LOGMEIN, INC., 10-Q filed on 7/26/2012
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Jul. 20, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
LogMeIn, Inc. 
 
Entity Central Index Key
0001420302 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q2 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
24,746,745 
Condensed Consolidated Balance Sheets (USD $)
Jun. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 98,443,541 
$ 103,603,684 
Marketable securities
100,015,400 
95,040,045 
Accounts receivable (net of allowance for doubtful accounts of $109,000 and $142,000 as of December 31, 2011 and June 30, 2012, respectively)
8,363,433 
8,747,104 
Prepaid expenses and other current assets
2,938,152 
2,411,640 
Deferred income tax assets
1,976,028 
1,980,342 
Total current assets
211,736,554 
211,782,815 
Property and equipment, net
5,884,674 
5,202,721 
Restricted cash
3,909,611 
369,792 
Intangibles, net
6,861,150 
3,260,612 
Goodwill
18,440,492 
7,258,743 
Other assets
230,767 
242,122 
Deferred income tax assets
3,940,312 
3,940,312 
Total assets
251,003,560 
232,057,117 
Current liabilities:
 
 
Accounts payable
5,554,634 
6,275,163 
Accrued liabilities
13,096,744 
10,472,805 
Deferred revenue, current portion
59,702,020 
55,961,859 
Total current liabilities
78,353,398 
72,709,827 
Deferred revenue, net of current portion
3,125,276 
2,302,465 
Other long-term liabilities
2,292,857 
1,239,136 
Total liabilities
83,771,531 
76,251,428 
Commitments and contingencies (Note 9)
   
   
Preferred stock, $0.01 par value - 5,000,000 shares authorized, 0 shares outstanding as of December 31, 2011 and June 30, 2012
   
   
Equity:
 
 
Common stock, $0.01 par value - 75,000,000 shares authorized as of December 31, 2011 and June 30, 2012; 24,551,641 and 24,733,520 shares issued and outstanding as of December 31, 2011 and June 30, 2012, respectively
247,335 
245,516 
Additional paid-in capital
165,076,334 
154,440,369 
Retained earnings
3,329,045 
2,677,128 
Accumulated other comprehensive loss
(1,420,685)
(1,557,324)
Total equity
167,232,029 
155,805,689 
Total liabilities and equity
$ 251,003,560 
$ 232,057,117 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
 
 
Allowance for doubtful accounts
$ 142,000 
$ 109,000 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
75,000,000 
75,000,000 
Common stock, shares issued
24,733,520 
24,551,641 
Common stock, shares outstanding
24,733,520 
24,551,641 
Condensed Consolidated Statements of Income (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Condensed Consolidated Statements of Income [Abstract]
 
 
 
 
Revenue
$ 33,796,581 
$ 29,097,956 
$ 66,484,512 
$ 56,136,735 
Cost of revenue
3,424,728 
2,445,765 
6,842,046 
4,981,901 
Gross profit
30,371,853 
26,652,191 
59,642,466 
51,154,834 
Operating expenses
 
 
 
 
Research and development
6,696,432 
4,661,979 
12,916,403 
8,979,758 
Sales and marketing
16,474,132 
14,056,128 
33,319,955 
27,042,237 
General and administrative
4,799,987 
3,836,955 
9,705,251 
9,895,645 
Legal settlement
 
 
 
1,250,000 
Amortization of acquired intangibles
145,680 
92,048 
272,945 
184,082 
Total operating expenses
28,116,231 
22,647,110 
56,214,554 
47,351,722 
Income from operations
2,255,622 
4,005,081 
3,427,912 
3,803,112 
Interest income, net
217,977 
239,958 
433,467 
450,670 
Other expense
(269,325)
(151,872)
(505,590)
(260,683)
Income before income taxes
2,204,274 
4,093,167 
3,355,789 
3,993,099 
Provision for income taxes
(1,628,597)
(1,410,843)
(2,703,872)
(1,376,022)
Net income
$ 575,677 
$ 2,682,324 
$ 651,917 
$ 2,617,077 
Net income per share:
 
 
 
 
Basic
$ 0.02 
$ 0.11 
$ 0.03 
$ 0.11 
Diluted
$ 0.02 
$ 0.11 
$ 0.03 
$ 0.10 
Weighted average shares outstanding:
 
 
 
 
Basic
24,677,893 
24,116,686 
24,625,851 
24,023,018 
Diluted
25,367,227 
25,169,689 
25,360,950 
25,118,423 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
 
 
 
 
Net income
$ 575,677 
$ 2,682,324 
$ 651,917 
$ 2,617,077 
Other comprehensive income:
 
 
 
 
Net unrealized gains (losses) on marketable securities, net of tax
(4,295)
13,720 
6,438 
(3,423)
Net translation gains (losses)
(905,512)
218,037 
130,201 
790,497 
Total other comprehensive income (loss)
(909,807)
231,757 
136,639 
787,074 
Comprehensive income (loss)
$ (334,130)
$ 2,914,081 
$ 788,556 
$ 3,404,151 
Condensed Consolidated Statements of Cash Flows (USD $)
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Cash flows from operating activities
 
 
Net income
$ 651,917 
$ 2,617,077 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Depreciation and amortization
2,848,825 
2,074,756 
Amortization of premium on investments
22,370 
95,291 
Provision for bad debts
55,000 
30,000 
Provision for deferred income taxes
173 
1,335,520 
Income tax benefit from the exercise of stock options
 
(2,028,000)
Stock-based compensation
6,073,007 
3,996,617 
Gain on disposal of equipment
(661)
(396)
Changes in assets and liabilities:
 
 
Accounts receivable
441,348 
(2,640,416)
Prepaid expenses and other current assets
(513,585)
494,470 
Other assets
11,355 
(163,153)
Accounts payable
(871,267)
645,428 
Accrued liabilities
2,235,628 
(881,303)
Deferred revenue
4,138,268 
8,339,473 
Other long-term liabilities
1,053,721 
(93,046)
Net cash provided by operating activities
16,146,099 
13,822,318 
Cash flows from investing activities
 
 
Purchases of marketable securities
(74,987,000)
(85,073,350)
Proceeds from sale or disposal of marketable securities
70,000,000 
85,000,000 
Purchases of property and equipment
(2,284,816)
(2,094,569)
Intangible asset additions
(566,442)
(137,519)
Cash paid for acquisition, net of cash acquired
(14,831,525)
 
Increase in restricted cash and deposits
(3,557,760)
(25,569)
Net cash used in investing activities
(26,227,543)
(2,331,007)
Cash flows from financing activities
 
 
Proceeds from issuance of common stock upon option exercises
2,012,777 
2,432,090 
Income tax benefit from the exercise of stock options
2,552,000 
2,028,000 
Net cash provided by financing activities
4,564,777 
4,460,090 
Effect of exchange rate changes on cash and cash equivalents and restricted cash
356,524 
772,196 
Net increase (decrease) in cash and cash equivalents
(5,160,143)
16,723,597 
Cash and cash equivalents, beginning of period
103,603,684 
77,279,987 
Cash and cash equivalents, end of period
98,443,541 
94,003,584 
Supplemental disclosure of cash flow information
 
 
Cash paid for interest
215 
950 
Cash paid for income taxes
380,787 
175,014 
Noncash investing and financing activities
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
871,749 
242,494 
Fair value of contingent consideration in connection with acquisition included in accrued liabilities and other long - term liabilities
$ 234,568 
 
Nature of the Business
Nature of the Business

1. Nature of the Business

LogMeIn, Inc. (the “Company”) develops and markets a suite of cloud-based remote access, remote IT management, collaboration, data management and customer care solutions that provide instant, secure access to Internet connected devices, data and other people. The Company’s product line includes BoldChat ®, Cosm TM (formerly known as Pachube), Cubby TM, join.me ®, LogMeIn Free®, LogMeIn Pro ®, LogMeIn ® CentralTM , LogMeIn Rescue®, LogMeIn ® Rescue+Mobile TM, LogMeIn Backup ®, LogMeIn IgnitionTM , LogMeIn for iOS, LogMeIn Hamachi®, and RemotelyAnywhere ®. The Company is based in Woburn, Massachusetts with wholly-owned subsidiaries in Hungary, The Netherlands, Australia, the United Kingdom, Brazil, Japan, India and Ireland.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Consolidation — The accompanying condensed consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Unaudited Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited and have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read along with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2012. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2011 and June 30, 2012, marketable securities consisted of U.S. government agency securities that have remaining maturities within two years and have an aggregate amortized cost of $95,051,808 and $100,016,438 and an aggregate fair value of $95,040,045 and $100,015,400, including $102,552 and $67,507 of unrealized gains and $114,315 and $68,545 of unrealized losses, respectively.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its LogMeIn premium services, the licensing of its Ignition for iPhone, iPad, and Android software products, and from the licensing of its RemotelyAnywhere software and its related maintenance.

