lufkin & Jenrette. Mr. Baker has served on the board of directors of XO Group Inc., a life stages media company targeting couples planning their weddings and future lives together, since November 2005, where he is currently the chair of its audit committee and its nominating and corporate governance committee, and on the board of directors of Homeaway, Inc., the world’s largest online marketplace for the vacation rental industry, since April 2011, where he is currently the chair of its audit committee. Mr. Baker holds a Bachelor of Arts degree in history from Yale College.

 

Eric L. Mersch has served as our Senior Vice President, Chief Financial Officer and Chief Accounting Officer since April 2012. From November 2010 to August 2011, Mr. Mersch served as Chief Financial Officer of Imaging Advantage, LLC, a provider of comprehensive radiology solutions to health centers and radiology groups. From February 2010 to May 2010, Mr. Mersch served as Chief Financial Officer of Sonim Technologies, Inc., a mobile phone manufacturer. From March 2008 to January 2010, Mr. Mersch co-founded Deer Valley Ventures and served as Chief Financial Officer of DemandFlex, LLC, a provider of virtual private data centers. From June 2007 to February 2008, Mr. Mersch served as Chief Financial Officer of Razorgator Inc., an Internet ticketing services company. From August 2006 to May 2007, Mr. Mersch served as Chief Financial Officer of VitalStream, Inc., a content delivery network provider. From March 2003 to August 2006, Mr. Mersch held several positions, including Vice President, Finance, with Harrah’s Entertainment (now Caesar’s Entertainment), a gaming and hospitality business. Mr. Mersch’s previous experience also includes seven years with the U.S. Navy as a Division Officer of the U.S.S. Los Angeles, a nuclear submarine. Mr. Mersch holds a Masters of Business Administration degree from Harvard Business School, a Masters of Nuclear Power Engineering degree from the Nuclear Engineering School (U.S. Military) and a Bachelor of Science degree in economics from the U.S. Naval Academy.

 

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Franklin V. (Van) Davis has served as our President of Brokerage Operations since May 2012. Mr. Davis has more than two decades of management and leadership experience in the real estate brokerage industry. Mr. Davis most recently served as owner and operator of F.V.O. Davis Consulting, a franchising and real estate consulting service, from September 2007 to April 2012. Mr. Davis’s previous real estate brokerage experience includes serving as President and Chief Executive Officer of Foxtons North America and as President and Chief Executive Officer of Century 21 Real Estate Corporation. Mr. Davis has also served as an advisory board member for BOGOPOD.com, a provider of online marketing services to merchants, and Trulia, Inc., an operator of a website for residential real estate consumers and agents, during their start-up phases. Mr. Davis holds a Masters of Business Administration degree and a Bachelor of Business Administration degree in finance magna cum laude from New Mexico State University.

 

Xavier Y. Zang has served as our President of Powered by Zip since June 2013. Mr. Zang came to us from Microsoft, where he served as Senior Director in various positions in the Online Services Division from May 2008 through May 2013, most recently as Senior Director, Marketing Solutions. Mr. Zang joined Microsoft through the acquisition of Rapt Inc., a provider of advertising yield management solutions for digital media publishers, where he served in several positions from July 2003 to April 2008, most recently as Executive Vice President, Field Operations. Mr. Zang’s previous positions include over five years with Viant Corporation, an internet consulting business, where he most recently served as Vice President and General Manager, and nearly a decade of experience with consulting firms R.B. Webber, McKinsey & Company, Information Consulting Group and Accenture. Mr. Zang holds a Masters of Business Administration degree with a concentration in the management of technology from the University of California at Berkeley and a Bachelor of Arts degree in economics from the University of Notre Dame.

 

Samantha E. Harnett has served as our Senior Vice President of Business Development, General Counsel and Secretary since December 2012. From November 2009 to December 2012, Ms. Harnett served as our Vice President, General Counsel and Secretary. From April 2008 to November 2009, Ms. Harnett served as our Vice President, Assistant General Counsel and Assistant Secretary. From April 2007 to April 2008, Ms. Harnett served as our Assistant General Counsel and Assistant Secretary. From May 2005 to April 2007, Ms. Harnett served as our Legal Counsel. From August 2003 to May 2005, Ms. Harnett practiced in the areas of litigation and employment law at Wilson Sonsini Goodrich & Rosati, P.C. Ms. Harnett holds a Juris Doctor degree from the Santa Clara University School of Law and a Bachelor of Arts degree in psychology from California State University, Chico.

 

James D. Wilson has served as our Senior Vice President of Technology since January 2013. From July 2011 to January 2013, Mr. Wilson served as our Vice President of Technology. From January 2007 to July 2011, Mr. Wilson served as our Vice President of Product Development. From January 2002 to January 2007, Mr. Wilson served as our Director of Product Strategy. From November 2000 through December 2001, Mr. Wilson served as our Product Strategy Manager. Mr. Wilson holds a Masters of Business Administration degree from the Haas School of Business at the University of California at Berkeley and Bachelor of Arts degree in economics from Stanford University.

 

Item 1A.     Risk Factors:

 

Because of the following factors, as well as other variables affecting our operating results and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. You should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks are realized, our business, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

 

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RISKS RELATED TO OUR BUSINESS AND INDUSTRY

 

We have experienced net losses in recent years and expect to incur losses in the future.

 

We have had a history of net losses from our inception in January 1999 through the first half of 2012.While we were profitable in several quarters from 2003 through 2006 and again in the second quarter of 2012 and second and third quarters of 2013, we have repeatedly experienced quarterly net losses. As of December 31, 2013, we had an accumulated deficit of $133.8 million. If we do not become consistently profitable, our accumulated deficit will grow larger and our cash reserves will decline, and we could require additional financing to continue operations. If we do not become consistently profitable and additional funding is required to support our business, financing may not be accessible on acceptable terms, if at all. We cannot guarantee that our revenues will increase sufficiently to achieve and maintain profitability on a quarterly or annual basis.

 

Our profitability is dependent of the health of the residential real estate market, which is subject to macroeconomic forces that are beyond our control and may be difficult to predict.

 

The success of our business depends to a significant extent on the health of the residential real estate market, which traditionally has been subject to cyclical economic swings as well as other changes in local, regional, national or seasonal economic conditions. The decision to purchase or sell residential real estate can be delayed or terminated based on macroeconomic conditions that, for example, reduce discretionary income. Macroeconomic factors that could adversely affect the demand for residential real estate and harm our business include, among others, economic slowdown or recession, changes in the availability and affordability of mortgages or extensions of credit, a rise in the number of foreclosures and other distressed properties available for sale, rising interest rates, inflation, disruptions in capital markets, declines in the stock market, adverse tax policies or changes in other regulations, increased unemployment, lower consumer confidence, lower wage and salary levels, war or terrorist attacks, natural disaster, energy price spikes, or actions taken by the Federal Reserve Board to regulate the supply of money, or the public perception that any of these events may occur. In addition, federal and state governments, agencies and government-sponsored entities such as Fannie Mae and Freddie Mac could take actions that result in unforeseen consequences or that otherwise could negatively impact our business.

 

The impact on our business of macroeconomic forces, over which we have no control, can be difficult to predict. For example, demand for housing could decrease, which should reduce the number of completed transactions and, consequently, revenues. Home sales prices could decrease, which should depress revenue and gross margins on completed transactions. Gross margins could decrease through higher costs. These and other consequences could significantly impair our ability to achieve and maintain profitability.

 

We have experienced market share declines in several markets in our owned-and-operated brokerage, and we cannot guarantee that we will be able to grow local market share profitably.

 

The residential real estate industry is intensely competitive and highly fragmented. In our owned-and-operated brokerage, our aggregate transaction volume market share in our local markets has averaged less than 1% historically, and in several of these markets, we have over time experienced a loss of market share. To capture and retain market share in our owned-and-operated brokerage, we must compete successfully against other brokerages not only for large numbers of clients, but also for large numbers of agents. Because the market is highly fragmented and brokerage fees are variable, competitors may reduce fees to attract business. In addition, many of these brokerages have valuable relationships, innovative models, or access to greater resources than we do. Many of our markets are composed of entrenched brokerages with superior local referral networks, name recognition and perceived local knowledge and expertise. These attributes give these brokerages an advantage in agent recruitment and retention, in attracting clients, and in building their listings business. Many brokerages also have more experience than us in acting as listing agents, as we have traditionally focused on clients looking to buy homes, with buyers representing nearly 80% of our closed transactions in 2013. Some of our competitors with greater resources may be able to undertake more extensive marketing campaigns or to better withstand price competition in a market. Unless our owned-and-operated brokerage can develop the relationships, branding, reputation, expertise and personnel to compete with these brokerages without reducing our prices or increasing our agent compensation, we may not be able grow our listings business, attract buyers, or attract and retain agents as needed to maintain or grow our market share profitably.

 

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Our Powered by Zip business is a new and unproven business opportunity, and we cannot guarantee that we will be able to operate and grow it profitably.

 

In early 2011, we began to build our Powered by Zip business with select third-party local brokerages, through which we provide access to our proprietary information and systems, including our website and our Zap customer service system. Currently, our Powered by Zip referral business is used by local brokerages in only 20 markets. Our Powered by Zip referral business represents less than 3% of our business and is still developing in many respects, including the services we provide under that business, pricing and conversion targets related to those services, and exclusivity terms. In addition, to expand the Powered by Zip referral business into additional markets, and to service those markets through our online URL, we will need to obtain MLS data in those markets, which the local MLSs may not be willing to provide because we will not be the brokerage that is using that data to service consumers. Further, by linking our name with the third-party brokerages in our Powered by Zip business, any negative action taken by one of those brokerages could negatively affect our reputation and, consequently, our business. In addition, we are beginning to offer our Powered by Zip SaaS platform as a new product line. We do not yet have any customers live on the platform, and we may encounter unforeseen expenses as we seek to win and launch new customers. Also, our SaaS platform may not fully meet brokerage needs and, in that case, we may need to update our offering before we gain traction in the market. There can be no assurance that our Powered by Zip business and its components, including the referral business and the SaaS platform product line, can be expanded into a profitable and meaningful business.

 

We may suffer significant financial harm and loss of reputation if we do not comply, cannot comply, or are alleged to have not complied with applicable laws, rules and regulations concerning our classification and compensation practices for the agents in our owned-and-operated brokerage.

 

As of January 31, 2011, all agents in our owned-and-operated brokerage have been retained as independent contractors, either directly or indirectly through third-party entities formed by these independent contractors for their business purposes. With respect to our independent contractor agents, and like most brokerages, we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it might be determined that the independent contractor classification is inapplicable to any of our agents. Further, if legal standards for classification of agents as independent contractors change or appear to be changing, it may be necessary to modify our compensation structure for these agents in some or all of our markets, including by paying additional compensation or reimbursing expenses.

 

In the past we have incurred, and in the future we could incur, substantial costs, penalties and damages, including back pay, unpaid benefits, taxes, expense reimbursement and attorneys’ fees, in defending future challenges by agents to our agent classification or compensation practices. For example, please see “Legal Proceedings” under “Note 6. Commitments and Contingencies” of our consolidated financial statements for discussions of settlements for claims relating to ZipRealty’s former compensation practices of employee real estate agents. Such challenges and related legal costs, settlements or judgments could result in substantial costs to us, could significantly impair our financial condition and our ability to conduct our business as we choose, and could damage our reputation and impair our ability to attract home buyers, home sellers and agents.

 

We may not be able to access capital to grow our business profitably.

 

There has been a trend towards consolidation in the residential real estate industry in recent years. To remain competitive in this industry, we may wish to pursue acquisition candidates, which could require us to access additional capital. Also, growing our existing owned-and-operated brokerage business, as well as adding clients and product lines to our existing Powered by Zip business, could require us to make substantial investments that require us to raise additional capital. We may not be able to obtain the capital needed to undertake these pursuits profitably or on commercially reasonable terms, if at all.

 

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If we do not remain innovation leaders in our industry, we may not be able to grow our business and leverage our costs to achieve profitability.

 

Innovation has been critical to our ability to leverage our costs while competing against other brokerages for clients and agents, and in competing against other technology providers for broker customers in our PbZ referral and SaaS platform business. For example, we have been at the forefront of brokerages in embracing the Internet by operating a virtual office website, or VOW, which reduces our need for office space and facilitates the transaction of business away from an office. We have also been at the forefront of managing lead acquisition costs by employing technology designed to promote efficient lead utilization, by using a centralized lead acquisition and distribution function, and by attracting consumers directly to our site for those markets we serve. As others follow our practices or develop their own innovative practices, and as consumers increasingly gain options for online real estate information and services, our ability to leverage our costs to achieve profitability may erode. For example, certain other brokerages, media companies, real estate technology providers, MLSs and NAR operate competing websites and are increasingly using the Internet to market to potential customers throughout the United States. Customers may not distinguish or value the benefits of our website and technology offerings as compared against these competing offerings, particularly if MLSs adopt rules that erode the distinction between the MLS data that can be shown online by brokers who operate VOWs and by brokers who do not. Such organizations are building, and could build, applications or offer products, including home listings and related information, that attract online traffic away from our website. Such organizations could devote substantial resources to dominating social media and online advertising, which would also impair our ability to attract website traffic. If our advantage in attracting website traffic erodes, our need to purchase leads from third parties will increase, thus increasing our costs. If we do not remain on the forefront of innovation to leverage our costs effectively, we may not be able to achieve and sustain profitability.

 

Providing online access to comprehensive MLS listings and related information concerning the residential real estate market is a hallmark of our business, and our ability to attract and service consumers and to manage lead acquisition costs would be harmed if our ability to provide or advertise this access is impaired.

 

A key component of our business strategy is to attract consumers directly to our website, thereby reducing our need to purchase leads from third parties. To do so, through our website, we offer consumers access to, and the ability to search, real estate listings posted on the MLSs in the markets served by our owned-and-operated brokerage or Powered by Zip customers, as well as related neighborhood information and maps. Our ability to display this information is subject to agreements with third parties, which may or may not be available on acceptable terms in the future. Those third parties operate their own technology platforms, and we may be unable to interoperate with those platforms cost-effectively or at all. Further, we could lose access to that information in the event of a systems failure or a dispute with those information providers. In addition, our ability to provide Internet access to home listings information could be diminished if increasing numbers of homeowners opt-out of providing their home listings information on the Internet, which is permitted by the rules of many MLSs, including those affiliated with NAR. Also, NAR is in the process of developing a nation-wide MLS, which could significantly change the current practice of listing homes for sale on individual MLSs. It is too soon to tell whether this new model will impair the home listings information we make available on our website, or the perceived value of that information. Should any such event occur, we expect that our website and services would become less attractive consumers, and we would likely need to purchase additional, and more costly, leads from third parties, increasing our expenses.

 

If we do not adapt to changes in technologies and practices relating to the nature and use of information, our operating results could suffer.

 

We believe that we rely more heavily on technology than traditional bricks-and-mortar brokerages to gather, store, evaluate and communicate information, including our efforts to generate leads via the Internet, to prioritize leads, to empower agents via our Zap customer service platform, and to service home buyers and sellers, including by providing online access to comprehensive MLS listings. To continue to perform those functions effectively, we will need to adapt to changes in technologies and practices concerning the nature and use of information. For example, we will need to adapt our website and our Zap customer service platform to be compatible with new Internet and mobile access tools. We may need to adapt our approach for generating website traffic to address evolving customer interests, for example, a greater interest in social websites, in local neighborhood information, or in alternative media. We may need to adapt our technology or change our practices to address new Internet regulations, as well as new “spam” filters that incorrectly treat our emails to clients as unsolicited materials and block them. We must constantly modify our technology to successfully interact with each independent MLS in order to maintain access to that MLS’s home listings information. In addition, if the current practice of listing homes for sale on individual MLSs is challenged or replaced by a competing system, such as the nation-wide MLS system being developed by NAR, we will need to adapt to that change to continue operating our business. Some of our competitors may respond more quickly to new or emerging technologies and practices relating to the nature and use of information. If we cannot make such adaptations quickly so as not to erode the competitive advantages our products offer in attracting and servicing clients and agents, or we do so in a manner that increases our expenses without a related increase in revenues, our operating results could suffer.

 

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Our business practices are heavily regulated, and we may suffer significant financial harm and loss of reputation if we do not comply, cannot comply, or are alleged to have not complied with applicable laws, rules and regulations.

