10-Q 1 v343850_10q.htm FORM 10-Q

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one) 

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

  

For the quarterly period ended March 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 of incorporation) (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)

 

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 (§232.405 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

We had 20,820,518 shares of common stock outstanding at May 1, 2013.

 

 
 

 

TABLE OF CONTENTS

  

    Page
   
PART I — FINANCIAL INFORMATION 4
     
Item 1. Unaudited Condensed Consolidated Financial Statements 4
     
  Unaudited Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 4
     
  Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 5
     
  Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012 6
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 30
   
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 30
     
Item 1A. Risk Factors 31
     
Item 5. Other Information 32
     
Item 6. Exhibits 32
   
SIGNATURE 32
   
EXHIBIT INDEX 33

 

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Statement 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” and 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. 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 of our annual report on Form 10-K for our fiscal year ended December 31, 2012, as such disclosure may be revised under “Risk Factors” in Item 1A of Part II of this report. 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 report 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. 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®. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners.

 

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 soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information contained on our website is not a part of this report.

 

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Where you can find additional information

 

You may review a copy of this report, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission’s Public Reference at Room 100 F Street NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission 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 Securities and Exchange Commission.

 

  

PART I — FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements:

 

ZIPREALTY, INC.

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

   March 31,   December 31, 
   2013   2012 
ASSETS          
Current assets:          
   Cash and cash equivalents  $10,967   $12,921 
   Accounts receivable, net of allowance of  $15 and $15, respectively   1,340    1,496 
   Prepaid expenses and other current assets   1,613    1,763 
       Total current assets   13,920    16,180 
   Restricted cash   500    500 
   Property and equipment, net   2,675    2,387 
   Other assets   341    362 
       Total assets  $17,436   $19,429 
LIABLITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
   Accounts payable  $562   $823 
   Accrued expenses and other current liabilities   4,237    4,293 
   Accrued restructuring charges, current portion   148    221 
       Total current liabilities   4,947    5,337 
Other long-term liabilities   574    592 
       Total liabilities   5,521    5,929 
Commitment and contingencies (Note 8)          
Stockholders' equity:          
   Common stock: $0.001 par value; 100,000 shares authorized: 24,403 and          
       24,303 shares issued and 20,793 and 20,692 outstanding, respectively   24    24 
   Additional paid-in capital   160,013    159,430 
   Accumulated deficit   (130,502)   (128,334)
   Treasury stock, at cost: 3,610 and 3,610 shares, respectively   (17,620)   (17,620)
       Total stockholders' equity   11,915    13,500 
           
       Total liabilities and stockholders' equity  $17,436   $19,429 

 

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

 

4
 

 

ZIPREALTY, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

  

   Three Months  Ended 
   March 31, 
   2013   2012 
Net revenues  $15,392   $16,073 
Operating costs and expenses:          
   Cost of revenues   8,703    8,336 
   Product development (1)   1,847    1,802 
   Sales and marketing   5,026    5,831 
   General and administrative   1,835    2,106 
   Litigation settlement charges (Note 7)   78    - 
   Restructuring charges, net   57    1,062 
       Total operating costs and expenses   17,546    19,137 
       Loss from operations   (2,154)   (3,064)
Interest income   2    7 
Loss before income taxes   (2,152)   (3,057)
Provision for income taxes   16    - 
       Net loss  $(2,168)  $(3,057)
Net loss per share:          
       Basic and diluted  $(0.10)  $(0.15)
Weighted average common shares outstanding:          
       Basic and diluted   20,735    20,573 
           
(1) Amortization of internal-use software and website development costs included in product development   317    285 

  

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

 

5
 

 

ZIPREALTY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

   Three Months  Ended 
   March 31, 
   2013   2012 
Comprehensive Loss:          
   Net loss  $(2,168)  $(3,057)
   Change in accumulated unrealized gain on available-for-sale securities, net of tax   -    3 
     Comprehensive loss  $(2,168)  $(3,054)

 

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

 

6
 

 

ZIPREALTY, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

   Three Months  Ended 
   March  31, 
   2013   2012 
Cash flows from operating activities:          
Net loss  $(2,168)  $(3,057)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   478    437 
Stock-based compensation expense   269    224 
Non-cash restructuring charges   -    2 
Provision for doubtful accounts   5    (7)
Amortization of short-term investment premium   -    21 
Loss on disposal of property and equipment   -    6 
Changes in operating assets and liabilities:          
Accounts receivable   151    (207)
Prepaid expenses and other current assets   147    226 
Other assets   21    62 
Accounts payable   (261)   (412)
Accrued expenses and other current liabilities   (56)   (709)
Accrued restructuring charges   (73)   276 
Other long-term liabilities   (18)   (59)
Net cash used in operating activities   (1,505)   (3,197)
Cash flows from investing activities:          
Purchases of short-term investments   -    2,000 
Purchases of property and equipment   (752)   (429)
Net cash provided by (used in) investing activities   (752)   1,571 
Cash flows from financing activities:          
Proceeds from stock option exercises   303    62 
Net cash provided by financing activities   303    62 
Net decrease in cash and cash equivalents   (1,954)   (1,564)
Cash and cash equivalents at beginning of period   12,921    12,634 
Cash and cash equivalents at end of period  $10,967   $11,070 

 

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

 

7
 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BACKGROUND AND BASIS OF PRESENTATION

 