Revenue from the Company’s LogMeIn premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to five years, but are generally one year in duration. The Company’s software cannot be run on another entity’s hardware nor do customers have the right to take possession of the software and use it on their own or another entity’s hardware.

Revenue from the sales of the Company’s Ignition for iPhone, iPad and Android software products, which are sold as a perpetual license, is recognized when there is persuasive evidence of an arrangement, the product has been provided to the customer, the collection of the fee is probable, and the amount of fees to be paid by the customer is fixed or determinable.

        The Company’s multi-element arrangements typically include subscription and professional services, which include development services. The Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis as the services are not sold by any other vendor and the customer would not be able to resell such services. As a result, the deliverables within these arrangements do not qualify for treatment as separate units of accounting. Accordingly, the Company accounts for fees received under these multi-element arrangements as a single unit of accounting and recognizes the entire arrangement consideration ratably over the term of the related agreement, or the customer life, commencing when all significant performance obligations have been delivered and when all revenue recognition criteria have been met.

Revenues are reported net of applicable sales and use tax, value-added tax, and other transaction taxes imposed on the related transaction.

 

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, restricted cash, and accounts receivable. Cash, cash equivalents, and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

As of December 31, 2011, and June 30, 2012, no customers accounted for more than 10% of accounts receivable, and no customers accounted for more than 10% of revenue for the three and six months ended June 30, 2011 or 2012.

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill, but performs an annual impairment test of goodwill on the last day of its fiscal year and whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. Through June 30, 2012, no impairments have occurred.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their estimated fair values at the date of acquisition. Intangible assets are amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. The Company’s intangible assets have estimated useful lives which range from one to seven years.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations. The Company had foreign currency losses of approximately $152,000 and $261,000 for the three and six months ended June 30, 2011, respectively, and foreign currency losses of approximately $269,000 and $506,000 for the three and six months ended June 30, 2012, respectively.

Stock-Based Compensation — Stock-based compensation is measured based upon the grant date fair value and recognized as an expense on a straight-line basis in the financial statements over the vesting period of the award for those awards expected to vest. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of stock awards. The Company uses the with-or-without method to determine when it will realize excess tax benefits from stock based compensation. Under this method, the Company will realize these excess tax benefits only after it realizes the tax benefits of net operating losses from operations.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss carry-forwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized, and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through December 31, 2011 and June 30, 2012, the Company has provided a liability for approximately $198,000 and $218,000 for uncertain tax positions, respectively. These uncertain tax positions would impact the Company’s effective tax rate if recognized.

Segment Data — Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

 

The Company’s revenue (based on customer address) by geography is as follows:

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Revenues:

                               

United States

  $ 18,782,830     $ 21,887,423     $ 35,999,433     $ 43,083,757  

United Kingdom

    2,767,445       3,086,635       5,367,393       6,095,188  

International - all other

    7,547,681       8,822,523       14,769,909       17,305,567  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 29,097,956     $ 33,796,581     $ 56,136,735     $ 66,484,512  
   

 

 

   

 

 

   

 

 

   

 

 

 

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

The Company has entered into agreements with certain customers that require the Company to indemnify the customer against certain claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited. As of the date hereof, the Company does not expect any material claims related to these indemnification obligations.

Through January 1, 2012, the Company had not experienced any losses related to these indemnification obligations, and no claims with respect thereto were outstanding. On March 15, 2012, the Company received an indemnification claim from a customer related to a third-party claim that the customer’s use of a LogMeIn service infringes the third party’s patent. The Company believes that a risk of material loss related to this indemnification obligation is remote.

Net Income Per Share — Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding during the period and the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

 

The Company excluded 795,175 and 1,587,310 of options to purchase common shares as well as 0 and 141,837 of unvested restricted stock units during the three months ended June 30, 2011 and 2012, respectively, and 795,175 and 1,586,910 of options to purchase common shares and 0 and 940 of unvested restricted stock units during the six months ended June 30, 2011 and 2012, respectively, because they had an anti-dilutive impact:

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Options to purchase common shares

    795,175       1,587,310       795,175       1,586,910  

Unvested restricted stock units

    —         141,837       —         940  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total options and unvested restricted stock units

    795,175       1,729,147       795,175       1,587,850  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Basic and diluted net income per share was calculated as follows:

 

                 
    Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2011  

Basic:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,116,686       24,023,018  
   

 

 

   

 

 

 

Net income, basic

  $ 0.11     $ 0.11  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,116,686       24,023,018  

Add: Options to purchase common shares

    1,053,003       1,095,405  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,169,689       25,118,423  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.11     $ 0.10  
   

 

 

   

 

 

 
     
    Three Months Ended     Six Months Ended  
    June 30, 2012     June 30, 2012  

Basic:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,677,893       24,625,851  
   

 

 

   

 

 

 

Net income, basic

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,677,893       24,625,851  

Add: Common stock equivalents

    689,334       735,099  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,367,227       25,360,950  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 

Recently Issued Accounting Pronouncements — In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in goodwill accounting standard. The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements (as defined in Note 3). The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

 

Fair Value of Financial Instruments
Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, and accounts payable, approximate their fair values due to their short maturities. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value:

 

                                 
    Basis of Fair Value Measurements  
    Balance     Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Balance at December 31, 2011

                               

Cash equivalents — money market funds

  $ 53,839,536     $ 53,839,536     $ —       $ —    

Cash equivalents — bank deposits

    5,032,135       —         5,032,135       —    

Short-term marketable securities — U.S. government agency securities

    95,040,045       85,040,105       9,999,940       —    

Contingent consideration liability

    212,536       —         —         212,536  

Balance at June 30, 2012

                               

Cash equivalents — money market funds

    49,285,842       49,285,842       —         —    

Cash equivalents — bank deposits

    5,034,637       —         5,034,637       —    

Short-term marketable securities — U.S. government agency securities

    100,015,400       95,014,146       5,001,254       —    

Contingent consideration liability

    234,568       —         —         234,568  

Bank deposits are classified within the second level of the fair value hierarchy and the fair value of those assets are determined based upon quoted prices for similar assets in active markets.

The Level 3 liability consists of contingent consideration related to the July 19, 2011 acquisition of Cosm. The fair value of the contingent consideration was estimated by applying a probability based model, which utilizes significant inputs that are unobservable in the market. Key assumptions include a 13% discount rate and a 76% weighted-probability of achieving earn-out. The current portion of contingent consideration is included in Accrued liabilities and the non-current portion is included in Other long-term liabilities. A reconciliation of the beginning and ending Level 3 liability is as follows:

 

         
    Six Months
Ended
June 30,
2012
 

Balance beginning of period

  $ 212,536  

Transfers into Level 3

    —    

Payments

    —    

Change in fair value (included within research and development expense)

    22,032  
   

 

 

 

Balance end of period

  $ 234,568  
   

 

 

 
Acquisitions
Acquisitions

4. Acquisitions

        On July 19, 2011, the Company acquired substantially all of the assets of Connected Environments (BVI) Limited, a British Virgin Island limited company and Connected Environments, Limited, a U.K. limited company (collectively “Connected Environments”), primarily including their Cosm service, for an initial cash payment of $10 million plus contingent payments totaling up to $5.2 million. The Cosm service is a cloud-based connectivity and data management platform for the Internet of Things. The Company acquired Cosm to expand its capabilities with embedded devices and enter into the Internet of Things market. The operating results of the acquired Cosm service, of which there was no revenue for the three and six months ended June 30, 2012, and $1.7 million and $3.3 million of expenses during the three and six months ended June 30, 2012, respectively, are included in the consolidated financial statements beginning on the acquisition date.