 

Our business practices are heavily regulated by numerous federal, state and local authorities, as well as the standards of private trade associations to which we belong. These regulations and standards are discussed in more detail in Item I of Part I of this report under “Regulatory Matters.” In addition to the regulations concerning agent classification and compensation that are discussed in the following risk factor, the laws, rules and regulations that apply to our business practices include the following:

 

·State real estate brokerage licensing requirements, as well as statutory due diligence, disclosure, record keeping and standard-of-care obligations relating to these licenses;

 

·The federal Real Estate Settlement Procedures Act, the federal Fair Housing Act, and federal advertising and other laws, as well as comparable state statutes;

 

·Rules of trade organization such as NAR, local MLSs, and state and local AORs;

 

·Licensing requirements and related obligations that could arise from our business practices relating to the provision of services other than real estate brokerage services;

 

·Privacy regulations relating to our use of personal information collected from the registered users of our website and the websites we operate for our Powered by Zip customers; and

 

·Laws relating to the use and publication of information through the Internet.

 

Because our business practices are heavily regulated, maintaining legal compliance is challenging and increases our costs, and we must continually monitor our business practices for compliance with applicable laws, rules and regulations. We may not become aware of all the laws, rules and regulations that govern our business, or be able to comply with all of them, given the rate of regulatory changes, ambiguities in regulations, contradictions in regulations between jurisdictions, and the difficulties in achieving both company-wide and region-specific knowledge and compliance. If we fail, or are alleged to have failed, to comply with any existing or future applicable laws, rules and regulations, we could be subject to lawsuits and administrative complaints and proceedings, as well as criminal proceedings, and we could incur significant defense costs, settlement costs, damages and penalties for non-compliance. We could also have our business licenses suspended or revoked, have our business practices enjoined, or be required to modify our business practices, which could materially impair, or even prevent, our ability to conduct all or any portion of our business. Any such events could also damage our reputation and impair our ability to attract and service home buyers, home sellers and agents, as well our ability to attract clients to our Powered by Zip business, without increasing our related costs. Although we carry general liability insurance, our insurance may not cover claims of these types or may be inadequate to protect us from all liability that we may incur. In addition, if we cannot in the future obtain and maintain all of the regulatory approvals and licenses we may need to carry on our business as we choose, our ability to conduct business may be harmed. Further, any lobbying or related activities we undertake in response to current or new regulations could substantially increase our operating costs.

 

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We derive a significant portion of our leads through third parties, and if any of our significant lead generation relationships are terminated, impaired or become more expensive, we may not be able to attract consumers and grow our business without a substantial increase in expenses.

 

We generate customer leads through many sources, including leads from third parties with which we have only non-exclusive, short-term agreements that are generally terminable on little or no notice and with no penalties. For example, our largest third-party lead source generated over 10% of our leads during 2013. We could lose a large lead supplier, whether through insolvency or otherwise. State laws or NAR or MLS rules could make it more difficult or expensive for lead generators to provide us with sufficient leads for our owned-and-operated brokerage or Powered by Zip business. Also, we rely on search engines such as Google and Bing for online traffic that generates leads. These search engines frequently update their search algorithms that affect the prominence of our online offerings. Our online traffic could be negatively impacted by such changes and lead to an increase in cost of leads. Should any of these events occur, or should leads otherwise become less available or more costly, we may not be able to obtain a sufficient number of leads to grow our business in our owned-and-operated brokerage or Powered by Zip business without a substantial increase in expenses.

 

If our arrangements for diversifying our revenue stream become impaired, our financial condition could suffer.

 

In addition to our core business of directly helping clients to buy and sell homes through our owned-and-operated brokerage business, and our PbZ referral and SaaS platform business, we have introduced our products and services in other channels to diversify our revenue stream while further leveraging our strengths in technology and online marketing. We realize additional revenues by offering marketing and advertising programs to the providers of transaction-related services that surround our core business, by offering advertising and lead generation services to third parties. For example, we have non-exclusive marketing agreements with residential mortgage service providers, under which we are paid either a flat marketing fee or on a cost-per-click basis (which in aggregate typically represents 3% or less of our monthly net revenues) in exchange for our commitment to market mortgage products and other services to our clients. If these relationships are terminated or otherwise become impaired, we could lose sources of revenues that we may not be able to readily replace, and our brand name and client relationships could suffer. In addition, our clients could have a more difficult time obtaining the financing or other services needed to purchase a home through us, which could negatively impact our transaction revenues. Any of these events could negatively impact our financial condition.

 

Our value proposition for agents in our owned-and-operated brokerage, which includes access to client leads and customer relationship management tools at no out-of pocket cost to them, is not typical in our industry, and if we are unable to promote this difference or if agents do not perceive its value, whether in its current form or as we may test or implement changes to it, we may not be able to attract, retain and incentivize agents.

 

Typically, real estate agents who want to acquire client leads and customer relationship management tools must pay for them. However, we provide agents in our owned-and-operated brokerage with access to client leads and our Zap customer service system, with its proprietary customer relationship management tools, at no out-of-pocket cost to them. These features represent a key component of our agent value proposition, which includes a complementary commission structure that is lower than what we would be able to pay if we did not offer these features. Our standard value proposition may not be attractive to certain agents who have developed their own client pipeline. Also, because our agent value proposition is not typical in our industry, agents may not understand or appreciate it. In addition, agents may not appreciate the modifications to our agent value proposition that we may test and implement from time to time. If agents do not understand the elements of our agent value proposition, or do not perceive it to be more valuable than the models used by most of our competitors, our owned-and-operated brokerage may not be able to attract, retain and incentivize them to grow our revenues without significantly increasing our commission splits or other costs, which would reduce our gross margins.

 

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Our efforts to offer advertising and lead generation services through our website could distract consumers from using our website to engage in residential real estate transactions.

 

We have entered into agreements to use our website to provide advertising and lead generation services to third parties in exchange for fixed monthly payments and, in some cases, volume-based and performance-based fees. We are exploring additional opportunities to leverage the advertising and lead generation capacities of our website. These activities may distract visitors to our site. They can also interrupt the registration-to-transaction path of our users, including by leading them away from our website. In addition, these activities may detract from our perceived commitment to user satisfaction and customer service, or may not be well received by visitors to our site for other reasons. This risk may be higher as consumers continue to embrace mobile devices because mobile advertising is typically seen as being much more disruptive than advertisements viewed on a computer or laptop. Any of these outcomes could impair the ability of our owned-and-operated brokerage and Powered by Zip clients to engage in residential real estate transactions with our website visitors.

 

As we pursue opportunities to increase our revenues, we may reduce our profit margins.

 

We may implement changes to our business model and operations to improve our revenues that cause a disproportionate increase in our expenses and reduce our profit margins. For example, we may increase the portion of our owned-and-operated brokerage that is composed of representing sellers in their home listings, through which we would incur costs that we do not incur when representing buyers, such as marketing costs. We may make further revisions to the agent compensation model in our owned-and-operated brokerage or replace it with a different model. We may disproportionately build our business in lower-priced markets or with transactions that comprise lower-priced homes, or we may expand into new business models with different revenue-operating expense mixes. These changes could also involve significant start-up costs that may only be recovered, if ever, after we have been operating in those markets or businesses for some time. Any of these attempts to improve our revenues could result in a disproportionate increase in our expenses and in reduced profit margins.

 

If we fail to protect the privacy of personal information that our registered users share with us, our reputation and our business could be significantly harmed.

 

Users of our website and the websites we operate for our Powered by Zip customers share with us personal information such as name, address, telephone number and email address. Our use and disclosure of that information is regulated by federal and state privacy laws. The Federal Trade Commission and many states’ rules impose some significant new obligations on operators of websites and online services, including expanded categories of personal information and new data security and data retention requirements. To comply with these laws, we have adopted a privacy policy, which we post on our website, that explains to our users that agents will see information concerning their home searches on our website, as well as how and with whom we may share their personal information. We could incur legal liability if our privacy policy or consent process is deemed to lack clarity or to otherwise give insufficient notice of how we share personal information, if we share personal information in violation of our privacy policy, or if third parties with whom we share personal information fail to protect the privacy of that information. Our legal liability could include significant defense costs, settlement costs, damages and penalties. Also, any claim that we failed to protect the privacy of our users’ personal information could damage our reputation with consumers, which could significantly impair our ability to attract clients. Any of these outcomes could have a significant negative impact on our business and financial performance.

 

Our operating results are subject to seasonality and vary significantly among quarters during each calendar year, making meaningful comparisons of successive quarters difficult.

 

The residential real estate market traditionally has experienced seasonality, with a peak in the spring and summer seasons and a decrease in activity during the fall and winter seasons. Revenues in each quarter are significantly affected by activity during the prior quarter, given the typical 30 to 45-day time lag between contract execution and closing for traditional home purchases. For non-traditional sales, the time lag from contract execution to closing can be a few months. Historically, this seasonality has caused our revenues, operating income, net income and cash flow from operating activities to be lower in the first and fourth quarters and higher in the second and third quarters of each year. However, there can be no assurance that the seasonality pattern for any fiscal year will be consistent with past experience, and macroeconomic changes in the market could mask the impact of seasonality.

 

Factors affecting the timing of real estate transactions that can cause our quarterly results to fluctuate include the timing of widely observed holidays and vacation periods, decisions to relocate prior to the start of the school year, inclement weather, and the timing of employment compensation changes and events, such as pay raises and bonus payments. We expect our revenues to continue to be subject to these seasonal fluctuations, which, combined with any growth in our business and the effects of macroeconomic market changes, may make it difficult to compare or analyze our financial performance effectively across successive quarters.

 

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Our failure to effectively manage the growth of our technology and control systems to service consumers and agents and maintain legal compliance could adversely affect our financial position.

 

As our business grows in terms of the number of consumers, agents and transactions we service, and the distribution channels in which we offer our products and services, our success will depend on our ability to expand, maintain and improve the technology that supports our business operations, as well as our financial and management information and control systems, and to maintain effective cost controls. Our ability to manage these efforts and to maintain legal compliance could be thwarted by many factors, including turnover in management and the lack of adequate staffing with the requisite expertise and training. If our operational technology is not sufficient to service agents and their clients, then the number of agents who wish to use our products could decrease, the level of client service and transaction volume afforded by our systems could suffer, and our costs could increase. In addition, if our systems, procedures or controls are not adequate to support our operations and reliable, accurate and timely financial and other reporting, we may not be able to satisfy regulatory scrutiny or contractual obligations with third parties and may suffer a loss of reputation. Any of these events could negatively affect our financial position.

 

Our business, financial condition and reputation may be substantially harmed by security breaches, interruptions, delays and failures in our systems and operations.

 

The performance and reliability of our systems and operations are critical to our reputation and our ability to attract and service home buyers, home sellers and agents, as well our ability to attract brokerages to our Powered by Zip business. Our Powered by Zip business is web-based and we process, store, and transmit large amounts of data, including personal information, for our brokerage customers and their clients. Our systems and operations are vulnerable to security breaches, interruption or malfunction due to certain events beyond our control, including natural disasters such as earthquakes, fire and flood, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Our failure to prevent or mitigate data loss or other security breaches could expose us or our brokerage customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us, and otherwise harm our business. In addition, we rely on third-party vendors to operate our network infrastructure co-location and to provide additional systems and related support. If we cannot continue to retain these services on acceptable terms, our access to these systems and services could be interrupted. Any security breach, interruption, delay or failure in our systems and operations could substantially reduce the transaction volume that can be processed with our systems, impair quality of service, increase costs, prompt litigation and other consumer claims, and damage our reputation, any of which could substantially harm our financial condition.

 

Our business is geographically concentrated, which makes us more susceptible to business interruption and financial loss due to natural disasters, inclement weather, economic or market conditions or other regional events outside of our control.

 

To date, our brokerage business has been conducted principally in a few states in the western United States, especially California, and along the eastern seaboard. For example, in the markets that we served through our owned-and-operated brokerage at the end of 2013, we derived approximately 42% of our net transaction revenues for that year in the State of California. Our geographic concentration makes us more vulnerable to forces and events beyond our control, such as regional disasters including earthquakes, severe weather, economic or market conditions, terrorist attacks, or population shifts away from our markets. These events could cause us to sustain a business interruption or other financial loss that would be greater than if our business were more dispersed geographically. In addition, our headquarters is located in the San Francisco Bay region of California, which is known for earthquakes. A disaster in this region could interrupt our financial functions and impair access to internal systems, documents and equipment that are critical to the operation of our business.

 

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Our intellectual property rights are valuable and our failure to protect those rights could adversely affect our business.

 

Our intellectual property rights, including existing and future patents, trademarks, trade secrets and copyrights, are and will continue to be valuable and important assets of our business. We believe that our proprietary Zap technology engine, the ziprealty.com website, our lead generation and online marketing engine, our mobile applications and our email alerts, as well as our ability to interoperate with multiple MLSs and our other technologies and business practices, are competitive advantages and that any duplication by competitors would harm our business. We have taken measures to protect our intellectual property, but these measures may not be sufficient or effective. For example, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. We also seek to maintain certain intellectual property as trade secrets. Intellectual property laws and contractual restrictions may not prevent misappropriation of our intellectual property or deter others from developing similar technologies. In addition, others may develop technologies that are similar or superior to our technology, including our patented technology, or that otherwise prevent, limit or interfere with our ability to use our intellectual property. Any significant impairment of our intellectual property rights could harm our business.

 

We could be subject to intellectual property rights disputes that adversely affect our business.

 

As noted above, our business depends on the protection and utilization of our intellectual property to provide our products and services. We may bring lawsuits to protect against the potential infringement of our intellectual property rights. In addition, other companies, including our competitors, may make claims against us alleging our infringement of their intellectual property rights. For example, companies have filed lawsuits against us alleging that certain features of our mobile applications infringe upon their patents. These lawsuits and any other intellectual property claims brought by or against us, with or without merit, could be time-consuming and expensive to litigate or settle and could significantly divert management resources and attention. If we are unable to resolve those claims in our favor, we may be required to pay damages, to stop using any infringing technology, to seek a license for that technology, which may not be available on acceptable terms, or to develop alternative non-infringing technology, which may require significant effort and expense. If we cannot license or develop alternative technology for any infringing aspects of our business on attractive terms, we may be forced to limit our product and service offerings. Any of these results could harm our business.

 

We intend to evaluate acquisitions or investments in complementary technologies and businesses, and we may not realize the anticipated benefits from, and may have to pay substantial costs related to, any acquisitions, mergers, joint ventures or investments that we undertake.

 

As part of our business strategy, we plan to evaluate acquisitions of, or investments in, complementary technologies and businesses, including acquisitions of our own stock. We may be unable to identify suitable acquisition candidates in the future or to make these acquisitions on a commercially reasonable basis. If we complete an acquisition, merger, joint venture or investment, we may not realize the benefits we expect to derive from the transaction. Any future acquisitions and investments would have several risks, including:

 

·Our inability to successfully integrate acquired business cultures, personnel, systems, technologies or operations;

 

·Problems integrating and maintaining uniform standards, procedures, controls, policies, books and records, including problems relating to the adequacy of internal controls and to reporting;

 

·Diversion of management’s attention;

 

·Loss of key employees of acquired businesses;

 

·Disruption of existing operations;

 

·Risks associated with operating a business or in a market in which we have little or no prior experience;

 

·Our inability to recover the costs of acquisition, merger, joint venture or investment;

 

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·Accounting risks, including risks associated with accounting for acquisitions, potential amortization of intangible assets, and potential write-off of acquired assets;

 

·Potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

 

·Our inability to increase earnings per share; and

 

·Assumption of liabilities, including unknown and unforeseen liabilities.

 

If we experience significant changes in our management team, cannot successfully manage these changes or cannot retain and attract key personnel, our business could be harmed.

 

Our success depends on the contributions of our senior sales, operations, marketing, technology and financial personnel. Many of our senior executives have been hired in the last few years. We could experience further transitions in our management team or other key personnel. All of our officers and key employees are at-will employees, and, with the exception of Mr. Baker, none of them has an employment agreement with us. We do not have “key person” life insurance policies covering any of our personnel. If we cannot adapt to changes in our management team or other key personnel quickly and effectively, or if we lose the services of additional key personnel, our business operations and our financial results could be significantly harmed.

 

OTHER RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

 

The trading price of our stock has been, and may continue to be volatile.

 

The trading price of our common stock may fluctuate widely. For example, our closing stock price on the NASDAQ Stock Market for the 52 weeks ended March 1, 2014 ranged from a low of $2.77 to a high of $6.56. Many factors can cause stock price fluctuation, some of which are beyond our control. These factors include, among others, the risks identified above, as well as the following factors:

 

·Indicia of our financial performance, such as variations in our quarterly results of operations, changes in our financial guidance for future periods, inability to meet quarterly or yearly performance estimates or targets, and changes in performance estimates or recommendations, or termination of coverage, by securities analysts;

 

·Announcements by us, our competitors or lead source providers, including announcements about strategic alliances;

 

·The relatively low level of public float and average daily trading volumes of our common stock;

 

·The sale of substantial amounts of our common stock in the public market, including by investors who still own a significant number of our shares issued before our public offering, or from the perception that these sales could occur;

 

·Any repurchase by us of our outstanding stock;

 

·Our adoption of any stockholder rights plan; and

 

·Broad market and industry factors that are independent of our actual operating performance.

 

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In addition, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources and could harm the price of our common stock. Although we carry general liability and errors and omissions insurance, our insurance may not cover claims of these types or may be inadequate to protect us from all liability that we may incur.

 

Our principal stockholders, executive officers and directors own a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and these stockholders can take actions that may be adverse to your interests.

 

Our executive officers and directors and entities affiliated with them, in the aggregate, beneficially own a significant percentage of our outstanding common stock, totaling about one-quarter as of March 1, 2014. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, may have the ability to influence significantly all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders who are executive officers or directors, or who have representatives on our Board of Directors, could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to our other stockholders.

 

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. Among other things, these provisions:

 

·Establish a classified board of directors with staggered, three-year terms;

 

·Do not permit cumulative voting in the election of directors;

 

 ·Authorize the board to issue, without stockholder approval, preferred stock with rights senior to those of common stock, including pursuant to a stockholder rights plan;

 

 ·Prohibit stockholder action by written consent;

 

 ·Limit the persons who may call special meetings of stockholders; and

 

·Require advance notification of stockholder nominations and proposals.

 

In addition, the provisions of Section 203 of Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

 

These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

Item 1B.    Unresolved Staff Comments:

 

None.

 

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Item 2.    Properties:

 

Our principal executive offices are located in a leased facility in Emeryville, California, consisting of approximately 23,803 square feet of office space, under a lease that expires in July 2017. This facility accommodates our principal administrative and finance operations. We typically occupy a leased facility in each of our operating districts to accommodate offices for our district director, district broker, district recruiter, and support staff. We generally do not provide office space for our agent force. We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities will be available for lease to meet our future needs.

 

Item 3.    Legal Proceedings:

 

 On March 26, 2010, we were named as one of fourteen defendants in a lawsuit filed in the United States District Court for the District of Delaware, Smarter Agent LLC v. Boopsie, Inc., et al. The complaint alleges that the defendants have each infringed on patents owned by Smarter Agent relating to mobile device application technology and seeks unspecified damages and injunctive relief. The US Patent Office is currently examining the patent issue, and litigation is stayed pending the completion of that investigation. After completing investigation of this matter, we do not believe that we have infringed on any patent, or that we have any liability for the claims alleged, and, thus, we intend to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

On February 17, 2012, two real estate sales agents formerly employed by us, on behalf of themselves and all other similarly situated individuals, filed a lawsuit against us in the United States District Court, District of Arizona, Patricia Anderson and James Kwasiborski v. ZipRealty, Inc. The complaint concerns our compensation practices nationwide regarding our real estate agents, who at the time at issue were classified as employees. Specifically, the complaint alleges that we failed to pay these persons minimum wage and overtime as required by federal law. The complaint seeks liquidated and treble damages in addition to wages and overtime for an unspecified amount. On December 23, 2013, we reached a preliminary settlement for $1.7 million to resolve both the federal and state law claims. We will also be responsible for payment of the employer’s share of F.I.C.A. taxes and other employer tax for the back wages which total approximately $0.2 million. The settlement, which has been agreed to by the parties, is subject to court approval.

 

On February 29, 2012, one real estate agent formerly employed by us, on behalf of herself and all other similarly situated individuals, filed a lawsuit against us in the Superior Court of California, Los Angeles County, Tracy Adewunmi v. ZipRealty, Inc., concerning our compensation practices regarding real estate agents in California. Specifically, the complaint alleged that we failed to pay these persons minimum wage and overtime, failed to provide meal and rest periods, failed to reimburse employee expenses and failed to provide itemized wage statements as required by California laws. The complaint sought unspecified damages including penalties and attorneys’ fees in addition to wages and overtime. On May 20, 2013, Ms. Adewunmi dropped the class claims in her complaint and proceeded as an individual plaintiff. On January 28, 2014, we reached a settlement with Ms. Adewunmi for $30,000 to resolve all claims.

 

 We are not currently subject to any other material legal proceedings. From time to time we have been, and we currently are, a party to litigation and subject to claims incident to the ordinary course of the business. The amounts in dispute in these matters are not material to us, and we believe that the resolution of these proceedings will not have a material adverse effect on the business, financial position, results of operations or cash flows.

 

Item 4.    Mine Safety Disclosures:

 

Not applicable

 

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PART II

 

Item 5.    Market for Our Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities:

 

Market information

 

Our common stock trades on the NASDAQ Stock Market under the symbol “ZIPR.” The following table sets forth the high and low closing prices for our common stock as reported by the NASDAQ Stock Market:

 

   High   Low 
2012 Calendar year          
First Quarter  $1.50   $1.06 
Second Quarter  $1.69   $1.29 
Third Quarter  $3.01   $1.32 
Fourth Quarter  $3.08   $2.49 
2013 Calendar year          
First Quarter  $4.12   $2.75 
Second Quarter  $3.50   $2.77 
Third Quarter  $5.99   $3.03 
Fourth Quarter  $6.05   $5.11 

 

As of March 4, 2014, we had approximately 75 common stockholders of record and a substantially greater number of beneficial owners. Our closing stock price on March 4, 2014 was $4.06. We did not sell any of our equity securities during 2013 that were not registered under the Securities Act of 1933, as amended.

 

Dividend policy

 

We have never declared or paid any dividends on our common stock. We intend to retain our earnings for use in our business and therefore we do not anticipate declaring or paying any cash dividends in the foreseeable future.

 

Item 6.     Selected Consolidated Financial Data:

 

The following selected consolidated financial data set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this annual report on Form 10-K to fully understand factors that may affect the comparability of the information presented below.

 

The consolidated statements of operations data for the years ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2013 and 2012 are derived from our audited consolidated financial statements appearing in “Item 8. Financial Statements and Supplementary Data” of this annual report on Form 10-K. The consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011, 2010 and 2009 are derived from audited consolidated financial statements not included in this report. Our historical results are not necessarily indicative of the results to be expected in the future.

 

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   Year Ended December 31, 
Consolidated Statement of Operations Data  2013   2012   2011   2010   2009 
   (In thousands, except per share data) 
Net revenues  $75,853   $73,820   $85,149   $118,696   $123,130 
Operating costs and expenses:                         
Cost of revenues   43,674    40,661    45,757    67,185    71,254 
Product development (1)   7,608    6,957    8,738    10,393    10,372 
Sales and marketing   21,205    20,490    28,079    43,545    41,881 
General and administrative   6,713    7,795    9,147    13,376    13,405 
Litigation settlement charges (Note 6)   2,003    5,825    878    -    - 
Restructuring charges, net   33    1,686    2,339    -    - 
Total operating costs and expenses   81,236    83,414    94,938    134,499    136,912 
Loss from operations   (5,383)   (9,594)   (9,789)   (15,803)   (13,782)
Other income, net:                         
Interest income   6    22    58    253    718 
Other income, net   -    -    -    -    1 
Total other income, net   6    22    58    253    719 
Loss before income taxes   (5,377)   (9,572)   (9,731)   (15,550)   (13,063)
Provision for (benefit from) income taxes   59    106    -    -    (171)
Net loss  $(5,436)  $(9,678)  $(9,731)  $(15,550)  $(12,892)
Net loss per share:                         
Basic and diluted  $(0.26)  $(0.47)  $(0.47)  $(0.76)  $(0.64)
Weighted average common shares outstanding:                         
Basic and diluted   21,071    20,641    20,543    20,510    20,242 
                          
(1) Amortization of internal-use software and website development costs included in product development  $1,348   $1,156   $1,095   $1,117   $943 

 

   Year ended December 31, 
Consolidated Statement of Balance Sheet Data  2013   2012   2011   2010   2009 
   (In thousands) 
Cash, cash equivalents and short term investments  $14,311   $12,921   $22,135   $32,341   $44,134 
Working capital   9,372    10,843    19,663    26,698    38,028 
Total assets   20,184    19,429    28,296    39,805    52,392 
Total long-term liabilities   586    592    781    179    327 
Total liabilities   7,901    5,929    6,464    9,904    10,762 
Total stockholders' equity  $12,283   $13,500   $21,832   $29,901   $41,630 

 

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations:

 

The following discussion should be read together with our financial statements and related notes included in “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” of this annual report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including but not limited to those described under “Risk Factors” and elsewhere in this annual report on Form 10-K. Except as otherwise required by law, we do not intend to revise or update any information contained in these forward-looking statements.

 

OVERVIEW

 

We are a leading online, technology-enabled residential real estate brokerage company. Our company owned-and-operated real estate brokerage serves 19 metropolitan markets with over 1,700 licensed REALTORS®. We serve an additional 20 markets through our Powered by Zip, or PbZ, business, which provides our technology platform for acquiring and incubating new customer relationships and for managing real estate transactions. We operate ZipRealty.com, which is consistently one of the most visited real estate brokerage websites in the nation according to reports generated with Google Analytics, a website traffic analysis service. ZipRealty.com attracts approximately 2.6 million unique monthly visitors. We also provide consumers with highly rated mobile applications that offer all of the key features of our website and optimize them for all major platforms and devices.

 

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Both our owned-and-operated brokerage and our Powered by Zip client platform share the same internal engine: the powerful proprietary customer service technology, known as Zap, and the online marketing capabilities that form the foundation of our business. We developed Zap over a 15 year period during which our technology team partnered with REALTORS® across the country to collaboratively develop a customer service platform that empowers real estate professionals to deliver superior customer service using a significantly more efficient approach. We refer to this innovation feedback loop as our “innovation factory” and believe that our disciplined management of this process directly led to Zap’s success in our brokerage and our Powered by Zip clients and also allows us to keep this application on the cutting-edge.

 

As the direct result of offering the most accurate, timely and comprehensive housing information, buyers using our services can quickly find relevant home listings that meet their search criteria and are well positioned when they are ready to interact with local REALTORS® affiliated with our owned-and-operated brokerage or our PbZ clients. At the same time, sellers using our system gain confidence in the pricing and marketing of their home to interested home buyers.

 

Who we serve

 

Our proprietary technology, established reputation as a full service online brokerage, and Powered by Zip business, as well as our prominence both online and in mobile, allow us to serve three main constituencies in the residential real estate industry:

 

·        First and foremost, we serve serious consumers, which we define as those who expect to purchase or sell a home within the next six to eighteen months. We offer these consumers our technology and services to provide control, choice and seamless, customized service. Through ZipRealty.com and our award-winning mobile apps, we provide consumers with the most accurate and relevant data on homes currently for sale wrapped up in an easy-to-use interface and, when they are ready, connect them with knowledgeable local REALTORS® to assist them through every step of their real estate transaction.

 

·        Second, we serve real estate professionals in our owned-and-operated brokerage business. For these professionals, who seek more productive ways to conduct business in the competitive residential real estate industry, we generate a large base of customer leads which, through an advanced algorithm developed over the course of 15 years, have been systematically matched to yield productive agent-client relationships. These leads are made even more valuable with Zap, which is a system that helps incubate customer relationships with the assistance of powerful prospecting tools and real-time data on client activity that enables agents to provide excellent anticipatory service. In October 2013, we launched a mobile Zap application, which allows agents to access the full functionality of the system via their smartphone or tablet while in the field. In the fourth quarter of 2013, 85% of our owned-and-operated brokerage agents accessed our mobile Zap application at some point. We also market ZipRealty-affiliated REALTORS® on ZipRealty.com by showcasing their local expertise and real estate transaction activity. We also provide these individuals with personalized agent profile pages accessible online and via mobile devices.

 

·        Third, we serve other real estate brokerages and their affiliated agents who seek a competitive edge in this new era in which consumers are increasingly using online services for home buying and selling. Brokerages empowered with Zap enjoy online analytical metrics on consumer behavior, and real-time visibility on their leads, transaction pipeline and brokerage operations. With a wide array of analytics, brokerages can measure productivity by agent and allocate leads and resources in a targeted manner. Further, by utilizing our SaaS-based Zap technology platform, our PbZ brokerage clients benefit from our rapid innovation cycle without the burden of expensive IT maintenance and software upgrade costs.

 

Geographic reach

 

We conduct our owned-and-operated brokerage services in 19 markets nationwide: Austin, TX; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; Houston, TX; Las Vegas, NV; Los Angeles, CA; Orange County, CA; Orlando, FL; Phoenix, AZ; Richmond, VA; Sacramento, CA; San Diego, CA; San Francisco Bay Area, CA; Seattle, WA; Portland, OR; and Washington, DC.

 

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Our Powered by Zip business serves leading local brokerages in 20 markets where we do not otherwise conduct business: Atlanta, GA; Brooklyn, NY; Charlotte, NC; Greater Hudson Valley, NY; Greater Philadelphia area, PA; Harrisburg, PA; Jacksonville, FL; Long Island, NY; Miami, FL; Minneapolis, MN; Nashville, TN; Palm Beach, FL; Pittsburgh, PA; Raleigh-Durham, NC; Salt Lake City, UT; Sarasota-Naples, FL; St. Louis, MO; Tampa, FL; Tucson, AZ; and Virginia Beach, VA.

 

Our Powered by Zip clients retain over 620 agents, bringing the total agent count in the markets served by our owned-and-operated brokerage and Powered by Zip clients to nearly 2,400 local, licensed real estate agents, all of whom are independent contractors.

 

In 2013, we continued to extend our Multiple Listing Service, or MLS, coverage to include several new markets where we do not yet have a full-scale owned-and-operated presence or a PbZ client. This expanded coverage also plays a role in facilitating expansion of our PbZ client base.

 

How we derive our revenues

 

We derive all of our revenues from our core business of offering the best proprietary technology and online marketing capabilities available in our industry. We derive the significant majority of our net revenues from commissions earned in our owned-and-operated brokerage representing buyers and sellers in residential real estate transactions. We record commission revenues net of any commission discount, transaction fee adjustment or, when applicable, rebate. Net transaction revenues are principally driven by our base of real estate professionals whose productivity leads to the number of transactions closed and the average net revenue per transaction. Average net revenue per transaction is a function of the home sales price and percentage commission received on each transaction and can vary significantly by market. We also derive revenues from net commission earned by brokerages in our Powered by Zip business. Brokerages in our Powered by Zip business typically pay a combination of a monthly subscription and transaction-based success fee for our full SaaS solution. This solution includes a co-branded website, online agent marketing, a steady stream of leads for their metropolitan area, the Zap brokerage operating system for managing the business, and the full agent functionality of the Zap platform for managing the client interaction, lead incubation and customer service. Additionally, we derive revenues from our website through marketing arrangements with residential mortgage service providers as well as the sale of online display advertising. Finally, we earn lead referral fees. Marketing and other revenues, which includes Powered by Zip revenues, represented approximately 7% of our net revenues for 2013.

 

RECENT DEVELOPMENTS

 

Expansion of the Powered by Zip business: We are a consistent technology innovator, known in the industry for testing and launching ground-breaking products, and using the live feedback of agents and consumers to improve those ideas and deliver even better, more relevant solutions over time. Our technology progress helped to drive success in our Powered by Zip business, which offers all of Zap’s functionality to third party brokerages. In 2013, we added seven new clients to our Powered by Zip business, bringing the total number of brokerages served to 20. Additionally, two of our existing clients broadened the geographic footprint of our relationship in 2013. Our clients’ brands include Coldwell Banker, Prudential/Berkshire Hathaway Home Services, Better Homes & Gardens, Century 21, and ERA as well as several independent brokerages with strong regional brands. Over the past year, we continued to gain experience serving our clients and their agents, which translated into increased adoption of our technology. Of the PbZ clients that we have served for more than 12 months, we grew agent count by 28% versus the prior year as additional agents signed on to PbZ teams. With the addition of new clients, we grew agent count to 620 at December 31, 2013 which was a 69% increase compared to the agent count at the prior year end.

 

Recent advances in technology: We made several advancements in our consumer and agent facing technology during 2013. The most significant milestone was our development of Mobile Zap and its successful launch in October of 2013. Mobile Zap offers agents in both our owned-and-operated business and our PbZ business the full functionality of the desktop version, augmented with mobile-specific features such as geolocation and one-touch click to call functionality. Mobile Zap provides productivity enhancements over the desktop version with crisp data visualization designed to improve filtering and sorting capabilities for effective and efficient client platform management. Communication is improved with notifications now linked to SMS as well as email to enable an agent to respond more rapidly, which is a metric that we believe resonates well with consumers. The “Quick Add” feature of Mobile Zap allows agents to add new contacts, showing appointments, tasks and calendar items while in the field. The showings option includes a field to capture comments on the home during the visit. Data provided by Agent Comments highlights the agents’ local insight, knowledge and experience to online consumers. We expect that the Mobile Zap launch will increase the number, timeliness and quality of Agent Comments.

