10-Q 1 q2fy1610-q.htm 10-Q Document


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2016
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
   
Commission File Number: 000-24821
 
 
 
Care.com, Inc.
 
(Exact name of registrant as specified in its charter)
Delaware
20-578-5879
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
77 Fourth Avenue, Fifth Floor
Waltham, MA
02451
(Address of principal executive offices)
(Zip Code)
(781) 642-5900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, par value $0.001
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
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 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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
 
Accelerated filer
[x]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
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]
As of July 21, 2016, there were 28,600,609 shares of the registrant's common stock, $0.001 par value, outstanding.





CARE.COM, INC.
FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
Signatures
 






PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CARE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
 
June 25, 2016
 
December 26, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55,617

 
$
61,240

Accounts receivable (net of allowance of $88 and $125, respectively)
3,165

 
3,107

Unbilled accounts receivable
4,044

 
3,595

Prepaid expenses and other current assets
3,629

 
2,599

Current assets of discontinued operations
212

 
439

Total current assets
66,667

 
70,980

Property and equipment, net
5,611

 
6,371

Intangible assets, net
2,331

 
3,389

Goodwill
58,866

 
58,631

Other non-current assets
2,596

 
3,098

Non-current assets of discontinued operations

 
9

Total assets
$
136,071

 
$
142,478

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,703

 
$
3,189

Accrued expenses and other current liabilities
15,614

 
12,413

Deferred revenue
14,895

 
13,435

Current liabilities of discontinued operations
206

 
17,883

Total current liabilities
34,418

 
46,920

Deferred tax liability
3,704

 
3,166

Other non-current liabilities
4,639

 
4,140

Total liabilities
42,761

 
54,226

Contingencies (see Note 6)

 

Stockholders' equity
 
 
 
Preferred Stock, $0.001 par value; 5,000 shares authorized, no shares issued
 
 
 
Common stock, $0.001 par value; 300,000 shares authorized; 32,287 and 32,276 shares issued and outstanding, respectively
32

 
32

Additional paid-in capital
285,018

 
283,669

Accumulated deficit
(191,518
)
 
(194,854
)
Accumulated other comprehensive loss
(222
)
 
(595
)
Treasury stock, at cost (478 shares at June 25, 2016)

 

Total stockholders' equity
93,310

 
88,252

Total liabilities and stockholders' equity
$
136,071

 
$
142,478


See accompanying notes to the condensed consolidated financial statements
2



CARE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Revenue
$
38,184

 
$
32,902

 
$
77,450

 
$
64,952

Cost of revenue
7,619

 
6,630

 
14,861

 
12,902

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
18,561

 
18,096

 
38,028

 
38,453

Research and development
5,036

 
5,022

 
9,911

 
9,631

General and administrative
7,933

 
7,477

 
15,752

 
15,101

Depreciation and amortization
947

 
1,225

 
1,919

 
2,456

Restructuring charges
714

 

 
714

 

Total operating expenses
33,191

 
31,820

 
66,324

 
65,641

Operating loss
(2,626
)
 
(5,548
)
 
(3,735
)
 
(13,591
)
Other (expense) income, net
(129
)
 
487

 
(143
)
 
(704
)
Loss from continuing operations before income taxes
(2,755
)
 
(5,061
)
 
(3,878
)
 
(14,295
)
Provision for income taxes
620

 
345

 
620

 
905

Loss from continuing operations
(3,375
)
 
(5,406
)
 
(4,498
)
 
(15,200
)
(Loss) income from discontinued operations, net of tax (see note 3)
(44
)
 
(1,831
)
 
7,834

 
(4,047
)
Net (loss) income
$
(3,419
)
 
$
(7,237
)
 
$
3,336

 
$
(19,247
)
Net (loss) income per share (Basic):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.14
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.24

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
Net (loss) income per share (Diluted):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.13
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.23

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,136

 
31,981

 
32,183

 
31,872

Diluted
32,136

 
31,981

 
34,082

 
31,872



See accompanying notes to the condensed consolidated financial statements
3



CARE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Net (loss) income
$
(3,419
)
 
$
(7,237
)
 
$
3,336

 
$
(19,247
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
55

 
72

 
373

 
(932
)
Comprehensive (loss) income
$
(3,364
)
 
$
(7,165
)
 
$
3,709

 
$
(20,179
)





See accompanying notes to the condensed consolidated financial statements
4



CARE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
Cash flows from operating activities
 
 
 
Net income (loss)
$
3,336

 
$
(19,247
)
(Loss) income from discontinued operations, net of tax
7,834

 
(4,047
)
Loss from continuing operations
(4,498
)
 
(15,200
)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
3,014

 
2,294

Depreciation and amortization
2,314

 
2,837

Deferred taxes
538

 
801

Foreign currency remeasurement loss
200

 
684

Other non-cash operating expenses (income)
(78
)
 
7

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
(68
)
 
(382
)
Unbilled accounts receivable
(449
)
 
(451
)
Prepaid expenses and other current assets
(508
)
 
975

Other non-current assets
(14
)
 
(13
)
Accounts payable
514

 
(3,138
)
Accrued expenses and other current liabilities
3,014

 
3,033

Deferred revenue
1,452

 
1,905

Other non-current liabilities
610

 
400

Net cash provided by (used in) operating activities by continuing operations
6,041

 
(6,248
)
Net cash provided by (used in) operating activities by discontinued operations
2,481

 
(4,035
)
Net cash provided by (used in) operating activities
8,522

 
(10,283
)
 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(84
)
 
(3,979
)
Payments for acquisitions, net of cash acquired
(420
)
 

Cash withheld for purchase consideration

 
73

Net cash used in investing activities by continuing operations
(504
)
 
(3,906
)
Net cash used in investing activities by discontinued operations

 
(2
)
Net cash used in investing activities
(504
)
 
(3,908
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from exercise of common stock options
925

 
611

Payments of contingent consideration previously established in purchase accounting

 
(1,840
)
Net cash provided by (used in) financing activities by continuing operations
925

 
(1,229
)
Net cash used in financing activities by discontinued operations
(14,510
)
 

Net cash used in financing activities
(13,585
)
 
(1,229
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(56
)
 
34


See accompanying notes to the condensed consolidated financial statements
5



Net decrease in cash and cash equivalents
(5,623
)
 