The accompanying unaudited interim condensed consolidated financial statements as of March 31, 2013 and 2012 and for the three months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for annual financial statements. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented. The results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013, or any other period. The unaudited condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

 

Principles of consolidation

 

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

 

Seasonality

 

The Company’s net transaction revenues and income (loss) from operations have historically varied from quarter to quarter. Such variations are principally attributable to variations in home sales activity over the course of the calendar year. The Company has historically experienced lower net transaction revenues during the first quarter because holidays and adverse weather conditions in certain regions typically reduce the level of sales activity and listings inventories between the Thanksgiving and Presidents’ Day holidays. The Company’s historical quarterly operations have been additionally impacted in recent years as a result of economic conditions and government programs that altered home buyer behavior. Net transaction revenues during the three months ended March 31, 2012 and 2011 accounted for approximately 24.0% and 23.0% of annual net transaction revenues for the years ended December 31, 2012 and 2011, respectively.

 

Significant accounting policies

 

Revenue recognition

 

The Company derives the majority of its revenue from commissions earned as agents in residential real estate transactions and from commission referrals earned from its network of third-party brokerages. Commission revenue is recognized upon closing of a transaction, net of any rebate or commission discount or transaction fee adjustment. These transactions typically do not have multiple deliverables.

 

Non-commission revenues are derived primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, lead referral fees and other revenues. 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. Revenues related to revenue sharing arrangements are recognized based on revenue reports received from our partners, provided that collectability is reasonably assured.

 

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

 

2. BALANCE SHEET COMPONENTS

 

Property and equipment, net

 

Property and equipment, net consisted of the following:

   

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Computer hardware and software  $9,617   $9,095 
Furniture, fixture and equipment   1,938    1,938 
Leasehold improvements   1,897    1,656 
     Total   13,452    12,689 
Less: accumulated depreciation and amortization   (10,777)   (10,302)
     Total property and equipment, net  $2,675   $2,387 

 

Depreciation and amortization expense for the quarter ended March 31, 2013 and March 31, 2012 was approximately $478,000 and $437,000, respectively.

 

Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consisted of the following:

  

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Accrued compensation  $1,197   $1,073 
Accrued agent commissions   1,252    1,423 
Accrued marketing   735    863 
Accrued litigation settlement   206    227 
Accrued professional fees   203    188 
Other accrued expenses   644    519 
   Total accrued expenses and other current liabilities  $4,237   $4,293 

 

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3. SHORT-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTS

  

At March 31, 2013 and December 31, 2012, the Company’s cash equivalents were invested in money market funds. The table below sets forth the fair value of the Company’s financial assets:

  

   March 31, 2013   December 31, 2012 
   Gross   Gross   Gross   Estimated   Gross   Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value   Cost   Gains   Losses   Value 
   (In thousands)   (In thousands) 
Money market funds  $7,958   $-   $-   $7,958   $7,957   $-   $-   $7,957 
      Total  $7,958   $-   $-   $7,958   $7,957   $-   $-   $7,957 

  

   March 31,   December 31, 
   2013   2012 
Recorded as:  (In thousands) 
Cash equivalents  $7,958   $7,957 
      Total  $7,958   $7,957 

 

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 and 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. At March 31, 2013 and December 31, 2012, there were no liabilities recorded at fair value. The fair values of the Company’s Level 1 financial assets are based on quoted market prices of the identical underlying security. The Company did not have any Level 2 and Level 3 financial assets at March 31, 2013 and at December 31, 2012. The Company utilizes a pricing service to assist in obtaining fair value pricing for its investment portfolio.

 

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At December 31, 2012 and March 31, 2013, the Company’s cash equivalents amounting to $8.0 million, were invested in money market funds and were measured at fair value on a recurring basis, using Level 1 inputs within the fair value hierarchy.

 

   March 31, 2013   December 31, 2012 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
   (In thousands)   (In thousands) 
 Money market funds  $7,958   $-   $-   $7,958   $7,957   $-   $-   $7,957 
      Total  $7,958   $-   $-   $7,958   $7,957   $-   $-   $7,957 

 

4. NET LOSS PER SHARE

 

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

  

   Three Months Ended March 31, 
   2013   2012 
   (In thousands, except per share amounts) 
Numerator:          
    Net loss  $(2,168)  $(3,057)
Denominator:          
    Weighted average common shares outstanding; basic and diluted   20,735    20,573 
    Net loss per share; basic and diluted:  $(0.10)  $(0.15)

 

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:

  

   Three Months Ended March 31, 
   2013   2012 
   (In thousands) 
Options to purchase common stock   5,278    4,284 
Nonvested common stock   15    20 
   Total   5,293    4,304 

 

5. STOCK-BASED COMPENSATION

 

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 is based on the historical volatility of the Company’s common stock. The expected life of options granted during the three months ended March 31, 2013 and 2012 was estimated by taking the average of the vesting term and the contractual term of the option. The risk-free interest rate estimate is based upon U.S. Treasury bond rates appropriate for the expected life of the options.

