10-Q 1 q2fy1710-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 July 1, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
[ ]
 
 
 
Emerging growth company
[x]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [x]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [x]
As of August 4, 2017, there were 29,769,091 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)
 
July 1, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
71,839

 
$
61,094

Short-term investments
15,000

 
15,000

Accounts receivable (net of allowance of $175 and $163, respectively) (1) 
4,264

 
2,789

Unbilled accounts receivable (2) 
5,734

 
5,541

Prepaid expenses and other current assets
5,224

 
3,787

Total current assets
102,061

 
88,211

Property and equipment, net
4,621

 
4,947

Intangible assets, net
1,267

 
1,708

Goodwill
59,380

 
57,910

Other non-current assets
2,466

 
2,448

Total assets
$
169,795

 
$
155,224

 
 
 
 
Liabilities, redeemable convertible preferred stock, and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable (3) 
$
3,379

 
$
2,483

Accrued expenses and other current liabilities (4) 
13,859

 
12,798

Deferred revenue (5)
19,522

 
15,971

Total current liabilities
36,760

 
31,252

Deferred tax liability
4,472

 
4,276

Other non-current liabilities
5,338

 
5,087

Total liabilities
46,570

 
40,615

Contingencies (see Note 5)

 

Series A Redeemable Convertible Preferred Stock - 46 shares designated; 46 shares issued and outstanding at July 1, 2017 and December 31, 2016; at aggregate liquidation and redemption value at July 1, 2017 and December 31, 2016, respectively
48,922

 
47,660

Stockholders' equity
 
 
 
Preferred Stock: $0.001 par value - authorized 5,000 shares at July 1, 2017 and December 31, 2016, respectively

 

Common stock, $0.001 par value; 300,000 shares authorized; 29,737 and 28,984 shares issued and outstanding at July 1, 2017 and December 31, 2016 respectively
30

 
29

Additional paid-in capital
259,366

 
255,031

Accumulated deficit
(185,311
)
 
(187,808
)
Accumulated other comprehensive income (loss)
218

 
(303
)
Total stockholders' equity
74,303

 
66,949

Total liabilities, redeemable convertible preferred stock and stockholders' equity
$
169,795

 
$
155,224

(1) Includes accounts receivable due from related party of $196 and $150 at July 1, 2017 and December 31, 2016, respectively (Note 13)  

See accompanying notes to the condensed consolidated financial statements
2



(2) Includes unbilled accounts receivable due from related party of $180 and $286 at July 1, 2017 and December 31, 2016, respectively (Note 13)  
(3) Includes accounts payable due to related party of $44 and $107 at July 1, 2017 and December 31, 2016, respectively (Note 13)  
(4) Includes accrued expenses and other current liabilities due to related party of $1,438 and $1,055 at July 1, 2017 and December 31, 2016, respectively (Note 13)  
(5) Includes deferred revenue associated with related party of $80 and $151 at July 1, 2017 and December 31, 2016, respectively (Note 13)  


See accompanying notes to the condensed consolidated financial statements
3



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

 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
 
 
 
 
 
 
 
Revenue (1)
$
41,972

 
$
38,184

 
$
85,338

 
$
77,450

Cost of revenue
9,000

 
7,619

 
17,766

 
14,861

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing (2)
17,853

 
18,561

 
37,050

 
38,028

Research and development
6,666

 
5,036

 
12,655

 
9,911

General and administrative
8,433

 
7,933

 
16,688

 
15,752

Depreciation and amortization
423

 
947

 
847

 
1,919

Restructuring charges

 
714

 

 
714

Total operating expenses
33,375

 
33,191

 
67,240

 
66,324

Operating (loss) income
(403
)
 
(2,626
)
 
332

 
(3,735
)
Other income (expense), net
1,008

 
(129
)
 
1,309

 
(143
)
Income (loss) from continuing operations before income taxes
605

 
(2,755
)
 
1,641

 
(3,878
)
(Benefit) provision for income taxes
(1,068
)
 
620

 
(856
)
 
620

Income (loss) from continuing operations
1,673

 
(3,375
)
 
2,497

 
(4,498
)
Loss (income) from discontinued operations, net of tax (see note 3)

 
(44
)
 

 
7,834

Net income (loss)
1,673

 
(3,419
)
 
2,497

 
3,336

Accretion of Series A Redeemable Convertible Preferred Stock dividends
(660
)
 

 
(1,262
)
 

Net income attributable to Series A Redeemable Convertible Preferred Stock
(139
)
 

 
(169
)
 

Net income (loss) attributable to common stockholders
$
874

 
$
(3,419
)
 
$
1,066

 
$
3,336

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Basic):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
(0.14
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.24

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
0.10

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Diluted):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
(0.13
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.23

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
0.10

 
 
 
 
 
 
 
 

See accompanying notes to the condensed consolidated financial statements
4



Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
29,556

 
32,136

 
29,352

 
32,183

Diluted
32,220

 
32,136

 
31,746

 
34,082


(1) Includes related party revenue of $432 and $825 for the three and six months ended July 1, 2017 (Note 13)  
(2) Includes related party expenses of $4,120 and $7,820 for the three and six months ended July 1, 2017 (Note 13)  

See accompanying notes to the condensed consolidated financial statements
5



CARE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
1,673

 
$
(3,419
)
 