(15,386
)
Cash and cash equivalents, beginning of the period
61,240

 
71,881

Cash and cash equivalents, end of the period
$
55,617

 
$
56,495

 
 
 
 
Supplemental disclosure of cash flow activities
 
 
 
Cash paid for taxes
$
177

 
$
26

 
 
 
 
Supplemental disclosure of non-cash operating, investing and financing activities
 
 
 
Unpaid purchases of property and equipment
$
17

 
$
33

Issuance of common stock in connection with acquisitions
$

 
$
4,878

Unpaid deferred offering costs
$
329

 
$

Fair value of common shares received from legal settlement (Note 3)
$
2,593

 
$




See accompanying notes to the condensed consolidated financial statements
6


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)


1. Description of Business and Summary of Significant Accounting Policies
Care.com, Inc. (the “Company”, “we”, “us”, and “our”), a Delaware corporation, was incorporated on October 27, 2006. We are the world’s largest online marketplace for finding and managing family care. Our consumer matching solutions enable families to connect to caregivers and caregiving services in a reliable and easy way, and our payment solutions enable families to pay caregivers electronically online or via their mobile device and to manage their household payroll and tax matters with Care.com HomePay. In addition, we serve employers by providing access to our platform to employer-sponsored families and care-related businesses—such as day care centers, nanny agencies and home care agencies—who wish to market their services to our care-seeking families and recruit our caregiver members.
Certain Significant Risks and Uncertainties
We operate in a dynamic industry and, accordingly, our business is affected by a variety of factors. For example, we believe that negative changes in any of the following areas could have a significant negative effect on our future financial position, results of operations or cash flows: rates of revenue growth; member engagement and usage of our existing and new products; protection of our brand; retention of qualified employees and key personnel; management of our growth; scaling and adaptation of existing technology and network infrastructure; competition in our market; performance of acquisitions and investments; protection of our intellectual property; protection of customers’ information and privacy concerns; security measures related to our website; and access to capital at acceptable terms, among other things.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, filed on March 1, 2016.
There have been no material changes in our significant accounting policies for the three and six months ended June 25, 2016 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015.
The condensed consolidated balance sheet as of December 26, 2015, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP on an annual reporting basis.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, and are not necessarily indicative of the results of operations to be anticipated for fiscal 2016 or any future period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries, after elimination of all intercompany balances and transactions. We have prepared the accompanying financial statements in conformity with GAAP.
Fiscal Year-End
We operate and report using a 52 or 53 week fiscal year ending on the Saturday in December closest and prior to December 31. Accordingly, our fiscal quarters end on the Saturday that falls closest to the last day of the third month of each quarter.
Subsequent Events Consideration
We consider events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. There were no material recognized subsequent events recorded in the condensed consolidated financial statements as of and for the three and six months ended June 25, 2016. Please refer to Note 13 for further detail on subsequent events.

7


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

Recently Issued and Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation- Stock Compensation (Topic 718). The guidance changes how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee's shares than it can today for tax withholding purposes providing for withholding at the employee's maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The updated guidance is effective for annual periods beginning after December 15, 2017, and is applicable to the Company in fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires an entity to recognize a right-of-use asset and a lease liability for virtually all of its leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The guidance is effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial position and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for entities to separate deferred income tax liabilities and assets into current and non-current amounts in the balance sheet. Rather, it requires that deferred tax assets and liabilities are classified as non-current in the balance sheet. We adopted this standard prospectively for the year-ended December 26, 2015. The adoption of this standard has no effect on our statements of consolidated operations and cash flows.
In September 2015, the FASB released ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The guidance is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. There were no measurement period adjustments for which this guidance would apply.
In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which amends ASC 350. The amendments provide guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar arrangements) includes a software license, and based on that determination, how to account for such arrangements. ASU 2015-05 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 and may be applied on either a prospective or retrospective basis. Early adoption is not permitted. We adopted this standard in the first quarter on a prospective basis. The adoption of this standard has no effect on our statements of operations and cash flows in the quarter ended June 25, 2016.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810)-Amendments to the Consolidation Analysis, which amends the criteria for determining which entities are considered variable interest entities, or VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. ASU 2015-02 is effective for annual periods, and interim periods therein, beginning after December 15, 2015. The adoption of this standard has no effect on our consolidated statements of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. We are currently evaluating the effect of the adoption of ASU 2014-15, but the adoption is not expected to have a material effect on our consolidated financial statements or disclosures.

8


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption is permitted but not before the original effective date of December 15, 2016. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the full retrospective or modified retrospective approach. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
2. Fair Value Measurements
The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 25, 2016 and December 26, 2015 and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):
 
June 25, 2016
 
December 26, 2015
 
Fair Value Measurements Using Input Types
 
 
 
Fair Value Measurements Using Input Types
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
22,879

 
$

 
$

 
$
22,879

 
$
25,420

 
$

 
$

 
$
25,420

Total assets
$
22,879

 
$

 
$

 
$
22,879

 
$
25,420

 
$

 
$

 
$
25,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent acquisition consideration (included in current liabilities of discontinued operations)
$

 
$

 
$

 
$

 
$
8,163

 
$

 
$
7,878

 
$
16,041

Total liabilities
$

 
$

 
$

 
$

 
$
8,163

 
$

 
$
7,878

 
$
16,041

The following table sets forth a summary of changes in the fair value of our contingent acquisition consideration which represents recurring measurements that are classified within Level 3 of the fair value hierarchy wherein fair value is estimated using significant unobservable inputs (in thousands):
 
June 25, 2016
 
Contingent Acquisition
Consideration
 
 
Beginning balance (December 26, 2015)
$
7,878

Decrease in fair value included in earnings
(441
)
Contingent acquisition consideration payments
(7,437
)
Ending balance
$