 

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

   

   Three Months Ended March 31, 
   2013   2012 
Expected volatility   51%   49%
Risk-free interest rate   1.0%   0.9-1.2% 
Expected life (years)   6.1    5.5-6.1 
Expected dividend yield   0%   0%

Weighted-average fair value per share of options granted

  $1.88   $0.58 

 

Stock-based compensation expense was as follows:

  

   Three Months Ended March 31, 
   2013   2012 
   (In thousands) 
Cost of revenues  $66   $15 
Product development   23    20 
Sales and marketing   9    26 
General and administrative   171    163 
      Total stock-based compensation expense  $269   $224 

  

The accounting standards require forfeitures to 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 March 31, 2013, there was $3.1 million of unrecorded stock-based compensation, after estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted average remaining recognition period of 2.8 years. As of March 31, 2013, there was $29,000 of unrecorded stock-based compensation related to unvested restricted stock, which is expected to be recognized over a weighted average remaining recognition period of 0.7 years.

 

Stock option activity

 

A summary of the Company’s stock option activity for the period indicated was as follows:

  

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
   Shares   Price   Life ( Years)   Value 
   (In thousands)           (In thousands) 
Outstanding at December 31, 2012   5,097   $3.16    6.15   $2,614 
  Options granted   875    3.84           
  Options exercised   (100)   3.02           
  Options forfeited/cancelled/expired   (81)   4.59           
Outstanding at March 31, 2013   5,791   $3.25    6.66   $5,237 
Exercisable at March 31, 2013   3,381   $3.70    4.87   $2,500 

 

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Options generally vest over a four-year period with one-fourth (1/4) of the shares vesting one year after the vesting commencement date, and an additional one-forty eighth (1/48) of the shares vesting on the first day of each calendar month thereafter until all such shares are exercisable. Options generally expire after ten years. Options issued pursuant to the Company’s voluntary stock option exchange program, completed in July 2009, vest ratably over a 36 month period and expire after seven years.

 

The Company granted options for 183,000 shares during the three months ended March 31, 2012 that provide accelerated vesting if the Company’s closing stock price is equal to or greater than $5.00 per share for a period of 120 consecutive days and granted options for 183,000 shares that provided for vesting in full if the Company achieves adjusted EBITDA profitability for the year ended December 31, 2012, which was achieved. 

   

Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $3.65 on March 28, 2013, and the exercise price for the options that were in-the-money at March 31, 2013. The total number of in-the-money options exercisable as of March 31, 2013 was 2,267,000. Total intrinsic value of options exercised was $54,000 and $17,000 for the three months ended March 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. Stock-based compensation expense related to restricted stock for the three months ended March 31, 2013 and 2012 was $11,000 and ($3,000), respectively. As of December 31, 2012 and March 31, 2013, the Company has 15,000 shares of nonvested restricted stock awards.

   

6. INCOME TAXES

 

The Company currently forecasts losses for the year. Since these losses are not benefitted, they are not included in the effective tax rate calculation. The tax provision is comprised of Texas margin tax and other state minimum taxes and is recorded ratably in the interim period.

 

The Company maintains that a full valuation allowance should be maintained for its net deferred tax assets at March 31, 2013. The Company supports the need for a valuation allowance against the deferred tax assets due to negative evidence including recent historical results and management’s expectations for the future.

 

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7. LEGAL SETTLEMENT CHARGES

 

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 during the year ended December 31, 2012 and $0.1 million in the three months ended March 31, 2013, and which could total an additional $0.1 million if all remaining former employee claimants participate. A liability and corresponding expense for this additional $0.1 million of employer taxes and administrative fees have 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.

  

8. COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through July 2017. The terms of the lease agreements provide for renewal options and escalation clauses. Future gross and net lease commitments under non-cancelable operating leases at March 31, 2013 were as follows, in thousands:

 

   Gross         
   Operating       Net Operating 
   Lease   Sublease   Lease 
   Commitments   Income   Commitments 
   (In thousands) 
Remainder of 2013  $1,307   $(40)  $1,267 
2014   1,439    (41)   1,398 
2015   1,191    (43)   1,148 
2016   941    (44)   897 
2017   473    (34)   439 
2018   37    -    37 
Total minimum lease payments  $5,388   $(202)  $5,186 

 

Legal proceedings

 

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., by plaintiff, Smarter Agent LLC. 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. After completing its initial investigation of this matter, the Company does not currently 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.

 

14
 

  

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 the Company 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 April 2, 2012, the Company filed an answer denying these allegations because the Company believes that its sales agents, whose job duties consisted exclusively of selling residential real estate, were properly classified as “outside salespersons” under the Federal Fair Labor Standards Act and, thus, the Company believes that this claim is without merit. In addition to the federal law allegations, the complaint alleges violation of the Arizona Minimum Wage law. The Company intends to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

On February 29, 2012, one real estate agent formerly employed by the Company, on behalf of herself and all other similarly situated individuals, filed a lawsuit against the Company in the Superior Court of California, Los Angeles County, Tracy Adewunmi v. ZipRealty, Inc., concerning the Company’s compensation practices regarding real estate agents in California. Specifically, the complaint alleges that the Company 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 seeks unspecified damages including penalties and attorneys’ fees in addition to wages and overtime.  On April 2, 2012, the Company filed an answer denying these allegations because it believes that its sales agents, whose job duties consisted exclusively of selling residential real estate, were properly classified as “outside salespersons” and were compensated accordingly in full compliance with California law.  Additionally, the Company filed a cross complaint against Ms. Adewumni for fraud and breach of contract, in which the Company alleged that she created false client accounts that resulted in her receiving higher commission payments than she was entitled receive under her employment agreement. Accordingly, the Company believes Ms. Adewumni’s claim is without merit and, thus, it intends to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

 On January 11, 2013, the Company was named as a defendant in a lawsuit filed in the United State 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. After completing the initial investigation of this matter, the Company does not believe that it has infringed the patent, or that it has any liability for the claims alleged. The Company intends to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

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 it believes that the resolution of these proceedings will not have a material adverse effect on its business, 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.