 

The Cosm acquisition has been accounted for as a business combination. The assets acquired and the liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company retained an independent third party valuation firm to calculate the fair value of the intangible assets using the cost method with estimates and assumptions provided by Company management. The excess of the purchase price over the tangible net assets and identifiable intangible assets was recorded as goodwill.

The purchase price was allocated as follows:

 

         
    Amount  

Tangible assets

  $ 7,595  

Technology and know-how

    3,250,000  

Goodwill

    6,934,966  
   

 

 

 

Total purchase price

    10,192,561  

Liability for contingent consideration

    (192,561
   

 

 

 

Cash paid

  $ 10,000,000  
   

 

 

 

The asset purchase agreement included a contingent payment provision requiring the Company to make additional payments to the shareholders of Connected Environments, as well as certain employees, on the first and second anniversaries of the acquisition, contingent upon the continued employment of certain employees and the achievement of certain product performance metrics. The range of the contingent payments that the Company could pay is between $0 to $4,898,000. The Company has concluded that the arrangement is a compensation arrangement and is accruing the maximum payout ratably over the performance period, as it believes it is probable that the criteria will be met. The Company intends to pay approximately $1.7 million of contingent payments in July 2012.

The asset purchase agreement also includes a contingent payment provision to a non-employee shareholder for an amount between $0 and $267,000, which the Company has concluded is part of the purchase price. This contingent liability was recorded at its fair of $192,561 at the acquisition date. The Company will re-measure the fair value of the consideration at each subsequent reporting period and recognize any adjustment to fair value as part of earnings.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to Gravity, our service delivery platform, and the ability to leverage existing sales and marketing capacity and customer base with respect to the acquired Cosm service. All goodwill acquired is expected to be deductible for income tax purposes.

The Company incurred approximately $324,000 of acquisition-related costs which are included in general and administrative expense for the year ended December 31, 2011.

On January 6, 2012, the Company acquired substantially all of the assets of Bold Software, LLC (“Bold”), a Wichita, Kansas-based limited liability corporation, for a cash purchase price of approximately $15.3 million plus contingent, retention-based bonuses totaling $1.5 million, which are expected to be paid over a two year period from the date of acquisition. Bold is a leading provider of web chat and customer communications software. Bold’s operating results, of which there was approximately $1.1 million and $1.9 million of revenue for the three and six months ended June 30, 2012, respectively, and $1.4 million and $2.5 million of expenses during the three and six months ended June 30, 2012, respectively, are included in the consolidated financial statements beginning on the acquisition date.

The Bold acquisition has been accounted for as a business combination. The assets acquired and the liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company retained an independent third party valuation firm to calculate the fair value of the intangible assets with estimates and assumptions provided by Company management. The excess of the purchase price over the tangible net assets and identifiable intangible assets was recorded as goodwill.

The purchase price was allocated as follows:

 

         
    Amount  

Cash

  $ 482,000  

Current assets

    126,000  

Other assets

    19,000  

Deferred revenue

    (424,000

Other liabilities

    (107,000

Completed technology

    1,090,000  

Trade name and trademark

    30,000  

Customer relationships

    2,760,000  

Non-compete agreements

    160,000  

Goodwill

    11,178,000  
   

 

 

 

Total purchase price

  $ 15,314,000  
   

 

 

 

The asset purchase agreement included a contingent, retention-based bonus program provision requiring the Company to make additional payments to employees, including former Bold owners now employed by the Company, on the first and second anniversaries of the acquisition, contingent upon their continued employment. The range of the contingent, retention-based bonus payments that the Company could pay is between $0 to $1,500,000. The Company has concluded that the arrangement is a compensation arrangement and is accruing the maximum payout ratably over the performance period, as it believes it is probable that the criteria will be met.

 

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its existing sales and marketing capacity and customer base to accelerate BoldChat sales, and the ability to leverage Bold’s technology with the Company’s existing support service. All goodwill acquired is expected to be deductible for income tax purposes.

The Company incurred approximately $0.1 million of acquisition-related costs which are included in general and administrative expense for the year ended December 31, 2011, and $0 and $0.1 million of acquisition-related costs in the three and six months ended June 30, 2012, respectively.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

5. Goodwill and Intangible Assets

The changes in the carry amounts of goodwill for six months ended June 30, 2012 are due to the addition of goodwill resulting from the Bold acquisition and the impact of foreign currency translation adjustments related to asset balances that are recorded in non-U.S. currencies.

 

Changes in goodwill for the six months ended June 30, 2012, are as follows:

 

         

Balance, December 31, 2011

  $ 7,258,743  

Goodwill related to the acquisition of Bold

    11,178,000  

Foreign currency translation adjustments

    3,749  
   

 

 

 

Balance, June 30, 2012

  $ 18,440,492  
   

 

 

 

Intangible assets consist of the following:

 

                                                         
          December 31, 2011     June 30, 2012  
    Estimated
Useful Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Identifiable intangible assets:

                                                       

Trade name and trademark

    1 -5 years     $ 635,506     $ 635,506     $ —       $ 665,344       651,194       14,150  

Customer base

    5 -7 years       1,003,068       1,003,068       —         3,750,573       1,219,163       2,531,410  

Domain names

    5 years       222,826       51,499       171,327       495,862       85,648       410,214  

Software

    4 years       298,977       298,977       —         298,977       298,977       —    

Technology

    3 -6 years       4,475,281       1,831,276       2,644,005       5,592,195       2,467,063       3,125,132  

Non-compete agreements

    5 years       0       0       —         159,189       4,241       154,948  

Internally developed software

    3 years       539,612       94,332       445,280       834,496       209,200       625,296  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $ 7,175,270     $ 3,914,658     $ 3,260,612     $ 11,796,636       4,935,486       6,861,150  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the Bold acquisition, the Company capitalized $1,090,000 of technology, $30,000 of trade names and trademarks, $2,760,000 of customer base and $160,000 of non-compete agreements as intangible assets. Changes in the gross carrying amount of the intangible assets are due to foreign currency translation adjustments. The Company is amortizing the intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. The intangible assets have estimated useful lives which range from one to seven years.

The Company capitalized $75,575 and $186,676 during the three months ended June 30, 2011 and 2012, respectively and $137,326 and $294,884 during the six months ended June 30, 2011 and 2012, respectively of costs related to internally developed computer software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services. The Company paid $271,558 to acquire domain names in both the three and six months ended June 30, 2012.

The Company is amortizing its intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Amortization expense for intangible assets was $112,658 and $516,787 for the three months ended June 30, 2011 and 2012, respectively, and $220,023 and $1,025,420 for the six months ended June 30, 2011 and 2012, respectively. Amortization relating to software, technology and internally developed software is recorded within cost of revenues and the amortization of trade name and trademark, customer base, domain names, and non-compete agreements is recorded within operating expenses. Future estimated amortization expense for intangible assets is as follows at June 30, 2012:

 

 

         

Amortization Expense (Years Ending December 31)

  Amount  

2012 (Six months ending December 31)

  $ 1,057,150  

2013

    2,122,385  

2014

    1,596,018  

2015

    803,342  

2016

    585,857  

Thereafter

    696,398  
   

 

 

 

Total

  $ 6,861,150  
   

 

 

 

 

Accrued Expenses
Accrued Expenses

6. Accrued Expenses

 

Accrued expenses consisted of the following:

 

                 
    December 31,
2011
    June 30,
2012
 

Marketing programs

  $ 1,770,611     $ 2,671,289  

Payroll and payroll related

    5,333,430       6,312,734  

Professional fees

    795,720       1,071,002  

Other accrued expenses

    2,573,044       3,041,719  
   

 

 

   

 

 

 

Total accrued expenses

  $ 10,472,805     $ 13,096,744  
   

 

 

   

 

 

 
Income Taxes
Income Taxes

7. Income Taxes

The Company recorded a provision for federal, state and foreign income taxes of approximately $1.4 million and $1.6 million for the three months ended June 30, 2011 and 2012, respectively, and $1.4 million and $2.7 million for the six months ended June 30, 2011 and 2012, respectively. The Company’s effective tax rate has increased for the three and six months ended June 30, 2012, as compared to the three and six month ending June 30, 2011 as a result of losses generated in its Cosm subsidiary.