 

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We continued to drive innovation on our website to improve its SEO drawing power. Recognizing the increasing importance of social media to consumer behavior as well as to relevance with respect to search engine algorithms, we developed social sharing buttons on home detail pages, enabling agents to link to their social profiles from their profiles on ZipRealty.com, and opening up social sharing of Agent Reviews. These efforts resulted in social referral traffic that was up 94% year-over-year in the fourth quarter of 2013. In addition, Agent Comments continue to be a significant driver for SEO. Over 30% of all visit requests resulted in an Agent Comment in 2013. We expect that Mobile Zap will increase the volume of Agent Comments through increased participation by agents and a higher number of comments per agent.

 

All of these technology advances benefited from the close collaboration between our technology team and our agents. These continuing advances demonstrate our conviction that this innovation factory serves as one of our core competencies, helping us maintain our technology leadership in the residential real estate industry.

 

MARKET CONDITIONS AND TRENDS IN OUR BUSINESS

 

We compete in the domestic residential real estate market. Beginning in late 2005, the market was negatively impacted by a significant correction in the total value of homesale transactions and the deep economic recession that followed. The Federal Reserve responded to these events by implementing an extraordinary monetary accommodation policy, which helped to restore the country to economic growth beginning in 2011. Over the past three years, economic activity as measured by real Gross Domestic Product, or GDP, grew 1.8%, 2.2% and 1.9% in 2011, 2012 and 2013, respectively. The residential real estate market began showing signs of recovery between mid-2011 and early 2012, and since that time it has shown strong sales and price recovery. However, the deceleration of growth in GDP from 2012 to 2013 reflects an economy undergoing an uneven recovery.

 

Macroeconomic forces: The current Federal Reserve monetary policy is one of the most significant economic variables affecting the real estate market. For the past few years, the Federal Reserve has been pursuing an accommodative monetary policy designed to spur economic growth. In December 2013, in response to what was viewed as a “moderate” expansion of economic activity, the Federal Reserve announced that it planned to reduce the rate of treasury bond repurchases beginning in January 2014. The January 2014 meeting of the Federal Open Market Committee led to a further reduction in the pace of bond repurchases to $65 billion per month from $85 billion per month throughout 2013. The Committee also reaffirmed its commitment to an accommodative monetary policy as long as the unemployment rate exceeds 6.5% and the projected inflation continues to run below 2%.

 

The Federal Reserve’s accommodative monetary policy depressed mortgage rates for several years, which reached a low point of 3.31% for a conventional 30-year fixed rate mortgage in November 2012, and which remained below 4.0% through the first half of 2013. Expectations of a change in Federal Reserve monetary policy pushed this rate up 53 basis points following the June 2013 Federal Open Market Committee meeting to above 4%, where it remained for the second half of 2013. Mortgage interest rates are still at historic lows and home affordability remains high, but if mortgage interest rates continue to rise, they could impair the housing recovery.

 

In 2014, we believe that the health of the residential housing market will continue to be significantly affected by the availability of credit, inventory levels, and interest rates, as well as any significant change in unemployment levels. We cannot predict any changes in those macroeconomic forces, nor can we predict the combined impact of those changes on the residential real estate market nationally or in the markets we serve.

 

Federal action: The federal government, state governments and related agencies have acted to address the decline in the residential real estate market and the availability of home mortgage credit. The most significant lending-related legislation in effect was mandated by The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau and mandated it to develop rules that discourage risky home mortgage lending practices. The resulting regulations, referred to as Regulation Z, which implement the Truth in Lending Act, or TILA, became effective January 10, 2014 and prohibit a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. Because TILA is a new regulation, there can be no assurance that it will have a positive, meaningful and lasting impact on the housing market, or that it will not result in unintended consequences.

 

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Current residential real estate market conditions: Recent indicators of national residential real estate market include the following:

 

·Volume: According to the NAR, total existing-home sales in 2013 were the highest since 2006. NAR’s preliminary annual total for existing-home transactions in 2013 was 5.09 million, up 9.1 percent from 4.65 million in 2012, marking the third consecutive year of volume increases. However, the volume increase tapered off by the end of 2013, with existing home sales increasing just 0.8% year-over-year for the fourth quarter of 2013, and down 0.6% year-over year for December 2013. Low mortgage interest rates, particularly through the first half of 2013, seem to have played a large role in affecting sales volume, although inventory shortages and tight lending criteria may be limiting buying opportunities.

 

·Price: NAR’s preliminary estimate of median existing-home price for the full year 2013 was $197,100, up 11.5 percent from $176,800 in 2012. This year-over-year increase represented the strongest annual price gain since 2005, when the median price rose 12.4 percent. Year-over-year price growth continued through the end of 2013, increasing 10.1% for the fourth quarter and 9.9% for December 2013. The price increase may have been due, in part, to a decrease in the percentage of national home sales that represented distressed properties, as well as inventory shortages.

 

·Inventory: NAR reported a December 2013 housing inventory level of 1.86 million homes, which it stated was approximately a 4.6-month supply at its estimated current sales pace. This inventory level is slightly higher than the December 2012 level, which had not been that low since May of 2005. The sharp decrease in housing inventory experienced in 2012, during which inventory fell by 22%, moderated somewhat in 2013. However, NAR noted that inventory continued to be tight at the end of 2013, particularly in the Western United States. Tight inventory can distort the market by causing sharp price increases that favor sellers and that are typically only sustainable over a short period of time.

 

Fluctuations in quarterly profitability: We have experienced fluctuations in profitability from period to period. Our profitability has been impacted by various factors, including ongoing market challenges, government intervention, seasonality, market expansions and closures, and legal settlements.

 

Industry seasonality and cyclicality: The residential real estate brokerage market is influenced both by seasonal factors and by overall economic cycles. While individual markets vary, transaction volume nationally tends to increase progressively from January through the summer months, then to slow gradually over the last three to four months of the calendar year. Revenues in each quarter are significantly affected by activity during the prior quarter, given the typical 30 to 45-day time lag between contract execution and closing for traditional home purchases. For non-traditional sales, the time lag from contract execution to closing can be longer. We have been, and believe we will continue to be, influenced by overall market activity and seasonal forces. We generally experience the most significant impact in the first and fourth quarters of each year, when our revenues are typically lower relative to the second and third quarters as a result of traditionally slower home sales activity and reduced listings inventory between Thanksgiving and Presidents’ Day.

 

The impact of seasonality can be masked by the general health of the residential real estate market at any given point in time, whether affected by macroeconomic events, periodic business cycles or other factors. Generally, when economic conditions are fair or good, the housing market tends to perform well. If the economy is weak, if interest rates dramatically increase, if mortgage lending standards tighten, or if there are disturbances such as terrorist attacks or threats, the outbreak of war or geopolitical uncertainties, the housing market likely would be negatively impacted.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated 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 evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements under Item 8, and of those policies, we believe that the following accounting policies are the most critical to understand and evaluate our financial condition and results of operations.

 

Revenue recognition

 

Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service has been delivered and collectability of the resulting receivable is reasonably assured.

 

We derive the significant majority of our net revenues from commissions earned in our owned-and-operated residential real estate brokerage. We recognize this commission based revenue upon closing of a sale and purchase transaction, net of any rebate, commission discount or transaction fee adjustment. These transactions typically do not have multiple deliverable arrangements.

 

We derive marketing and other revenues primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, and other referral revenue including revenue from brokerages who are clients of our Powered by Zip business. Marketing service revenues are recognized over the term of the agreements as the contracted services are delivered. Advertising revenues on contracts are recognized as impressions are delivered or as clicks are provided to advertisers. Advertising and marketing contracts may consist of multiple deliverables which generally include a blend of various impressions or clicks as well as other marketing deliverables. Other referral revenues related to revenue sharing arrangements are recognized based on reports received from our partners, provided that collectability is reasonably assured.

 

Internal-use software and website development costs

 

We account for internal-use software and website development costs, including the development of our customer service platform which we refer to as Zap, in accordance with the guidance set forth in the related accounting standards. We capitalize internal costs consisting of payroll and direct payroll-related costs of employees who devote time to the development of internal-use software, as well as any external direct costs. We amortize these costs over their estimated useful lives, which typically is 24 months. Our judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. The estimated life is based on management’s judgment as to the product life cycle. We periodically evaluate the carrying value of capitalized internal-use software and website development costs for impairment when events and circumstances warrant such a review. As of December 31, 2013, we have not recorded any charges for impairment of capitalized internal-use software and website development costs to date.

 

Stock-based compensation

 

We follow the provisions of accounting standards for share-based payments, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors, including employee stock options and employee stock purchases, based on estimated fair values. Under the fair value recognition provisions of the accounting standards, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense using the straight-line method over the requisite service period of the award.

 

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We estimate the fair value of stock options using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock. The expected life of options is estimated by taking the average of the vesting term and the contractual term of the option. We estimate expected forfeitures based on various factors including employee class and historical experience. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised.

 

Income taxes

 

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period adjusted for the change during the period in deferred tax assets and liabilities.

 

The accounting guidance for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent historical results and our expectations for the future. Historically, we have recorded a valuation allowance on our deferred tax assets, the majority of which relate to net operating loss carryforwards and we maintain that a full valuation allowance should be accounted for against our net deferred tax assets at December 31, 2013.

 

Restructuring charges

 

In connection with our cost reduction initiatives, we record restructuring charges for employee termination costs, costs related to leased facilities to be abandoned or subleased, fixed asset impairments and other exit-related costs. Formal plans are developed and approved by management. Restructuring costs related to employee severance and related expenses are recorded when probable and estimable. Fixed assets impaired as a result of restructuring are typically accounted for as assets held for sale or abandoned. The recognition of restructuring charges requires us to make judgments and estimates regarding the nature, timing, and costs associated with the planned restructuring activity, including estimating sublease income and the fair value, less selling costs, of fixed assets being disposed of. Estimates of future liabilities may change, requiring us to record additional restructuring charges or to reduce or reverse the amount of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued liabilities to ensure their adequacy, that no excess accruals are retained and that the utilization of the provisions is for the intended purpose in accordance with the approved restructuring plan. In the event circumstances change and the provision is no longer required, the provision is reversed.

 

Litigation

 

We are involved in legal proceedings on an ongoing basis. Based upon our evaluation and consultation with outside counsel handling our defense in these matters and an analysis of potential results, we accrue for losses related to litigation if we determine that a loss is probable and it can be reasonably estimated. If only a range of estimated losses can be determined, then we record an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we record the low end of the range. Any such accrual is charged to expense in the appropriate period. We record litigation expenses in the period in which the litigation services were provided.

 

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Recent accounting pronouncements

 

In January 2013, the Financial Accounting Standards Board (“FASB”) amended its guidance on the presentation of comprehensive income. The new guidance requires entities to present information regarding reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. The amendment becomes effective for reporting periods beginning after December 15, 2012 and is applied prospectively. The Company has adopted this guidance during the year ended December 31, 2012. This guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it is an enhancement to current required disclosures.

 

RESULTS OF OPERATIONS

 

The following table summarizes certain financial data related to our operations for the periods indicated:

 

   Year Ended December 31, 
Statement of Operations Data  2013   2012 
   (In thousands, except per share amounts) 
Net revenues  $75,853   $73,820 
Operating costs and expenses:          
Cost of revenues   43,674    40,661 
Product development (1)   7,608    6,957 
Sales and marketing   21,205    20,490 
General and administrative   6,713    7,795 
Litigation settlement charges (Note 6)   2,003    5,825 
Restructuring charges, net   33    1,686 
Total operating costs and expenses   81,236    83,414 
Loss from operations   (5,383)   (9,594)
Interest income   6    22 
Loss before income taxes   (5,377)   (9,572)
Provision for income taxes   59    106 
Net loss  $(5,436)  $(9,678)
Net loss per share:          
Basic and diluted  $(0.26)  $(0.47)
Weighted average common shares outstanding:          
Basic and diluted   21,071    20,641 
           
(1) Amortization of internal-use software and website development costs included in product development  $1,348   $1,156 

 

The following table presents our operating results as a percentage of net revenue for the periods indicated:

 

   Year Ended December 31, 
Statement of Operations Data  2013   2012 
Net revenues   100%   100%
Operating costs and expenses:          
Cost of revenues   57.6    55.1 
Product development   10.0    9.4 
Sales and marketing   28.0    27.8 
General and administrative   8.9    10.6 
Litigation settlement charges   2.6    7.9 
Restructuring charges, net   -    2.3 
Total operating costs and expenses   107.1    113.1 
Loss from operations   (7.1)   (13.1)
Interest income   -    - 
Loss before income taxes   (7.1)   (13.1)
Provision for income taxes   0.1    0.1 
Net loss   (7.2)%   (13.2)%

  

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Comparison of the years ended December 31, 2013 and December 31, 2012

Other operating data (1)

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
Number of markets-same markets (2)   19    19    -      
Number of markets-total markets (2)   19    19    -      
                     
Number of transactions closed during the period-same markets (3)   9,731    10,299    (568)   (5.5)%
Number of transactions closed during the period-total markets (3)   9,731    10,418    (687)   (6.6)%
                     
Average net revenue per transaction-same markets (4)  $7,184   $6,578    606    9.2%
Average net revenue per transaction-total markets (4)  $7,184   $6,577    607    9.2%
                     
Number of agents at end of the period-same markets   1,745    1,540    205    13.3%
Number of agents at end of the period-total markets   1,745    1,540    205    13.3%

 

 

  (1) Other operating data includes our owned-and-operated markets only and excludes marketing and other revenue along with Powered by Zip revenue.

 

  (2) Same-market operating data excludes markets closed as the result of our 2011 and 2012 restructuring plans. These plans included closing our owned-and-operated brokerage operations in selected underperforming markets and, in certain markets, transitioning operations to third-party brokerages joining our Powered by Zip business. We closed our owned-and-operated brokerage offices in Fresno/Central Valley, Charlotte, Naples, Jacksonville, Miami, Palm Beach, Tampa, Hartford, Minneapolis, Virginia Beach, Atlanta, and Tucson during the quarter ended March 31, 2011 and we closed Philadelphia and Raleigh-Durham during the quarter ended December 31, 2011. Operations in Atlanta, Tucson, Raleigh, and Philadelphia were transitioned to clients of our Powered by Zip business. Our brokerage operations in Salt Lake City were closed and transitioned to a Powered by Zip brokerage client during the quarter ended March 31, 2012. The Westchester/Bronx portion and the Long Island portion of our New York brokerage operations were transitioned to Powered by Zip brokerage clients during the quarter ended June 30, 2012 and September 30, 2012, respectively, and are excluded from the owned-and-operated data for all periods.

 

  (3) The term “transaction” refers to each representation of a buyer or seller in a real estate purchase or sale.

 

  (4) Average net revenue per transaction equals net transaction revenues divided by number of transactions with respect to each period.

 

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Net revenues

 

Net transaction revenues consist primarily of commissions earned in our owned-and-operated residential real estate brokerage. Marketing and other revenues consist primarily of marketing agreements, lead generation, advertising and transaction referral commissions, including commission referrals earned from brokers that are clients of our Powered by Zip business.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
Net transaction revenues:  (In thousands)     
Same market  $69,910   $67,750   $2,160    3.2%
Closed market   -    766    (766)   (100.0)%
    69,910    68,516    1,394    2.0%
Marketing and other revenues   5,943    5,304    639    12.0%
Total net revenues  $75,853   $73,820   $2,033    2.8%

 

The increase in our net transaction revenues of $1.4 million or 2.0% for the year ended December 31, 2013 compared to the year ended December 31, 2012 was driven primarily by an increase in revenue per transaction of $607 or 9.2% offset by a decrease in the number of transactions closed during the period of 687 or 6.6% compared to the prior year. Transactions closed during 2013 on a same-market basis were 9,731 compared to 10,299 in 2012, a decrease of 568 or 5.5%. We believe the decrease in same-market transaction volume was attributable to inventory constraints and a year-over-year decline in home sale transactions in some markets we serve. The market continues to be impacted by reduced availability of mortgage financing and low inventory. Same-market average net revenue per transaction for 2013 was $7,184 compared to $6,578 in the prior year, an increase of $606 or 9.2 % due to the impact of higher average homesale prices and changes in our average commission rates.

 

The increase in marketing and other revenues for the year ended December 31, 2013 compared to the year ended December 31, 2012 was attributable to an increase in transaction referrals, principally from brokers that are clients of our Powered by Zip business, of approximately $0.5 million and marketing fees of $0.1 million.