 

15
 

 

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. 

 

9. RESTRUCTURING CHARGES, NET

 

2012 Restructuring Plan

 

During February 2012, the Company announced a restructuring, including a work force realignment to more appropriately allocate resources to its key strategic initiatives. The workforce realignment involved investing resources in some areas, reducing resources in others and eliminating some areas of the Company’s business that did not support its strategic priorities. During March 2012, the Company announced the transition of its owned-and-operated brokerage office in Salt Lake City to a third-party brokerage joining the Company’s Powered by Zip network. The Company recorded restructuring charges of approximately $ 0.1 million related to the 2012 Restructuring Plan during the three months ended March 31, 2013.

 

2011 Restructuring Plan

 

During January 2011, the Company announced a restructuring, including closing brokerage operations in selected underperforming markets and a workforce reduction in sales support and administration functions. The associated restructuring charges included employee severance pay and related expenses, non-cancelable lease obligations and other exit costs. As of March 31, 2013, the Company has recorded the majority of the cost of this restructuring. Accrued 2011 Restructuring Plan charges as of March 31, 2013 relate primarily to non-cancelable lease obligations and related facility costs which the Company expects to pay over the remaining terms of the obligations through the third quarter of 2013.

 

Restructuring charges activity, relating to the 2012 and 2011 Restructuring Plans, was as follows for the three months ended March 31, 2013:

 

   Balance
as of 
December 31,
           Balance as of 
March 31,
   Total charges
 to date as of 
March 31,
 
   2012   Charges   Payments   2013   2013 
   (In thousands) 
2012  Restructuring Plan                         
Employee severance and related expenses  $27   $57   $(83)  $1   $1,588 
Lease obligation and other exit costs   44    -    (6)   38    75 
    71    57    (89)   39    1,663 
                          
2011  Restructuring Plan                         
Employee severance and related expenses   -    -    -    -    1,450 
Lease obligation and other exit costs   150    -    (41)   109    830 
Non-cash charges   -    -    -    -    59 
    150    -    (41)   109    2,339 
Total  $221   $57   $(130)  $148   $4,002 

  

 

Restructuring charges activity, relating to the 2012 and 2011 Restructuring Plans, was as follows for the three months ended March 31, 2012:

 

   Balance
as of  
December 31,
           Balance as of  
March 31,
   Total charges
to date as of
March 31,
 
   2011   Charges   Payments   2012   2012 
   (In thousands) 
2012  Restructuring Plan                         
Employee severance and related expenses  $-   $1,031   $(801)  $230   $1,031 
Lease obligation and other exit costs   -    28    -    28    28 
Non-cash charges   -    2    (2)   -    2 
    -    1,061    (803)   258    1,061 
                          
2011  Restructuring Plan                         
Employee severance and related expenses   39    1    (40)   -    1,451 
Lease obligation and other exit costs   377    -    (68)   309    830 
Non-cash charges   -    -    -    -    59 
    416    1    (108)   309    2,340 
   Total  $416   $1,062   $(911)  $567   $3,401 

  

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Accrued restructuring changes for March 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 the third quarter of 2013. Accrued restructuring charges were as follows:

 

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Accrued restructuring charges (current liabilities)  $148   $221 
Total accrued restructuring charges  $148   $221 

 

Item 2. 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 appearing elsewhere in this report. 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” in Item 1A of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2012. Those reasons include, without limitation, those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements.

 

OVERVIEW

 

We are the most prominent online, technology-enabled real estate brokerage company in the United States. Our company owned-and-operated real estate brokerage serves 19 metropolitan markets with over 1,600 licensed REALTORS®. We serve an additional 16 markets through our Powered by Zip, or PBZ, business, which provides our technology platform as an enterprise cloud-based application. We operate ZipRealty.com, the most visited brokerage website with approximately 2.5 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 network 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 14 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 in 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 Powered by Zip network and also allows us to keep this application on the cutting-edge. In December 2012, we launched a transformational Zap upgrade that made it even easier for REALTORS® to efficiently manage small and large contact pools with follow-up plans, that features an enhanced intelligence engine which predicts client behaviors and propensity to transact, and that is completely redesigned with an intuitive stylized Web 2.0 interface. We consider our innovation factory to be one of our core competencies, helping us maintain our technology leadership in the residential real estate industry.

 

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 network. At the same time, sellers using our system gain assurance that their listings are marketed effectively online to interested home buyers.

 

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Our proprietary technology, established reputation as full service online brokerage, and Powered by Zip network, 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 a beautiful and 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 fiercely competitive residential real estate industry, we generate a large base of customer leads which, through an advanced algorithm developed over the course of 14 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. We also market ZipRealty-affiliated REALTORS® on ZipRealty.com by showcasing their local know-how and real estate activity and by providing them with personalized agent websites.

 

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. For these brokerages, we not only generate online leads on their behalf, but we also provide them access to Zap as an enterprise cloud-based application that better enables them to turn these leads into closed transactions. Zap gives these brokerages crystal-clear, real-time visibility on their transaction pipeline, brokerage operations and financials, while facilitating a paperless office environment. Because Zap is a cloud-based application, our brokerage partners 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, all of which were opened prior to May 2009: 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, the San Francisco Bay area, CA, Seattle, WA, Portland, OR, and Washington, DC.

 

Our Powered by Zip network serves leading local brokerages in 16 markets where we do not otherwise conduct business: Atlanta, GA, Jacksonville, FL, Nashville, TN, the Greater Philadelphia area, PA, Raleigh-Durham, NC, Salt Lake City, UT, Tucson, AZ, Westchester/Bronx, NY, Tampa, FL, Palm Beach, FL, Long Island, NY, Brooklyn, NY, Miami, FL, Minneapolis, MN, Virginia Beach, VA, and St. Louis, MO.

 

The markets in our owned-and-operated brokerage and Powered by Zip network are served by approximately 2,100 local, licensed real estate agents, all of whom are independent contractors.

 

In 2012, we extended our MLS coverage to include several new markets where we do not yet have a physical presence or a PBZ partner. This expanded coverage facilitates expansion of our PBZ network.

 

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All of our revenues derive from our core business of offering the best proprietary technology and online marketing capabilities available in our industry. We derive the 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 network. Brokerages in our Powered by Zip network 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 9% of our net revenues for both the three months ended for March 31, 2013 and 2012.

 

RECENT DEVELOPMENTS

 

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 twelve of those markets, we either transitioned our local operations to third-party brokerages in our Powered by Zip network, or we added brokerages to our Powered by Zip network 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.

 

Powered by Zip: In 2011, we launched the Powered by Zip program to provide third-party real estate brokerages with our robust proprietary end-to-end technology solution. Since then, we have built a network of 16 independent brokerages that use our technology, which we refer to as our Powered by Zip network. Over the past year, we have gained significant experience serving our Powered by Zip customers. The terms on which we offer our technology vary among these brokerages because we are still developing, testing and building our business model, and because each brokerage is at a different stage of adoption and incorporation of the technology and services into their business. We currently evaluate each individual brokerage’s performance using the same metrics that we do for our owned-and-operated brokerage, as well as other subjective measures such as the agents’ experience and level of engagement with our technology.

 

We are developing new pricing schedules for our current offering, which is currently offered on an exclusive basis in any one metropolitan area. Additionally, our technology and product teams are developing new versions of the offering, including a version designed to serve multiple customers in the same metropolitan area nonexclusively, and a subscription model for real estate professionals. We are also in the process of developing a formal organizational structure for the Powered by Zip business and, within the next several quarters, we expect to hire managers and staff in sales, account management, operations and integration, and product development.

 

MARKET CONDITIONS AND TRENDS IN OUR BUSINESS

 

We compete in the domestic residential real estate market. For the past few years, this market has been negatively impacted by the significant correction in the total value of homesale transactions in 2005 and the deep economic recession that followed. Recent indications suggest that a recovery may be underway, but reasons for caution remain, as we believe that the health of the residential housing market in 2013 will continue to be significantly affected by the availability of credit, inventory and shadow inventory levels, the pace at which banks process their foreclosure pipelines, 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.

 

19
 

 

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

 

·Volume: According to the National Association of REALTORS®, or NAR, total existing-home sales in March 2013 increased 10.3% year-over-year, with volume increases in all major regions of the country. March 2013 represented the 21st consecutive month of national year-over-year volume increases. NAR noted that buyer traffic is up 25% year-over year but believes that inventory shortages and tight lending criteria are still limiting buying opportunities.

 

·Price: According to NAR, the national median existing-home price in March 2013 increased 11.8% year-over-year, with price increases in all major regions of the country. March 2013 represented the 13th consecutive month of national year-over-year price increases, as well as the strongest year-over year price increase since November 2005, around the time the latest housing slump began. The price increase may have been due, in part, to a decrease in the percentage of national home sales that represented distressed properties to 21% in March 2013 from 29% in March 2012, as well as inventory shortages.

 

·Inventory: NAR reported an inventory of 1.93 million existing homes available for sale at the end of March 2013, which represented a 4.7-month supply at the then-current sales pace, and which was down 16.8% year-over-year. NAR believes that a housing supply of over six months is needed for equilibrium between home buyers and sellers.

 

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.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our 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. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, 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 contained in our Form 10-K for the year ended December 31, 2012, 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.

 

20
 

 

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 majority of our net revenues from commissions earned in our owned-and-operated residential real estate brokerage, and from commission referrals earned from brokers in our Powered by Zip network. We recognize commission based revenues 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.

 

Non-commission based revenues are derived primarily from marketing agreements with residential mortgage service providers, the sale of online advertising, lead referral fees and other revenues. We classify these revenues as marketing and other revenues. 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. Revenues related to revenue sharing arrangements are recognized based on revenue 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 ZipRealty Agent Platform (“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, typically 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.

 

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.

 

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.

 

21
 

 

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 March 31, 2013.

  

Restructuring costs

 

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 are 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.

 

Litigations

 

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.

