1.	Nature of the Business

LogMeIn, Inc. (the “Company”) develops and markets a suite of remote access, remote support, and collaboration solutions that provide instant, secure connections between Internet enabled devices. The Company’s product line includes Gravity ^TM, LogMeIn Free ^®, LogMeIn Pro^®, LogMeIn ^® Central ^TM, LogMeIn Rescue ^®, LogMeIn^® Rescue+Mobile^TM, LogMeIn Backup ^®, LogMeIn ^® Ignition^TM , the LogMeIn App, LogMeIn Hamachi^®, join.me ^TM, Pachube ^TM BoldChat, 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.

 

2.	Summary of Significant Accounting Polices

Principles of Consolidation — The accompanying 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”).

Use of Estimates — The preparation of 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.

Cash Equivalents — Cash equivalents consist of highly liquid investments with an original or remaining maturity of less than three months at the date of purchase. Cash equivalents consist of investments in money market funds which primarily invest in U.S. Treasury obligations. Cash equivalents are stated at cost, which approximates fair value.

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 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, 2010 and 2011, marketable securities consisted of U.S. government agency securities that have remaining maturities within two years and have an aggregate amortized cost of $90,119,605 and $95,051,808 and an aggregate fair value of $90,144,484 and $95,040,045, including $65,136 and $102,552 of unrealized gains and $40,257 and $114,315 of unrealized losses.

Restricted Cash — As of December 31, 2010 and 2011, the Company had a letter of credit of $125,000 from a bank. The letter of credit was issued in lieu of a security deposit on its Woburn, Massachusetts office lease. The letter of credit is secured by a certificate of deposit in the same amount which is held at the same financial institution. As of December 31, 2010 and 2011, the Company had a security deposit with a bank related to its Budapest, Hungary office lease in the amount of 170,295 Euro (which totaled $225,481 and $219,988 at December 31, 2010 and 2011, respectively). In February 2011, the Company entered into a lease for new office space for its Australian office which required a bank guarantee in the amount of $24,375 AUD (which totaled $24,808 at December 31, 2011). Such amounts are classified as long-term restricted cash in the accompanying consolidated balance sheets.

Accounts Receivable — The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue.

 

Activity in the allowance for doubtful accounts was as follows:

 

		December 31,
		2009				2010				2011
Balance, beginning		$	69,266			$	83,116			$	110,751
Provision for bad debt			115,000				87,500				85,000
Uncollectible accounts written off			101,150				59,865				87,009
Balance, ending		$	83,116			$	110,751			$	108,742

Property and Equipment — Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of income. Expenditures for maintenance and repairs are charged to expense as incurred.

Estimated useful lives of assets are as follows:

 

Computer equipment and software			2 —3 years
Office equipment			3 years
Furniture and fixtures			5 years
Leasehold Improvements			Shorter of lease term or estimated useful life

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired related to the Pachube acquisition in July 2011 (see note 4) and the Applied Networking acquisition in July 2006. 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. As of December 31,2011, the fair value of the Company as a whole significantly exceeds the carrying amount of the Company. Through December 31, 2011, no impairments have occurred.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized using the straight-line method over their estimated useful lives, which range from three to five years.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through December 31, 2011, no impairments have occurred.

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 the licensing of the Company’s 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 four 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 product, which is 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 the fees to be paid by the customer is fixed and 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 the significant performance obligation have been delivered and when all the 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.

Deferred Revenue — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for products and services in advance on a monthly and annual basis. Deferred revenue to be recognized in the next twelve months is included in current deferred revenue, and the remaining amounts are included in long-term deferred revenue in the consolidated balance sheets.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, short term 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, no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10% or more of revenue for the years ended December 31, 2009, 2010, or 2011. As of December 31, 2010, one customer accounted for 14% of accounts receivable.

Legal costs — Legal expenditures are expensed as incurred.

Research and Development — Research and development expenditures are expensed as incurred.

In June 2009, the Company received approval of a grant from the Hungarian government which reimburses it for a portion of its Hungarian research and development related costs for a three year period, beginning in September 2008. These reimbursements are recorded as a reduction of research and development expense and totaled approximately $200,000, $371,000 and $279,000 for the years ended December 31, 2009, 2010, and 2011. The Company does not expect to receive any additional reimbursements related to this grant.

Software Development Costs — The Company has determined that technological feasibility of its software products that are sold as a perpetual license is reached shortly before their introduction to the marketplace. As a result, development costs incurred after the establishment of technological feasibility and before their release to the marketplace have not been material and such costs have been expensed as incurred.

The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a three year period in the expense category to which the software relates.

 

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 $18,000, $219,000 and $564,000 for the years ended December 31, 2009, 2010 and 2011.

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. As of December 31, 2011, the Company has provided a liability for approximately $198,000 for uncertain tax positions. These uncertain tax positions would impact the Company’s effective tax rate if recognized.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2009, 2010 and 2011, was approximately $11,717,000, $17,678,000, and $20,458,000 respectively, which consisted primarily of online paid searches, banner advertising, and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of income.

Comprehensive Income — Comprehensive income is the change in stockholders’ equity during a period relating to transactions and other events and circumstances from non-owner sources and currently consists of net income, foreign currency translation adjustments, and unrealized gains and losses, net of tax on available-for-sale securities.

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.

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) and long-lived assets by geography are as follows:

 

		Years Ended December 31,
		2009				2010				2011
Revenues:
United States(1)		$	52,440,000			$	68,960,000			$	79,050,000
United Kingdom			6,525,000				8,871,000				10,652,000
International — all other			15,444,000				23,226,000				29,759,000
Total revenue		$	74,409,000			$	101,057,000			$	119,461,000
Long-lived assets:
United States		$	2,981,000			$	3,894,000			$	3,177,000
Hungary			1,208,000				1,700,000				1,373,000
United Kingdom			425,000				385,000				264,000
International — all other			245,000				219,000				389,000
Total long-lived assets		$	4,859,000			$	6,198,000			$	5,203,000

 

(1)

United States revenue for the years ended December 31, 2009 and 2010 includes $6,007,000 and $9,580,000 in revenue associated with the Intel Agreement.

Net Income (Loss) Attributable to Common Stockholders 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 options to purchase common shares from the assumed exercise of stock options.

The Company used the two-class method to compute net income (loss) per share for the year ended December 31, 2009, because the Company had previously issued securities, other than common stock, that contractually entitled the holders to participate in dividends and earnings of the Company. The two class method requires earnings available to common stockholders for the period, after an allocation of earnings to participating securities, to be allocated between common and participating securities based upon their respective rights to receive distributed and undistributed earnings. The Company’s convertible preferred stock was a participating security as it shared in any dividends paid to common stockholders. