TMCnet News
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q. Overview Trulia is redefining the home search experience for consumers and changing the way that real estate professionals build their businesses. Our marketplace, delivered through the web and mobile applications, gives consumers powerful tools to research homes and neighborhoods and enables real estate professionals to efficiently market their listings and attract and manage new clients. We believe we deliver the best home search experience by combining our superior user interface with our comprehensive database of real estate properties, local insights, and user-generated content. We also offer a comprehensive suite of free and subscription products that provide real estate professionals with access to transaction-ready consumers and help them to grow and manage their online presence. We also generate media revenue from sales of display advertising on our websites and mobile applications. Key elements of our marketplace are extensive consumer reach, an engaged base of real estate professionals, and a comprehensive database of real estate information and local insights. We also offer free and subscription-based products that provide comprehensive marketing and customer relationship management (CRM) solutions for real estate professionals. In the three months ended September 30, 2014, we had approximately 55 million monthly unique visitors. In addition, as of September 30, 2014, we had more than 520,000 active real estate professionals in our Trulia marketplace and 179,000 active real estate professionals using our Market Leader software and services. Approximately 78,000 of these real estate professionals were paying subscribers (assuming a 20% overlap between Trulia subscribers and Market Leader's premium subscribers). Our large, continually refreshed, and searchable database contains approximately 114 million properties, including 3.2 million homes for sale and rent. We supplement listings data with local information on schools, crime, commute time, neighborhood amenities, rental prices, and historical earthquake, flood and other natural disaster data to provide unique insights into each community. In addition, we harness rich, insightful user-generated content from our active community of contributors, including consumers, local enthusiasts, and real estate professionals. With 15.7 million unique user contributions, we believe we have the largest collection of user-generated content on homes, neighborhoods, and real estate professionals. We deliver this information on mobile devices through our iPhone, iPad, Android Phone, Android tablet, and Kindle Fire applications and also provide tailored mobile experiences, such as GPS-based search. We offer our products free to consumers. We deliver hard to find insights on homes, neighborhoods, and real estate professionals in an intuitive and engaging way, helping consumers make more informed housing decisions. Our free products attract users to our marketplace and the quality of our products drives the growth of our audience and promotes deep engagement by our users. We believe this leads real estate professionals to convert to paying subscribers and brand advertisers to purchase our advertising products. For real estate professionals, we offer a suite of free and subscription products to promote themselves and their listings online, manage and grow their businesses and to connect with consumers searching for homes. We generate revenue primarily from sales of subscription marketing products and our software-as-a-service customer relationship management products that we offer to real estate professionals. Our Trulia Pro and Trulia Premium Listings products allow real estate professionals to receive prominent placement of their listings in our search results. With our Trulia Local Ads and Trulia Mobile Ads products, real estate professionals can purchase local advertising on our Trulia website and mobile applications, respectively, by locale and by share of a given market. With our recently launched Trulia Seller Ads product, real estate professionals can generate leads from consumers interested in selling their homes. With our software-as-a-service products, real estate professionals can manage and cultivate clients and potential clients by automating daily tasks and efficiently marketing their services. We charge real estate professionals subscription fees for our software-as-a-service products. We also generate revenue through enterprise marketing agreements with real estate franchise networks. We provide a base level software-as-a-service product to all agents and/or brokerages in these franchise networks in exchange for certain minimum payments from the real estate franchise networks. We also generate revenue through the sale of premium software and marketing products to individual agents, teams and brokerage offices within these real estate franchise networks. In addition, we generate revenue from display advertising we sell to leading advertisers engaged in promoting their brand to our attractive audience. Pricing for our display advertisements is based on advertisement size and position on our web page, and fees are primarily based on a Cost-Per-Thousand, Cost-Per-Click, or Cost-Per-Lead basis. - 18 --------------------------------------------------------------------------------- Table of Contents To date, we have focused our efforts and investments on developing and delivering superior products and user experiences, attracting consumers and real estate professionals to our marketplace, selling our products and growing our revenue. We intend to continue to spend significantly on technology and engineering in order to further improve the experience of our users and offer the most comprehensive end-to-end marketing and customer relationship management solutions for real estate professionals. We believe that the growth of our business and our future success are dependent upon many factors including our ability to increase our audience size and user engagement, grow the number of our paying subscribers, increase the value of our advertising and software-as-a-service products, achieve the anticipated benefits of the Market Leader acquisition, and successfully invest in our growth. While each of these areas presents significant opportunities for us, they also pose important challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We also expect that our efforts to maintain or increase consumer traffic and subscribers are likely to include, among other things, significant increases to our marketing spending and significant expenditures to increase the number of our engineering and product development personnel. In February 2014, we announced a national marketing campaign that is designed to attract serious home buyers and sellers to our marketplace. Proposed Acquisition by Zillow, Inc. On July 28, 2014, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Zillow, Inc., or Zillow, and Zebra Holdco, Inc., or HoldCo, pursuant to which Zillow will acquire us. The Merger Agreement provides that both we and Zillow will become wholly-owned subsidiaries of HoldCo, which series of transactions we refer to as the Zillow Merger. The Merger Agreement has been approved by our board of directors and the board of directors of Zillow. Upon completion of the Zillow Merger, (i) each outstanding share of our common stock will be converted into the right to receive 0.444 of a share of Class A common stock of HoldCo; (ii) each outstanding share of Class A common stock of Zillow will be converted into the right to receive one share of Class A common stock of HoldCo; and (iii) each outstanding share of Class B common stock of Zillow will be converted into the right to receive one share of Class B common stock of HoldCo. The Class A common stock of HoldCo will have one vote per share and the Class B common stock of HoldCo will have ten votes per share, similar to the current capital structure of Zillow. The Zillow Merger is subject to the satisfaction of customary closing conditions, including the expiration of U.S. antitrust waiting periods and shareholder approval of both companies. The Merger Agreement contains certain termination rights for both us and Zillow, including for the failure to consummate the Zillow Merger by January 28, 2016, the enactment, promulgation or issuance of any injunction, order or ruling which has become final and non-appealable and makes the consummation of the Zillow Merger illegal or otherwise prohibits their consummation, failure of either our stockholders or Zillow's shareholders to approve the Merger Agreement, or breaches of representations, warranties or covenants by a party that result in the failure of certain conditions to closing being satisfied. In addition, we and Zillow have the right to terminate the Merger Agreement in the event that the other party's board of directors recommends or accepts a "Competing Transaction Proposal" (as defined in the Merger Agreement). Prior to receipt of the approval of the Merger Agreement by our stockholders, we also have the right to terminate the Merger Agreement in connection with entering into a definitive agreement with respect to a superior proposal with a third party. The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances involving a competing transaction proposal, we or Zillow may be required to pay the other party a termination fee of $69.8 million. Further, the Merger Agreement provides that, upon termination of the Merger Agreement by us or Zillow in the event that any necessary regulatory approval is not obtained, Zillow would be required to pay us a termination fee of $150 million. The Merger Agreement also provides that, upon termination of the Merger Agreement by us if Zillow is unable to obtain shareholder approval of the Merger Agreement, Zillow would be required to pay us a termination fee of $150 million. Acquisition of Market Leader, Inc. On August 20, 2013 we completed the acquisition of Market Leader, Inc., or Market Leader, for approximately $372.7 million, including 4,412,489 million shares of our common stock valued at $189.3 million, and $170.5 million in cash and assumed Market Leader equity awards valued at $26.7 million, $12.9 million of which was included in the purchase price and the remaining amount is subject to post-acquisition service requirement and will be expensed prospectively. Market Leader is a provider of software-as-a-service based customer relationship management software for the real estate sector. We acquired Market Leader to help accelerate our growth, including by expanding our product portfolio for real estate professionals and increasing our subscriber base. - 19 --------------------------------------------------------------------------------- Table of Contents In June 2014, our board of directors approved a restructuring plan to accelerate the integration of our Market Leader operations with those of Trulia, to eliminate overlapping positions and streamline operations. We anticipate that this initiative will result in approximately $4 to $6 million of cost savings during the remainder of 2014. We implemented the restructuring initiative to shorten the time to market for our products and to drive further growth. See Note 11 elsewhere in this Quarterly Report on Form 10-Q for further details on this restructuring. Convertible Senior Notes On December 17, 2013 we issued $230.0 million aggregate principal amount of 2.75% Convertible Senior Notes due in 2020, or the 2020 Notes, which included a $30.0 million of principal amount issued pursuant to an option to purchase additional notes granted to the initial purchasers. The aggregate principal amount of the 2020 Notes is due on December 15, 2020. We received net proceeds of $222.4 million, after deducting offering expenses of $7.6 million payable by us. Interest began to accrue on December 17, 2013 and is payable semi-annually every June 15 and December 15, starting on June 15, 2014. We may not redeem the 2020 Notes prior to December 20, 2018. We may redeem the 2020 Notes, at our option, in whole or in part on or after December 20, 2018, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period. Holders of the notes may convert all or portion all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The notes are convertible at an initial conversion rate of 27.8303 shares of our common stock per $1,000 principal amount of notes, subject to adjustment in certain events. Upon completion of the Zillow Merger, the 2020 Notes will become obligations of HoldCo, and will become convertible for shares of HoldCo Class A common stock. Key Business Metrics To analyze our business performance, determine financial forecasts, and help develop long-term strategic plans, we review the key business metrics below. • Monthly Unique Visitors. We count a unique visitor the first time a computer or mobile device with a unique IP address accesses trulia.com (including our Trulia blogs), any of our more than 148,292 agent websites powered by Market Leader, or our mobile websites and applications during a calendar month. If an individual accesses any of the websites or mobile applications using different IP addresses within a given month, the first access by each such IP address is counted as a separate unique visitor. If an individual accesses more than any one of our websites in a single month, the first access to each website is counted as a separate unique user since unique users are tracked separately for each domain. Our number of monthly unique visitors includes mobile monthly unique visitors. We calculate our monthly unique visitors based on the monthly average over the applicable period. The third quarter of 2013 was the first quarter in which we included our consumer facing blogs in our monthly unique visitor count, and starting in March 2014 of the first quarter of 2014 we began including all other blogs in our monthly unique visitor count. We view monthly unique visitors as a key indicator of the growth in our business and audience reach, the quality of our