 

RESULTS OF OPERATIONS

 

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

 

   Three Months Ended March 31, 
   2013   2012 
Consolidated statement of operations data (unaudited)  (In thousands, except per share amounts) 
Net revenues  $15,392   $16,073 
Operating costs and expenses          
Cost of revenues   8,703    8,336 
Product development (1)   1,847    1,802 
Sales and marketing   5,026    5,831 
General and administrative   1,835    2,106 
Litigation settlement charges  (Note 7)   78    - 
Restructuring charges, net   57    1,062 
Total operating costs and expenses   17,546    19,137 
Loss from operations   (2,154)   (3,064)
Interest income   2    7 
Loss before income taxes   (2,152)   (3,057)
Provision for income taxes   16    - 
Net loss  $(2,168)  $(3,057)
Net loss per share:          
Basic and diluted  $(0.10)  $(0.15)
Weighted average common shares outstanding:          
Basic and diluted   20,735    20,573 
           
(1) Amortization of internal-use software and website development costs included in product development  $317   $285 

 

22
 

 

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

 

         
   Three Months Ended March 31, 
   2013   2012 
Consolidated statement of operations data (unaudited)        
Net revenues   100%   100%
Operating costs and expenses          
Cost of revenues   56.5    51.9 
Product development   12.0    11.2 
Sales and marketing   32.7    36.3 
General and administrative   11.9    13.1 
Litigation settlement charges   0.5    - 
Restructuring charges, net   0.4    6.6 
Total operating costs and expenses   114.0    119.1 
Loss from operations   (14.0)   (19.1)
Interest income   -    - 
Loss before income taxes   (14.0)   (19.1)

Provision for income taxes

   0.1    - 
Net loss   (14.1)%   (19.1)%

  

Comparison of the three months ended March 31, 2013 and 2012

Other operating data (1)

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
Number of markets-same markets (2)   19    19    -      
Number of markets-total markets (2)   19    20    (1)     
                     
Number of transactions closed during the period-same markets (3)   2,083    2,313    (230)   (9.9)%
Number of transactions closed during the period-total markets (3)   2,083    2,412    (329)   (13.6)%
                     
Average net revenue per transaction-same markets (4)  $6,715   $6,081    634    10.4%
Average net revenue per transaction-total markets (4)  $6,715   $6,077    638    10.5%
                     
Number of agents at end of the period-same markets   1,576    1,586    (10)   (0.6)%
Number of agents at end of the period-total markets   1,576    1,624    (48)   (3.0)%

 

(1)Other operating data includes our owned-and-operated markets only.

 

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(2)Our brokerage operations in Salt Lake City were closed and transitioned to a brokerage in the Powered by Zip network 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 third-party brokerages in the Powered by Zip network 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.

 

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 commission, including commission referrals earned from brokers in our Powered by Zip network.

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)          
Net transaction revenues:              
Same market  $13,987   $14,065   $(78)   (0.6)%
Closed market   -    593    (593)   (100.0)%
    13,987    14,658    (671)   (4.6)%
Marketing and other revenues   1,406    1,415    (9)   (0.7)%
Total net revenues  $15,393   $16,073   $(680)   (4.2)%

 

The decrease in our net transaction revenues of $0.7 million or 4.6% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was driven primarily by a decrease in the number of transactions closed during the period of 329 or 13.6%. Transactions closed during the period on a same market basis were 2,083 compared to 2,313 last year, a decrease of 230 or 9.9%. We believe the decrease in same market transaction volume was attributable to the disruption to our business model and to our agent population from our restructuring and the conversion of our agents to independent contractors. The market continues to be impacted by reduced availability of mortgage financing and low inventory. Same market average net revenue per transaction for the period was $6,715 compared to $6,081 last year, an increase of $634 or 10.4%, due to the impact of higher average homesale prices. The modest decrease in marketing and other revenues for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was attributable to increased transaction referrals from brokers in our Powered by Zip network of $0.1 million and advertising income of $0.2 million, offset by decreases in marketing fees of $0.2 million and lease referral fees of $0.1 million.

  

We expect our net revenues will increase modestly in 2013 compared to 2012, driven by an increase in the overall number of transactions closed and an increase in the average net revenue per transaction. We also expect our marketing and other revenue will increase for 2013 primarily attributable to increased revenues from our Powered by Zip network partially and higher marketing agreement revenues.

 

Cost of revenues

 

                 
   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)          
Cost of revenues:                          
   Same markets  $8,703   $8,046   $657    8.2%
   Closed markets   -    290    (290)   (100.0)%
        Total  $8,703   $8,336   $367    4.4%

 

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The increase in cost of revenues for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was related to higher commission rates paid to agents. Same market cost of revenues for the three months ended March 31, 2013 were $8.7 million compared to $8.0 million for the three months ended March 31, 2012. Agent commissions increased by approximately $0.6 million or 8.0%. Same market cost of revenues as a percentage of net transaction revenues was 62.2% in the three months ended March 31, 2013 compared to 57.2% in the three months ended March 31, 2012.

 

We expect our cost of revenues will increase in 2013, compared to 2012, because of an expected increase in market 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.

 

Product development

 

Product development expenses include our information technology costs relating to the maintenance of our website, proprietary technology platform and systems 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.

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Product development  $1,847   $1,802   $45    2.5%

 

Product development expenses for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 were essentially flat quarter over quarter. As a percentage of net revenues, product development expenses increased by 0.8 percentage points for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

 

We expect to continue enhancing tools and features on our website and technology platform for consumers and brokers in our Powered by Zip network and expect that our product development expenses will increase in 2013 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.

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Sales and marketing:                    
Market level  $3,693   $4,586   $(893)   (19.5)%
Regional/corporate support and marketing   1,333    1,245    88    7.0%
Total  $5,026   $5,831   $(805)   (13.8)%

 

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Market level sales and marketing expenses decreased for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily as a result of closing markets and eliminating positions in our remaining markets attributable to our 2011 and 2012 restructurings. The decrease of $0.9 million or 19.5% was principally attributable to decreases in salaries and benefits of $0.1 million, customer acquisition and marketing costs of $0.5 million and facilities and operating expenses of $0.3 million. Approximately $0.3 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 24.0% in 2013 compared to 28.5% in 2012.