9


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

During the first quarter of fiscal 2016, we entered into a settlement agreement with the previous shareholders of Citrus Lane. The settlement agreement relates to our acquisition of Citrus Lane and the merger agreement pursuant to which the acquisition was consummated. Under the terms of the settlement agreement, we paid the previous shareholders of Citrus Lane $15.6 million of contingent consideration payments that were valued at $16.0 million as of December 26, 2015 ($16.4 million was the undiscounted value at the time of the acquisition) that was otherwise payable to them in the event Citrus Lane achieved certain milestones in 2015 and 2016. Refer to Note 3 for further discussion on the impact of the settlement in the first quarter of 2016.
Non-Recurring Fair Value Measurements
We re-measure the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets are comprised of long-lived assets, including property and equipment, intangible assets and goodwill. In the three and six months ended June 25, 2016 and June 27, 2015, no significant remeasurements were necessary. Other financial instruments not measured or recorded at fair value in the accompanying condensed consolidated balance sheets principally consist of accounts receivable, accounts payable, and accrued liabilities. The estimated fair values of these instruments approximate their carrying values due to their short-term nature.
3. Discontinued Operations
During the third quarter of fiscal 2015 we made the decision to exit the Citrus Lane business through either a sale or wind-down as it was no longer a strategic priority. In the fourth quarter of fiscal 2015, we made the decision to shut down the business and had substantially completed our plans for exiting the business. As such, financial results of Citrus Lane have been presented within income (loss) from discontinued operations, net of tax on the consolidated statements of operations for the three and six months ended June 25, 2016 and June 27, 2015. Assets and liabilities of Citrus Lane to be disposed of are presented as assets from discontinued operations and liabilities from discontinued operations on the consolidated balance sheets as of June 25, 2016 and December 26, 2015.
In February 2016, we entered into a settlement agreement with the previous shareholders of Citrus Lane. The settlement agreement related to our acquisition of Citrus Lane and the merger agreement pursuant to which the acquisition was consummated. Under the terms of the settlement agreement, we paid the previous shareholders of Citrus Lane $15.6 million in contingent consideration payments that were valued at $16.0 million as of December 26, 2015 ($16.4 million was the undiscounted value at the time of the acquisition) that was otherwise payable to them in the event Citrus Lane achieved certain milestones in 2015 and 2016. In exchange, the former shareholders forfeited the $5.0 million in original cash consideration that was being held in an escrow account, as well as the 0.4 million shares of common stock issued at closing (valued at $2.0 million as of the February 2016 settlement date and $3.9 million as of the original closing date) and 0.1 million shares of common stock which was subject to the achievement of certain milestones in 2015 and 2016 (valued at $0.6 million as of the February 2016 settlement date and $1.1 million as of the original closing date) offered as part of the deal consideration. We recorded the receipt of these shares a Treasury Stock with a cost of $0 on the condensed consolidated balance sheet as of June 25, 2016. As a result of this settlement, and based on our assessment that there was not a clear and direct link to the original consideration transferred at the acquisition date, we have recognized a gain within income (loss) from discontinued operations on the consolidated statements of operations for the six months ended June 25, 2016 of $8.0 million.
The following table presents financial results of the Citrus Lane business included in income (loss) from discontinued operations, net of tax for the six months ended June 25, 2016 and June 27, 2015 (in thousands):

10


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Revenue
$
19

 
$
2,750

 
$
101

 
$
5,821

Cost of revenue
3

 
2,594

 
97

 
5,870

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
13

 
627

 
54

 
1,311

Research and development

 
383

 
11

 
789

General and administrative
47

 
951

 
(7,903
)
 
1,828

Depreciation and amortization

 
26

 
8

 
70

Operating (loss) income
(44
)
 
(1,831
)
 
7,834

 
(4,047
)
Other expense, net

 

 

 

(Loss) income from discontinued operations before income taxes
(44
)
 
(1,831
)
 
7,834

 
(4,047
)
Provision for income tax

 

 

 

Net (loss) income from discontinued operations
$
(44
)
 
$
(1,831
)
 
$
7,834

 
$
(4,047
)
The major components of current assets and current liabilities of the Citrus Lane business were as follows (in thousands):
 
June 25, 2016
 
December 26, 2015
Assets
 
 
 
Accounts receivable
$
152

 
$
92

Prepaid expenses and other current assets
60

 
28

Inventory

 
319

Total current assets
212

 
439

Property and equipment, net

 
9

Total assets
$
212

 
$
448

 
 
 
 
Liabilities
 
 
 
Accounts payable
$

 
$
435

Accrued expenses and other liabilities
206

 
1,325

Deferred revenue

 
82

Current contingent acquisition consideration

 
16,041

Total liabilities
$
206

 
$
17,883



11


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

4. Supplemental Balance Sheet Information
The following table presents the detail of property and equipment, net for the periods presented (in thousands):
 
June 25,
2016
 
December 26,
2015
 
 
 
 
Computer equipment
$
2,302

 
$
2,236

Furniture and fixtures
1,571

 
1,611

Software
1,374

 
1,374

Leasehold improvements
3,854

 
3,847

Total
9,101

 
9,068

Less accumulated depreciation
(3,490
)
 
(2,697
)
Property and equipment, net
$
5,611

 
$
6,371

Depreciation expense for the three months ended June 25, 2016 and June 27, 2015 was $0.4 million and $0.4 million, respectively, and for the six months ended June 25, 2016 and June 27, 2015 was $0.8 million and $0.8 million, respectively.
The following table presents the detail of accrued expenses and other current liabilities for the periods presented (in thousands):
 
June 25,
2016
 
December 26,
2015
 
 
 
 
Payroll and compensation
$
4,166

 
$
5,167

Marketing expenses
7,110

 
3,451

Other accrued expenses
4,338

 
3,795

Total accrued expenses and other current liabilities
$
15,614

 
$
12,413


5. Goodwill and Intangible Assets
The following table presents the change in goodwill for the periods presented (in thousands):
Balance as of December 26, 2015
$
58,631

Effect of currency translation
235

Balance as of June 25, 2016
$
58,866


12


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

The following table presents the detail of intangible assets for the periods presented (dollars in thousands):
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted-Average Remaining Life (Years)
 
 
 
 
 
 
 
 
June 25, 2016
 
 
 
 
 
 
 
Indefinite lived intangibles
$
242

 
$

 
$
242

 
N/A
Trademarks and trade names
4,424

 
(4,177
)
 
247

 
3.0
Proprietary software
5,193

 
(4,215
)
 
978

 
1.6
Website
50

 
(49
)
 
1

 
0.1
Training materials
30

 
(30
)
 

 
0.0
Non-compete agreements
131

 
(118
)
 
13

 
1.1
Leasehold interests
170

 
(98
)
 
72

 
2.9
Caregiver relationships
289

 
(289
)
 

 
0.0
Customer relationships
8,790

 
(8,012
)
 
778

 
5.5
Total
$
19,319

 
$
(16,988
)
 
$
2,331

 
 
 
 
 
 
 
 
 
 
December 26, 2015
 
 
 
 
 
 
 
Indefinite lived intangibles
$
242

 
$

 
$
242

 
N/A
Trademarks and trade names
4,417

 
(4,133
)
 
284

 
3.5
Proprietary software
4,751

 
(3,802
)
 
949

 
1.6
Website
50

 
(44
)
 
6

 
0.6
Training materials
30

 
(30
)
 

 
0.0
Non-compete agreements
130

 
(111
)
 
19

 
1.6
Leasehold interests
170

 
(86
)
 
84

 
3.4
Caregiver relationships
285

 
(285
)
 

 
0.0
Customer relationships
8,782

 
(6,977
)
 
1,805

 
3.1
Total
$
18,857

 
$
(15,468
)
 
$
3,389

 
 
Amortization expense was $1.5 million and $2.1 million for the six months ended June 25, 2016 and June 27, 2015, respectively. Of these amounts, $1.1 million and $1.7 million was classified as a component of depreciation and amortization, and $0.4 million and $0.4 million was classified as a component of cost of revenue in the condensed consolidated statements of operations for the six months ended June 25, 2016 and June 27, 2015, respectively.
As of June 25, 2016, the estimated future amortization expense related to intangible assets for future fiscal years was as follows (in thousands):
2016 remaining
$
608

2017
688

2018
343

2019
145

2020
96

Thereafter
209

Total
$
2,089


13


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

6. Contingencies
Legal matters
From time to time, we have or may become party to litigation incident to the ordinary course of business. We assess the likelihood of any adverse judgments or outcomes with respect to these matters and determine loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, we consider other relevant factors that could impact our ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. Our reserve may change in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of all pending matters will not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can adversely impact us due to defense and settlement costs, diversion of management resources, and other factors.
7. Stockholders’ Equity
Stock-Based Compensation
The following table summarizes stock-based compensation in our accompanying condensed consolidated statements of operations (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
 
 
 
 
 
 
 
 
Cost of revenue
$
79

 
$
60

 
$
154

 
$
96

Selling and marketing
229

 
269

 
414

 
412

Research and development
279

 
242

 
509

 
315

General and administrative
1,059

 
897

 
1,937

 
1,471

(Loss) income from discontinued operations
3

 
189

 
8

 
301

   Total stock-based compensation
$
1,649

 
$
1,657

 
$
3,022

 
$
2,595

Pursuant to our 2014 Incentive Award Plan (the “2014 Plan”), during the six months ended June 25, 2016, we granted 0.6 million restricted stock units (RSUs) to certain employees and directors and 0.5 million performance based RSUs to certain members of senior management. Each recipient of performance based RSUs is eligible to receive up to 100% of the shares granted on the achievement of certain financial targets for fiscal 2016. If those targets are reached, the award will vest over a four-year period retroactive to March 2016 as continued services are performed. Management is recognizing expense straight-line over the required service period based on its estimate of the number of shares that will vest. If there is a change in the estimate of the number of shares that are probable of vesting, we will cumulatively adjust compensation expense in the period that the change in estimate is made.
RSUs are not included in issued and outstanding common stock until the shares are vested and released. The fair value of the RSUs is measured based on the market price of the underlying common stock as of the date of grant, reduced by the purchase price of $0.001 per share.  The weighted-average grant-date fair value per share and the total fair value of vested shares from RSU grants was $7.37 and $1.9 million, respectively, for the six months ended June 25, 2016. During the six months ended June 27, 2015, 1.7 million RSUs were granted to employees.
During the six months ended June 25, 2016, we granted 1.4 million stock options to certain employees and directors at a weighted average grant-date fair value per share of $6.68. During the six months ended June 27, 2015, no stock options were granted to employees.

14


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
Risk-free interest rate
1.3 - 1.6%
 
N/A
Expected term (years)
6.25
 
N/A
Volatility
38.23%
 
N/A
Expected dividend yield
 
N/A
A summary of stock option and RSU activity for the six months ended June 25, 2016 was as follows (in thousands for shares and intrinsic value):
 
 
 
 
 
 
 
 
 
Restricted Stock Units
 
Shares
 
Weighted-Average Remaining Contractual Term (Years)
 
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
 
Shares
 
Weighted-Average Grant Date Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding as of December 26, 2015
3,482

 
5.93
 
$
6.52

 
$
8,891

 
1,306

 
$
7.42

Granted(1)
1,352

 
 
 
$
6.68

 
 
 
1,106

 
6.66

Settled (RSUs)

 
 
 

 
 
 
(254
)
 
7.37

Exercised
(235
)
 
 
 
$
3.95

 
 
 

 

Canceled and forfeited
(147
)
 
 
 
$
11.54

 
 
 
(94
)
 
6.88

Outstanding as of June 25, 2016
4,452

 
6.97
 
$
6.53

 
$

 
2,064

 
$

Vested and exercisable as of June 25, 2016
2,749

 
5.64
 
$
5.55

 
$
11,316

 
N/A
 
N/A
Vested and expected to vest as of June 25, 2016(2)
4,189

 
6.82
 
$
6.47

 
$
13,842

 
1,345

 
$
7.15

____________________________
(1) For RSUs, includes both time-based and performance-based restricted stock units
(2) Options and RSUs expected to vest reflect an estimated forfeiture rate
Aggregate intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on the New York Stock Exchange as of June 24, 2016, the final trading day of the six months ended June 25, 2016, was $8.68. The total intrinsic value of options exercised and RSUs vested was approximately $2.7 million for the six months ended June 25, 2016. The aggregate fair value of the options that vested during the six months ended June 25, 2016 was $1.3 million.
As of June 25, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options and RSUs was approximately $4.9 million and $9.3 million, respectively, which is expected to be recognized over a weighted-average period of 3.0 years and 3.1 years, respectively, to the extent they are probable of vesting. As of June 25, 2016, we had 2,412,066 shares available for grant under the 2014 Plan.

15


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

Common Stock
As of June 25, 2016, we had reserved the following shares of common stock for future issuance in connection with the following (in thousands):
 
June 25, 2016
Options issued and outstanding
4,451,790

Restricted stock units issued and outstanding
2,063,741

Common stock available for stock-based award grants under incentive award plans
2,412,066

Total
8,927,597


8. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period and potentially dilutive common stock equivalents, except in cases where the effect of common stock equivalent would be anti-dilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options as well as shares issuable under outstanding contingent consideration arrangements.
The calculations of basic and diluted net income per share and basic and dilutive weighted-average shares outstanding for the three and six months ended June 25, 2016 and June 27, 2015 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 25, 2016
 
June 27, 2015
 
June 25, 2016
 
June 27, 2015
Loss from continuing operations
$
(3,375
)
 
$
(5,406
)
 
$
(4,498
)
 
$
(15,200
)
(Loss) income from discontinued operations
(44
)
 
(1,831
)
 
7,834

 
(4,047
)
Net (loss) income
$
(3,419
)
 
$
(7,237
)
 
$
3,336

 
$
(19,247
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
32,136

 
31,981

 
32,183

 
31,872

 
 
 
 
 
 
 
 
Dilutive impact from:
 
 
 
 
 
 
 
Options outstanding

 

 
1,052

 

Restricted stock units

 

 
847

 

Dilutive weighted-average shares outstanding
32,136

 
31,981

 
34,082

 
31,872

 
 
 
 
 
 
 
 
Net (loss) income per share (Basic):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.14
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.24

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
Net (loss) income per share (Diluted):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.13
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.23

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
The following equity shares were excluded from the calculation of diluted net loss per share from continuing operations because their effect would have been anti-dilutive for the periods presented (in thousands):

16


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Stock options
4,452

 
3,835

 
617

 
3,835

Restricted stock units
2,064

 
1,633

 
1,217

 
1,633

Contingent consideration

 
106

 

 
106


9. Income Taxes
We recorded income tax expense of $0.6 million and $0.3 million for the three months ended June 25, 2016 and June 27, 2015, respectively, and $0.6 million and $0.9 million for the six months ended June 25, 2016 and June 27, 2015, respectively. The tax provision recorded for the three and six months ended June 25, 2016 related to the amortization of goodwill associated with the acquisition of Care.com HomePay for tax purposes, for which there is no corresponding book deduction, and certain state taxes based on operating income that are payable without regard to tax loss carryforwards. Our tax provision for the three and six months ended June 27, 2015 related to the amortization of Care.com HomePay goodwill for tax purposes for which there is no corresponding book deduction, and certain state taxes based on operating income that are payable without regard to our tax loss carry forwards.
10. Segment and Geographical Information
We consider operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is the CEO. The CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Prior to our decision to exit the Citrus Lane business in fiscal 2015, we had determined that we had two operating and reporting segments, CRCM Businesses, Excluding Citrus Lane and Citrus Lane. Subsequent to our decision to exit the Citrus Lane business, we have concluded that we have a single operating and reportable segment.
No country outside of the United States provided greater than 10% of our total revenue. Revenue is classified by the major geographic areas in which our customers are located. The following table summarizes total revenue generated by our geographic locations (dollars in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
United States
$
34,789

 
$
30,429

 
$
70,700

 
$
60,213

International
3,395

 
2,473

 
6,750

 
4,739

Total revenue
$
38,184

 
$
32,902

 
$
77,450

 
$
64,952


 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
(As a percentage of revenue)
United States
91
%
 
92
%
 
91
%
 
93
%
International
9
%
 
8
%
 
9
%
 
7
%
Total revenue
100
%
 
100
%
 
100
%
 
100
%
Our long-lived assets are primarily located in the United States and are not allocated to any specific region. Therefore, geographic information is presented only for total revenue.

17


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

11. Restructuring Charges
On April 14, 2016, we entered into a sublease agreement to lease approximately 10,362 square feet of our 108,743 square foot headquarters facility located in Waltham, Massachusetts.
During the quarter ended June 25, 2016, we recorded a $0.5 million sublease loss liability and related expenses of $0.2 million for the expected loss on the sublease, in accordance with ASC 840-20 Leases, because the monthly payments we expect to receive under the sublease are less than the amounts that we will owe the lessor for the sublease space. The sublease term is less than the remaining term under the original lease, and thus we do not believe we have met a cease use date as we may re-enter the space following the sublease. The fair value of the liability was determined using the estimated future net cash flows, consisting of the minimum lease payments to the lessor for the sublease space and payments we will receive under the sublease. The sublease loss was recorded as part of restructuring expense in the consolidated statement of operations in the three and six months ended June 25, 2016.
12. Other (Expense) Income, Net
Other (expense) income, net consisted of the following (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Interest income
$
55

 
$
52

 
$
71

 
$
86

Interest expense
(1
)
 
(54
)
 
(2
)
 
(82
)
Other expense, net
(183
)
 
489

 
(212
)
 
(708
)
Total (expense) income, net
$
(129
)
 
$
487

 
$
(143
)
 
$
(704
)

13. Subsequent Events
On June 29, 2016, we announced our entry into an Investment Agreement with Google Capital 2016, L.P. (“Google Capital”) relating to the issuance and sale (the “Transaction”) to Google Capital of 46,350 shares of the Company’s Convertible Preferred Stock, Series A, par value $0.001 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of $46.35 million, or $1,000 per share. The Transaction closed on June 29, 2016. We utilized a portion of the proceeds from the Transaction to repurchase an aggregate of 3,700,000 shares of common stock at a price of $8.25 per share from Matrix Partners VII, L.P. and Weston & Co. VII LLC. This repurchase also closed on June 29, 2016.
The Convertible Preferred Stock ranks senior to our common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Convertible Preferred Stock has a liquidation preference of $1,000 per share (equal to the original issuance price) plus all accrued and unpaid dividends. Holders of Convertible Preferred Stock are entitled to a cumulative dividend at a rate of 5.50% per annum during the period from the date of the issuance of the Convertible Preferred Stock (the “Closing Date”) to the seventh anniversary of the Closing Date, payable semi-annually in arrears. Dividends shall be paid in additional Liquidation Preference (as defined in the Certificate of Designations) per share of Convertible Preferred Stock.
The Convertible Preferred Stock is convertible at the option of the holders at any time into shares of common stock at an initial conversion price of $10.50 per share, which rate will be subject to adjustment upon the occurrence of certain events. At any time after the seventh anniversary of the Closing Date, and if between the fifth anniversary and the seventh anniversary of the Closing Date, the consolidated closing price of the common stock equals or exceeds 150% of the then prevailing Conversion Price (as defined in the Certificate of Designations) for at least 20 trading days in any period of 30 consecutive trading days, including the last trading day of such 30-day period, then following such time, all or some of the Convertible Preferred Stock may be converted, at the election of the Company, into the relevant number of shares of common stock. At our option, at any time after the seventh anniversary of the Closing Date, all of the Convertible Preferred Stock may be redeemed by us at the then current Liquidation Preference plus accrued and unpaid dividends after giving the holders of Convertible Preferred Stock the ability to convert their shares into common stock at the then current Conversion Price. At any point after the seventh anniversary of the Closing Date, each holder of the Convertible Preferred Stock may cause the Company to redeem all of such holder’s Convertible Preferred Stock at the then current Liquidation Preference plus accrued and unpaid dividends.

18


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 25, 2016
(unaudited)

Holders of Convertible Preferred Stock will be entitled to vote with the holders of common stock on an as-converted basis.
Upon certain change of control events involving the Company, holders of Convertible Preferred Stock can elect to either (1) convert the Convertible Preferred Stock into common stock at the then current Conversion Price or (2) require us to redeem the Convertible Preferred Stock for 150% of the then current Liquidation Preference plus accrued and unpaid dividends, provided that in the case of a change of control event in which the common stock is converted into or canceled for cash or publicly traded securities, such conversion or redemption will be mandatory, with the selection deemed to be in favor of the alternative that would result in holders of Convertible Preferred Stock receiving the greatest consideration.
Additionally, at any time when at least 50% of the shares of Convertible Preferred Stock purchased from us pursuant to the Investment Agreement are outstanding, we cannot, without the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Convertible Preferred Stock, (a) amend our Certificate of Incorporation in a manner that adversely affects the preferences or rights of the Convertible Preferred Stock; (b) authorize or issue capital stock unless it ranks equal to or junior to the Convertible Preferred Stock, or increase the authorized number of shares of Convertible Preferred Stock; or (c) reclassify or amend any existing security of the Company that is equal to or junior to the Convertible Preferred Stock to render such security senior to the Convertible Preferred Stock.
Pursuant to the Investment Agreement and the Certificate of Designations, for so long as Google Capital or its affiliates beneficially own at least 50% of the shares of Convertible Preferred Stock purchased from us pursuant to the Investment Agreement, the holders of Convertible Preferred Stock shall have the right to elect one director to our Board, with Google Capital having the right to designate nominees for such position.



19



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, filed on March 1, 2016. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from our expectations.
Overview
We are the world’s largest online marketplace for finding and managing family care. We have more than 20.7 million members, including 11.6 million families and 9.1 million caregivers, spanning 18 countries. We help families address their particular lifecycle of care needs, which includes child care, senior care, special needs care and other non-medical family care needs such as pet care, tutoring and housekeeping. In the process, we also help caregivers find rewarding full-time and part-time employment opportunities.
Our consumer matching solutions allow families to search for, qualify, vet, connect with and ultimately select caregivers in a low-cost, reliable and easy way. We also provide caregivers with solutions to create personal profiles, describe their unique skills and experience, and otherwise differentiate and market themselves in a highly fragmented marketplace.
In addition to our consumer matching solutions, we offer our members innovative products and services to facilitate their interaction with caregivers. We provide solutions intended to improve both the ease and reliability of the care relationship in the home. One product area we are particularly focused on is consumer payments solutions. Through Care.com HomePay, families can subscribe to payroll and tax preparation services for domestic employees. This offering deepens our relationship with our members and could enhance the lifetime value associated with each member.
We also serve employers by providing access to certain of our products and services to employer-sponsored families. In addition, we serve care-related businesses—such as day care centers, nanny agencies and home care agencies—who wish to market their services to our care-seeking families and recruit our caregiver members. These businesses improve our member experience by providing additional caregiving choices for families and employment opportunities for caregivers.
We have experienced steady growth in revenue and members. Our members increased to 20.7 million as of June 25, 2016 from 16.1 million as of June 27, 2015, representing a 29% annual growth rate. Our revenue has increased to $77.5 million for the six months ended June 25, 2016 from $65.0 million for the six months ended June 27, 2015. We experienced net losses from continuing operations of $3.9 million and $14.3 million in the six months ended June 25, 2016 and June 27, 2015, respectively. We experienced net income from discontinued operations of $7.8 million in the six months ended June 25, 2016 and net losses from discontinued operations of $4.0 million in the six months ended June 27, 2015.
Key Business Metrics
In addition to traditional financial and operational metrics, we use the following business metrics to monitor and evaluate results (in thousands, except monthly average revenue per member - U.S. Consumer Business):
 
As of
 
June 25,
2016
 
June 27,
2015
Total members
20,698

 
16,105

Total families
11,588

 
8,917

Total caregivers
9,110

 
7,188

Paying members - U.S. Consumer Business
252

 
238

Monthly average revenue per member - U.S. Consumer Business
$
38

 
$
36

Total Members. We define total members as the number of paying and non-paying families, including those who have registered through employer programs, and caregivers who have registered through our websites and mobile apps since the launch of our marketplace in 2007, as well as subscribers of Care.com HomePay. Our total members increased 29% as of June 25, 2016, compared to the corresponding period in the prior fiscal year.
Total Families. We define total families as the number of paying and non-paying families who have registered through our websites and mobile apps, including those who have registered through employer programs, since the launch of our

20


marketplace in 2007, as well as subscribers of Care.com HomePay. Our total families increased 30% as of June 25, 2016, compared to the corresponding period in the prior fiscal year.
Total Caregivers. We define total caregivers as the number of paying and non-paying caregivers who have registered through our websites and mobile apps since the launch of our marketplace in 2007. Our total caregivers increased 27% as of June 25, 2016, compared to the corresponding period in the prior fiscal year.
Paying Members - U.S. Consumer Business. We define paying members - U.S. Consumer Business as the number of families located in the United States who have registered through our U.S.-based websites and mobile apps and who are paying subscribers of our U.S.-based matching services, as well as subscribers of Care.com HomePay services as of the end of the fiscal period. The number of paying members in our U.S. Consumer Business increased 6% as of June 25, 2016, compared to the corresponding period in the prior fiscal year.
Monthly Average Revenue per Member - U.S. Consumer Business. We define monthly average revenue per member, or ARPM, for our U.S. Consumer Business as total U.S. Consumer Business revenue, including revenue from subscriptions and products, divided by the average number of U.S. consumer matching & payments paying members in a given fiscal period, expressed on a monthly basis. Our U.S. Consumer Business ARPM as of June 25, 2016 increased 6% compared to the corresponding period in the prior fiscal year.
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed in the table below and within this Quarterly Report on Form 10-Q adjusted EBITDA, a non-GAAP financial measure. The table below represents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our consolidated operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business.
Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• 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 cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• adjusted EBITDA does not reflect discontinued operations;
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
• adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
• other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss, and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (in thousands):

21


 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Loss from continuing operations
$
(3,375
)
 
$
(5,406
)
 
$
(4,498
)
 
$
(15,200
)
 
 
 
 
 
 
 
 
Federal, state and franchise taxes
727

 
304

 
816

 
993

Other expense, net
129

 
(487
)
 
143

 
704

Depreciation and amortization
1,145

 
1,413

 
2,314

 
2,837

EBITDA
(1,374
)
 
(4,176
)
 
(1,225
)
 
(10,666
)
 
 
 
 
 
 
 
 
Stock-based compensation
1,646

 
1,468

 
3,014

 
2,294

Merger and acquisition related costs
16

 
37

 
74

 
103

Restructuring related costs
714

 

 
714

 

Adjusted EBITDA
$
1,002

 
$
(2,671
)
 
$
2,577

 
$
(8,269
)
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with the following critical accounting policies have the greatest potential impact on our condensed consolidated financial statements:
• Revenue recognition;
• Business combinations;
• Goodwill;
• Amortization and impairment of intangible assets;
• Income taxes; and
• Stock-based compensation.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015 filed on March 1, 2016.
Recently Issued and Adopted Accounting Pronouncements
For information on recent accounting pronouncements, see Recently Issued and Adopted Accounting Standards in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

22



Results of Operations
The following table sets forth our condensed consolidated results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results (in thousands, except per share data):

 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Revenue
$
38,184

 
$
32,902

 
$
77,450

 
$
64,952

Cost of revenue
7,619

 
6,630

 
14,861

 
12,902

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
18,561

 
18,096

 
38,028

 
38,453

Research and development
5,036

 
5,022

 
9,911

 
9,631

General and administrative
7,933

 
7,477

 
15,752

 
15,101

Depreciation and amortization
947

 
1,225

 
1,919

 
2,456

Restructuring charges
714

 

 
714

 

Total operating expenses
33,191

 
31,820

 
66,324

 
65,641

Operating loss
(2,626
)
 
(5,548
)
 
(3,735
)
 
(13,591
)
Other (expense) income, net
(129
)
 
487

 
(143
)
 
(704
)
Loss from continuing operations before income taxes
(2,755
)
 
(5,061
)
 
(3,878
)
 
(14,295
)
Provision for income taxes
620

 
345

 
620

 
905

Loss from continuing operations
(3,375
)
 
(5,406
)
 
(4,498
)
 
(15,200
)
(Loss) income from discontinued operations, net of tax
(44
)
 
(1,831
)
 
7,834

 
(4,047
)
Net (loss) income
$
(3,419
)
 
$
(7,237
)
 
$
3,336

 
$
(19,247
)
Net (loss) income per share (Basic):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.14
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.24

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
Net (loss) income per share (Diluted):
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.11
)
 
$
(0.17
)
 
$
(0.13
)
 
$
(0.48
)
(Loss) income from discontinued operations

 
(0.06
)
 
0.23

 
(0.13
)
Net (loss) income per share
$
(0.11
)
 
$
(0.23
)
 
$
0.10

 
$
(0.61
)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,136

 
31,981

 
32,183

 
31,872

Diluted
32,136

 
31,981

 
34,082

 
31,872

Stock-based compensation included in the results of operations data above was as follows (in thousands):

23


 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
 
 
 
 
 
 
 
 
Cost of revenue
$
79

 
$
60

 
$
154

 
$
96

Selling and marketing
229

 
269

 
414

 
412

Research and development
279

 
242

 
509

 
315

General and administrative
1,059

 
897

 
1,937

 
1,471

(Loss) income from discontinued operations
3

 
189

 
8

 
301

Total stock-based compensation
$
1,649

 
$
1,657

 
$
3,022

 
$
2,595

The following tables set forth our condensed consolidated results of operations for the periods presented as a percentage of revenue for those periods (certain items may not foot due to rounding).
 
Three Months Ended
 
Six Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue
20
 %
 
20
 %
 
19
 %
 
20
 %
Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
49
 %
 
55
 %
 
49
 %
 
59
 %
Research and development
13
 %
 
15
 %
 
13
 %
 
15
 %
General and administrative
21
 %
 
23
 %
 
20
 %
 
23
 %
Depreciation and amortization
2
 %
 
4
 %
 
2
 %
 
4
 %
Restructuring charges
2
 %
 
 %
 
1
 %
 
 %
Total operating expenses
87
 %
 
97
 %
 
86
 %
 
101
 %
Operating loss
(7
)%
 
(17
)%
 
(5
)%
 
(21
)%
Other (expense) income, net
 %
 
1
 %
 
 %
 
(1
)%
Loss from continuing operations before income taxes
(7
)%
 
(15
)%
 
(5
)%
 
(22
)%
Provision for income taxes
2
 %
 
1
 %
 
1
 %
 
1
 %
Loss from continuing operations
(9
)%
 
(16
)%
 
(6
)%
 
(23
)%
(Loss) income from discontinued operations, net of tax
 %
 
(6
)%
 
10
 %
 
(6
)%
Net (loss) income
(9
)%
 
(22
)%
 
4
 %
 
(30
)%
Revenue
We generate revenue primarily through (a) subscription fees to our suite of products and services, which enable families to manage their diverse and evolving care needs and caregivers to describe their unique skills and experience, and otherwise differentiate and market themselves in a highly fragmented marketplace; and (b) annual contracts with corporate employers - providing access to our suite of products and services as an employee benefit and through contractual obligations with businesses through which the business can recruit employees and advertise their business profiles. Substantially all of our revenue earned is recognized on a ratable basis over the period the service is provided, with the exception of revenue from background checks, which is recognized when the services are delivered to the end customer.
The following are our sources of revenue:
U.S. Consumer Business
Our U.S. Consumer Business consists of our U.S. matching solutions and our payments solutions.

24


Our U.S. matching solutions provide families access to job posting features, search features, caregiver profiles and content and are offered directly to consumers. Access to this platform is free of charge for basic members. Paying family members pay a monthly, quarterly or annual subscription fee to connect directly with caregivers and to utilize enhanced tools such as third-party background checks. Paying caregiver members pay a subscription fee for priority notification of jobs, messaging services and to perform third-party background checks on themselves. Subscription payments are received from all paying members at the time of sign-up and are recognized on a daily basis over the subscription term as the services are delivered once the revenue recognition criteria are met (see ‘‘Critical Accounting Policies and Estimates’’ in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015, filed on March 1, 2016 for a description of the revenue recognition criteria).
Our payments solutions provide families several options to manage their financial relationship with their caregiver through the use of household employer payroll and tax services. Revenue related to Care.com HomePay, our household payroll and tax service, is primarily generated through quarterly subscriptions and recognized on a daily ratable basis over the period the services are provided.
Other Revenue
Other revenue includes revenue generated from international markets. This revenue is typically recognized on a daily basis over the term of a member’s subscription. Other revenue also includes revenue generated through contracts that provide corporate employers access to certain of our products and services through our Care@Work solution. This product offering is typically sold through the use of an annual contract with an automatic renewal clause. Revenue related to this offering is recognized on a daily basis over the subscription term. Additionally, we generate revenue through our marketing solutions offering, which is designed to provide care-related businesses an efficient and cost-effective way to target qualified families seeking care services, and through our recruiting solutions offering, which allows care-related businesses to recruit caregivers for full-time and part-time employment. Revenue related to these product offerings is typically recognized in the period earned.
 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
(in thousands, except percentages)
Revenue
$
38,184

 
$
32,902

 
$
5,282

 
16
%
 
$
77,450

 
$
64,952

 
$
12,498

 
19
%
Comparison of the Three Months Ended June 25, 2016 and June 27, 2015
The change was primarily attributed to an increase of $3.5 million in our consumer matching business, principally related to a higher number of paying members and higher average revenue per paying member. Additionally, there was an increase in consumer payment solutions, Care@Work and background checks of $0.7 million, $0.7 million and $0.3 million, respectively.
Comparison of the Six Months Ended June 25, 2016 and June 27, 2015
The change was primarily attributed to an increase of $8.3 million in our consumer matching business, principally related to a higher number of paying members and higher average revenue per paying member. Additionally, there was an increase in consumer payment solutions, Care@Work, and background checks of $1.9 million, $1.4 million, and $1.0 million, respectively.
Cost of Revenue
Our cost of revenue primarily consists of expenses that are directly related, or closely correlated, to revenue generation, including matching and payments member variable servicing costs such as personnel costs for customer support, transaction fees related to credit card payments and the cost of background checks run on both families and caregivers. Additionally, cost of revenue includes website hosting fees and amortization expense related to caregiver relationships, proprietary software acquired as part of acquisitions and website intangible assets. We currently expect cost of revenue to increase on an absolute basis in the near term as we continue to expand our related customer base.

25


 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
(in thousands, except percentages)
Cost of revenue
$
7,619

 
$
6,630

 
$
989

 
15
%
 
$
14,861

 
$
12,902

 
$
1,959

 
15
%
Percentage of revenue
20
%
 
20
%
 
 
 
 
 
19
%
 
20
%
 
 
 
 

Comparison of the Three Months Ended June 25, 2016 and June 27, 2015
The change was primarily related to increased costs in member servicing and background checks of $0.4 million, compensation and related costs of $0.2 million, hosting fees $0.2 million, and credit card fees of $0.2 million.
Comparison of the Six Months Ended June 25, 2016 and June 27, 2015
The change was primarily related to increased compensation and related costs of $0.9 million, higher member servicing costs, background check screening fees of $0.8 million, and credit card fees of $0.2 million.
Selling and Marketing
Our selling and marketing expenses primarily consist of customer acquisition marketing, including television advertising, branding, other advertising and public relations costs, as well as allocated facilities and other supporting overhead costs. In addition, sales and marketing expenses include salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. We plan to continue to invest in sales and marketing to grow our current customer base, continue building brand awareness, and expand our global footprint. In the near term, we expect sales and marketing expenses to increase and to be our largest expense on an absolute basis but decline as a percentage of revenue.
 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
June 25,
2016
 
June 27,
2015
 
$ Change
 
% Change
 
(in thousands, except percentages)
Selling and marketing
$
18,561

 
$
18,096

 
$
465

 
3
%
 
$
38,028

 
$
38,453

 
$
(425
)
 
(1
)%
Percentage of revenue
49
%
 
55
%
 
 
 
 
 
49
%
 
59
%
 
 
 
 
Comparison of the Three Months Ended June 25, 2016 and June 27, 2015
The change principally related to a reduction in spending on marketing programs of $0.3 million, partially off-set by increases in acquisition marketing, compensation costs, and consulting expenses of $0.4 million, $0.2 million, and $0.1 million, respectively.
Comparison of the Six Months Ended June 25, 2016 and June 27, 2015
The change principally related to a reduction in spending on marketing programs of $1.3 million, partially off-set by increases in acquisition marketing, compensation costs, and consulting expenses of $0.3 million, $0.3 million, and $0.2 million, respectively.
Research and Development
Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers and developers. In addition, product development expenses include third-party resources, as well as allocated facilities and other supporting overhead costs. We believe that continued investment in features, software development tools and code modification is important to attaining our strategic objectives and, as a result, we expect product development expense to increase on an absolute basis in the near term.
 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change