products, and the strength of our brand awareness. In the three months ended September 30, 2014, the total number of monthly unique visitors increased to 55 million from 40.6 million in the three months ended September 30, 2013, a 36% increase. We attribute the growth in our monthly unique visitors principally to our marketing campaign efforts, the popularity of our mobile products, and the overall industry trend of more consumers using the web and mobile applications to research housing decisions. • Mobile Monthly Unique Visitors. We count a unique mobile visitor the first time a mobile device with a unique IP address accesses trulia.com (including our Trulia blogs starting March 2014), any of our more than 148,292 agent websites powered by Market Leader, or our mobile websites and applications during a calendar month. We calculate our mobile monthly unique visitors based on the monthly average over the applicable period. These mobile monthly unique visitors are included in our monthly unique visitors metric. We view mobile monthly unique visitors as a key indicator of the growth in our business and audience reach, and believe that having more unique visitors using our mobile applications will drive faster growth in our revenue. We plan to expand our mobile products to support our rapidly growing mobile user base. In the three months ended September 30, 2014, the number of mobile monthly unique visitors increased to 29.9 million from 15.8 million in the three months ended September 30, 2013, a 89% increase. We attribute this growth to our marketing campaign efforts, the overall adoption of smartphones and the growth of mobile applications and mobile web use by consumers. We also attribute the growth in our mobile monthly unique visitors to our increased efforts in developing a mobile website and mobile applications. Due to the significant growth rate of usage of our mobile products and solutions, our mobile monthly unique visitors has grown as a percentage of our monthly unique visitors over recent periods and we expect this trend to continue. • New Contributions to User-Generated Content. We define user-generated content as any content contributed by a user through trulia.com, or Trulia's mobile websites or applications, such as Q&A discussions, blogs, blog comments, user votes, recommendations, and neighborhood ratings and reviews. In the three months ended September 30, 2014, new - 20 - -------------------------------------------------------------------------------- Table of Contents contributions to user-generated content increased by approximately 1.2 million contributions, and we now have over 15.7 million cumulative contributions on our marketplace. We expect new contributions to user-generated content to continue to grow as our monthly unique visitors and total subscribers grow and as we introduce new features to trulia.com and our Trulia mobile websites and applications. While the absolute number of new contributions to user-generated content may continue to grow period-over-period, the rate of growth has slowed and we expect that the rate of growth may continue to slow as the aggregate size of our user-generated content increases. We believe the slowing growth rate of new contributions to user-generated content is a function of the large historical number of new contributions to user-generated content on our marketplace, which makes achievement of increasing rates of growth more challenging. We continue to focus on promoting new contributions to user-generated content to increase the engagement of our users with our marketplace. • Total Subscribers. We define a subscriber as a real estate professional with a paid subscription at the end of a period. This includes agents using our premium software-as-a-service product under a licensed purchased by their brokerage, and excludes subscribers to certain legacy Market Leader properties, such as activerain.com and SharperAgent. Total subscribers has been, and we expect will continue to be, a key driver of revenue growth. It is also an indicator of our market penetration, the value of our products, and the attractiveness of our consumer audience to real estate professionals. As of September 30, 2014, we had approximately 78,000 total subscribers, a 38% increase from approximately 56,000 total subscribers as of September 30, 2013, assuming a 20% overlap between Trulia and Market Leader. We attribute the growth in our total subscribers to our increasing sales and marketing efforts, principally from the growth of our inside sales team, as well as growth in monthly unique visitors. Although our total subscribers are growing period-over-period and we expect total subscribers to continue to grow, the rate of growth may slow as we increase efforts to sell more products to existing subscribers. In addition, subscribers often purchase subscriptions for limited periods as a result of seasonality, as part of their advertising campaigns, and other factors. • Average Monthly Revenue per Subscriber. We calculate our average monthly revenue per subscriber by dividing the revenue generated from subscriptions of our lead generation products and our software as a service products in a period by the average number of subscribers in the period, divided again by the number of months in the period. Our average number of subscribers is calculated by taking the average of the beginning and ending number of subscribers for the period, and assumes a 20% overlap between Trulia and Market Leader. Our average monthly revenue per subscriber is a key indicator of our ability to monetize our marketplace and the performance of our software as a service subscription products for real estate professionals, and we monitor changes in this metric to measure the effectiveness of our monetization strategy. As our new and existing subscribers mature, we have been able to increase our average monthly revenue per subscriber by launching new products to sell to these customers, redesigning existing products to expand inventory in high demand zip codes, raising prices in certain geographic markets, and selling to existing subscribers the additional advertising inventory created by traffic growth to our marketplace. In addition, in geographic markets that show strong demand for our Trulia subscription products-those where inventory is sold out and wait lists to purchase our products exist-average monthly revenue per subscriber is higher than in markets with less demand for these products. While our average monthly revenue per subscriber has increased and may continue to increase in absolute dollars year-over-year, the rate of increase has slowed and we expect that the rate of increase may continue to slow. We believe that the slowing growth rate of our average monthly revenue per subscriber is the result of the consolidation of the historically lower Market Leader average monthly revenue per subscriber into this key business metric, our larger subscriber base and the resulting challenge associated with achieving higher growth rates and our efforts to