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss carry-forwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized, and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. As of December 31, 2011 and June 30, 2012, the Company maintained a full valuation allowance related to the deferred tax assets of its Hungarian and Cosm subsidiaries. These entities have historical losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company’s income tax returns since inception are open to examination by federal, state, and foreign tax authorities. The Company has recorded a liability related to uncertain tax provisions of approximately $198,000 and $218,000 as of December 31, 2011 and June 30, 2012, respectively. The Company’s policy is to record estimated interest and penalty related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. During the three and six months ended June 30, 2011 and 2012, the Company did not recognize any interest or penalties in its statements of operations, and there are no accruals for interest or penalties at December 31, 2011 or June 30, 2012.

The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code and has determined that an ownership change as defined by Section 382 occurred in October 2004 and March 2010 resulting in approximately $219,000 and $12,800,000, respectively, of net operating losses (“NOLs”) being subject to limitation. As of December 31, 2011 and June 30, 2012, the Company believes all NOLs generated by the Company, including those subject to limitation, are available for utilization given the Company’s large annual limitation amount. Subsequent ownership changes as defined by Section 382 could potentially limit the amount of net operating loss carry-forwards that can be utilized annually to offset future taxable income.

Stock Based Awards
Stock Based Awards

8. Stock Based Awards

The Company’s 2009 Stock Incentive Plan (“2009 Plan”) is administered by the Board of Directors and Compensation Committee, which have the authority to designate participants and determine the number and type of awards to be granted and any other terms or conditions of the awards. Options generally vest over a four-year period and expire ten years from the date of grant. Restricted stock units generally vest over a three-year period. Certain stock-based awards provide for accelerated vesting if there is a change in control. On May 24, 2012, the Company’s stockholders approved an amendment to the 2009 Plan that increased the shares available to grant under the plan by 1,400,000 shares, established a maximum option term, eliminated certain liberal share recycling provisions, set a ratio so that the aggregate number of shares available for issuance under the 2009 Plan will be reduced by one and sixty-two hundredths (1.62) shares for each share delivered in settlement of any award of Restricted Stock, Restricted Stock Units or other stock based awards and one share for each share delivered in settlement of an Option or a Stock Appreciation Right, and removed the provision that allows our board of directors to re-price underwater awards without stockholder approval. There were 1,743,474 shares available for grant under the 2009 Plan as of June 30, 2012.

The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of stock awards. The Company estimates the expected volatility of its common stock at the date of grant based on the historical volatility of comparable public companies over the option’s expected term as well as its own stock price volatility since the Company’s IPO. The Company estimates expected term based on historical exercise activity and giving consideration to the contractual term of the options, vesting schedules, employee turnover, and expectation of employee exercise behavior. The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable

 

future. The risk-free rate for periods within the estimated life of the stock award is based on the U.S. Treasury yield curve in effect at the time of grant. Historical employee turnover data is used to estimate pre-vesting stock awards forfeiture rates. The compensation expense is amortized on a straight-line basis over the requisite service period of the stock award, which is generally four years for options and three years for restricted stock units.

 

The Company used the following assumptions to apply the Black-Scholes option-pricing model:

 

                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2012   2011   2012
Expected dividend yield   0.00%   0.00%   0.00%   0.00%

Risk-free interest rate

  1.73%   0.77%   1.73% - 2.28%   0.77% - 0.87%
Expected term (in years)   5.56 - 6.25   5.56 - 6.25   5.56 - 6.25   5.56 - 6.25
Volatility   60%   55%   60%   55% - 60%

 

The following table summarizes stock option activity, including performance-based options:

 

                                 
    Number of
Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2012

    2,626,260     $ 22.34       7.4     $ 44,093,090  
                           

 

 

 

Granted

    668,166       36.43                  

Exercised

    (181,879     11.07             $ 1,141,019  
                           

 

 

 

Forfeited

    (128,770     30.46                  
   

 

 

   

 

 

                 

Outstanding, June 30, 2012

    2,983,777     $ 25.83       7.5     $ 25,950,580  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2011

    1,100,792     $ 9.54       5.5     $ 32,040,375  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at June 30, 2012

    1,310,101     $ 15.09       5.7     $ 22,454,602  
   

 

 

   

 

 

   

 

 

   

 

 

 

The aggregate intrinsic value was calculated based on the positive differences between the fair value of the Company’s common stock on December 31, 2011, of $38.55 and $30.52 per share on June 30, 2012, or at time of exercise, and the exercise price of the options.

The weighted average grant date fair value of stock options issued or modified was $22.42 per share for the year ended December 31, 2011, and $19.80 for the six months ended June 30, 2012.

Of the total stock options issued subject to the plans, certain stock options have performance-based vesting. These performance-based options granted during 2004 and 2007 were granted at-the-money, contingently vest over a period of two to four years depending upon the nature of the performance goal, and have a contractual life of ten years.

 

 

The performance-based stock option activity is summarized below:

 

                                 
    Number
of Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2012

    453,432     $ 1.25       3.6     $ 16,859,614  
                           

 

 

 

Granted

    —                            

Exercised

    10,000                          

Forfeited

    —                            
   

 

 

   

 

 

                 

Outstanding, June 30, 2012

    443,432     $ 1.25       3.1     $ 12,979,275  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2011

    453,432     $ 1.25       3.6     $ 16,859,614  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at June 30, 2012

    443,432     $ 1.25       3.1     $ 12,979,275  
   

 

 

   

 

 

   

 

 

   

 

 

 

The aggregate intrinsic value was calculated based on the positive differences between the estimated fair value of the Company’s common stock on December 31, 2011, of $38.55 per share, and $30.52 per share on June 30, 2012, or at the time of exercise, and the exercise price of the options.

During the three and six months ended June 30, 2012, the Company granted 320,308 and 467,866 restricted stock units, respectively, containing time-based vesting conditions which lapse over a three year period. Upon vesting, the restricted stock units entitle the holder to receive one share of common stock for each restricted stock unit. As of June 30, 2012, the Company estimates that 376,241 shares of restricted stock units with an intrinsic value of approximately $12,457,000 and a weighted average remaining contractual term of 2.9 years will ultimately vest.

 

The following table summarizes restricted stock unit activity:

 

                 
    Number of Shares
Underlying Restricted
Stock Units
    Weighted Average
Grant Date
Fair Value
 

Unvested as of January 1, 2012

    —       $ —    

Restricted stock units granted

    467,866       33.17  

Restricted stock units vested

    —         —    

Restricted stock units forfeited

    (5,721     38.02  
   

 

 

         

Unvested as of June 30, 2012

    462,145     $ 33.11  
   

 

 

         

 

The Company recognized stock based compensation expense within the accompanying condensed consolidated statements of operations as summarized in the following table:

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Cost of revenue

  $ 82,523     $ 107,789     $ 171,575     $ 214,970  

Research and development

    393,511       574,452       673,628       1,156,167  

Sales and marketing

    619,508       900,724       1,182,043       1,850,669  

General and administrative

    1,155,581       1,505,606       1,969,371       2,851,201  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2,251,123     $ 3,088,571     $ 3,996,617     $ 6,073,007  
   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2012, there was approximately $38,723,000 of total unrecognized share-based compensation cost, net of estimated forfeitures, related to unvested stock awards which are expected to be recognized over a weighted average period of 2.9 years. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.

Commitments and Contingencies
Commitments and Contingencies

9. Commitments and Contingencies

Operating Leases — The Company has operating lease agreements for offices in Massachusetts, Hungary, The Netherlands, Australia, the United Kingdom, Japan, and India that expire in 2012 through 2023.

 

In April 2012, the Company entered into a lease for a new corporate headquarters located in Boston, Massachusetts. The landlord is obligated to rehabilitate the existing building and the Company expects that the lease term will begin in February 2013 and extend through May 2023. The aggregate amount of minimum lease payments to be made over the term of the lease is approximately $41.3 million. Pursuant to the terms of the lease, the landlord is responsible for making certain improvements to the leased space up to an agreed upon cost to the landlord. Any excess costs for these improvements will be billed by the landlord to the Company as additional rent. The Company estimates these excess costs to be approximately $2.5 million. The lease required a security deposit of approximately $3.3 million in the form of an irrevocable standby letter of credit which is collateralized by a bank deposit in the amount of approximately $3.5 million or 105 percent of the security deposit. The security deposit is classified as restricted cash. The lease includes an option to extend the original term of the lease for two successive five year periods

Rent expense under all leases was approximately $799,000 and $797,000 for the three months ended June 30, 2011 and 2012, respectively, and $1,460,000 and $1,555,000 for the six months ended June 30, 2011 and 2012, respectively. The Company records rent expense on a straight-line basis for leases with scheduled escalation clauses or free rent periods.

The Company also enters into hosting services agreements with third-party data centers and internet service providers that are subject to annual renewal. Hosting fees incurred under these arrangements aggregated approximately $428,000 and $632,000 for the three months ended June 30, 2011 and 2012, respectively and $924,000 and $1,386,000 for the six months ended June 30, 2011 and 2012, respectively.

 

Future minimum lease payments under non-cancelable operating leases including one year commitments associated with the Company’s hosting services arrangements are approximately as follows at June 30, 2012:

 

         

Years Ending December 31

     

2012 (Six months ending December 31)

  $ 2,763,000  

2013

    3,928,000  

2014

    5,389,000  

2015

    5,185,000  

2016

    5,316,000  

Thereafter

    28,395,000  
   

 

 

 

Total minimum lease payments

  $ 50,976,000  
   

 

 

 

The future minimum lease payments under the non-cancelable operating leases above include commitments associated with the Company’s future corporate headquarters located in Boston, Massachusetts (see note 10).

        Litigation — On September 8, 2010, 01 Communique Laboratory, Inc., or 01, filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court for the Eastern District of Virginia (Civil Action No. 1:10cv1007). The Company received service of the complaint on September 10, 2010. The complaint alleged that the Company infringed U.S. Patent No. 6,928,479, which allegedly is owned by 01 and has claims directed to a particular application or system for providing a private communication portal from one computer to a second computer. The complaint sought damages in an unspecified amount and injunctive relief. On April 1, 2011, the U.S. District Court for the Eastern District of Virginia granted the Company’s motion for summary judgment of non-infringement and issued a written order regarding this decision on May 4, 2011. On May 13, 2011, 01 filed a notice of appeal appealing the court’s ruling granting summary judgment. The U.S. Court of Appeals for the Federal Circuit heard oral argument regarding 01’s appeal of the summary judgment ruling on February 6, 2012. At this time the Company does not believe that a loss is probable and remains unable to reasonably estimate a possible loss or range of loss associated with this litigation.

 

On November 3, 2010, Gemini IP LLC, or Gemini, filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court for the Eastern District of Texas (Civil Action No. 4:07-cv-521). The Company received service of the complaint on November 10, 2010. The complaint alleged that the Company infringed U.S. Patent No. 6,117,932, which allegedly is owned by Gemini and has claims related to a system for operating an IT helpdesk. The complaint sought damages in an unspecified amount and injunctive relief. On April 25, 2011, the Company and Gemini entered into a License Agreement which granted the Company a fully-paid license that covers the patent at issue in the action and mutually released each party from all claims. The Company paid Gemini a one-time licensing fee of $1,250,000 in connection with the License Agreement. As a result, the action was dismissed by the court on May 23, 2011.

The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s consolidated financial statements.

Summary of Significant Accounting Policies (Policies)

Principles of Consolidation — The accompanying condensed consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Unaudited Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited and have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read along with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 24, 2012. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2011 and June 30, 2012, marketable securities consisted of U.S. government agency securities that have remaining maturities within two years and have an aggregate amortized cost of $95,051,808 and $100,016,438 and an aggregate fair value of $95,040,045 and $100,015,400, including $102,552 and $67,507 of unrealized gains and $114,315 and $68,545 of unrealized losses, respectively.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its LogMeIn premium services, the licensing of its Ignition for iPhone, iPad, and Android software products, and from the licensing of its RemotelyAnywhere software and its related maintenance.

Revenue from the Company’s LogMeIn premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to five years, but are generally one year in duration. The Company’s software cannot be run on another entity’s hardware nor do customers have the right to take possession of the software and use it on their own or another entity’s hardware.

Revenue from the sales of the Company’s Ignition for iPhone, iPad and Android software products, which are sold as a perpetual license, is recognized when there is persuasive evidence of an arrangement, the product has been provided to the customer, the collection of the fee is probable, and the amount of fees to be paid by the customer is fixed or determinable.

        The Company’s multi-element arrangements typically include subscription and professional services, which include development services. The Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis as the services are not sold by any other vendor and the customer would not be able to resell such services. As a result, the deliverables within these arrangements do not qualify for treatment as separate units of accounting. Accordingly, the Company accounts for fees received under these multi-element arrangements as a single unit of accounting and recognizes the entire arrangement consideration ratably over the term of the related agreement, or the customer life, commencing when all significant performance obligations have been delivered and when all revenue recognition criteria have been met.

Revenues are reported net of applicable sales and use tax, value-added tax, and other transaction taxes imposed on the related transaction.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, restricted cash, and accounts receivable. Cash, cash equivalents, and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

As of December 31, 2011, and June 30, 2012, no customers accounted for more than 10% of accounts receivable, and no customers accounted for more than 10% of revenue for the three and six months ended June 30, 2011 or 2012.

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill, but performs an annual impairment test of goodwill on the last day of its fiscal year and whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. Through June 30, 2012, no impairments have occurred.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their estimated fair values at the date of acquisition. Intangible assets are amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. The Company’s intangible assets have estimated useful lives which range from one to seven years.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations. The Company had foreign currency losses of approximately $152,000 and $261,000 for the three and six months ended June 30, 2011, respectively, and foreign currency losses of approximately $269,000 and $506,000 for the three and six months ended June 30, 2012, respectively.

Stock-Based Compensation — Stock-based compensation is measured based upon the grant date fair value and recognized as an expense on a straight-line basis in the financial statements over the vesting period of the award for those awards expected to vest. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of stock awards. The Company uses the with-or-without method to determine when it will realize excess tax benefits from stock based compensation. Under this method, the Company will realize these excess tax benefits only after it realizes the tax benefits of net operating losses from operations.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss carry-forwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized, and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through December 31, 2011 and June 30, 2012, the Company has provided a liability for approximately $198,000 and $218,000 for uncertain tax positions, respectively. These uncertain tax positions would impact the Company’s effective tax rate if recognized.

Segment Data — Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision making group, in making decisions regarding resource allocation and assessing performance. The Company, which uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

The Company has entered into agreements with certain customers that require the Company to indemnify the customer against certain claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited. As of the date hereof, the Company does not expect any material claims related to these indemnification obligations.

Through January 1, 2012, the Company had not experienced any losses related to these indemnification obligations, and no claims with respect thereto were outstanding. On March 15, 2012, the Company received an indemnification claim from a customer related to a third-party claim that the customer’s use of a LogMeIn service infringes the third party’s patent. The Company believes that a risk of material loss related to this indemnification obligation is remote.