$
2,497

 
$
3,336

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
493

 
55

 
521

 
373

Comprehensive income (loss)
$
2,166

 
$
(3,364
)
 
$
3,018

 
$
3,709






See accompanying notes to the condensed consolidated financial statements
6



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

 
Six Months Ended
 
July 1, 2017
 
June 25, 2016
Cash flows from operating activities
 
 
 
Net income
$
2,497

 
$
3,336

Income from discontinued operations, net of tax

 
7,834

Income (loss) from continuing operations
2,497

 
(4,498
)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Stock-based compensation
3,551

 
3,014

Depreciation and amortization
1,199

 
2,314

Deferred taxes
196

 
538

Foreign currency remeasurement gain
1,157

 
200

Other non-cash operating income

 
(78
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
(1,448
)
 
(68
)
Unbilled accounts receivable
(191
)
 
(449
)
Prepaid expenses and other current assets
(1,358
)
 
(508
)
Other non-current assets

 
(14
)
Accounts payable
879

 
514

Accrued expenses and other current liabilities
1,258

 
3,014

Deferred revenue
3,469

 
1,452

Other non-current liabilities
(69
)
 
610

Net cash provided by operating activities by continuing operations
11,140

 
6,041

Net cash provided by operating activities by discontinued operations

 
2,481

Net cash provided by operating activities
11,140

 
8,522

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(387
)
 
(84
)
Payments for acquisitions, net of cash acquired

 
(420
)
Purchase of short-term investment
(15,000
)
 

Sale of short-term investment
15,000

 

Net cash used in investing activities
(387
)
 
(504
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from exercise of common stock options
2,037

 
925

Net cash provided by financing activities by continuing operations
2,037

 
925

Net cash used in financing activities by discontinued operations

 
(14,510
)
Net cash provided by (used in) financing activities
2,037

 
(13,585
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(2,045
)
 
(56
)
Net increase (decrease) in cash and cash equivalents
10,745

 
(5,623
)
Cash and cash equivalents, beginning of the period
61,094

 
61,240


See accompanying notes to the condensed consolidated financial statements
7



Cash and cash equivalents, end of the period
$
71,839

 
$
55,617

 
 
 
 
Supplemental disclosure of cash flow activities
 
 
 
Cash paid for taxes
$

 
$
177

 
 
 
 
Supplemental disclosure of non-cash operating, investing and financing activities
 
 
 
Unpaid purchases of property and equipment
$
15

 
$
17

Series A Redeemable Convertible Preferred Stock dividend accretion
$
1,262

 
$

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
8


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(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 we serve care-related businesses—such as day care centers, nanny agencies and home care agencies—that 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 31, 2016, filed on March 9, 2017.
There have been no material changes in our significant accounting policies for the three and six months ended July 1, 2017 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, with the exception of the adoption of the Financial Accounting Standards Board’s Accounting Standard Update 2016-09 in the first quarter of fiscal 2017. Refer below to “Recently Issued and Adopted Accounting Pronouncements” for further information.
The condensed consolidated balance sheet as of December 31, 2016, 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 2017 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.

9


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

In the third quarter of 2017, we concluded that we would exit 25,812 square feet of the Company’s headquarters facility located in Waltham, Massachusetts. We expect to record lease obligation charges ranging from approximately $4.0 million to $6.0 million in the third quarter of 2017, as we plan to meet the cease-use date requirements for that portion of the facility. We will finalize the lease obligation charge in the third quarter of 2017 following the cease-use date. In order to estimate the lease obligation charges, we have made certain assumptions, including the time period it will take to obtain a subtenant and certain sub-lease rates. These estimates may vary from the sub-lease agreements ultimately executed, if at all, resulting in an adjustment to the charges.
Recently Issued and Adopted Accounting Pronouncements
As an ‘‘emerging growth company’’ under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.  Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting.” The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09, which will become effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods, is not expected to have a significant impact on our financial statement presentation or disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The guidance is effective for us in our annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. ASU 2017-04 must be applied prospectively. We expect that the future adoption of this update will simplify our measurement of goodwill impairment, if any of our reporting units have a zero or negative carrying value, or would fail Step 1 of the impairment test following the date of adoption.
In November, 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-18 must be applied retrospectively to all periods presented. We do not anticipate that the adoption of this update will have a material impact on our consolidated statement of cash flows.
In August 2016, FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” ASU 2016-15 amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The updated guidance requires a retrospective transition method to each period presented. We do not anticipate that the adoption of this update will have a material impact on our consolidated statement of cash flows.
In March 2016, the FASB issued 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. We adopted this standard in the first quarter of fiscal 2017 using a modified retrospective approach. We elected to account for forfeitures when they occur, rather than to estimate forfeitures when determining the amount of stock-based compensation costs to be recognized in each period.