 

Regional/corporate sales support and marketing expenses were flat quarter over quarter and as a percentage of net revenues were approximately 8.7% in 2013 compared to 7.7% in 2012.

 

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 2013 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.

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
General and administrative  $1,835   $2,106   $(271)   (12.9)%

 

General and administrative expenses for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 decreased by approximately $0.3 million or 12.9% and were primarily attributable to decreased professional fees of $0.1 million, salaries and benefits of $0.2 million and facilities and operating expenses of $0.1 million offset by an increase in recruiting of $0.1 million. As a percentage of net revenues, general and administrative expenses were 11.9% for the three months ended March 31, 2013 compared to 13.1% in the three months ended March 31, 2012.

 

We expect our general and administrative expenses for 2013 will decrease in absolute dollars and as a percentage of net revenues primarily as a result of our 2011 and 2012 restructurings and the reduction in consulting and professional fees.

  

Restructuring charges, net

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Restructuring charges, net  $57   $1,062   $(1,005)   (94.6)%

 

  On March 31, 2012, we announced a restructuring, including a work force realignment to more appropriately allocate resources to key strategic initiatives and the closing of brokerage operations in our Salt Lake City market. The associated restructuring charges incurred in March 31, 2013 of $0.1 million included employee severance pay and related expenses, non-cancelable lease obligations and other exit costs. During the three months ended March 31, 2011, we announced a restructuring, including closing brokerage operations in selected underperforming markets and a workforce reduction in sales support and administration functions which we expect to pay over the remaining terms of obligations through the third quarter of 2013.

 

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 Interest income

 

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

 

   Three Months Ended March 31,   Increase   Percent 
   2013   2012   (Decrease)   Change 
   (In thousands)     
Interest income  $2   $7   $(5)   (71.4)%

 

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 three months ended March 31, 2013, compared to the three months ended March 31, 2012, was due primarily to lower average balances. The lower average balances were attributable primarily to cash used in our operating activities as a result of the losses incurred during the quarter.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal sources of liquidity for 2013 are our cash, cash equivalents and short-term investments. As of March 31, 2013, we had cash and cash equivalents at fair value of $11.0 million and no bank debt, line of credit or equipment facilities.

 

Operating activities

 

Our operating activities used cash in the amount of $1.5 million and $3.2 million in the three months ended March 31, 2013 and 2012, respectively. Cash used in the three months ended March 31, 2013 resulted primarily from a net loss of $2.2 million and net changes in operating assets and liabilities of $0.1 million offset by non-cash adjustments. Cash used of $0.1 million from the net change in operating assets and liabilities included a $0.1 million restructuring charge accrual. The non-cash adjustments resulted primarily from $0.5 million of depreciation and amortization and $0.3 million of stock-based compensation expense. The increase in cash used attributable to the net changes in operating assets and liabilities was mainly driven by timing differences in accounts receivable, accounts payable and accrued expenses relating to agent compensation, bonuses, and customer acquisition expenses. Cash used in the three months ended March 31, 2012 resulted primarily from a net loss of $3.1 million and net changes in operating assets and liabilities of $0.8 million offset by non-cash adjustments. Cash used of $0.8 million from the net change in operating assets and liabilities included a $0.3 million restructuring charge accrual reversal. The non-cash adjustments resulted primarily from $0.4 million of depreciation and amortization and $0.2 million of stock-based compensation expense. The increase in cash used attributable to the net changes in operating assets and liabilities was mainly driven by timing differences in accounts receivable, accounts payable and accrued expenses relating to agent compensation, bonuses, and customer acquisition expenses.

 

Our primary source of operating cash flow is the collection of net commission income from escrow companies or similar intermediaries in the real estate transaction closing process, plus marketing and other revenues. These cash collections are 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 $0.8 million in the three months ended March 31, 2013 and provided cash of $1.6 million in the three months ended March 31, 2012. Cash used for in the three months ended March 31, 2013 represents the purchase of property and equipment, including amounts for website development and internal use software. Cash provided for the three months ended March 31, 2012 represent the net proceeds from the sales and maturity of short-term investments of $2.0 million less the purchase of property and equipment, including amounts for website development and internal use software. 

 

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Currently, we expect our remaining 2013 capital expenditures to be approximately $1.5 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 $0.3 million and $0.1 million in the three months ended March 31, 2013 and 2012, respectively, from proceeds 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, restructurings 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 broker referral network and possible litigation settlements and legal fees. In addition, although there are signs that an economic recovery may be underway, if the recent macroeconomic environment and state of the residential real estate market continues or worsens, we may have a greater need to fund our business by using our cash and cash equivalents, 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.

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

We lease office space under non-cancelable operating leases with various expiration dates through July 2017. The following table provides summary information concerning our future obligations and commitments as of March 31, 2013:

 

   Payments due by Period 
   Less Than           More Than     
   1 year   1 to 3 years   3 to 5 years   5 Years   Total 
   (In thousands) 
Minimum lease payments  $1,700   $2,485   $1,180   $23   $5,388 

 

OFF-BALANCE SHEET ARRANGEMENTS AND INDEMNIFICATIONS

 

We do not have any off balance-sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases. Our indemnifications agreements are described in note 7, “Commitments and Contingencies” of the unaudited condensed consolidated financial statements.