 

We expect our net revenues will increase modestly in 2014 compared to 2013, driven by an expected increase in the overall number of transactions closed and an expected increase in the average net revenue per transaction. We also expect our marketing and other revenues will increase for 2014 primarily attributable to increased transaction commission referrals earned from brokerages that are clients of our Powered by Zip business.

 

Cost of revenues

 

Our cost of revenues consists principally of commissions and related costs paid to our agents. Agent commissions are generally paid on net transaction revenues plus referral and other revenues generated by our agents.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
Cost of revenues:  (In thousands)     
Same markets  $43,674   $40,291   $3,383    8.4%
Closed markets   0    370    (370)   (100.0)%
Total  $43,674   $40,661   $3,013    7.4%

 

The increase in cost of revenues for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily related to the overall increase in net revenues on which we paid agent commissions. Same market cost of revenues for the year ended December 31, 2013 were $43.7 million compared to $40.3 million for the year ended December 31, 2012. Same market agent commissions increased by approximately $3.3 million or 8.2% between these periods. Same-market cost of revenues as a percentage of net transaction revenues was 62.5% in 2013 compared to 59.5% in 2012.

 

We expect our cost of revenues will increase in absolute dollars in 2014, compared to 2013, because of an expected increase in net revenues. Our cost of revenues moves in relation to the market net revenues on which commissions are based and also increases or decreases as a result of the mix of commission rates paid to our agents.

 

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Product development

 

Product development expenses include our information technology costs relating to the maintenance of our website, proprietary technology platforms and system infrastructure. These costs consist primarily of compensation and benefits, software, equipment and infrastructure costs consisting primarily of facilities, communications and other operating expenses. Product development expenses also include amortization of capitalized internal-use software and website development costs.

  

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Product development  $7,608   $6,957   $651    9.4%

 

The increase in product development expenses for the year ended December 31, 2013 compared to the year ended December 31, 2012 was due primarily to increases in salaries and benefits of $0.3 million attributable to increases in headcount, technology infrastructure costs of $0.3 million and amortization of internal-use software of $0.2 million offset by a decrease in consulting costs of $0.1 million. As a percentage of net revenues, product development expenses increased by 0.6% for the year ended December 31, 2013 compared to the year ended December 31, 2012.

 

We expect to continue enhancing tools and features on our website and technology platform for consumers and brokers that are clients of our Powered by Zip business and, accordingly, we expect that our product development expenses will increase in 2014 in absolute dollars.

 

Sales and marketing

 

Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in sales, sales support and customer service as well as promotional, advertising and client acquisition costs. These expenses have been categorized below between those incurred in our market offices and those expenses which are incurred by the regional and corporate support functions across all markets.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
Sales and marketing:  (In thousands)     
Market level  $15,414   $15,759   $(345)   (2.2)%
Regional/corporate support and marketing   5,791    4,731    1,060    22.4%
Total  $21,205   $20,490   $715    3.5%

 

Market-level sales and marketing expenses decreased for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease of $0.3 million, or 2.2%, was principally attributable to decreases in customer acquisition costs of $0.7 million and facilities and operating expenses of $0.4 million offset by increases in salaries and benefits of $0.6 million, travel of $0.1 million and recruiting of $0.1 million. Approximately $0.4 million of the overall decrease was attributable to operations of the closed markets. As a percentage of net revenues, market-level sales and marketing expenses were 20.3% in 2013 compared to 21.4% in 2012.

 

Regional/corporate sales support and marketing expenses increased for the year ended December 31, 2013 compared to the year ended December 31, 2012 by approximately $1.1 million and consisted primarily of increased salaries and benefits of $0.6 million and customer acquisition of $0.5 million. As a percentage of net revenues, regional/corporate sales support and marketing expenses were approximately 7.6% in 2013 compared to 6.4% in 2012.

 

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We expect our market-level and regional/corporate sales and marketing expenses to increase in absolute dollars and as a percentage of net revenues for 2014 primarily as a result of our Powered by Zip expansion and associated sales and marketing activities.

 

General and administrative

 

General and administrative expenses consist primarily of compensation and related costs for personnel, facilities and operating expenses related to our executive, finance, human resources, facilities and legal organizations, and fees for professional services. Professional services are principally comprised of outside legal, audit and tax services.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
General and administrative  $6,713   $7,795   $(1,082)   (13.9)%

 

General and administrative expenses for the year ended December 31, 2013 compared to the year ended December 31, 2012 decreased by approximately $1.1 million or 13.9% which was primarily attributable to a decrease in professional services fees of $0.9 million and salaries and benefits of $0.2 million due to reductions in headcount. As a percentage of net revenues, general and administrative expenses were 8.9% for the year ended December 31, 2013 compared to 10.6% in the year ended December 31, 2012.

 

We expect our general and administrative expenses for 2014 will decrease slightly in absolute dollars and as a percentage of net revenues primarily as a result of a reduction in anticipated legal fees.

 

Litigation settlement charges

 

Litigation settlement charges consist of settlement and claims expense for litigation associated with our former employee model for our agents which has since been transitioned to an independent contractor model, and other non-core litigation settlements.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Litigation settlement charges, net (Note 6)  $2,003   $5,825   $(3,822)   (65.6)%

 

Litigation settlement charges for the year ended December 31, 2013 compared to the year ended December 31, 2012 decreased by approximately $3.8 million or 65.6 %. For the year ended December 31, 2013, litigation settlement charges were primarily attributable to the preliminary settlement agreement we entered into in connection with the Patricia Anderson and James Kwasiborski v. ZipRealty, Inc. claim. For the year ended December 31, 2012, litigation settlement charges were primarily attributable to the settlement agreement we entered into with the State of California’s Department of Labor Standards Enforcement, or DLSE, for a release of all its claims that we failed to pay our California real estate agents, who were at the time in question classified as employees, minimum wage and overtime mandated by California laws; see Note 6 of the Financial Statements.

 

Restructuring charges

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Restructuring charges, net  $33   $1,686   $(1,653)   (98.0)%

 

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During the year ended December 31, 2012, we implemented a cost reduction initiative which included reducing our workforce in our corporate sales support and administrative functions. The restructuring charges include severance pay and related expenses of approximately $1.7 million. Adjustments to non-cash stock-based compensation expense resulting from expense reversals for unvested stock awards that were forfeited were not significant. At December 31, 2013, the aggregate outstanding restructuring liability was less than $0.1 million, which primarily relates to non-cancelable lease costs we expect to pay over the remaining term of the leases, which end by the third quarter of 2016.

 

Some expenses required estimates, particularly those related to our ability and the timing of generating sublease income and terminating lease obligations, and may require future adjustments to the amount of the restructuring charge recorded. We expect additional charges for these restructuring to be insignificant.

 

Interest income

 

Interest income relates to interest we earn on our money market deposits and short-term investments.

 

   Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Interest income  $6   $22   $(16)   (72.7)%

  

Interest income fluctuates as our cash equivalents and short-term investment balances change and applicable interest rates increase or decrease. The decrease in interest income for the year ended December 31, 2013, compared to the year ended December 31, 2012, was due primarily to lower interest rates earned on lower average balances. The lower interest rates were primarily attributable to overall decreases in market interest rates combined with maintaining higher money market account balances yielding lower interest rates as we decreased our short-term investments positions. The lower average balances were primarily attributable to cash used in our operating activities as a result of the losses incurred during the year ended December 31, 2013.

 

Provisions for income taxes

  

  Year Ended December 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Provisions for income taxes  $59   $106   $(47)   (44.3)%

  

Provision for income taxes for the year ended December 31, 2013 compared to the year ended December 31, 2012 decreased by less than $0.1 million or 44.3%.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal sources of liquidity for 2013 were our cash and cash equivalents. As of December 31, 2013 and 2012, we had cash and cash equivalents of $14.3 million and $12.9 million, respectively. We had no bank debt, line of credit or equipment facilities at December 31, 2013 and 2012.

 

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Operating activities

 

Our operating activities provided cash in the amount of $1.0 million in the year ended December 31, 2013 and used cash in the amount of $7.3 million in the year ended December 31, 2012. Cash provided in the year ended December 31, 2013 resulted primarily from $1.9 million of depreciation and amortization, $1.4 million of non-cash stock-based compensation expense and net changes in working capital partially offset by a net loss of $5.4 million. Cash used in the year ended December 31, 2012 resulted primarily from a net loss of $9.7 million partially offset by $1.8 million of depreciation and amortization, $1.2 million of non-cash stock-based compensation expense and net changes in working capital.

 

Our primary source of operating cash flow is the collection of our net commission income from escrow companies or similar intermediaries in the real estate transaction closing process offset by cash payments for agent commissions and related costs as well as for product development, sales and marketing and general and administrative costs including employee compensation, benefits, client acquisition costs and other operating expenses. Due to the structure of our commission arrangements, our accounts receivable are settled in cash on a short-term basis and our accounts receivable balances at period end have historically been significantly less than one month’s net revenues.

 

Investing activities

 

Our investing activities used cash of $2.4 million for the year ended December 31, 2013 and provided cash of $7.5 million for the years ended December 31, 2012. Cash used for the year ended December 31, 2013 primarily represents the purchase of property and equipment of $2.6 million which includes $1.8 million expended for internal-use software and website development costs. Cash provided for the year ended December 31, 2012 primarily represents the net proceeds from the sale and purchase of short-term investments of $9.5 million offset by the purchase of property and equipment of $2.0 million which includes $1.3 million expended for internal-use software and website development costs.

 

Currently, we expect our 2014 capital expenditures to be approximately $2.0 million primarily attributable to amounts capitalized for internal-use software and website development costs as well as expenditures for increased server capacity and software. In the future, our ability to make significant capital investments may depend on our ability to generate cash flow from operations and to obtain adequate financing, if necessary and available.

 

Financing activities

 

Our financing activities provided cash of $2.8 million and $0.1 million in the years ended December 31, 2013 and 2012, respectively, primarily from stock option exercises.

 

Future needs

 

We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund cash used in our operations and capital expenditures for at least the next twelve months. Our future capital requirements will depend on many factors, including our level of investment in technology and online marketing initiatives, our rate of growth in our local markets and in expanding our Powered by Zip business and SaaS platform solution product line, whether we engage in industry consolidation and pursue acquisition candidates, and possible unforeseen litigation settlements and legal fees. In addition, if the macroeconomic environment and residential real estate market deteriorate or fail to continue to improve, we may have a greater need to fund our business by using our cash, cash equivalent and short-term investment balances, which could not continue indefinitely without raising additional capital.

 

We currently have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business and results of operations will likely suffer.

 

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

We lease office space under non-cancelable operating leases with various expiration dates through July 2018. The following table provides summary information concerning our future contractual obligations and commitments at December 31, 2013.

  

   Payments Due by Period 
   Less Than   1 to 3   3 to 5   More Than     
   1 Year   Years   Years   5 Years   Total 
   (In thousands) 
Operating lease commitments  $1,723   $2,806   $966   $12   $5,507 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off balance-sheet arrangements, other than the indemnification agreements discussed in Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, and we do not have investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

 

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

See “Recent Accounting Pronouncements” in Note 1 “The Company and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

 

NON-GAAP MEASURE

 

The table below shows the trend of Adjusted EBITDA as a percentage of revenue for the periods indicated:

  

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Net revenue  $75,853   $73,820 
Adjusted EBITDA  $11   $823 
Adjusted EBITDA margin   0.0%   1.1%

 

We present Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our performance. We believe Adjusted EDITDA provides useful information regarding the operating results of our core business activity and prospects for the future. We define Adjusted EBITDA as net income (loss) less interest income plus interest expense, provision for (benefit from) income taxes, depreciation and amortization expense, and stock-based compensation and further adjusted to eliminate the impact of certain items that we do not consider reflective of our ongoing core operating performance including litigation settlement charges associated with our former model for our agents, which has since been transitioned from an employee to an independent contractor model.

 

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are reflective of our core operating performance. In addition, we use Adjusted EBITDA to evaluate our financial results and business strategies, develop budgets and manage expenditures and as a factor in evaluating management’s performance when determining incentive compensation.

 

Our use of Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

 

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·Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

·Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
   
·Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

·Adjusted EBITDA does not reflect any cash requirements for such replacements; non-cash stock-based compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;

 

·Adjusted EBITDA does not reflect the impact of certain cash charges or credits resulting from matters we consider not to be reflective of our core ongoing operations; and

 

·Other companies, including companies in our industry, may calculate Adjusted EBITDA differently than we do, which limits its usefulness as a comparative measure.

 

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. When evaluating our performance, Adjusted EBITDA should be considered alongside other financial measures, including net income and our other GAAP results.

 

The following is a reconciliation of Adjusted EBITDA to the most comparable GAAP measure, net loss, for the years ended December 31, 2013 and 2012:

  

   Year Ended December 31, 
   2013   2012 
Reconciliation of non-GAAP Adjusted EBITDA to net loss  (In thousands) 
Net loss  $(5,436)  $(9,678)
Add back:          
Interest income   (6)   (22)
Provision for  income taxes   59    106 
Depreciation and amortization   1,947    1,807 
Stock-based compensation expense   1,411    1,179 
Restructuring charges, net (1)   33    1,606 
Litigation settlement charges (non-core-operating) (2)   2,003    5,825 
Non-GAAP Adjusted EBITDA  $11   $823 

 

 

 

(1)Restructuring charges, net for 2012 Adjusted EBTIDA reconciliation purposes exclude $80,000 of non-cash stock based compensation expense associated with a modification of certain awards previously granted to employees affected by the restructuring which are reflected in the stock-based compensation expense line.
(2)Litigation settlement charges (non-core operations) represent amounts we consider not reflective of our core ongoing operations and includes settlement and claim expense for litigation associated with our former model for our agents which has since been transitioned from an employee to an independent contractor model.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk:

 

Interest rate sensitivity

 

Our investment policy requires us to invest funds in excess of current operating requirements. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. We believe that this investment policy is prudent, that it helps to reduce, but does not prevent, loss of principal, and that it results in minimal interest rate exposure on our investments.

 

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As of December 31, 2013, our cash and cash equivalents consisted primarily of money market funds. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. The amount of credit exposure to any one issue, issuer and type of instrument is limited. Our interest income is sensitive to changes in the general level of interest rates in the United States. If market interest rates were to increase or decrease immediately and uniformly by 10% from levels at December 31, 2013, there would be a negligible increase or decline in fair market value of the portfolio.

 

Exchange rate sensitivity

 

We consider our exposure to foreign currency exchange rate fluctuations to be minimal, as we do not have any sales or expenses denominated in foreign currencies. We have not engaged in any hedging or other derivative transactions to date.

 

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Item 8. Financial Statements and Supplementary Data:

 

Financial Statements Table of Contents

 

 

Page
Number

Report of Independent Registered Public Accounting Firm 51
Consolidated Balance Sheets 52
Consolidated Statements of Operations 53
Consolidated Statements of Comprehensive Loss 54
Consolidated Statements of Stockholders’ Equity 55
Consolidated Statements of Cash Flows 56
Notes to Consolidated Financial Statements 57
Financial Statement Schedule — Valuation and Qualifying Accounts 76

  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

ZipRealty, Inc.