introduce new, lower priced, entry level lead generation products to attract new subscribers. Despite this slowing growth rate, we believe we have significant opportunities to continue to increase average monthly revenue per subscriber by further penetrating markets and by offering new products to existing subscribers. Our key business metrics are as follows: Three Months Ended September 30, 2014 2013 Monthly unique visitors (in thousands) 55,044 40,556 Mobile monthly unique visitors (in thousands) 29,900 15,817 New contributions to user-generated content (in thousands) 1,229 1,169 Total subscribers (at period end) 77,914 56,468 Average monthly revenue per subscriber ($) 204 189 - 21 - -------------------------------------------------------------------------------- Table of Contents Components of Statements of Operations Revenue Our revenue is comprised of Marketplace revenue and Media revenue. Marketplace Revenue. Marketplace revenue primarily consists of products and services sold to real estate professionals, including agents, brokers, agents of property managers, builders, and mortgage lenders on a fixed fee subscription, Cost Per Click ("CPC"), or Cost Per Lead ("CPL") basis. We currently sell four sets of products to real estate professionals on a subscription basis. The first set of products, which includes Trulia Local Ads and Trulia Mobile Ads, enables real estate professionals to promote themselves on our search results pages and property details pages for a local market area. Real estate professionals purchase subscriptions to these products based upon their specified market share for a city or zip code, at a fixed monthly price, for periods ranging from one month to one year, with pricing depending on demand, location, and the percentage of market share purchased. Our second set of products allows real estate professionals to receive prominent placement of their listings in our search results. Real estate professionals sign up for new subscriptions to this product at a fixed monthly price for periods that generally range from 1 month to 24 months. Our third set of products includes Trulia Seller Ads that enables real estate professionals to generate leads from consumers interested in selling their homes. Our fourth set of products is our comprehensive premium software-as-a-service based marketing products typically sold to real estate professionals as a bundle of products under a fixed fee subscription. We also sell a base version of these products to strategic franchise networks for specified contractual amounts over a number of years and partner with them to drive adoption of our premium solution across their network. Media Revenue. Media revenue primarily consists of display advertising sold on a Cost per Thousand ("CPM"), CPC, and CPL basis to advertisers promoting their brand on trulia.com, our mobile website, m.trulia.com and our partners websites (cumulatively "Trulia Websites"). Impressions are the number of times an advertisement is loaded on a web page and clicks are the number of times users click on an advertisement. Revenue is recognized in the periods the clicks or impressions are delivered. Pricing is primarily based on advertisement size and position on the Trulia Websites and fees are generally billed monthly. As our mobile web pages and mobile applications offer less space on which to display advertising, a shift in user traffic from our websites to mobile products could decrease our advertising inventory and negatively affect our Media revenue. Recently, we have experienced a shift in user traffic as our mobile monthly unique visitors continued to grow at a rapid pace and our monthly unique visitors have stayed relatively constant. During the three months ended September 30, 2014 and 2013, we recognized marketplace revenue and media revenue as follows: Three Months Ended September 30, 2014 2013 Marketplace Revenue $ 55,875 $ 31,308 Media Revenue $ 11,269 $ 8,975 Cost and Operating Expenses Cost of Revenue. Cost of revenue consists primarily of expenses related to operating our websites and mobile applications, including those associated with the operation of our data centers and customer websites, hosting fees, customer service related headcount expenses including salaries, bonuses, benefits and compensation paid in stock, cost to generate leads for customers, licensed content, multiple listing services fees, revenue sharing costs, credit card processing fees, third-party contractor fees, and allocated overhead. Technology and Development. Technology and development expenses consist primarily of headcount related expenses including salaries, bonuses, benefits and compensation paid in stock, third-party contractor fees, and allocated overhead primarily associated with developing new technologies. Technology and development also includes amortization expenses related to capitalized costs from internal and external development activities for our marketplace. Sales and Marketing. Sales and marketing expenses consist primarily of headcount-related expenses including salaries, bonuses, commissions, benefits and compensation paid in stock for sales, customer service, marketing, and public relations employees; advertising expenses and third-party contractor fees. Sales and marketing expenses also include other sales expenses related to promotional and marketing activities, and allocated overhead. General and Administrative. General and administrative expenses consist primarily of headcount related expenses including salaries, bonuses, and benefits and compensation paid in stock for executive, finance, accounting, legal, human resources, recruiting, and administrative support personnel. General and administrative expenses also include legal, accounting, and other third-party professional service fees, bad debt, and allocated overhead costs. Interest Income. Interest income consists primarily of interest earned on our cash and cash equivalents. - 22 - -------------------------------------------------------------------------------- Table of Contents Interest Expense. Interest expense consists primarily of interest on our outstanding long-term debt and capital lease obligations. See Note 6 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about our long-term debt. Provision for Income Taxes. Our provision for income taxes has not been historically significant to our business as we have incurred operating losses to date. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which include estimates for revenue recognition, allowance for doubtful accounts, goodwill, impairment of long-lived assets, product development costs, compensation paid in stock, income taxes, accounting for business combination, useful lives and recoverability of the purchased intangible assets, contingencies, as well as estimates in the three months ended September 30, 2014 related to accounting for restructuring costs, are critical to understanding our historical and future performance, as these policies relate to the critical areas involving our judgments and estimates, and as such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K. There have been no material changes to the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Restructuring Costs The main components of our restructuring plan relate to workforce reduction and contract termination costs. Workforce reduction charges are accrued when it is probable that the employees are entitled to the severance payments and the amounts can be reasonably estimated. One-time involuntary termination benefits are accrued when the plan of termination has been communicated to employees and certain other criteria are met. Contract termination costs are recognized as a liability when a contract is terminated in accordance with its terms, or at the cease-use date. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and other related charges could be materially different than those we have recorded. Advertising Expense Advertising costs are expensed when incurred and are included in sales and marketing expenses in the accompanying condensed consolidated statements of operations. Barter transactions represent the exchange of online advertising for online advertising through placement of links. No revenue or expense for such barter transactions is recognized because the fair value of neither the advertising surrendered nor the advertising received is determinable. - 23 --------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (In thousands) Statement of Operations Data: Revenue $ 67,144 $ 40,283 $ 185,719 $ 93,998 Cost and operating expenses: (1) Cost of revenue (exclusive of amortization of product development costs) (2) 12,025 6,069 32,996 13,694 Technology and development 14,865 10,058 41,931 21,484 Sales and marketing 38,867 20,189 109,516 45,785 General and administrative 11,606 9,826 37,162 20,568 Acquisition costs 10,832 4,060 10,832 6,065 Restructuring costs 1,154 - 4,797 - Total cost and operating expenses 89,349 50,202 237,234 107,596 Loss from operations (22,205 ) (9,919 ) (51,515 ) (13,598 ) Interest and other income 109 33 400 112 Interest expense (1,830 ) (203 ) (5,529 ) (655 ) Loss before provision for income taxes (23,926 ) (10,089 ) (56,644 ) (14,141 ) (Provision) benefit for income taxes (67 ) 7,869 (363 ) 7,529 Net loss attributable to common stockholders $ (23,993 ) $ (2,220 ) $ (57,007 ) $ (6,612 ) (1) Compensation paid in stock was allocated as follows: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Compensation paid in stock related to vesting of stock based awards: Cost of revenue $ 1,129 $ 200 $ 1,749 $ 298 Technology and development 2,179 2,039 6,359 3,028 Sales and marketing 2,391 1,526 8,963 2,348 General and administrative 3,476 3,525 12,002 4,994 Total compensation paid in stock related to vesting of stock based awards 9,175 7,290 29,073 10,668 Other compensation paid in stock: Restructuring cost - - 82 - Total compensation paid in stock $ 9,175 $ 7,290 $ 29,155 $ 10,668 (2) Amortization of product development costs was included in technology and development as follows: $ 1,817 $ 559 $ 6,263 $ 1,155 - 24 - -------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Percentage of Revenue:** Revenue 100 % 100 % 100 % 100 % Cost and operating expenses: Cost of revenue 18 15 18 14 Technology and development 22 25 23 23 Sales and marketing 58 50 59 49 General and administrative 17 24 20 22 Acquisition costs 16 10 6 6 Restructuring costs 2 - 3 - Total cost and operating expenses 133 125 128 114 Loss from operations (33 ) (25 ) (28 ) (14 ) Interest and other income * * * - Interest expense (3 ) (1 ) (3 ) (1 ) Loss before provision for income taxes (36 ) (25 ) (30 ) (15 ) (Provision) benefit for income taxes * 20 * 8 Net loss attributable to common stockholders (36 )% (6 )% (31 )% (7 )% * Less than 0.5% of revenue. ** Columns may not add up to 100% due to rounding. Non-GAAP Financial Measures Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, loss on extinguishment of debt, income taxes, depreciation and amortization, compensation paid in stock, and certain other infrequently occurring items that we do not believe are indicative of ongoing results (such as acquisition or restructuring related costs). Below, we have provided a reconciliation of Adjusted EBITDA to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure. We include Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is an important measure upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets, and the impact of compensation paid in stock. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities. 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: • Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments; • 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 capital expenditure requirements for such replacements; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure. - 25 - -------------------------------------------------------------------------------- Table of Contents In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results. The following table presents a reconciliation of Adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (In thousands)Net loss attributable to common stockholders $ (23,993 ) $ (2,220 ) $ (57,007 ) $ (6,612 ) Non-GAAP adjustments: Interest and other income (109 ) (33 ) (400 ) (112 ) Interest expense 1,830 203 5,529 655 Depreciation and amortization 7,754 3,380 20,907 6,288 Compensation paid in stock 9,175 7,290 29,073 10,668 Provision (benefit) for income taxes 67 (7,869 ) 363 (7,529 ) Acquisition related costs 10,832 4,060 10,832 6,065 Restructuring related costs 1,154 - 4,797 - Adjusted EBITDA $ 6,710 $ 4,811 $ 14,094 $ 9,423 Comparison of the Three Months Ended September 30, 2014 and 2013 Revenue Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Revenue $ 67,144 $ 40,283 67 % Revenue increased to $67.1 million in the three months ended September 30, 2014 from $40.3 million in the three months ended September 30, 2013, an increase of $26.8 million, or 67%. Marketplace revenue and Media revenue represented 83% and 17%, respectively, of total revenue in the three months ended September 30, 2014, compared to 78% and 22%, respectively, of total revenue in the three months ended September 30, 2013. The increase in total revenue was primarily attributable to the growth in our subscriber base, an increase in the average revenue per subscriber, the growth in our monthly unique visitors, and increased sales of our Trulia Mobile Ads and Trulia Seller Ads subscription products. During the three months ended September 30, 2014 and 2013, we recognized Marketplace revenue and Media revenue as follows: Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Marketplace revenue $ 55,875 $ 31,308 78 % Media revenue 11,269 8,975 26 % Total revenue $ 67,144 $ 40,283 67 % - 26 - -------------------------------------------------------------------------------- Table of Contents Marketplace revenue increased to $55.9 million in the three months ended September 30, 2014 from $31.3 million in the three months ended September 30, 2013, an increase of $24.6 million, or 78%. This increase was primarily attributable to the growth in our subscriber base, the growth in sales of our subscription products for agents, Trulia Mobile Ads and Trulia Seller Ads, and an increase in the average revenue per subscriber. Overall our subscriber base grew by 38% to approximately 78,000 subscribers as of September 30, 2014 from 56,468 subscribers as of September 30, 2013. However, we estimate that there was a 20% overlap of subscribers between Trulia and Market Leader for the three months ended September 30, 2014. Our subscription products for agents, Trulia Mobile Ads and Trulia Seller Ads, contributed to Marketplace revenue growth in the three months ended September 30, 2014. The average monthly revenue per subscriber increased from $189 in the three months ended September 30, 2013 to $204 in the three months ended September 30, 2014, largely due to increased sales of these products. Media revenue increased to $11.3 million in the three months ended September 30, 2014 from $9.0 million in the three months ended September 30, 2013, an increase of $2.3 million, or 26%. This increase is driven by the strong execution in our builder, credit, and display advertising areas, as well as continued rapid growth of our mobile monthly unique visitors, as our monthly unique visitors stayed relatively constant. Cost of Revenue Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Cost of revenue $ 12,025 $ 6,069 98 % Cost of revenue increased to $12.0 million in the three months ended September 30, 2014 from $6.1 million in the three months ended September 30, 2013, an increase of $5.9 million, or 98%. The increase was primarily due to a $3.5 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 41% increase in headcount in the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Also, $1.1 million of the increase was related to lead acquisition. Technology and Development Expenses Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Technology and development $ 14,865 $ 10,058 48 % Technology and development expenses increased to $14.9 million in the three months ended September 30, 2014 from $10.1 million in the three months ended September 30, 2013, an increase of $4.8 million, or 48%. The increase was primarily due to a $3.1 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 15% increase in headcount in the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Also, $632,000 of the increase was related to the amortization of the intangible assets acquired in the Market Leader transaction, and $940,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. Sales and Marketing Expenses Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Sales and marketing $ 38,867 $ 20,189 93 % Sales and marketing expenses increased to $38.9 million in the three months ended September 30, 2014 from $20.2 million in the three months ended September 30, 2013, an increase of $18.7 million, or 93%. The increase was primarily due to an $8.5 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 13% increase in headcount in - 27 - -------------------------------------------------------------------------------- Table of Contents the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Also, $8.2 million of the increase was related to our marketing and advertising activities, $860,000 was related to the amortization of the intangible assets acquired in the Market Leader transaction, $320,000 was related to the compensation paid in stock for the performance-based awards granted to certain employees in connection with the Market Leader acquisition, and $730,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. General and Administrative Expenses Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) General and administrative $ 11,606 $ 9,826 18 % General and administrative expenses increased to $11.6 million in the three months ended September 30, 2014 from $9.8 million in the three months ended September 30, 2013, an increase of $1.8 million, or 18%. The increase was primarily due to a $2.1 million net increase in labor and facilities related costs, including compensation paid in stock, which reflects a 10% decrease in headcount in the three months ended September 30, 2014, compared to the three months ended September 30, 2013, as a result of our restructuring plan. Also, $588,000 was related to the amortization of the intangible assets acquired in the Market Leader transaction, and $507,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. This was offset by a $1.7 million decrease in the compensation paid in stock related to forfeitures of certain performance-based awards granted in connection with the Market Leader acquisition. Acquisition Costs Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Acquisition costs $ 10,832 $ 4,060 167 % In the three months ended September 30, 2014 we incurred $10.8 million of expenses in connection with the Zillow Merger described elsewhere in this Quarterly Report on Form 10-Q primarily related to legal and other professional fees, compared to $4.1 million of expenses incurred in connection with our acquisition of Market Leader in the three months ended September 30, 2013. Restructuring Costs Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Restructuring costs $ 1,154 $ - 100 % In the three months ended September 30, 2014 we incurred $1.2 million of expenses in connection with the restructuring activities related to our ongoing integration of Market Leader, which is described elsewhere in this Quarterly Report on Form 10-Q. Interest Expense Three Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Interest expense $ 1,830 $ 203 802 % - 28 - -------------------------------------------------------------------------------- Table of Contents Interest expense increased to $1.8 million in the three months ended September 30, 2014 from $203,000 in the three months ended September 30, 2013, an increase of $1.6 million, or 802%. The increase is primarily related to the 2020 Notes that we issued in December 2013, which accrue interest at 2.75% annually. Comparison of the Nine Months Ended September 30, 2014 and 2013 Revenue Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Revenue $ 185,719 $ 93,998 98 % Revenue increased to $185.7 million in the nine months ended September 30, 2014 from $94.0 million in the nine months ended September 30, 2013, an increase of $91.7 million, or 98%. Marketplace revenue and Media revenue represented 83% and 17%, respectively, of total revenue in the nine months ended September 30, 2014, compared to 76% and 24%, respectively, of total revenue in the nine months ended September 30, 2013. The increase in total revenue was primarily attributable to the revenue from our acquisition of Market Leader in August 2013, the growth in our subscriber base, an increase in the average revenue per subscriber, the growth in our monthly unique visitors, and increased sales of our Trulia Mobile Ads, and Trulia Seller Ads subscription products. During the nine months ended September 30, 2014 and 2013, we recognized Marketplace revenue and Media revenue as follows: Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Marketplace revenue $ 154,821 $ 71,231 117 % Media revenue 30,898 22,767 36 % Total revenue $ 185,719 $ 93,998 98 % Marketplace revenue increased to $154.8 million in the nine months ended September 30, 2014 from $71.2 million in the nine months ended September 30, 2013, an increase of $83.6 million, or 117%. This increase was primarily attributable to the revenue from our acquisition of Market Leader in August 2013, the growth in our subscriber base, the growth in sales of our subscription products for agents, Trulia Mobile Ads and Trulia Seller Ads, and an increase in the average revenue per subscriber. Overall our subscriber base grew by 38% to approximately 78,000 subscribers as of September 30, 2014 from 56,468 subscribers as of September 30, 2013. However, we estimate that there was a 20% overlap of subscribers between Trulia and Market Leader for the nine months ended September 30, 2014. Our Trulia Mobile Ads and Trulia Seller Ads subscription products contributed to Marketplace revenue growth in the nine months ended September 30, 2014. The average monthly revenue per subscriber increased from $189 in the nine months ended September 30, 2013 to $205 in the nine months ended September 30, 2014, largely due to increased sales of these products. Media revenue increased to $30.9 million in the nine months ended September 30, 2014 from $22.8 million in the nine months ended September 30, 2013, an increase of $8.1 million, or 36%. This increase is driven by the strong executions in our builder, credit, and display advertising areas, as well as continued rapid growth of our mobile monthly unique visitors, as our monthly unique visitors stayed relatively constant. Cost of Revenue Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Cost of revenue $ 32,996 $ 13,694 141 % - 29 - -------------------------------------------------------------------------------- Table of Contents Cost of revenue increased to $33.0 million in the nine months ended September 30, 2014 from $13.7 million in the nine months ended September 30, 2013, an increase of $19.3 million, or 141%. The increase was primarily due to a $9.7 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 78% increase in headcount in the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, partially as a result of the Market Leader acquisition. Also, $5.7 million of the increase was related to lead acquisition. Technology and Development Expenses Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Technology and development $ 41,931 $ 21,484 95 % Technology and development expenses increased to $41.9 million in the nine months ended September 30, 2014 from $21.5 million in the nine months ended September 30, 2013, an increase of $20.4 million, or 95%. The increase was primarily due to a $14.2 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 62% increase in headcount in the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, partially as a result of the Market Leader acquisition. Also, $2.9 million of the increase was related to the amortization of the intangible assets acquired in the Market Leader transaction, $575,000 was related to the compensation paid in stock for the performance-based awards granted to certain employees in connection with the Market Leader acquisition, and $940,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. Sales and Marketing Expenses Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Sales and marketing $ 109,516 $ 45,785 139 % Sales and marketing expenses increased to $109.5 million in the nine months ended September 30, 2014 from $45.8 million in the nine months ended September 30, 2014, an increase of $63.7 million, or 139%. The increase was primarily due to a $34.3 million increase in labor and facilities related costs, including compensation paid in stock, largely as a result of a 64% increase in headcount in the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, partially as a result of the Market Leader acquisition. Also, $21.8 million of the increase was related to our marketing and advertising activities, $4.1 million was related to the amortization of the intangible assets acquired in the Market Leader transaction, $1.9 million was related to the compensation paid in stock for the performance-based awards granted to certain employees in connection with the Market Leader acquisition, and $730,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. General and Administrative Expenses Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) General and administrative $ 37,162 $ 20,568 81 % General and administrative expenses increased to $37.2 million in the nine months ended September 30, 2014 from $20.6 million in the nine months ended September 30, 2013, an increase of $16.6 million, or 81%. The increase was primarily due to a $10.2 million increase in labor and facilities related costs, including stock-based compensation, largely as a result of a 48% increase in headcount in the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, partially as a result of the Market Leader acquisition. Also, $2.7 million of the increase was related to the amortization of the intangible assets acquired in the Market Leader transaction, $1.2 million was related to the compensation paid in stock for the performance-based awards granted to certain employees in connection with the Market Leader acquisition, and $507,000 was related to the compensation paid in stock for the equity awards granted to certain employees in connection with the Zillow Merger. - 30 --------------------------------------------------------------------------------- Table of Contents Acquisition Costs Nine Months Ended 2013 to 2014 September 30, % Change 2014 2013 (In thousands) Acquisition costs $ 10,832 $ 6,065 79 % In the nine months ended September 30, 2014 we incurred $10.8 million of expenses in connection with the Zillow Merger described elsewhere in this Quarterly Report on Form 10-Q primarily related to legal and other professional fees, compared to the $6.1 million of expenses incurred in connection with our acquisition of Market Leader in the nine months ended September 30, 2013 Restructuring Costs Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Restructuring costs $ 4,797 $ - 100 % In the nine months ended September 30, 2014 we incurred $4.8 million of expenses in connection with the restructuring activities related to our ongoing integration of Market Leader described elsewhere in this Quarterly Report on Form 10-Q. Interest Expense Nine Months Ended September 30, 2013 to 2014 2014 2013 % Change (In thousands) Interest expense $ 5,529 $ 655 744 % Interest expense increased to $5.5 million in the nine months ended September 30, 2014 from $655,000 in the nine months ended September 30, 2013, an increase of $4.9 million, or 744%. The increase is primarily related to the 2020 Notes that we issued in December 2013, which accrue interest at 2.75% annually. Liquidity and Capital Resources As of September 30, 2014, our principal