 

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NON-GAAP MEASURE

 

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

 

   Three Months Ended March 31, 
   2013   2012 
   (In thousands) 
Net revenue  $15,392   $16,073 
Adjusted EBITDA  $(1,272)  $(1,341)
Adjusted EBITDA margin   (8.3)%   (8.3)%

 

We present Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our performance. We believe Adjusted EBITDA 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 income taxes, depreciation and amortization expense, 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.

 

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, 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:

  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, and 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 three months ended March 31, 2013 and 2012:

 

   Three Months Ended March 31, 
   2013   2012 
Reconciliation of non-GAAP Adjusted EBITDA to net loss  (In thousands) 
Net loss  $(2,168)  $(3,057)
Add back:          
Interest income   (2)   (7)
Provision for income taxes   16    - 
Depreciation and amortization   478    437 
Stock-based compensation expense   269    224 
Restructuring charges, net   57    1,062 
Litigation settlement charges (non-core-operating) (1)   78    - 
Non-GAAP Adjusted EBITDA  $(1,272)  $(1,341)

 

 

 

(1)Litigation settlement charges (non-core operations) represents amounts we consider not reflective 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.

 

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Item 3. 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 this investment policy is prudent, and helps to reduce, but does not prevent, loss of principal, and results in minimal interest rate exposure on our investments.

 

As of March 31, 2013 and 2012, our cash and cash equivalents consisted primarily of money market funds and our short-term investments consisted primarily of investment grade, highly liquid interest-bearing securities. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities and short-term investments are carried at fair value. 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, particularly since the majority of our investments are fixed income investments. If market interest rates were to increase or decrease immediately and uniformly by 10% from levels at March 31, 2013 and 2012, 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 revenues or expenses denominated in foreign currencies. We have not engaged in any hedging or other derivative transactions to date.

 

 

Item 4. Controls and Procedures:

 

(a) Disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and 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 Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly 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.

 

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

 

PART II — OTHER INFORMATION

 

Item 1. 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 reexamining the patents at issue. After completing our 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.

 

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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 April 2, 2012, we filed an answer denying these allegations because we believe that our sales agents, whose job duties consisted exclusively of selling residential real estate, were properly classified as “outside salespersons” under the Federal Fair Labor Standards Act and, thus, we believe that this claim is without merit. In addition to the federal law allegations, the complaint alleges violations of the Arizona Minimum Wage law. We intend to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

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 alleges 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 seeks unspecified damages including penalties and attorneys’ fees in addition to wages and overtime. On April 2, 2012, we filed an answer denying these allegations because we believe that our sales agents, whose job duties consisted exclusively of selling residential real estate, were properly classified as “outside salespersons” and were compensated accordingly in full compliance with California law. Additionally, we filed a cross complaint against Ms. Adewumni for fraud and breach of contract, in which we alleged that she created false client accounts that resulted in her receiving higher commission payments than she was entitled to receive under her written employment agreement. Accordingly, we believe Ms. Adewumni’s claim is without merit and, thus, we intend to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

On January 11, 2013, we were 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 our mobile-device application has infringed on a patent owned by Arczar relating to computer vision system technology and seeks unspecified damages and other legal and equitable relief. After completing our initial investigation of this matter, we do not believe that we have infringed the patent, or that we have any liability for the claims alleged. We intend to vigorously defend against this lawsuit. No estimate of possible loss, if any, can be made at this time.

 

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 1A. Risk Factors:

 

Our business is subject to a number of risks and uncertainties. Because of risks and uncertainties 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 consider carefully the risk factors described under “Risk Factors” in Item 1A of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2012. At this time, we are not aware of any material changes to the nature of those risk factors. We intend to set forth material changes to the nature of those risk factors in our future reports on Form 10-Q as required by Item 1A of Part II thereof. For business, market and other developments in the quarter ended March 31, 2013, please see Item 2 of Part I of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

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Item 5. Other Information:

 

Not applicable.

 

Item 6. Exhibits:

 

 The exhibits listed in the Exhibit Index are filed as a part of this report.

 

 

SIGNATURE

 

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
    Senior Vice President and Chief Financial Officer

 

Date: May 9, 2013

 

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Exhibit Index

 

Exhibit

number

  Description
3.1(1)   Certificate of Correction to Amended and Restated Certificate of Incorporation
     
3.2(a)(2)   Bylaws
     
4.1(2)   Form of Common Stock Certificate
     
10.1(3)*   Management Incentive Plan – Fiscal Year 2013
     
10.2(4)*   Consulting Agreement with Genni Combes dated as of January 21, 2013
     
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 10.1 to the Registrant’s Registration Statement on S-1 (File No. 333-115657) filed with the Securities Exchange Commission on May 20, 2004, as amended.
(3) Incorporated by reference to the exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-51002) filed with Securities and Exchange Commission on March 6, 2013.
(4) Incorporated by reference to the 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 January 24, 2013.
   
  *   Identifies a management contract or compensatory plan of arrangement required to be filled as an exhibit to this report.
  **   XBRL (Extensible Business Reporting Language) information is furnished and not filled herewith, is not part of a registration statement or prospectus of Section 11 or 12 of the Securities Act of 1933, is deemed not filed for purpose of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

33