 

We have audited the accompanying consolidated balance sheets of ZipRealty, Inc. (the “Company”), as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended. Our audits also included the consolidated financial statement schedule as of and for the years ended December 31, 2013 and 2012, listed in the index at Item 15 in Schedule II. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZipRealty, Inc. as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule as of and for the years ended December 31, 2013 and 2012, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

/s/ Moss Adams LLP

 

San Francisco, California

March 7, 2014

 

 

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ZIPREALTY, INC

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

   Year Ended December 31, 
   2013   2012 
ASSETS        
Current assets:          
Cash and cash equivalents  $14,311   $12,921 
Accounts receivable, net of allowance of $7 and $15, respectively   975    1,496 
Prepaid expenses and other current assets   1,401    1,763 
Total current assets   16,687    16,180 
Restricted cash   210    500 
Property and equipment, net   3,142    2,387 
Other assets   145    362 
Total assets  $20,184   $19,429 

LIABLITIES AND STOCKHOLDERS' EQUITY

          
Current liabilities:          
Accounts payable  $1,100   $823 
Accrued expenses and other current liabilities   6,171    4,293 
Accrued restructuring charges, current portion   44    221 
Total current liabilities   7,315    5,337 
Other long-term liabilities   586    592 
Total liabilities   7,901    5,929 
Commitments and contingencies (Note 6)          
Stockholders' equity:          
Common stock: $0.001 par value; 100,000 shares authorized: 25,263 and 24,303 shares issued and 21,647 and 20,692 outstanding, respectively   25    24 
Additional paid-in capital   163,680    159,430 
Accumulated deficit   (133,770)   (128,334)
Treasury stock, at cost: 3,615 and 3,610 shares, respectively   (17,652)   (17,620)
Total stockholders' equity   12,283    13,500 
Total liabilities and stockholders' equity  $20,184   $19,429 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZIPREALTY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

   Year Ended December 31, 
   2013   2012 
Net revenues  $75,853   $73,820 
Operating costs and expenses:          
Cost of revenues   43,674    40,661 
Product development (1)   7,608    6,957 
Sales and marketing   21,205    20,490 
General and administrative   6,713    7,795 
Litigation settlement charges (Note 6)   2,003    5,825 
Restructuring charges, net   33    1,686 
Total operating costs and expenses   81,236    83,414 
Loss from operations   (5,383)   (9,594)
Interest income   6    22 
Loss before income taxes   (5,377)   (9,572)
Provision for income taxes   59    106 
Net loss  $(5,436)  $(9,678)
Net loss per share:          
Basic and diluted  $(0.26)  $(0.47)
           
Weighted average common shares outstanding:          
Basic and diluted   21,071    20,641 
           
(1) Amortization of internal-use software and website development costs included in product development   1,348    1,156 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZIPREALTY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

   Year Ended December 31, 
   2013   2012 
Comprehensive Loss:        
Net loss  $(5,436)  $(9,678)
Change in accumulated unrealized gain on available-for-sale securities, net of tax   -    3 
Comprehensive loss  $(5,436)  $(9,675)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZIPREALTY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

 

                      Common     Accumulated                          
          Additional     Stock     Other     Accumulated                 Total  
    Common Stock     Paid in     Warrants     Comprehensive     Deficit     Treasury Stock     Stockholders  
    Shares     Amount     Capital     Amount     Loss     Amount     Shares     Amount     Equity  
Balances, December 31, 2011     20,565     $ 24     $ 158,080     $ -     $ (3 )   $ (118,656 )     3,602     $ (17,613 )   $ 21,832  
                                                                         
Issuance of common stock upon exercise  of stock options     120       -       144       -       -       -       -       -       144  
                                                                         
Issuance of restricted common stock     15       -       -       -       -       -       -       -       -  
                                                                         
Stock-based compensation expense     -       -       1,206       -       -       -       -       -       1,206  
                                                                         
Acquisition of treasury stock     (8 )             -       -       -       -       8       (7 )     (7 )
                                                                         
Net loss     -       -       -       -       -       (9,678 )     -       -       (9,678 )
                                                                         
Unrealized gain on available for sale  securities, net of tax     -       -       -       -       3       -       -       -       3  
                                                                         
Balances, December 31, 2012     20,692       24       159,430       -       -       (128,334 )     3,610       (17,620 )     13,500  
                                                                         
Issuance of common stock upon exercise  of stock options     930       1       2,789       -       -       -       -       -       2,790  
                                                                         
Issuance of restricted common stock     30       -       -       -       -       -       -       -       -  
                                                                         
Stock-based compensation expense     -       -       1,461       -       -       -       -       -       1,461  
                                                                         
Acquisition of treasury stock     (5 )     -       -       -       -       -       5       (32 )     (32 )
                                                                         
Net loss     -       -       -       -       -       (5,436 )     -       -       (5,436 )
                                                                         
Balances, December 31, 2013     21,647     $ 25     $ 163,680     $ -     $ -     $ (133,770 )     3,615     $ (17,652 )   $ 12,283  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZIPREALTY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

  

   Year Ended December 31, 
   2013   2012 
Cash flows from operating activities:          
Net loss  $(5,436)  $(9,678)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,947    1,807 
Stock-based compensation expense   1,411    1,179 
Non-cash restructuring charges   -    3 
Provision for doubtful accounts   12    (15)
Amortization of short-term investment premium   -    44 
Loss on disposal of property and equipment   -    11 
Changes in operating assets and liabilities:          
Accounts receivable   509    (272)
Prepaid expenses and other current assets   356    234 
Other assets   217    (123)
Accounts payable   277    (273)
Accrued expenses and other current liabilities   1,878    (44)
Accrued restructuring charges, current portion   (177)   (29)
Other long-term liabilities   (6)   (189)
Net cash provided by (used in) operating activities   988    (7,345)
Cash flows from investing activities:          
Restricted cash   290    - 
Proceeds from maturity of short-term investments   -    9,460 
Purchases of property and equipment   (2,646)   (1,980)
Proceeds on property and equipment   -    15 
Net cash provided by (used in) investing activities   (2,356)   7,495 
Cash flows from financing activities:          
Proceeds from stock option exercises   2,790    144 
Acquisition of treasury stock   (32)   (7)
Net cash provided by financing activities   2,758    137 
Net increase in cash and cash equivalents   1,390    287 
Cash and cash equivalents at beginning of period   12,921    12,634 
Cash and cash equivalents at end of period  $14,311   $12,921 
Supplemental cash flow information          
Non-cash investing and financing activities:          
Cash paid for taxes  $55   $53 
Stock-based compensation capitalized in internal-use-software and website development costs  $50   $27 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZIPREALTY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of operations

 

ZipRealty, Inc. (the “Company”), was incorporated in California in January 1999 and reincorporated in Delaware in August 2004. The Company provides an online marketing and sales system for residential real estate professionals. The Company’s owned-and-operated brokerages, and the brokerage clients of its Powered by Zip business, offer brokerage services through their agents, utilizing this system, to buyers and sellers in residential real estate transactions.

 

Principles of consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and reflect the elimination of intercompany accounts and transactions.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

  

Net income (loss) per share

 

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding plus, if dilutive, potential common shares outstanding during the period. Potential common shares are composed of incremental shares of common stock issuable upon the exercise of potentially dilutive stock options, warrants and unvested restricted stock.

 

Revenue recognition

 

Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service has been delivered, and collectability of the resulting receivable is reasonably assured. 

 

We derive the significant majority of our net revenues from commissions earned in our owned-and-operated residential real estate brokerage. We recognize this commission based revenue upon closing of a sale and purchase transaction, net of any rebate, commission discount or transaction fee adjustment. These transactions typically do not have multiple deliverable arrangements.

 

We derive marketing and other revenues primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, and other referral revenue including revenue from brokerages who are clients of our Powered by Zip business. Marketing service revenues are recognized over the term of the agreements as the contracted services are delivered. Advertising revenues on contracts are recognized as impressions are delivered or as clicks are provided to advertisers. Advertising and marketing contracts may consist of multiple deliverables which generally include a blend of various impressions or clicks as well as other marketing deliverables. Other referral revenues related to revenue sharing arrangements are recognized based on reports received from our partners, provided that collectability is reasonably assured.

 

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Cost of revenues

 

Cost of revenues consists of agent and broker commissions and related costs. During the last half of the year ended December 31, 2010 and the first quarter of the year ended December 31, 2011, the Company converted its agent force from an employee model to an independent contractor model. Under the employee model, cost of revenues consisted principally of commissions, payroll taxes, benefits including health insurance, performance and tenure based award programs and agent expense reimbursements. Under the independent contractor model, cost of revenues consists principally of commissions and related costs. Agent commissions are generally paid on transaction revenues plus referral and other revenues generated by our agents.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents. At December 31, 2013 and 2012, $11,349,000 and $7,957,000, respectively, of money market funds, the fair value of which approximates cost, are included in cash and cash equivalents.

 

Short-term investments

 

The Company classifies fixed income securities with a maturity of over twelve months from the balance sheet date as short-term investments based on the funds being available for use in current operations, if needed. To date all fixed income securities have been classified as available-for-sale and carried at fair value, which is determined based on quoted market prices, with unrealized gains or losses, net of tax effects, included in accumulated other comprehensive income (loss) in the consolidated accompanying financial statements. Interest and amortization of premiums and accretion of discounts on fixed income securities are included in other income (expense), net, in the accompanying consolidated financial statements. Realized gains and losses are calculated using the specific identification method.

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash, cash equivalents, accounts receivable, restricted cash, accounts payable, accrued expenses and other current liabilities, approximate their fair values due to their short maturities.

 

Concentration of credit risk, significant customers and significant suppliers

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, accounts receivable and restricted cash.

 

The Company deposits its cash and cash equivalents with financial institutions that management believes to be of high credit quality, and these deposits may on occasion exceed federally insured limits. At December 31, 2013, substantially all of the Company’s cash and cash equivalents were managed, on behalf of the Company and, in accordance with its investment policy, by one financial institution.

 

The Company’s accounts receivable are derived from commissions earned which are due from escrow and other residential real estate transfer agents and from non-commission revenues including marketing agreements, advertising, lead referrals and other revenue. These accounts receivable are typically unsecured. Allowances for doubtful accounts are provided for in the financial statements and have been within management’s expectations. No escrow or other transfer agent accounted for 10% or more of the accounts receivable at December 31, 2013 or 2012.

 

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The Company derived 42% and 42% of its net transaction revenues during the years ended December 31, 2013 and 2012, respectively, in the State of California. No customer accounted for more than 10% of net revenues in 2013 or 2012.

 

 The Company generates leads for its agents through many sources, including leads from third parties with which the Company has only non-exclusive, short-term agreements that are generally terminable on little or no notice and with no penalties. The cost of these leads is included in sales and marketing expenses. The Company’s largest third-party paid lead source, Google, generated approximately 30% and 33% of the Company’s leads in 2013 and 2012, respectively. Commission Junction, a competitor for online customer acquisition, generated 7% in 2013 and 12% in 2012, while HomeGain, Inc., also competitor for online customer acquisition, generated 8% in 2013 and less than 10% in 2012 of the Company’s leads.

  

Property and equipment

 

Property and equipment are stated at cost. Leasehold improvements are amortized on the straight-line basis over the shorter of the lease period or their estimated useful lives. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the property and equipment as follows:

 

Computer hardware and software   2 to 3 years
Furniture, fixtures and equipment   4 to 5 years
Leasehold improvements   Shorter of the lease period or estimated useful life

 

When assets are sold or retired, the cost and accumulated depreciation and amortization are eliminated from the accounts, and any resulting gains or losses are recorded in operations in the period realized. Maintenance and repairs are expensed as incurred. Expenditures that substantially increase an asset’s useful life or improve an asset’s functionality are capitalized.

Leasehold improvements made by the Company and reimbursable by the landlord as tenant incentives are recorded by the Company as leasehold improvement assets and amortized over the shorter of the lease period or estimated useful life. The incentives from the landlord are recorded as deferred rent and amortized as reductions to rent expense over the lease term. Deferred rent of $50,000 and $50,000 was amortized as a reduction of rent expense in 2013 and 2012, respectively. At December 31, 2013 and 2012, the deferred rent balance attributable to these incentives totaled $179,000 and $229,000, respectively.

 

Impairment of long-lived assets

 

In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Through December 31, 2013, the Company has not recorded any charges for impairment of long-lived assets.

 

Stock-based compensation

 

The Company follows the accounting guidance for share-based payments which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors, including employee stock options and employee stock purchases, based on estimated fair values. Under the fair value recognition provisions of the accounting standards, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense using the straight-line method over the requisite service period of the award.

 

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The Company estimates the fair value of stock options using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock and consideration of other relevant factors such as the volatility assumptions of guideline companies. The expected life of options is estimated by taking the average of the vesting term and the contractual term of the option. The Company estimates expected forfeitures based on various factors including employee class and historical experience. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised.

 

Internal-use software and website development costs

 

The Company accounts for its internal-use software and website development costs in accordance with the applicable accounting guidance. Costs incurred in the planning stage are expensed as incurred while costs incurred in the application and infrastructure stage are capitalized, assuming such costs are deemed to be recoverable. Costs incurred in the operating stage are expensed as incurred except for the costs of fees paid for cancelable maintenance contracts for internal-use software purchased from third-party vendors. The costs of these fees incurred during the operating phase are recognized on a ratable basis over the period of expected economic benefit, which generally coincides with the contractual service period. The planning stage ends when the functional specifications for a release are complete. Costs incurred relating to architecture design and coding that result in additional functionality are capitalized in the application and infrastructure stage. These costs principally relate to payroll costs for employees directly involved in the development process. Capitalized internal-use software costs, included in property and equipment, are amortized over the software’s useful life, which is generally estimated to be 24 months. Capitalized internal-use software and website development costs are amortized to product development. Costs incurred in connection with the research and development of the Company’s product and technology are expensed as incurred to product development.

  

The Company capitalized $1,853,000 and $1,304,000 in internal-use software costs during the years ended December 31, 2013 and 2012, respectively. Amortization expense totaled $1,348,000 and $1,156,000 during the years ended December 31, 2013 and 2012, respectively. The amount of unamortized internal-use software costs at December 31, 2013 and 2012 was $1,881,000 and $1,329,000, respectively.

 

Advertising costs

 

The costs of advertising are expensed as incurred. Advertising expense was $29,000 and $181,000 for the years ended December 31, 2013 and 2012, respectively. Such expense is included in sales and marketing expense in the Company’s consolidated statements of operations.

 

Income taxes

 

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period adjusted for the change during the period in deferred tax assets and liabilities.

 

Comprehensive loss

 

Comprehensive income (loss) is the sum of net income (loss) and unrealized gains (losses) on available-for-sale securities. Unrealized gains (losses) on investments are excluded from net income (loss) and are reported in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements.

 

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Restructuring charges

 

In connection with the Company’s cost reduction initiatives, it records restructuring charges for employee termination costs, costs related to leased facilities to be abandoned or subleased, fixed asset impairments and other exit-related costs. Formal plans are developed and approved by management. Restructuring costs related to employee severance and related expenses are recorded when probable and estimable. Fixed assets impaired as a result of restructuring are typically accounted for as assets held for sale or abandoned. The recognition of restructuring charges requires the Company to make judgments and estimates regarding the nature, timing, and costs associated with the planned restructuring activity, including estimating sublease income and the fair value, less selling costs, of fixed assets being disposed of. Estimates of future liabilities may change, requiring the Company to record additional restructuring charges or to reduce or reverse the amount of liabilities already recorded. At the end of each reporting period, management evaluates the remaining accrued liabilities to ensure their adequacy, that no excess accruals are retained and that the utilization of the provisions is for the intended purpose in accordance with the approved restructuring plan. In the event circumstances change and the provision is no longer required, the provision is reversed.

 

Litigation settlement charges

 

The Company is involved in legal proceedings on an ongoing basis. Based upon management’s evaluation and consultation with outside counsel handling its defense in these matters and an analysis of potential results, losses related to litigation are accrued if it is determined that a loss is probable and can be it reasonably estimated. If only a range of estimated losses can be determined, then we record an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we record the low end of the range. Any such accrual is charged to expense in the appropriate period. The Company records litigation defense expenses in the period in which the litigation services were provided and are included in the general and administrative line of the consolidated statements of operations.

 

Segment reporting

 

Under the accounting standards for reporting information about operating segments in a company’s financial statements, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company’s Chief Executive Officer), or decision making group, in deciding how to allocate resources and in assessing performance. The Company operates as one segment and in one geographic area, the United States of America.

 

Recent accounting pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the presentation of certain unrecognized tax benefits in the financial statements. This guidance provides that a liability related to an unrecognized tax benefit must be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with earlier adoption permitted, and may be applied prospectively or retrospectively. We expect to adopt this guidance on January 1, 2014. The adoption of this guidance is not expected to have a significant impact on our financial position, results of operations or cash flows, as we have provided a full valuation allowance against our net deferred tax assets.

 

In February 2013, the FASB issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. An entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2012, with earlier adoption permitted, and must be applied prospectively. We adopted this guidance on January 1, 2013. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows.

 

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2. BALANCE SHEET COMPONENTS

 

Restricted cash

 

The Company’s restricted cash balance at December 31, 2013 was $210,000 which serves as collateral to a commercial card agreement of $50,000 and a letter of credit issued as a security deposit in connection with a facility lease agreement of $160,000. The letter of credit expires in July 2017. The restricted cash balance at December 31, 2012 was $500,000 which served as collateral to a commercial card agreement of $300,000 and a letter of credit issued as a security deposit in connection with a facility lease agreement of $200,000.

 

Property and equipment, net

 

Property and equipment, net consisted of the following:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Computer hardware and software  $11,341   $9,095 
Furniture, fixture and equipment   1,944    1,938 
Leasehold improvements   1,956    1,656 
    15,241    12,689 
Less: accumulated depreciation and amortization   (12,099)   (10,302)
Property and equipment, net  $3,142   $2,387 

 

Depreciation and amortization expense for the years ended December 31, 2013 and 2012 was approximately $1,947,000 and $1,807,000, respectively.