10


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

Refer to Note 9 for our accounting policy elections related to income taxes. The adoption of this standard did not have a material impact on our financial position, results of operations, or statement of cash flows.
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 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. Since ASU 2014-09 was issued, several additional ASUs have been issued and incorporated within ASC 606 to clarify various elements of the guidance.
As of the date of these condensed consolidated financial statements, we have substantially completed the diagnostic assessment phase of our ASU 2014-09 adoption, including preliminary assessment and project planning, revenue stream scoping, and analysis of the impact the new revenue standard has on our various revenue streams. As part of the Company’s ongoing evaluation of ASU 2014-09, the following revenue streams were identified: U.S. matching solutions, Care@Work solution, payments solutions, and marketing solutions. Each of these revenue streams will continue to be further evaluated in detail based on the criteria established under ASU 2014-09 and will serve as the basis for the accounting analysis and documentation as it relates to the impact of the standard.

We currently anticipate adopting ASU 2014-09 effective January 1, 2018 utilizing the modified retrospective method of adoption. Accordingly, upon adoption, we currently anticipate recognizing the cumulative effect, if any, of adopting this guidance as an adjustment to the opening balance of the accumulated deficit within the consolidated balance sheet for the period of adoption, and prior periods will not be retrospectively adjusted. While we have completed a preliminary assessment of the key provisions of ASU 2014-09, the evaluation of the full impact of the standard on the consolidated financial statements and related disclosures is ongoing, and we are therefore not yet able to reasonably estimate the financial statement impact of ASU 2014-09 upon adoption. We are continuing to assess all potential impacts of the standard, including the impact to the capitalization of costs for commissions. Additionally, we continue to actively monitor outstanding issues currently being addressed by the FASB’s Transition Resource Group as conclusions reached by this group may impact the Company’s application of ASU 2014-09.
2. Fair Value Measurements
The following table presents information about our assets measured at fair value on a recurring basis as of July 1, 2017 and December 31, 2016 and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):
 
July 1, 2017
 
December 31, 2016
 
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
$
20,084

 
$

 
$

 
$
20,084

 
$
20,014

 
$

 
$

 
$
20,014

Certificates of deposit
$
15,000

 
$

 
$

 
$
15,000

 
$
15,000

 
$

 
$

 
$
15,000

Total assets
$
35,084

 
$

 
$

 
$
35,084

 
$
35,014

 
$

 
$

 
$
35,014


11


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

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 July 1, 2017 and June 25, 2016, 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 completed our plans for exiting the business in the fourth quarter of 2016. 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 July 1, 2017 and June 25, 2016. As of July 1, 2017 and December 31, 2016 there were no recorded assets or liabilities of the Citrus Lane business.
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 retired these shares of common stock as of the third quarter of fiscal 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 from discontinued operations on the consolidated statements of operations for the six months ended March 26, 2016 of $8.0 million.
The following table presents financial results of the Citrus Lane business included in income from discontinued operations, net of tax, for the three and six months ended June 25, 2016 (in thousands). There were no financial results of the Citrus Lane business included in income from discontinued operations, net of tax, for the three and six months ended July 1, 2017.

12


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

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

 
$
101

Cost of revenue
3

 
97

Operating expenses:
 
 
 
Selling and marketing
13

 
54

Research and development

 
11

General and administrative
47

 
(7,903
)
Depreciation and amortization

 
8

Operating (loss) income
(44
)
 
7,834

Other expense, net

 

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

Provision for income tax

 

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

4. Goodwill and Intangible Assets
The following table presents the change in goodwill for the periods presented (in thousands):
Balance as of December 31, 2016
$
57,910

Effect of currency translation
1,470

Balance as of July 1, 2017
$
59,380

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)
 
 
 
 
 
 
 
 
July 1, 2017
 
 
 
 
 
 
 
Indefinite lived intangibles
$
242

 
$

 
$
242

 
N/A
Trademarks and trade names
4,441

 
(4,272
)
 
169

 
2.0
Proprietary software
5,242

 
(4,974
)
 
268

 
1.2
Non-compete agreements
133

 
(132
)
 
1

 
0.1
Leasehold interests
170

 
(124
)
 
46

 
1.9
Customer relationships
8,810

 
(8,269
)
 
541

 
5.7
Total
$
19,038

 
$
(17,771
)
 
$
1,267

 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Indefinite lived intangibles
$
242

 
$

 
$
242

 
N/A
Trademarks and trade names
4,394

 
(4,200
)
 
194

 
2.5
Proprietary software
5,102

 
(4,485
)
 
617

 
1.3
Non-compete agreements
127

 
(120
)
 
7

 
0.6
Leasehold interests
170

 
(111
)
 
59

 
2.3
Customer relationships
8,754

 
(8,165
)
 
589

 
6.1
Total
$
18,789

 
$
(17,081
)
 
$
1,708

 
 

13


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

Amortization expense was $0.5 million and $1.5 million for the six months ended July 1, 2017 and June 25, 2016, respectively. Of these amounts, $0.1 million and $1.1 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 July 1, 2017 and June 25, 2016, respectively.
As of July 1, 2017, the estimated future amortization expense related to intangible assets for future fiscal years was as follows (in thousands):
2017 remaining
233

2018
345

2019
146

2020
96

2021
96

Thereafter
109

Total
$
1,025

5. Contingencies
Legal matters
From time to time we are involved in legal proceedings and other regulatory matters arising in the ordinary course of our business. Each reporting period, we evaluate whether or not a loss contingency related to such matters is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. If a loss is probable and the potential estimate of the loss is a range, we evaluate if there is a point within the range that appears at the time to be a better estimate than any other point in the range, and if so, that amount is accrued. If we conclude that no amount in the range appears to be a better estimate than any other, we accrue the minimum amount in the range. We monitor developments in legal matters that could affect estimates we have previously accrued and update our estimates as appropriate based on subsequent developments.
In the first quarter of fiscal 2017, we received a demand for payments totaling approximately $1.5 million relating to a government inquiry which commenced in 2016.  The Company determined that it is probable that it will incur a loss in connection with this matter and accrued an amount as of December 31, 2016 based on its reasonable estimate of this loss. The Company has accrued an additional amount as of the first half of fiscal 2017, based on its updated estimate of this loss. The total amount accrued was not material to our financial statements for the periods ended July 1, 2017 and December 31, 2016

14


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

6. 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
 
July 1, 2017
 
June 25, 2016
 
July 1, 2017
 
June 25, 2016
 
 
 
 
 
 
 
 
Cost of revenue
$
105

 
$
79

 
$
197

 
$
154

Selling and marketing
295

 
229

 
541

 
414

Research and development
370

 
279

 
651

 
509

General and administrative
1,178

 
1,059

 
2,162

 
1,937

Loss (income) from discontinued operations

 
3

 

 
8

   Total stock-based compensation
$
1,948

 
$
1,649

 
$
3,551

 
$
3,022

Pursuant to our 2014 Incentive Award Plan (the “2014 Plan”), during the six months ended July 1, 2017, we granted 0.4 million time-based restricted stock units (RSUs) to certain employees, advisors and directors, 0.4 million performance-based RSUs (“PSUs”) to certain members of management, and 0.2 million market-based RSUs (“MSUs”) to senior management.
In the first quarter of fiscal 2017, we issued 0.4 million PSUs. The number of PSUs that become eligible to vest for each recipient will be determined in the first quarter of 2018 based upon the Company’s level of achievement of certain financial targets for fiscal 2017. To the extent any PSUs become eligible to vest, they generally will vest over a three-year period retroactive to March 2017 as continued services are performed. Management is recognizing expense straight-line over the required service period based on its estimate of the number of PSUs that will vest. If there is a change in the estimate of the number of PSUs that are probable of vesting, we will cumulatively adjust compensation expense in the period that the change in estimate is made.
In the second quarter of fiscal 2017, we issued 0.2 million MSUs to senior management. The MSUs awarded will vest at any point during a five-year performance period, from 2017 through 2022, based on achievement of specified 120-day volume-weighted average closing share price targets, which is a market condition, or a change-in-control event, and if vested, will be issued in the form of common stock. The MSUs were valued at $9.31 - $5.78 per share using the Monte Carlo simulation model for the specified price targets.
RSUs are not included in issued and outstanding common stock until the shares are vested and released. With the exception of MSUs, the fair value of an RSU and PSU 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 vested RSU share and the total fair value of vested shares from RSU grants was $7.46 and $2.1 million, respectively, for the six months ended July 1, 2017.
During the six months ended July 1, 2017, we granted 0.9 million stock options to certain employees and directors with a weighted average exercise price per share of $12.62. During the six months ended June 25, 2016, we granted 1.4 million stock options to certain employees and directors with a weighted average exercise price per share of $6.68.
The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
Risk-free interest rate
1.86% - 2.18%
 
1.3 - 1.6 %
Expected term (years)
6.25
 
6.25
Volatility
32.89% - 33.37%
 
38.23%
Expected dividend yield
 

15


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

A summary of stock option and RSU activity for the six months ended July 1, 2017 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 31, 2016
4,312

 
6.45
 
$
6.64

 
$
13,042

 
1,780

 
$
7.08

Granted(1)
873

 
 
 
$
12.62

 
 
 
925

 
$
12.86

Settled (RSUs)

 
 
 

 
 
 
(288
)
 
$
7.46

Exercised
(458
)
 
 
 
$
4.48

 
 
 

 

Canceled and forfeited
(142
)
 
 
 
$
11.85

 
 
 
(510
)
 
$
6.89

Outstanding as of July 1, 2017
4,585

 
6.84
 
$
7.83

 
$
35,047

 
1,907

 
$
9.88

Vested and exercisable as of July 1, 2017
2,766

 
5.35
 
$
6.41

 
$
25,417

 
N/A
 
N/A
____________________________
(1) For RSUs, includes both time-based, performance-based, and market-based restricted stock units
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 30, 2017, the final trading day of the six months ended July 1, 2017, was $15.10. The total intrinsic value of options exercised and RSUs vested was approximately $7.2 million for the six months ended July 1, 2017. The aggregate fair value of the options that vested during the six months ended July 1, 2017 was $1.2 million.
As of July 1, 2017, total unrecognized compensation cost related to non-vested stock options and RSUs was approximately $6.8 million and $14.5 million, respectively, which is expected to be recognized over a weighted-average period of 3.0 years and 2.5 years, respectively, to the extent they are probable of vesting. As of July 1, 2017, we had 2.6 million shares available for grant under the 2014 Plan.
Common Stock
As of July 1, 2017, we had reserved the following shares of common stock for future issuance in connection with the following (in thousands):
 
July 1, 2017
Options issued and outstanding
4,585

Restricted stock units issued and outstanding
1,907

Common stock available for stock-based award grants under incentive award plans
2,647

Common stock available for conversion of Series A Redeemable Convertible Preferred Stock
4,659

Total
13,798

7. Net Income (Loss) per Share Attributable to Common Stockholders

16


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. For the three and six months ended July 1, 2017, we applied the two-class method to calculate basic and diluted net income per share of common stock, as our Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock) is a participating security. The two-class method is an earnings allocated formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. We compute diluted net income (loss) per common share using income from continuing operations as the “control number” in determining whether potential common shares are dilutive, after giving consideration to all potentially dilutive common shares, including stock options, unvested restricted stock outstanding during the period and potential issuance of stock upon the conversion of the our Series A Preferred Stock, including accrued dividends, outstanding during the period, except where the effect of such securities would be antidilutive.
The calculations of basic and diluted net income (loss) per share and basic and dilutive weighted-average shares outstanding for the three and six months ended July 1, 2017 and June 25, 2016 were as follows (in thousands, except per share data):

17


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
July 1, 2017
 
June 25, 2016
 
July 1, 2017
 
June 25, 2016
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders - basic
$
874

 
$
(3,419
)
 
$
1,066

 
$
3,336

Net income attributable to common stockholders - diluted
$
885

 
$

 
$
1,077

 
$

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
29,556

 
32,136

 
29,352

 
32,183

 
 
 
 
 
 
 
 
Dilutive impact from:
 
 
 
 
 
 
 
Options outstanding
1,962

 

 
1,786

 
1,052

Restricted stock units
702

 

 
608

 
847

Weighted-average shares outstanding - dilutive
32,220

 
32,136

 
31,746

 
34,082

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Basic):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
(0.14
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.24

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
0.10

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Diluted):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
(0.13
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.23

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
0.10

The following equity shares were excluded from the calculation of diluted net income per share from continuing operations and discontinued operations because their effect would have been antidilutive for the periods presented (in thousands):
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Stock options
1,398

 
4,452

 
1,292

 
617

Restricted stock units
24

 
2,064

 
14

 
1,217

Series A Redeemable Convertible Preferred Stock (as converted to common stock)
4,659

 

 
4,659

 

The Series A Preferred Stock is considered antidilutive due to the fact that the two-class method was more dilutive when calculating dilutive net income per share attributable to common stockholders.

18


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

8. Preferred Stock
Preferred Stock consists of the following at July 1, 2017 and December 31, 2016 (in thousands, except shares):
 
Preferred Stock Authorized
 
Issuance Date
 
Issued and Outstanding
 
Liquidation Preference (as of June 29, 2023)
 
Carrying Value
 
Common Stock Issuable Upon Conversion (as of June 29, 2023)
July 1, 2017
Series A
46,350

 
June 29, 2016
 
46,350

 
$
67,424

 
$
48,922

 
6,421,369

December 31, 2016
Series A
46,350

 
June 29, 2016
 
46,350

 
$
67,424

 
$
47,660

 
6,421,369

Please refer to Form 10-K filed on March 9, 2017 for further detail on the Series A Redeemable Convertible Preferred Stock.
9. Income Taxes
We recorded income tax (benefit) expense of $(1.1) million and $0.6 million for the three months ended July 1, 2017 and June 25, 2016, respectively, and $(0.9) million and $0.6 million for the six months ended July 1, 2017 and June 25, 2016. The tax benefit recorded for the three and six months ended July 1, 2017 primarily related to the excess tax benefits from the taxable compensation on share-based awards, partially offset by tax expense pertaining to 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.
Prior to January 1, 2017, we recognized the excess tax benefits of stock-based compensation expense as additional paid-in capital (“APIC”), and tax deficiencies of stock-based compensation expense in the income tax provision or as APIC to the extent that there were sufficient recognized excess tax benefits previously recognized. As a result of the prior guidance that excess tax benefits reduce taxes payable prior to being recognized as an increase in paid in capital, we had not recognized certain deferred tax assets (all tax attributes such as loss or credit carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting.  As of January 1, 2017, we had generated federal and state net operating loss carryforwards due to excess tax benefits of $2.2 million and $1.9 million, respectively.
Effective as of January 1, 2017, we adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. No cumulative transition adjustments were recorded to accumulated deficit as a result of this change in the accounting policy, as we had previously maintained a valuation allowance against our deferred tax assets that could be attributed to equity compensation in excess of compensation recognized for financial reporting.
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. For the periods presented 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):

19


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
United States
$
38,336

 
$
34,789

 
$
78,178

 
$
70,700

International
3,636

 
3,395

 
7,160

 
6,750

Total revenue
$
41,972

 
$
38,184

 
$
85,338

 
$
77,450


 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
(As a percentage of revenue)
 
 
 
 
United States
91
%
 
91
%
 
92
%
 
91
%
International
9
%
 
9
%
 
8
%
 
9
%
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.
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. The following table presents the change in restructuring liability from December 31, 2016 to July 1, 2017 (in thousands):
 
July 1, 2017
 
Restructuring Liability
Balance as of December 31, 2016
$
356

Accretion of sublease liability
(50
)
Balance as of July 1, 2017
$
306


20


CARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 1, 2017
(unaudited)

12. Other Income (Expense)
Other income (expense) consisted of the following (in thousands):
 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Interest income
$
93

 
$
55

 
$
159

 
$
71

Interest expense
(1
)
 
(1
)
 
(2
)
 
(2
)
Gain (loss) on foreign exchange
916

 
(183
)
 
1,152

 
(212
)
Total income (expense)
$
1,008

 
$
(129
)
 
$
1,309

 
$
(143
)
13. Related Party Transactions

We had the following transactions with related parties during the three months ended July 1, 2017:
CapitalG LP
On June 29, 2016, we issued Series A Preferred Stock to CapitalG LP, as described in Note 8. As a result of this transaction, Alphabet Inc., the ultimate parent of CapitalG LP (“CapitalG”), and all related affiliates of Alphabet Inc. are considered to be related parties. During the three and six months ended July 1, 2017, we had recorded $0.4 million and $0.8 million of revenue from Care@Work arrangements with Alphabet Inc. and its affiliates, respectively. During the three and six months ended July 1, 2017, we incurred $3.5 million and $6.6 million of selling and marketing expenses for internet based marketing services with Alphabet Inc. and its affiliates, respectively. As of July 1, 2017, we had $0.2 million and $0.2 million of accounts receivable and unbilled accounts receivable, respectively, recorded with Alphabet Inc. and its affiliates. As of December 31, 2016, we had $0.1 million and $0.3 million of accounts receivable and unbilled accounts receivable, respectively, recorded with Alphabet Inc. and its affiliates. As of July 1, 2017, we had $0.1 million and $1.2 million of deferred revenue and accrued expenses and other current liabilities, respectively, recorded with Alphabet Inc. and its affiliates. As of December 31, 2016, we had $0.2 million, $0.1 million, and $1.1 million of deferred revenue, accounts payable, and accrued expenses and other current liabilities, respectively, recorded with Alphabet Inc. and its affiliates.
West of Everything, the successor of West Studios, LLC
In fiscal 2016, we entered into a professional services agreement with West of Everything, the successor of West Studios, LLC (“West”). We consider West to be a related party because one of our board members is acting as a Managing Director of the entity. Under the terms of the agreement, we incurred an aggregate of $1.4 million in service fees between the fourth quarter of fiscal 2016 and the second quarter of fiscal 2017, prior to terminating the agreement in the second quarter of fiscal 2017. During three and six months ended July 1, 2017, we incurred $0.6 million and $1.2 million of selling and marketing expenses related to our West relationship. As of July 1, 2017, we had $0.3 million of accrued expense and other current liabilities recorded with West.
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 31, 2016, filed on March 9, 2017. 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

21


We are the world’s largest online marketplace for finding and managing family care. We have more than 25.2 million members, including 14.2 million families and 11.0 million caregivers, spanning over 20 countries. We help families address their particular lifecycle of care needs, which may include 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 through our Care@Work offering by providing access to certain of our products and services, including back-up care for children and seniors, to employer-sponsored families. In addition, we serve care-related businesses— such as day care centers, nanny agencies and home care agencies — that 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 25.2 million as of July 1, 2017 from 20.7 million as of June 25, 2016, representing a 22% annual growth rate. Our revenue has increased to $85.3 million for the six months ended July 1, 2017 from $77.5 million for the six months ended June 25, 2016. We experienced net income from continuing operations of $2.5 million and net losses from continuing operations of $4.5 million in the six months ended July 1, 2017 and June 25, 2016, respectively. We completed the closure of the Citrus Lane business in the fourth quarter of fiscal 2016, and we had no income or losses from discontinued operations for the six months ended July 1, 2017. In comparison, we had net income from discontinued operations of $7.8 million in the six months ended June 25, 2016 due to a settlement agreement completed in the first quarter of fiscal 2016. Refer to Note 3.
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
 
July 1,
2017
 
June 25,
2016
Total members
25,199

 
20,698

Total families
14,239

 
11,588

Total caregivers
10,959

 
9,110

Paying families - U.S. Consumer Business
294

 
252

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

 
$
38

Total Members. We define total members as the sum of paying families, non-paying families, and caregivers worldwide who have registered through our websites and mobile apps since the launch of our marketplace in 2007. Total members also includes subscribers of our Care.com HomePay service. We believe this metric is significant to our business because it represents the universe of families and caregivers who are more likely than the general population to drive revenue because our members are more familiar with our brand and the services we offer and are interested enough in them to have registered. Our total members increased 22% as of July 1, 2017, compared to the corresponding period in the prior fiscal year.
Total Families. We define total families as the number of paying families and non-paying families who have registered through our websites and mobile apps since the launch of our marketplace in 2007. Total families also includes subscribers of our Care.com HomePay service. Our total families increased 23% as of July 1, 2017, compared to the corresponding period in the prior fiscal year.
Total Caregivers. We define total caregivers as the number of caregivers who have registered through our websites and mobile apps since the launch of our marketplace in 2007. Our total caregivers increased 20% as of July 1, 2017, compared to the corresponding period in the prior fiscal year.