Net Income Per Share — Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding during the period and the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

 

The Company excluded 795,175 and 1,587,310 of options to purchase common shares as well as 0 and 141,837 of unvested restricted stock units during the three months ended June 30, 2011 and 2012, respectively, and 795,175 and 1,586,910 of options to purchase common shares and 0 and 940 of unvested restricted stock units during the six months ended June 30, 2011 and 2012, respectively, because they had an anti-dilutive impact:

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Options to purchase common shares

    795,175       1,587,310       795,175       1,586,910  

Unvested restricted stock units

    —         141,837       —         940  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total options and unvested restricted stock units

    795,175       1,729,147       795,175       1,587,850  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Basic and diluted net income per share was calculated as follows:

 

                 
    Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2011  

Basic:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,116,686       24,023,018  
   

 

 

   

 

 

 

Net income, basic

  $ 0.11     $ 0.11  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,116,686       24,023,018  

Add: Options to purchase common shares

    1,053,003       1,095,405  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,169,689       25,118,423  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.11     $ 0.10  
   

 

 

   

 

 

 
     
    Three Months Ended     Six Months Ended  
    June 30, 2012     June 30, 2012  

Basic:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,677,893       24,625,851  
   

 

 

   

 

 

 

Net income, basic

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,677,893       24,625,851  

Add: Common stock equivalents

    689,334       735,099  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,367,227       25,360,950  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 

Recently Issued Accounting Pronouncements — In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in goodwill accounting standard. The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements (as defined in Note 3). The Company adopted this ASU and it did not have a material effect on its financial position, results of operations or cash flows.

Summary of Significant Accounting Policies (Tables)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Revenues:

                               

United States

  $ 18,782,830     $ 21,887,423     $ 35,999,433     $ 43,083,757  

United Kingdom

    2,767,445       3,086,635       5,367,393       6,095,188  

International - all other

    7,547,681       8,822,523       14,769,909       17,305,567  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 29,097,956     $ 33,796,581     $ 56,136,735     $ 66,484,512  
   

 

 

   

 

 

   

 

 

   

 

 

 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Options to purchase common shares

    795,175       1,587,310       795,175       1,586,910  

Unvested restricted stock units

    —         141,837       —         940  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total options and unvested restricted stock units

    795,175       1,729,147       795,175       1,587,850  
   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income per share was calculated as follows:

 

                 
    Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2011  

Basic:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,116,686       24,023,018  
   

 

 

   

 

 

 

Net income, basic

  $ 0.11     $ 0.11  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 2,682,324     $ 2,617,077  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,116,686       24,023,018  

Add: Options to purchase common shares

    1,053,003       1,095,405  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,169,689       25,118,423  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.11     $ 0.10  
   

 

 

   

 

 

 
     
    Three Months Ended     Six Months Ended  
    June 30, 2012     June 30, 2012  

Basic:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding, basic

    24,677,893       24,625,851  
   

 

 

   

 

 

 

Net income, basic

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 

Diluted:

               

Net income

  $ 575,677     $ 651,917  
   

 

 

   

 

 

 

Weighted average common shares outstanding

    24,677,893       24,625,851  

Add: Common stock equivalents

    689,334       735,099  
   

 

 

   

 

 

 

Weighted average common shares outstanding, diluted

    25,367,227       25,360,950  
   

 

 

   

 

 

 

Net income, diluted

  $ 0.02     $ 0.03  
   

 

 

   

 

 

 
Fair Value of Financial Instruments (Tables)

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value:

 

                                 
    Basis of Fair Value Measurements  
    Balance     Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Balance at December 31, 2011

                               

Cash equivalents — money market funds

  $ 53,839,536     $ 53,839,536     $ —       $ —    

Cash equivalents — bank deposits

    5,032,135       —         5,032,135       —    

Short-term marketable securities — U.S. government agency securities

    95,040,045       85,040,105       9,999,940       —    

Contingent consideration liability

    212,536       —         —         212,536  

Balance at June 30, 2012

                               

Cash equivalents — money market funds

    49,285,842       49,285,842       —         —    

Cash equivalents — bank deposits

    5,034,637       —         5,034,637       —    

Short-term marketable securities — U.S. government agency securities

    100,015,400       95,014,146       5,001,254       —    

Contingent consideration liability

    234,568       —         —         234,568  
         
    Six Months
Ended
June 30,
2012
 

Balance beginning of period

  $ 212,536  

Transfers into Level 3

    —    

Payments

    —    

Change in fair value (included within research and development expense)

    22,032  
   

 

 

 

Balance end of period

  $ 234,568  
   

 

 

 
Acquisitions (Tables)

The purchase price was allocated as follows:

 

         
    Amount  

Tangible assets

  $ 7,595  

Technology and know-how

    3,250,000  

Goodwill

    6,934,966  
   

 

 

 

Total purchase price

    10,192,561  

Liability for contingent consideration

    (192,561
   

 

 

 

Cash paid

  $ 10,000,000  
   

 

 

 

The purchase price was allocated as follows:

 

         
    Amount  

Cash

  $ 482,000  

Current assets

    126,000  

Other assets

    19,000  

Deferred revenue

    (424,000

Other liabilities

    (107,000

Completed technology

    1,090,000  

Trade name and trademark

    30,000  

Customer relationships

    2,760,000  

Non-compete agreements

    160,000  

Goodwill

    11,178,000  
   

 

 

 

Total purchase price

  $ 15,314,000  
   

 

 

 
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the six months ended June 30, 2012, are as follows:

 

         

Balance, December 31, 2011

  $ 7,258,743  

Goodwill related to the acquisition of Bold

    11,178,000  

Foreign currency translation adjustments

    3,749  
   

 

 

 

Balance, June 30, 2012

  $ 18,440,492  
   

 

 

 
                                                         
          December 31, 2011     June 30, 2012  
    Estimated
Useful Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Identifiable intangible assets:

                                                       

Trade name and trademark

    1 -5 years     $ 635,506     $ 635,506     $ —       $ 665,344       651,194       14,150  

Customer base

    5 -7 years       1,003,068       1,003,068       —         3,750,573       1,219,163       2,531,410  

Domain names

    5 years       222,826       51,499       171,327       495,862       85,648       410,214  

Software

    4 years       298,977       298,977       —         298,977       298,977       —    

Technology

    3 -6 years       4,475,281       1,831,276       2,644,005       5,592,195       2,467,063       3,125,132  

Non-compete agreements

    5 years       0       0       —         159,189       4,241       154,948  

Internally developed software

    3 years       539,612       94,332       445,280       834,496       209,200       625,296  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $ 7,175,270     $ 3,914,658     $ 3,260,612     $ 11,796,636       4,935,486       6,861,150  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

Amortization Expense (Years Ending December 31)

  Amount  

2012 (Six months ending December 31)

  $ 1,057,150  

2013

    2,122,385  

2014

    1,596,018  

2015

    803,342  

2016

    585,857  

Thereafter

    696,398  
   

 

 

 

Total

  $ 6,861,150  
   

 

 

 
Accrued Expenses (Tables)
Accrued Expenses

Accrued expenses consisted of the following:

 

                 
    December 31,
2011
    June 30,
2012
 

Marketing programs

  $ 1,770,611     $ 2,671,289  

Payroll and payroll related

    5,333,430       6,312,734  

Professional fees

    795,720       1,071,002  

Other accrued expenses

    2,573,044       3,041,719  
   

 

 

   

 

 

 

Total accrued expenses

  $ 10,472,805     $ 13,096,744  
   

 

 

   

 

 

 
Stock Based Awards (Tables)

The Company used the following assumptions to apply the Black-Scholes option-pricing model:

 

                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2012   2011   2012
Expected dividend yield   0.00%   0.00%   0.00%   0.00%

Risk-free interest rate

  1.73%   0.77%   1.73% - 2.28%   0.77% - 0.87%
Expected term (in years)   5.56 - 6.25   5.56 - 6.25   5.56 - 6.25   5.56 - 6.25
Volatility   60%   55%   60%   55% - 60%

The following table summarizes stock option activity, including performance-based options:

 

                                 
    Number of
Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2012

    2,626,260     $ 22.34       7.4     $ 44,093,090  
                           

 

 

 

Granted

    668,166       36.43                  

Exercised

    (181,879     11.07             $ 1,141,019  
                           

 

 

 

Forfeited

    (128,770     30.46                  
   

 

 

   

 

 

                 

Outstanding, June 30, 2012

    2,983,777     $ 25.83       7.5     $ 25,950,580  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2011

    1,100,792     $ 9.54       5.5     $ 32,040,375  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at June 30, 2012

    1,310,101     $ 15.09       5.7     $ 22,454,602  
   

 

 

   

 

 

   

 

 

   

 

 

 

The performance-based stock option activity is summarized below:

 

                                 
    Number
of Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2012

    453,432     $ 1.25       3.6     $ 16,859,614  
                           

 

 

 

Granted

    —                            

Exercised

    10,000                          

Forfeited

    —                            
   

 

 

   

 

 

                 

Outstanding, June 30, 2012

    443,432     $ 1.25       3.1     $ 12,979,275  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2011

    453,432     $ 1.25       3.6     $ 16,859,614  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at June 30, 2012

    443,432     $ 1.25       3.1     $ 12,979,275  
   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes restricted stock unit activity:

 

                 
    Number of Shares
Underlying Restricted
Stock Units
    Weighted Average
Grant Date
Fair Value
 

Unvested as of January 1, 2012

    —       $ —    

Restricted stock units granted

    467,866       33.17  

Restricted stock units vested

    —         —    

Restricted stock units forfeited

    (5,721     38.02  
   

 

 

         

Unvested as of June 30, 2012

    462,145     $ 33.11  
   

 

 

         

The Company recognized stock based compensation expense within the accompanying condensed consolidated statements of operations as summarized in the following table:

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2012     2011     2012  

Cost of revenue

  $ 82,523     $ 107,789     $ 171,575     $ 214,970  

Research and development

    393,511       574,452       673,628       1,156,167  

Sales and marketing

    619,508       900,724       1,182,043       1,850,669  

General and administrative

    1,155,581       1,505,606       1,969,371       2,851,201  
   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2,251,123     $ 3,088,571     $ 3,996,617     $ 6,073,007  
   

 

 

   

 

 

   

 

 

   

 

 

 
Commitments and Contingencies (Tables)
Schedule of minimum future lease payments receivable

Future minimum lease payments under non-cancelable operating leases including one year commitments associated with the Company’s hosting services arrangements are approximately as follows at June 30, 2012:

 

         

Years Ending December 31

     

2012 (Six months ending December 31)

  $ 2,763,000  

2013

    3,928,000  

2014

    5,389,000  

2015

    5,185,000  

2016

    5,316,000  

Thereafter

    28,395,000  
   

 

 

 

Total minimum lease payments

  $ 50,976,000  
   

 

 

 
Summary of Significant Accounting Policies (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Schedule by Geographic Areas
 
 
 
 
Revenues
$ 33,796,581 
$ 29,097,956 
$ 66,484,512 
$ 56,136,735 
United States [Member]
 
 
 
 
Schedule by Geographic Areas
 
 
 
 
Revenues
21,887,423 
18,782,830 
43,083,757 
35,999,433 
United Kingdom [Member]
 
 
 
 
Schedule by Geographic Areas
 
 
 
 
Revenues
3,086,635 
2,767,445 
6,095,188 
5,367,393 
International All Other Segments [Member]
 
 
 
 
Schedule by Geographic Areas
 
 
 
 
Revenues
$ 8,822,523 
$ 7,547,681 
$ 17,305,567 
$ 14,769,909 
Summary of Significant Accounting Policies (Details 1)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Summary of stock option activity
 
 
 
 
Options to purchase common shares
1,587,310 
795,175 
1,586,910 
795,175 
Unvested restricted stock units
141,837 
 
940 
 
Total options and unvested restricted stock units
1,729,147 
795,175 
1,587,850 
795,175 
Summary of Significant Accounting Policies (Details2) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Basic:
 
 
 
 
Net income
$ 575,677 
$ 2,682,324 
$ 651,917 
$ 2,617,077 
Weighted average common shares outstanding, basic
24,677,893 
24,116,686 
24,625,851 
24,023,018 
Net income, basic
$ 0.02 
$ 0.11 
$ 0.03 
$ 0.11 
Diluted:
 
 
 
 
Net income
$ 575,677 
$ 2,682,324 
$ 651,917 
$ 2,617,077 
Weighted average common shares outstanding
24,677,893 
24,116,686 
24,625,851 
24,023,018 
Add: Common stock equivalents/Options to purchase common shares
689,334 
1,053,003 
735,099 
1,095,405 
Weighted average common shares outstanding, diluted
25,367,227 
25,169,689 
25,360,950 
25,118,423 
Net income, diluted
$ 0.02 
$ 0.11 
$ 0.03 
$ 0.10 
Summary of Significant Accounting Policies (Details Textual) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Customer
Jun. 30, 2011
Customer
Jun. 30, 2012
Customer
Jun. 30, 2011
Customer
Dec. 31, 2011
Customer
Summary of Significant Accounting Policies (Textual) [Abstract]
 
 
 
 
 
Marketable securities, maturities remaining
 
 
2 years 
 
 
Marketable securities, amortized cost
$ 100,016,438 
 
$ 100,016,438 
 
$ 95,051,808 
Marketable securities, fair value
100,015,400 
 
100,015,400 
 
95,040,045 
Marketable securities, unrealized gains
67,507 
 
67,507 
 
102,552 
Marketable securities, unrealized losses
68,545 
 
68,545 
 
114,315 
Revenue, subscription period, Minimum
 
 
1 month 
 
 
Revenue, subscription period, Maximum
 
 
5 years 
 
 
Average subscription period
 
 
1 year 
 
 
Accounts receivable, customers accounted description
more than 10% of accounts receivable 
 
more than 10% of accounts receivable 
 
more than 10% of accounts receivable 
Accounts receivable, number of customers accounted
 
 
Accounts receivable, percentage accounted
10.00% 
 
10.00% 
 
10.00% 
Revenue, customers accounted description
more than 10% of revenue 
more than 10% of revenue 
more than 10% of revenue 
more than 10% of revenue 
 
Revenue, number of customers accounted
 
Revenue, percentage accounted
10.00% 
10.00% 
10.00% 
10.00% 
 
Goodwill impairments
 
 
 
 
Foreign currency loss
269,000 
152,000 
506,000 
261,000 
 
Income tax liability
$ 218,000 
 
$ 218,000 
 
$ 198,000 
Options to purchase common shares
1,587,310 
795,175 
1,586,910 
795,175 
 
Unvested restricted stock units
141,837 
940 
 
Maximum [Member]
 
 
 
 
 
Intangible assets, estimated life
 
 
7 years 
 
 
Minimum [Member]
 
 
 
 
 
Intangible assets, estimated life
 
 
1 year 
 
 
Fair Value of Financial Instruments (Details) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Summary of Company's financial assets carried at fair value
 
 
Short-term marketable securities - U.S. government agency securities
$ 100,015,400 
$ 95,040,045 
Contingent consideration liability
234,568 
212,536 
Recurring [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Contingent consideration liability
234,568 
212,536 
Recurring [Member] |
Bank Deposits [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Cash equivalents
5,034,637 
5,032,135 
Recurring [Member] |
U.S. Government Agency Securities [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Short-term marketable securities - U.S. government agency securities
100,015,400 
95,040,045 
Recurring [Member] |
Money Market Funds [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Cash equivalents
49,285,842 
53,839,536 
Recurring [Member] |
Quoted Prices in Active Markets for Identical Items (Level 1) [Member] |
U.S. Government Agency Securities [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Short-term marketable securities - U.S. government agency securities
95,014,146 
85,040,105 
Recurring [Member] |
Quoted Prices in Active Markets for Identical Items (Level 1) [Member] |
Money Market Funds [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Cash equivalents
49,285,842 
53,839,536 
Recurring [Member] |
Significant Other Observable Inputs (Level 2) [Member] |
Bank Deposits [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Cash equivalents
5,034,637 
5,032,135 
Recurring [Member] |
Significant Other Observable Inputs (Level 2) [Member] |
U.S. Government Agency Securities [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Short-term marketable securities - U.S. government agency securities
5,001,254 
9,999,940 
Recurring [Member] |
Significant Unobservable Inputs (Level 3) [Member]
 
 
Summary of Company's financial assets carried at fair value
 
 
Contingent consideration liability
$ 234,568 
$ 212,536 
Fair Value of Financial Instruments (Details1) (USD $)
6 Months Ended
Jun. 30, 2012
Reconciliation of beginning and ending Level 3 liability
 
Beginning Balance
$ 212,536 
Transfers into Level 3
   
Payments
   
Change in fair value (included within research and development expense)
22,032 
Ending Balance
$ 234,568 
Fair Value of Financial Instruments (Details Textual)
6 Months Ended
Jun. 30, 2012
Fair Value of Financial Instruments (Textual) [Abstract]
 
Fair value, discount rate
13.00% 
Fair value, weighted probability
76.00% 
Acquisitions (Details) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Jun. 30, 2012
Pachube [Member]
Jul. 19, 2011
Pachube [Member]
Purchase price allocation
 
 
 
 
Tangible assets
 
 
$ 7,595 
 
Technology and know-how
 
 
3,250,000 
 
Goodwill
 
 
6,934,966 
 
Total purchase price
 
 
10,192,561 
 
Liability for contingent consideration
(234,568)
(212,536)
(192,561)
 
Cash paid
 
 
$ 10,000,000 
$ 10,000,000 
Acquisitions (Details 1) (Bold [Member], USD $)
Jun. 30, 2012
Purchase price allocation
 
Cash
$ 482,000 
Current assets
126,000 
Other assets
19,000 
Deferred revenue
(424,000)
Other liabilities
(107,000)
Goodwill
11,178,000 
Total purchase price
15,314,000 
Completed technology [Member]
 
Purchase price allocation
 
Business acquisition, Intangible assets
1,090,000 
Trade name and trademark [Member]
 
Purchase price allocation
 
Business acquisition, Intangible assets
30,000 
Customer relationships [Member]
 
Purchase price allocation
 
Business acquisition, Intangible assets
2,760,000 
Non-compete agreements [Member]
 
Purchase price allocation
 
Business acquisition, Intangible assets
$ 160,000 
Acquisitions (Details Textual) (USD $)
3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended 12 Months Ended 3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2012
Jun. 30, 2012
Jul. 31, 2012
Dec. 31, 2011
Jun. 30, 2012
Pachube [Member]
Jun. 30, 2012
Pachube [Member]
Dec. 31, 2011
Pachube [Member]
Jul. 19, 2011
Pachube [Member]
Jun. 30, 2012
Bold [Member]
Jun. 30, 2012
Bold [Member]
Dec. 31, 2011
Bold [Member]
Jan. 6, 2012
Bold [Member]
Acquisitions (Textual) [Abstract]
 
 
 
 
 
 
 
 
 
 
 
 
Initial cash payment
 
 
 
 
$ 10,000,000 
$ 10,000,000 
 
$ 10,000,000 
 
 
 
$ 15,300,000 
Contingent payments
 
 
1,700,000 
 
 
 
 
5,200,000 
 
 
 
1,500,000 
Revenue
 
 
 
 
 
 
1,100,000 
1,900,000 
 
 
Expenses
 
 
 
 
1,700,000 
3,300,000 
 
 
1,400,000 
2,500,000 
 
 
Contingent payment provision to a non-employee shareholder, Minimum
 
 
 
 
 
 
 
 
 
 
 
Contingent payment provision to a non-employee shareholder, Maximum
 
 
 
 
 
267,000 
 
 
 
 
 
 
Contingent liability
234,568 
234,568 
 
212,536 
192,561 
192,561 
 
 
 
 
 
 
Range of contingent payments, Minimum
 
 
 
 
 
 
 
 
Range of contingent payments, Maximum
 
 
 
 
4,898,000 
4,898,000 
 
 
1,500,000 
1,500,000 
 
 
Maturity period for contingent payment
 
 
 
 
 
 
 
 
 
2 years 
 
 
Acquisition-related costs
$ 0 
$ 100,000 
 
 
 
 
$ 324,000 
 
 
 
$ 100,000 
 
Goodwill and Intangible Assets (Details) (USD $)
6 Months Ended
Jun. 30, 2012
Changes in goodwill
 
Balance, December 31, 2011
$ 7,258,743 
Foreign currency translation adjustments
3,749 
Balance, June 30, 2012
18,440,492 
Bold [Member]
 
Changes in goodwill
 
Goodwill related to the acquisition of Bold
$ 11,178,000 
Goodwill and Intangible Assets (Details 1) (USD $)
6 Months Ended
Jun. 30, 2012
Dec. 31, 2011
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
$ 11,796,636 
$ 7,175,270 
Accumulated Amortization
4,935,486 
3,914,658 
Intangibles, net
6,861,150 
3,260,612 
Maximum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
7 years 
 
Minimum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
1 year 
 
Trade name and trademark [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
665,344 
635,506 
Accumulated Amortization
651,194 
635,506 
Intangibles, net
14,150 
 
Trade name and trademark [Member] |
Maximum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
5 years 
 
Trade name and trademark [Member] |
Minimum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
1 year 
 
Customer base [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
3,750,573 
1,003,068 
Accumulated Amortization
1,219,163 
1,003,068 
Intangibles, net
2,531,410 
 
Customer base [Member] |
Maximum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
7 years 
 
Customer base [Member] |
Minimum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
5 years 
 
Domain names [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
495,862 
222,826 
Accumulated Amortization
85,648 
51,499 
Intangibles, net
410,214 
171,327 
Intangible assets, estimated life
5 years 
 
Software [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
298,977 
298,977 
Accumulated Amortization
298,977 
298,977 
Intangible assets, estimated life
4 years 
 
Technology [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
5,592,195 
4,475,281 
Accumulated Amortization
2,467,063 
1,831,276 
Intangibles, net
3,125,132 
2,644,005 
Technology [Member] |
Maximum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
6 years 
 
Technology [Member] |
Minimum [Member]
 
 
Intangible assets
 
 
Intangible assets, estimated life
3 years 
 
Non-compete agreements [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
159,189 
Accumulated Amortization
4,241 
Intangibles, net
154,948 
 
Intangible assets, estimated life
5 years 
 
Internally developed software [Member]
 
 
Intangible assets
 
 
Intangible Assets, Gross Carrying Amount
834,496 
539,612 
Accumulated Amortization
209,200 
94,332 
Intangibles, net
$ 625,296 
$ 445,280 
Intangible assets, estimated life
3 years 
 
Goodwill and Intangible Assets (Details 2) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Future estimated amortization expense
 
 
2012 (Six months ending December 31)
$ 1,057,150 
 
2013
2,122,385 
 
2014
1,596,018 
 
2015
803,342 
 
2016
585,857 
 
Thereafter
696,398 
 
Total
$ 6,861,150 
$ 3,260,612 
Goodwill and Intangible Assets (Details Textual) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Internally developed software
$ 186,676 
$ 75,575 
$ 294,884 
$ 137,326 
Amortization of acquired intangible assets
516,787 
112,658 
1,025,420 
220,023 
Amount paid by the company to acquire domain names
 
 
566,442 
137,519 
Maximum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
7 years 
 
Minimum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
1 year 
 
Technology [Member] |
Bold [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets acquired
1,090,000 
 
1,090,000 
 
Technology [Member] |
Maximum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
6 years 
 
Technology [Member] |
Minimum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
3 years 
 
Trade name and trademark [Member] |
Bold [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets acquired
30,000 
 
30,000 
 
Trade name and trademark [Member] |
Maximum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
5 years 
 
Trade name and trademark [Member] |
Minimum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
1 year 
 
Customer base [Member] |
Bold [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets acquired
2,760,000 
 
2,760,000 
 
Customer base [Member] |
Maximum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
7 years 
 
Customer base [Member] |
Minimum [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
5 years 
 
Non-compete agreements [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
5 years 
 
Non-compete agreements [Member] |
Bold [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets acquired
160,000 
 
160,000 
 
Domain names [Member]
 
 
 
 
Goodwill and Intangible Assets (Textual) [Abstract]
 
 
 
 
Intangible assets, estimated life
 
 
5 years 
 
Amount paid by the company to acquire domain names
$ 271,558 
$ 271,558 
 
 
Accrued Expenses (Details) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Accrued Expenses
 
 
Marketing programs
$ 2,671,289 
$ 1,770,611 
Payroll and payroll related
6,312,734 
5,333,430 
Professional fees
1,071,002 
795,720 
Other accrued expenses
3,041,719 
2,573,044 
Total accrued expenses
$ 13,096,744 
$ 10,472,805 
Income Taxes (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Dec. 31, 2011