 

Included in property and equipment at December 31, 2013 and 2012 is approximately $9,954,000 and $7,789,266, respectively, of fully depreciated property and equipment still in use.

 

Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Accrued compensation  $1,606   $1,073 
Accrued agent commissions   959    1,423 
Accrued marketing   861    863 
Accrued litigation settlement   1,909    227 
Accrued professional fees   164    188 
Other accrued expenses   672    519 
   $6,171   $4,293 

 

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Other long-term liabilities

 

Other long-term liabilities consisted of the following:

  

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Deferred rent  $556   $592 
Accrued restructuring   24    - 
Other long-term liabilities   6    - 
   $586   $592 

  

3.  FAIR VALUE MEASUREMENTS

 

Fair value measurements

 

The Company follows the fair value hierarchy, established by the accounting standard related to fair value measurement, to prioritize the inputs used in valuation techniques. There are three broad levels to the fair value hierarchy of inputs to fair value. Level 1 is the highest priority and Level 3 is the lowest priority. The levels are as follows:

 

  Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

  

  Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

  Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

The Company measures and reports certain financial assets at fair value on a recurring basis, including its investments in money market funds and available-for-sale securities. At December 31, 2013 and 2012, there were no liabilities within the scope of the accounting standards. The fair values of the Company’s Level 1 financial assets are based on quoted market prices of the identical underlying security. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of this investment portfolio.

 

At December 31, 2013 and 2012, the Company’s cash and cash equivalents, measured at fair value on a recurring basis, by level within the fair value hierarchy were as follows:

 

   Year Ended December 31, 2013   Year Ended December 31, 2012 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
   (In thousands)   (In thousands) 
Money Market funds  $11,349   $-   $-   $11,349   $7,957   $-   $-   $7,957 
Total  $11,349   $-   $-   $11,349   $7,957   $-   $-   $7,957 

 

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4. NET LOSS PER SHARE

 

The following table sets forth the computation of basic and dilutive net income (loss) per share for the periods indicated:

  

   Year Ended December 31, 
   2013   2012 
   (In thousands, except per share amounts) 
Numerator:          
Net loss  $(5,436)  $(9,678)
Denominator:          
Weighted average common shares outstanding; basic and diluted   21,071    20,641 
Net loss per share; basic and diluted:  $(0.26)  $(0.47)

 

The following weighted-average outstanding options and non-vested common shares were excluded in the computation of diluted net loss per share for the periods presented because including them would be anti-dilutive:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Options to purchase common stock   5,479    4,809 
Nonvested common stock   44    20 
Total   5,523    4,829 

 

5. INCOME TAXES

 

The components of the provision for income taxes are as follows:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Current:          
Federal  $-   $- 
State   59    106 
    59    106 
Deferred:          
Federal   -    - 
State   -    - 
    -    - 
Total provision for income taxes  $59   $106 

 

The tax provision expense for the year ended December 31, 2013 and 2012 related to Texas state income taxes. The Company incurred operating losses during 2013 and has maintained a valuation allowance equal to the net deferred tax asset.

 

The difference between the Company’s effective income tax rate and federal statutory rate consisted of the following:

 

   Year Ended December 31, 
   2013   2012 
Statutory federal tax rate   34.00%   34.00%
State tax rate, net of federal benefit   -1.10%   -1.10%
Federal NOL carryback   0.00%   0.00%
Stock options   -2.72%   -0.97%
Change in valuation allowance   -31.38%   -33.01%
Other, net   0.10%   -0.02%
Total   -1.10%   -1.10%

 

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Deferred tax assets consist of the following at:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Deferred tax assets:          
  Net operating loss carryforward  $39,074   $37,664 
  Stock-based compensation   3,117    3,580 
Fixed assets and intangibles   783    1,043 
Allowance and accruals   1,397    804 
Credits   23    23 
Total gross deferred tax assets   44,394    43,114 
Less: valuation allowance   (44,394)   (43,114)
Net deferred tax assets  $-   $- 

 

 The Company maintains that a full valuation allowance should be accounted for against its net deferred tax assets at December 31, 2013 and 2012. The Company supports the need for a valuation allowance against the deferred tax assets due to negative evidence including cumulative losses in recent years and management’s expectations for the future.

 

At December 31, 2013, the Company had approximately $113.7 million of federal and $81.8 million of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in 2019 for federal and 2014 for state tax purposes, respectively.

 

Approximately $5.4 million and $5.4 million of net operating loss carryforwards for federal and state income tax purposes, respectively, are attributable to employee stock option deductions, the benefit from which will be allocated to paid-in-capital rather than current income when subsequently recognized.

 

Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. If an ownership change has occurred, utilization of the net operating loss carryforwards could be reduced significantly.

 

The Company does not have any material accrued interest or penalties associated with any unrecognized tax benefits. The Company will account for any interest related to uncertain tax positions as interest expense, and for penalties as tax expense. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months. There were no material changes in the amount of unrecognized tax benefits as of December 31, 2013. The Company is subject to taxation from the United States and various state jurisdictions. Due to the unutilized losses carried forward from earlier years, our tax years 1999-2003 and 2006-2013 are generally open to exam.

 

6. COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through February 2019. The terms of the lease agreements provide for renewal options and escalation clauses. The Company amended the operating lease for its headquarters during July 2011, which extends the previous lease term through July 2017. Future gross and net lease commitments under non-cancelable operating leases at December 31, 2013 were as follows, in thousands:

 

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   Gross         
   Operating       Net Operating 
   Lease   Sublease   Lease 
   Commitments   Income   Commitments 
   (In thousands) 
Year ending December 31,            
2014  $1,723   $(41)  $1,682 
2015   1,520    (43)   1,477 
2016   1,286    (44)   1,242 
2017   733    (34)   699 
2018   233    -    233 
2019   12           
Total minimum lease payments  $5,507   $(162)  $5,333 

 

Rent expense for the years ended December 31, 2013 and 2012 was approximately $1,843,000 and $2,007,000, respectively.

 

Legal proceedings

 

On September 26, 2011, the Division of Labor Standard Enforcement, Department of Industrial Relations, State of California (the “DLSE”) filed a lawsuit against the Company in the Superior Court of California, Alameda County, State Labor Commissioner, etc., v. ZipRealty, Inc. The complaint concerned the Company’s compensation practices regarding real estate agents in California, who at the time at issue were classified as employees. Specifically, the complaint alleged that the Company failed to pay these persons minimum wage and overtime, and failed to provide itemized wage statements, as required by California laws. In addition to wages and overtime, the complaint seeks liquidated damages, for a total claim in excess of $17 million. On September 28, 2012, the Company entered into a settlement Agreement and General Release (the “Agreement”) with the DLSE concerning the complaint. Pursuant to the Agreement the Company paid $0.2 million to the DLSE for attorneys’ fees and costs, and $4.8 million into a trust for disbursement to former employees as back wages. The Company will pay the employer’s share of F.I.C.A. taxes and other employer tax responsibilities on back wages as they are distributed to former employees, as well as the administrative costs of the claims administrator for the trust, which totaled $0.8 million in 2012 and $0.1 million in 2013, and which could total less than $0.1 million in additional expense if all remaining former employee claimants participate. A liability and corresponding expense for this additional amount of less than $0.1 million of employer taxes and administrative fees has not been reflected within the balance sheet because an estimate of the ultimate liability for payment of these payroll taxes cannot be reasonably determined. Disbursements to former employees are subject to their execution of a release claim against the Company. The Agreement also includes a full release by the DLSE from further liability on this issue. On October 12, 2012, the Court dismissed the entire action, with prejudice, against the defendants.

 

On March 26, 2010, the Company was named as one of fourteen defendants in a lawsuit filed in the United States District Court for the District of Delaware, Smarter Agent LLC v. Boopsie, Inc., et al. The complaint alleges that the defendants have each infringed on patents owned by Smarter Agent relating to mobile device application technology and seeks unspecified damages and injunctive relief. The US Patent Office is currently examining the patent issue, and litigation is stayed pending the completion of that investigation. After completing investigation of this matter, the Company does not believe that it has infringed on any patent, or that it has any liability for the claims alleged, and, thus, it intends to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

On February 17, 2012, two real estate sales agents formerly employed by the Company, on behalf of themselves and all other similarly situated individuals, filed a lawsuit against us in the United States District Court, District of Arizona, Patricia Anderson and James Kwasiborski v. ZipRealty, Inc. The complaint concerns the Company’s compensation practices nationwide regarding its real estate agents, who at the time at issue were classified as employees. Specifically, the complaint alleges that the Company failed to pay these persons minimum wage and overtime as required by federal law. The complaint seeks liquidated and treble damages in addition to wages and overtime for an unspecified amount. On December 23, 2013, the Company reached a preliminary settlement for $1.7 million to resolve both the federal and state law claims. The Company will also be responsible for payment of the employer’s share of F.I.C.A. taxes and other employer taxes for the back wages which total approximately $0.2 million. A liability and corresponding expense for the $1.7 million preliminary settlement and $0.2 million for associated employer’s share of F.I.C.A. taxes and other employer taxes is included in litigation settlement charges in the Company’s Statement of Operations for the year ended December 31, 2013 because a loss is both probable and reasonably estimable. The settlement, which has been agreed to by the parties, is subject to court approval.

 

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On January 11, 2013, the Company was named as a defendant in a lawsuit filed in the United States District Court for the Eastern District of Texas, Arczar LLC v. ZipRealty, Inc. The complaint alleges that the Company’s mobile device application has infringed on a patent owned by Arczar relating to computer vision system technology and seeks unspecified damages and other equitable relief. Effective July 24, 2013, the Company entered into a Settlement and License Agreement with Arczar that resulted in a dismissal of the lawsuit with prejudice and the Company’s purchase of a perpetual license to Arczar’s patents.

 

The Company is not currently subject to any other material legal proceedings. From time to time the Company has been, and it currently is, a party to litigation and subject to claims incident to the ordinary course of the business. The amounts in dispute in these matters are not material to the Company, and management believes that the resolution of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows. A reasonably possible loss in excess of amounts accrued is not significant to the financial statements.

 

Indemnifications

 

The Company has entered into various indemnification agreements in the ordinary course of our business. Pursuant to these agreements, the Company has agreed to indemnify, hold harmless and reimburse the indemnified parties, which include certain of our service providers as well as others, in connection with certain occurrences. In addition, the corporate charter documents require the Company to provide indemnification rights to the Company’s directors and officers to the fullest extent permitted by the Delaware General Corporation Law, and permit the Company to provide indemnification rights to our other employees and agents, for certain events that occur while these persons are serving in these capacities. The Company’s charter documents also protect each of its directors, to the fullest extent permitted by the Delaware General Corporation Law, from personal liability to the Company and its stockholders from monetary damages for a breach of fiduciary duty as a director. The Company has also entered into indemnification agreements with the Company’s directors and each of our officers with a title of Vice President or higher.  

 

The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unspecified. The Company is not aware of any material indemnification liabilities for actions, events or occurrences that have occurred to date. The Company maintains insurance on some of the liabilities the Company has agreed to indemnify, including liabilities incurred by the Company’s directors and officers while acting in these capacities, subject to certain exclusions and limitations of coverage.

 

7. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company’s Certificate of Incorporation authorizes 5,000,000 shares of preferred stock, $0.001 par value. At December 31, 2013 and 2012, there were no shares issued or outstanding.

  

Common Stock

 

The Company’s Certificate of Incorporation authorizes 100,000,000 shares of common stock, $0.001 par value. At December 31, 2013 and 2012, there were 25,262,791 and 24,302,749 shares issued and 21,647,098 and 20,692,558 shares outstanding, respectively.

 

Treasury Stock

 

During the years ended December 31, 2013 and 2012, the Company repurchased approximately 5,000 and 5,000 shares of its common stock for approximately $32,000 and $7,000, respectively, to cover tax withholding obligations. These shares were repurchased in connection with the net share settlement provision of its Restricted Stock Award Agreements upon the vesting of restricted stock during the periods. During the years ended December 31, 2013 and 2012, there were approximately 0 and 3,000 shares, respectively, of restricted stock forfeited and transferred to treasury stock.

 

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8. STOCK-BASED COMPENSATION

 

Stock Option Plans

 

The Company maintains two Board of Directors (“BOD”) approved stock plans, the 1999 Stock Option Plan (“1999 Plan”) and the 2004 Equity Incentive Plan (“2004 Plan”), both of which are collectively referred to as the “Stock Plans.” The Stock Plans provide for the granting of stock options to employees and consultants of the Company. Options granted under the Stock Plans may be either incentive stock options or nonstatutory stock options. Incentive stock options (“ISO”) may be granted only to Company employees (including officers and directors who are also employees). Nonstatutory stock options (“NSO”) may be granted to Company employees and consultants. Following the Company’s initial public offering, any shares that were reserved but not issued under the 1999 Plan were made available under the 2004 Plan, and any shares that would have otherwise returned to the 1999 Plan are made available for issuance under the 2004 Plan. The Company has reserved approximately 2,939,000 shares of common stock for future issuance under the Stock Plans. The 2004 Plan contains an “evergreen” provision that automatically increases, on each January 1, the number of shares reserved for issuance equal to the least of (a) 1,666,666 shares, (b) 4% of the outstanding shares on such date, or (c) an amount determined by the BOD. The 2004 Equity Incentive Plan also allows for the issuance of restricted stock. The restricted stock awards have the voting rights of common stock and the shares underlying the restricted stock awards are considered issued and outstanding.

 

Options under the Stock Plans may be granted at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the BOD, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options generally vest 25% after the first year of service and ratably each month over the remaining 36 month period contingent upon employment with the Company on the date of vest. Options are generally granted for a term of ten years.

 

Other Stock Options

 

The BOD approved the registration of 325,000 shares of common stock underlying an option issued outside the Company’s Stock Plans in December 2008. These nonstatutory stock options (“NSO”) were granted in connection with employment of an executive with the Company and vested 25% after the first year of service and ratably each month over the remaining 36 month period. This option was granted for a term of ten years.

 

Valuation Assumptions and Stock-based Compensation Expense

 

The Company estimates the fair value of stock options on the day of grant using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility was based on the historical volatility of the Company’s common stock for the years ended December 31, 2013 and 2012. The expected life of options granted during the years ended December 31, 2013 and 2012 was estimated using the simplified method by taking the average of the vesting term and the contractual term of the option as provided by the applicable accounting guidance. The simplified method was used because of significant structural changes in the Company’s business associated with past restructuring activities such that its historical exercise data does not provide a reasonable basis upon which to estimate the expected term.

 

The assumptions used and the resulting estimates of weighted average fair value per share of options granted were as follows:

 

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   Year Ended December 31, 
   2013   2012 
Expected volatility   51-52%    49-51% 
Risk-free interest rate   1.0-1.3%    0.7-1.2% 
Expected life (years)   5.5-6.1    5.5-6.1 
Expected dividend yield   0%   0%
Weighted-average fair value of options granted during the period  $1.76   $0.66 

 

Stock-based compensation expense was as follows:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Cost of revenues  $253   $156 
Product development   105    73 
Sales and marketing   370    197 
General and administrative   683    673 
Restructuring charges, net   -    80 
Total stock-based compensation expense   1,411    1,179 
Tax effect on stock-based compensation expense   -    - 
Net effect on net loss  $1,411   $1,179 

 

The Company recognized approximately $80,000 of stock-based compensation expense for the year ended December 31, 2012 for stock option modifications in connection with the departure of the Company’s former Chief Financial Officer in 2012.

 

The accounting guidance requires that forfeitures be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from those estimates. The Company estimated expected forfeitures based on various factors including employee class and historical experience. The amount of stock-based compensation expense has been reduced for estimated forfeitures. As of December 31, 2013, there was $2.7 million of unrecorded total stock-based compensation, after estimated forfeitures, related to unvested stock options. That cost is expected to be recognized over a weighted average remaining period of 2.6 years. As of December 31, 2013, there was $27,000 of unrecorded stock-based compensation related to unvested restricted stock. That cost is expected to be recognized over a weighted average remaining period of 0.3 years.

 

Stock Option Activity

 

A summary of the Company’s stock option activity for the periods indicated is as follows:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
   Shares   Price   Life ( Years)   Value 
   (In thousands) 
Outstanding at December 31, 2011   4,163    3.87    6.01    20 
Options granted   1,767    1.41           
Options exercised   (120)   1.20           
Options forfeited/cancelled/expired   (713)   3.30           
Outstanding at December 31, 2012   5,097    3.16    6.15    2,614 
Options granted   1,277    3.57           
Options exercised   (930)   3.00           
Options forfeited/cancelled/expired   (363)   5.07           
Outstanding at December 31, 2013   5,081   $3.16    7.05   $13,412 
Vested and expected to vest at December 31, 2013   4,966   $3.16    7.00   $13,113 
Exercisable at December 31, 2013   2,894   $3.43    5.76   $7,293 

 

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Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $5.60 on December 31, 2013, and the exercise price for the options that were in-the-money at December 31, 2013. The total number of in-the-money options exercisable as of December 31, 2013 was 2,556,000. Total intrinsic value of options exercised was $1,436,000 and $70,000 for the years ended December 31, 2013 and 2012, respectively.

 

The Company settles employee stock option exercises with newly issued common shares.

 

 Restricted Stock

 

The Company expenses the cost of restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restriction lapse. Restricted stock awards generally vest in 24 months or less, contingent upon employment with the Company on the date of vest. Stock-based compensation expense related to restricted stock for the years ended December 31, 2013 and 2012 was $103,000 and $(1,000), respectively.

 

A summary of the Company’s nonvested restricted stock for the periods indicated is as follows:

 

       Weighted 
       Average Grant 
   Number of   Date Fair value 
   Shares   Per Share 
   (In thousands) 
Nonvested at December 31, 2011   23    4.90 
Shares granted   15    2.87 
Shares vested   (21)   4.90 
Shares forfeited   (2)   4.90 
Nonvested at December 31, 2012   15    2.87 
Shares granted   30    3.00 
Shares vested   (15)   2.87 
Shares forfeited   -    - 
Nonvested at December 31, 2013   30   $3.00 

 

9. EMPLOYEE BENEFIT PLAN

 

 The Company has a 401(k) profit sharing plan covering all eligible employees. Employees may contribute amounts ranging from 1% to 50% of their annual salary, up to the maximum statutory amount. The Company is not required to contribute to the plan, however, beginning January 1, 2006 the Company elected to match 25% of the first employee contributions to the plan of up to 4% of pay. For the years ended December 31, 2013 and 2012, the Company contributed $63,000 and $67,000, respectively, and such amounts are included as an expense in the Company’s consolidated statements of operations in the associated employees’ functional department.

 

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10. RESTRUCTURING CHARGES

 

During January 2011 and 2012, the Company implemented cost reduction initiatives, including closing brokerage operations in selected underperforming markets and a workforce reduction in sales support and administration functions. The associated restructuring charges include employee severance pay and related expenses, non-cancelable lease obligations and other exit costs. For the years ended December 31, 2013 and 2012, restructuring charges were comprised of the following:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Employee severance and related expenses  $54   $1,611 
Lease obligations and other exit costs   (21)   75 
Non-cash charges   -    (80)
Total  $33   $1,606 

 

The activity accrued restructuring charges for the year ended December 31, 2013 was as follows:

  

   Balance
as of
December
31,
           Non-cash   Balance as of
December
31,
   Total
Charges  to
date as of
December
31,
 
   2012   Charges   Payments   Adjustment   2013   2013 
   (In thousands) 
2012 Restructuring Plan                              
Employee severance and related expenses  $27   $54   $(81)  $-   $-   $1,585 
Lease obligation and other exit costs   44    -    (24)   -    20    75 
    71    54    (105)   -    20    1,660 
2011 Restructuring Plan                              
Employee severance and related expenses   -    -    -    -    -    1,452 
Lease obligation and other exit costs   150    (21)   (81)   -    48    808 
Non-cash charges   -         -         -    59 
    150    (21)   (81)   -    48    2,319 
Total  $221   $33   $(186)  $-   $68   $3,979 

 

The activity accrued restructuring charges for the year ended December 31, 2012 was as follows:

  

   Balance
as of
December
31,
           Non-cash   Balance as
of
December
31,
   Total
Charges  to
date as of
December
31,
 
   2011   Charges   Payments   Adjustment   2012   2012 
   (In thousands) 
2012 Restructuring Plan                              
Employee severance and related expenses  $-   $1,595   $(1,488)  $(80)  $27   $1,531 
Lease obligation and other exit costs   -    90    (109)   63    44    75 
    -    1,685    (1,597)   (17)   71    1,606 
2011 Restructuring Plan                              
Employee severance and related expenses   39    1    (40)   -    -    1,450 
Lease obligation and other exit costs   377    -    (224)   (3)   150    830 
Non-cash adjustments   -    -    -    -    -    59 
    416    1    (264)   (3)   150    2,339 
Total  $416   $1,686   $(1,861)  $(20)  $221   $3,945 

 

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Accrued restructuring charges as of December 31, 2013 and 2012 relates primarily to non-cancelable lease obligations and related facility costs which the Company expects to pay over the remaining terms of the obligations, which extend to 2016. Accrued restructuring charges were included in the Company’s consolidated balance sheet as follows:

 

   Year Ended December 31, 
   2013   2012 
   (In thousands) 
Accrued restructuring charges (current liabilities)  $44   $221 
Other long-term liabilities   24    - 
Total accrued restructuring charges  $68   $221 

  

11. UNAUDITED QUARTERLY FINANCIAL DATA

 

The following table sets forth our selected unaudited quarterly operating information for each of the eight quarters ended December 31, 2013. This information has been prepared on the same basis as the audited financial statements contained in this report and includes all normal recurring adjustments necessary for the fair statement of the information for the periods presented, when read together with our financial statements and related notes. Our future operating results are difficult to predict and may vary significantly. Results for any fiscal quarter are not necessarily indicative of results for the full year or for any future quarter.

 

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   Fourth   Third   Second   First 
   Quarter   Quarter   Quarter   Quarter 
   (In thousands) 
Year ended December 31, 2013                
Net revenue  $16,980   $21,816   $21,665   $15,392 
Cost of revenue   9,837    12,742    12,392    8,703 
Income (loss) from operations   (3,675)   104    342    (2,154)
Net income (loss)   (3,686)   94    324    (2,168)
Net income (loss) per share:                    
Basic  $(0.17)  $-   $0.02   $(0.10)
Diluted  $(0.17)  $-   $0.01   $(0.10)
Weighted average common shares outstanding:                    
Basic   21,569    21,114    20,830    20,735 
Diluted   21,569    22,492    21,700    20,735 

 

   Fourth   Third   Second   First 
   Quarter   Quarter   Quarter   Quarter 
   (In thousands) 
Year ended December 31, 2012                
Net revenue  $17,692   $19,767   $20,288   $16,073 
Cost of revenue   10,056    11,171    11,098    8,336 
Income (loss) from operations   (1,893)   (4,946)   309    (3,064)
Net income (loss)   (1,995)   (4,940)   314    (3,057)
Net income (loss) per share:                    
Basic  $(0.10)  $(0.24)  $0.02   $(0.15)
Diluted  $(0.10)  $(0.24)  $0.02   $(0.15)
Weighted average common shares outstanding:                    
Basic   20,659    20,637    20,650    20,573 
Diluted   20,659    20,637    20,663    20,573 

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

 

There have been no changes in or disagreements with accountants in accounting or financial disclosure matters during the Company's fiscal years ended December 31, 2013 and 2012.

 

Item 9A.Controls and Procedures:

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such items are defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (COSO) in Internal Control — Integrated Framework.

 

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Based on our evaluation, under the criteria set forth by COSO (1992 framework) in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. As a smaller reporting company we are not required to include an attestation report of our independent registered public accounting firm.

  

Our management, including our Chief Executive Officer and Chief Financial Officer, acknowledge that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.Other Information:

 

Not applicable.

  

PART III

 

Item 10.Directors, Executive Officers and Corporate Governance:

 

Executive officers

 

The information required by this item with respect to executive officers is incorporated by reference to Item 1 of this annual report on Form 10-K. That information can be found under the caption, “Executive Officers.”

 

Directors

 

The information required by this item with respect to directors is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Directors.”

 

Section 16(a) beneficial ownership reporting compliance

 

The information required by this item with respect to Section 16(a) beneficial ownership reporting compliance is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

Code of ethics

 

Our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Controller. The Code is available on our website at www.ziprealty.com under “Investor Relations — Corporate Governance — Governance Documents.” We intend to disclose, as required, any amendment to or waiver from a provision of the Code with respect to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer or Controller, including the name of the officer to whom any waiver is granted, on our website as set forth above.

 

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Corporate governance

 

The information required by this item with respect to corporate governance is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Board Committees — Audit Committee.”

  

Item 11.Executive Compensation:

 

The information required by this item with respect to executive compensation is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Compensation and Other Information Concerning Officers.”

 

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:

 

The information required by this item with respect to security ownership of certain beneficial owners and management is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Security Ownership by our Directors, Officers and Principal Stockholders.” The information required by this item with respect to equity compensation plan information is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Equity compensation plan information.”

 

Item 13.Certain Relationships and Related Transactions, and Director Independence:

 

The information required by this item is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Significant Relationships and Transactions with Directors, Officers or Principal Stockholders,” and “Director Independence.”

 

Item 14.Principal Accountant Fees and Services:

 

The information required by this item is incorporated by reference to our Proxy Statement for our 2014 Annual Meeting of Stockholders under the caption, “Proposal 2 — Appointment of Independent Registered Public Accounting Firm.”

 

PART IV

 

Item 15.Exhibits and Financial Statement Schedule:

 

(a) Documents filed with this report:

 

1. Financial Statements.

 

The following financial statements and related reports of Independent Registered Public Accounting Firms are incorporated in Item 8 of this report:

 

  Reports of independent Registered Public Accounting Firms;

 

  Consolidated Balance Sheets at December 31, 2013 and 2012;

 

  Consolidated Statements of Operations for the years ended December 31, 2013 and 2012;
     
 

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013 and 2012; 

 

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  Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013 and 2012;

 

  Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012; and

 

  Notes Consolidated Financial Statements.

  

2. Financial Statement Schedule

 

Schedule II — Valuation and Qualifying Accounts for the two fiscal years in the period ended December 31, 2013.

 

The following financial statement schedule of ZipRealty, Inc. for each of the past two years in the period ended December 31, 2013 should be read in conjunction with the Consolidated Financial Statements of ZipRealty, Inc.

 

Schedule II — Valuation and Qualifying Accounts

 

   Balance at   Charged  to        Balance 
   Beginning of   Costs and       at End 
Description  Year   Expenses   Deductions   of Year 
   (In thousands) 
Fiscal year ended December 31, 2012                
Provisions for Doubtful Accounts   35        20    15 
Deferred Tax Asset Valuation   41,305    1,809        43,114 
Fiscal year ended December 31, 2013                    
Provisions for Doubtful Accounts   15    15    7    7 
Deferred Tax Asset Valuation   43,114    1,280        44,394 

 

All other financial statement schedules have been omitted because they are not applicable or are not required, or because the required information is included in the Consolidated Financial Statements and Notes thereto which are included herein.

 

3. Exhibits.

 

The exhibits listed in the Exhibit Index are filed as a part of this annual report on Form 10-K.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

  ZIPREALTY, INC.
     
  By: /s/ Eric L. mersch
    Eric L. Mersch
    Chief Financial Officer

  

Date: March 7, 2014

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
/s/    Charles C. Baker   Chief Executive Officer, President and Director   March 7, 2014

Charles C. Baker

   (Principal Executive Officer)    
         
/s/    Eric L. Mersch   Chief Financial Officer   March 7, 2014

Eric L. Mersch

 

(Principal Financial and Accounting

Officer)

   
         
/s/    Donald F. Wood   Chairman of the Board of Directors   March 7, 2014

Donald F. Wood

       
         
/s/    Elisabeth H. DeMarse   Director   March 7, 2014

Elisabeth H. DeMarse

       
         
/s/    Robert C. Kagle   Director   March 7, 2014

Robert C. Kagle

       
         
/s/    Stanley M. Koonce, Jr.   Director   March 7, 2014

Stanley M. Koonce, Jr.

       
         
/s/    Gary A. Wetsel   Director   March 7, 2014

Gary A. Wetsel

       

 

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Exhibit Index

 

Exhibit    
Number   Description
  3.1(1)   Certificate of Correction to Amended and Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on December 12, 2008
     
  3.2(a)(2)   Bylaws
     
  4.1(2)   Form of Common Stock Certificate
     
10.1(3)*   Form of Director and Executive Officer Indemnification Agreement, revised May 2010
     
10.2(2)*   1999 Stock Option Plan
     
10.3(2)*   2004 Equity Incentive Plan
     
10.3(a)(4)*   Form of Stock Option Award Agreement under 2004 Equity Incentive Plan
     
10.3(b)(5)*   First Amendment under 2004 Equity Incentive Plan
     
10.4(6)*   Form of Change of Control Agreement – Non-Section 16 Vice Presidents
     
10.5(7)*   Form of Change of Control Agreement – Section 16 Executive Officers
     
10.5(8)*   Director Compensation Policy, revised March 8, 2012
     
10.6(2)   Office Lease Agreement between the Registrant and EOP-Emeryville Properties, L.L.C. dated November 28, 2001
     
10.6(a)(2)   First Amendment dated March 22, 2002 to Office Lease Agreement between the Registrant and EOP-Emeryville Properties, L.L.C. dated November 28, 2001
     
10.6(b)(9)   Third Amendment dated November 30, 2005 to Office Lease Agreement between ZipRealty, Inc. and CA-Emeryville Properties Limited Partnership (as successor in interest to EOP-Emeryville Properties, L.L.C.) dated November 28, 2001
     
10.6(c)(10)   Fourth Amendment dated as of July 29, 2011 to Office Lease Agreement between ZipRealty, Inc. and Emeryville Office, L.L.C. (as successor in interest to CA-Emeryville Properties Limited Partnership, as successor in interest to EOP-Emeryville Properties, L.L.C.) dated November 28, 2001
     
10.7(11)*   Management Incentive Plan- Fiscal Year 2012
     
10.8(12)*   Management Incentive Plan - Fiscal Year 2013
     
10.9(13)*   Management Incentive Plan - Fiscal Year 2014
     
10.10(14)*   Employment Agreement with Charles C. Baker dated October 14, 2010

 

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10.11(15)*   Offer Letter of Eric L. Mersch effective April 9, 2012
     
10.12(16)*   Offer Letter of Franklin V. (Van) Davis effective May 7, 2012
     
10.13(17)*   Offer Letter of Xavier Zang effective June 3, 2013
     
10.14(18)*   Separation Agreement and General Release with David A. Rector
     
10.15(19)   Settlement Agreement and General Release dated September 28, 2012, with the Division of Labor Standards Enforcement, Department of Industrial Relations, State of California
     
16.1(20)*   Letter from PricewaterhouseCoopers LLP regarding change in certifying accountant
     
23.1   Consent of independent registered public accounting firm
     
24.1   Power of Attorney (see signature page)
     
31.1   Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
     
31.2   Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
     
32.1   Certification of Chief Executive Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
     
32.2   Certification of Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-51002) filed with the Securities and Exchange Commission on December 16, 2008.
   
(2) Incorporated by reference to the exhibit of the same number to the Registrant’s Registration Statement on Form S-1(File No. 333-115657) filed with the Securities and Exchange Commission on May 20, 2004, as amended.

   

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(3) Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-51002) filed with the Securities and Exchange Commission on August 4, 2010.
   
(4) Incorporated by reference to the exhibit of the same number to the Registrant’s Annual Report on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 28, 2005.
   
(5) Incorporated by reference to Exhibit 10.3(b) to the Registrant’s Annual Report on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 13, 2012.
   
(6) Incorporated by reference to the exhibit of the same number to the Registrant’s Annual Report on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 9, 2011.
   
(7) Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 5, 2014.
   
(8) Incorporated by reference to Exhibit 10.5(a) to the Registrant’s Annual Report on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 13, 2012.
   
(9) Incorporated by reference to the exhibit of the same number to the Registrant’s Current Report on Form 8-K (File No. 000-51002) filed with the Securities and Exchange Commission on December 6, 2005.
   
(10) Incorporated by reference to the exhibit of the same number to the Registrant’s Annual Report on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March 9, 2012.
   
(11) Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K (file No. 000-51002) filed with the Securities and Exchange Commission on March 9, 2012.
   
(12) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on March 6, 2013.
   
(13) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on March 5, 2014.
   
(14) Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K/A (file No. 000-51002) filed with the Securities and Exchange Commission on October 14, 2010.
   
(15) Incorporated by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q (file No. 000-51002) filed with the Securities and Exchange Commission on May 11, 2012.
   
(16) Incorporated by reference to Exhibit 10.16 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on May 8, 2012.
   
(17) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on June 5, 2013.
   
(18) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on August 22, 2012.

 

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(19) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on October 1, 2012.
   
(20) Incorporated by to the exhibit of the same number to the Registrant’s Current Report on Form 8-K (file No. 000-51002) filed with the Securities and Exchange Commission on April 4, 2012.

 

*       Identifies a management contract or compensatory plan of arrangement required to be filed as an exhibit to this report.

 

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