22


Paying Families - U.S. Consumer Business. We define paying families - 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 or our Care.com HomePay services as of the end of the fiscal period. The number of paying families in our U.S. Consumer Business increased 17% as of July 1, 2017, compared to the corresponding period in the prior fiscal year.
Monthly Average Revenue per Paying Family - U.S. Consumer Business. We define monthly average revenue per paying family, or ARPPF, 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 paying families of our U.S.-based matching services and Care.com HomePay services in a given fiscal period, expressed on a monthly basis. We believe ARPPF is significant to our business because it represents how successful we have been at monetizing the subset of members who we have converted into paying families. The numerator of this metric includes revenue that comes from caregivers in addition to revenue that comes from families - while the denominator includes only paying families. We believe this is the most meaningful presentation because we do not consider the caregiver component of our business to be separate and distinct; rather, we believe revenue generated from caregivers is a byproduct of the families that have registered on our site. Our U.S. Consumer Business ARPPF as of July 1, 2017 remained consistent 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 include accretion of Series A Redeemable Convertible Preferred Stock dividends or issuance costs;
• adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
• adjusted EBITDA does not reflect one time unusual or non-cash significant adjustments; 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 our GAAP financial results. The following table presents a reconciliation of adjusted EBITDA for each of the periods indicated (in thousands):

23


 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Income (loss) from continuing operations
$
1,673

 
$
(3,375
)
 
$
2,497

 
$
(4,498
)
 
 
 
 
 
 
 
 
Federal, state and franchise taxes
(1,004
)
 
727

 
(710
)
 
816

Other (income) expense, net
(1,008
)
 
129

 
(1,309
)
 
143

Depreciation and amortization
598

 
1,145

 
1,199

 
2,314

EBITDA
259

 
(1,374
)
 
1,677

 
(1,225
)
 
 
 
 
 
 
 
 
Stock-based compensation
1,948

 
1,646

 
3,551

 
3,014

Merger and acquisition related costs
95

 
16

 
95

 
74

Restructuring related costs

 
714

 

 
714

Litigation related costs

 

 
75

 

Software implementation costs
216

 

 
216

 

Severance related costs
90

 

 
121

 

Adjusted EBITDA
$
2,608

 
$
1,002

 
$
5,735

 
$
2,577

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;
• Redeemable convertible preferred stock;
• 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 31, 2016 filed on March 9, 2017. Please refer to Note 1 for further detail.
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.

24



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):


25


 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
 
 
 
 
 
 
 
Revenue
$
41,972

 
$
38,184

 
$
85,338

 
$
77,450

Cost of revenue
9,000

 
7,619

 
17,766

 
14,861

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
17,853

 
18,561

 
37,050

 
38,028

Research and development
6,666

 
5,036

 
12,655

 
9,911

General and administrative
8,433

 
7,933

 
16,688

 
15,752

Depreciation and amortization
423

 
947

 
847

 
1,919

Restructuring charges

 
714

 

 
714

Total operating expenses
33,375

 
33,191

 
67,240

 
66,324

Operating (loss) income
(403
)
 
(2,626
)
 
332

 
(3,735
)
Other income (expense), net
1,008

 
(129
)
 
1,309

 
(143
)
Income (loss) from continuing operations before income taxes
605

 
(2,755
)
 
1,641

 
(3,878
)
(Benefit) provision for income taxes
(1,068
)
 
620

 
(856
)
 
620

Income (loss) from continuing operations
1,673

 
(3,375
)
 
2,497

 
(4,498
)
Loss (income) from discontinued operations, net of tax

 
(44
)
 

 
7,834

Net income (loss)
1,673

 
(3,419
)
 
2,497

 
3,336

Accretion of Series A Redeemable Convertible Preferred Stock dividends
(660
)
 

 
(1,262
)
 

Net income attributable to Series A Redeemable Convertible Preferred Stock
(139
)
 

 
(169
)
 

Net income (loss) attributable to common stockholders
$
874

 
$
(3,419
)
 
$
1,066

 
$
3,336

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Basic):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
(0.14
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.24

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.04

 
$
0.10

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders (Diluted):
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
(0.13
)
Income from discontinued operations attributable to common stockholders

 

 

 
0.23

Net income (loss) per share attributable to common stockholders
$
0.03

 
$
(0.11
)
 
$
0.03

 
$
0.10

 
 
 
 
 
 
 
 
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
29,556

 
32,136

 
29,352

 
32,183

Diluted
32,220

 
32,136

 
31,746

 
34,082

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

26


 
Three Months Ended
 
Six Months Ended
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
 
 
 
 
 
 
 
 
Cost of revenue
$
105

 
$
79

 
$
197

 
$
154

Selling and marketing
295

 
229

 
541

 
414

Research and development
370

 
279

 
651

 
509

General and administrative
1,178

 
1,059

 
2,162

 
1,937

Loss (income) from discontinued operations

 
3

 

 
8

Total stock-based compensation
$
1,948

 
$
1,649

 
$
3,551

 
$
3,022

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
 
July 1,
2017
 
June 25,
2016
 
July 1,
2017
 
June 25,
2016
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue
21
 %
 
20
 %
 
21
 %
 
19
 %
Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
43
 %
 
49
 %
 
43
 %
 
49
 %
Research and development
16
 %
 
13
 %
 
15
 %
 
13
 %
General and administrative
20
 %
 
21
 %
 
20
 %
 
20
 %
Depreciation and amortization
1
 %
 
2
 %
 
1
 %
 
2
 %
Restructuring charges
 %
 
2
 %
 
 %
 
1
 %
Total operating expenses
80
 %
 
87
 %
 
79
 %
 
86
 %
Operating (loss) income
(1
)%
 
(7
)%
 
 %
 
(5
)%
Other income (expense), net
2
 %
 
 %
 
2
 %
 
 %
Income (loss) from continuing operations before income taxes
1
 %
 
(7
)%
 
2
 %
 
(5
)%
(Benefit) provision for income taxes
(3
)%
 
2
 %
 
(1
)%
 
1
 %
Income (loss) from continuing operations
4
 %
 
(9
)%
 
3
 %
 
(6
)%
Loss (income) from discontinued operations, net of tax
 %
 
 %
 
 %
 
10
 %
Net income (loss)
4
 %
 
(9
)%
 
3
 %
 
4
 %
Accretion of Series A Redeemable Convertible Preferred Stock dividends
(2
)%
 
 %
 
(1
)%
 
 %
Net income attributable to Series A Redeemable Convertible Preferred Stock
 %
 
 %
 
 %
 
 %
Net income (loss) attributable to common stockholders
2
 %
 
(9
)%
 
1
 %
 
4
 %
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, both to provide access to our suite of products and services as an employee benefit, and to allow businesses to 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 individually purchased background checks, which is recognized when the services are delivered to the end customer.
The following are our sources of revenue:

27


U.S. Consumer Business
Our U.S. Consumer Business consists of our U.S. matching solutions and our payments solutions.
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 31, 2016, filed on March 9, 2017 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 through contracts that provide corporate employers access to certain of our products and services, including on-demand back-up care, 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, 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. We also 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
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
Revenue
$
41,972

 
$
38,184

 
$
3,788

 
10
%
 
$
85,338

 
$
77,450

 
$
7,888

 
10
%
Comparison of the Three Months Ended July 1, 2017 and June 25, 2016
The change was primarily attributed to an increase of $1.7 million in our consumer matching solutions business, principally attributable to a higher number of paying families and caregivers. Additionally, there was a $0.9 million increase in our consumer payment solutions business, a $0.9 million increase in Care@Work, and a $0.5 million increase in background check offerings.
Comparison of the Six Months Ended July 1, 2017 and June 25, 2016
The change was primarily attributed to an increase of $3.0 million in our consumer matching solutions business, principally related to a higher number of paying families and caregivers. Additionally, there was an increase of $2.1 million in our consumer payment solutions business, an increase of $1.8 million in Care@Work, and an increase of $1.0 million related to background check offerings.
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, the cost of background checks run on both families and caregivers and costs associated with back-up care. 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.

28


 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
Cost of revenue
$
9,000

 
$
7,619

 
$
1,381

 
18
%
 
$
17,766

 
$
14,861

 
$
2,905

 
20
%
Percentage of revenue
21
%
 
20
%
 
 
 
 
 
21
%
 
19
%
 
 
 
 

Comparison of the Three Months Ended July 1, 2017 and June 25, 2016
The change was primarily related to increased costs in member servicing and background checks of $0.8 million, credit card fees of $0.4 million, and compensation and related costs of $0.4 million. These were partially off-set by $0.3 million in hosting related costs.
Comparison of the Six Months Ended July 1, 2017 and June 25, 2016
The change was primarily related to increased costs in member servicing and background checks of $1.5 million, credit card fees of $0.9 million, compensation related costs of $0.6 million, and sales tax expense of $0.3 million. These were partially off-set by a decrease of $0.3 million in hosting related costs.
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 third-party resources for consulting and 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, to be our largest expense on an absolute dollar basis and to be consistent as a percentage of revenue.
 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
Selling and marketing
$
17,853

 
$
18,561

 
$
(708
)
 
(4
)%
 
$
37,050

 
$
38,028

 
$
(978
)
 
(3
)%
Percentage of revenue
43
%
 
49
%
 
 
 
 
 
43
%
 
49
%
 
 
 
 
Comparison of the Three Months Ended July 1, 2017 and June 25, 2016
The change principally related to a reduction in spending on acquisition marketing of $1.7 million, as we continue to focus on unpaid channels, and a decrease in occupancy expense of $0.1 million. These were partially off-set by increases in third-party resources for consulting expenses and compensation costs of $0.9 million and $0.2 million, respectively.
Comparison of the Six Months Ended July 1, 2017 and June 25, 2016
The change was primarily related to a reduction in spending on acquisition marketing of $3.4 million, as we continue to focus on unpaid channels. This was partially off-set by increases in third-party resources for consulting expense and compensation costs of $1.8 million and $0.7 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.

29


 
Three Months Ended
 
Period-to-Period Change
 
Six Months Ended
 
Period-to-Period Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
July 1,
2017
 
June 25,
2016
 
$ Change
 
% Change
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
Research and development
$
6,666

 
$
5,036

 
$
1,630

 
32
%
 
$
12,655

 
$
9,911

 
$
2,744

 
28
%
Percentage of revenue
16
%
 
13
%
 
 
 
 
 
15
%
 
13
%
 
 
 
 
Comparison of the Three Months Ended July 1, 2017 and June 25, 2016
The change was primarily related to increases in third-party resources for consulting expense and compensation-related costs of $1.2 million and $0.5 million, respectively.
Comparison of the Six Months Ended July 1, 2017 and