sources of liquidity were cash and cash equivalents totaling $212.1 million, which consisted of bank deposits and money market funds. On December 17, 2013 we issued $230.0 million aggregate principal amount of the 2020 Notes, which included a $30.0 million of principal amount issued pursuant to an option to purchase additional notes granted to the initial purchasers. The aggregate principal amount of the 2020 Notes is due on December 15, 2020. We received net proceeds of $222.4 million after deducting offering expenses of $7.6 million. On March 20, 2013, we completed our follow-on public offering pursuant to which we sold an aggregate of 3,500,000 shares of our common stock, at a public offering price of $29.75 per share, resulting in aggregate net proceeds to us of $98.1 million, after deducting underwriting discounts and commissions and offering expenses payable by us. On March 26, 2013, we sold an additional 525,000 shares of our common stock pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $29.75 per share, resulting in aggregate net proceeds to us of $14.8 million, after deducting underwriting discounts and commissions and offering expenses payable by us. In addition, another 3,117,311 shares were sold by certain selling stockholders, which included 406,606 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares. We did not receive any proceeds from sales by the selling stockholders. - 31 --------------------------------------------------------------------------------- Table of Contents Prior to our follow-on public offering and our 2020 Notes offering, our operations were financed primarily by the net proceeds of $89.4 million from our initial public offering in September 2012 and $10.0 million in proceeds from the issuance of indebtedness from a credit facility. We repaid in full the outstanding balance of the credit facility in December 2013 with the net proceeds received from issuance of the 2020 Notes. We have incurred cumulative losses of $121.9 million from our operations to date, and expect to incur additional losses in the future. We believe that our cash balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our future capital requirements will depend on many factors, including our rate of revenue growth, the cash that may be used in connection with acquisitions or other investments, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our technology and development efforts. To the extent that existing cash and cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2014 2013 (In thousands) Cash provided by (used in) operating activities $ 15,065 $ (5,759 ) Cash used in investing activities $ (34,827 ) $ (167,092 ) Cash provided by financing activities $ 6,279 $ 116,251 Cash Flows from Operating Activities Cash provided by operating activities for the nine months ended September 30, 2014 was $15.1 million. The cash flows from our net loss were increased by our non-cash operating activities and net cash flows provided through changes in certain of our operating assets and liabilities. Specifically, we recognized non-cash charges of $20.9 million for depreciation and amortization of our property and equipment, $29.1 million for compensation paid in stock, and $2.9 million related to our restructuring activities. Also, we recognized changes in assets and liabilities which provided $18.4 million of cash from operating activities and $0.2 million of cash from restructuring activities. The primary drivers of the changes in our operating assets and liabilities were a $4.1 million decrease in prepaid expenses and other current assets driven by the receipt of our tenant improvement allowance for our Bellevue lease; a $10.7 million increase in accrued liabilities primarily due to the overall growth in our business during the year; and a $4.9 million increase in deferred rent due to our receipt of tenant improvement allowance for our new office lease in San Francisco. Changes in our operating assets and liabilities were also affected by an increase in accounts receivable of $2.3 million due to timing of collections, and an increase in accrued compensation and benefits of $2.0 million due to the growth in headcount. Cash Flows from Investing Activities Cash flows used in investing activities of $34.8 million for the nine months ended September 30, 2014 were primarily comprised of a $5.3 million increase in our restricted cash balance mainly related to our new office lease in San Francisco and a $29.5 million increase in purchases of property and equipment. Cash Flows from Financing Activities Cash flows provided by financing activities for the nine months ended September 30, 2014 of $6.3 million were primarily comprised of $9.8 million proceeds from the exercise of stock options by our employees that were partially offset by $3.5 million value of equity awards withheld for tax liability. Contractual Obligations and Other Commitments On March 10, 2014, we entered into a lease agreement (the "Lease") for 52,595 square feet of office space at 535 Mission Street in San Francisco. The term of the Lease is approximately 107 months and is scheduled to commence on November 1, 2014, or the date that the landlord substantially completes the construction of our new facility. On July 25, 2014 we entered into a lease amendment under which we will lease an additional 26,620 square feet of office space commencing in October 2015 under the same terms and conditions. Furthermore, we have options to lease up to an aggregate of approximately 40,000 square feet of additional office space - 32 --------------------------------------------------------------------------------- Table of Contents under the Lease. Future minimum lease payments under the Lease will range from $182,000 per month to $347,000 per month. Once we occupy this office space, it will become our new principal executive office and will replace 116 New Montgomery Street in San Francisco. To secure our lease obligation we were required to enter into a secured letter of credit arrangement with a financial institution for the amount of $3.8 million. This deposit is classified as restricted cash in our balance sheet as of September 30, 2014. On April 10, 2014, we entered into a lease agreement for 64,908 square feet of office space in the Denver metropolitan area. The term of the lease is approximately 90 calendar months and is scheduled to commence on May 1, 2014. The lease agreement calls for escalating rent payments over the 90 calendar months and allows for six full months of rent abatement. Future minimum lease payments range from $124,000 per month to $141,000 per month. In connection with this lease agreement we were required to enter into a secured letter of credit arrangement with a financial institution for the amount of $1.1 million to secure our lease obligation. This deposit is classified as restricted cash in our balance sheet as of September 30, 2014. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Segment Information We have one business activity and operate in one reportable segment. |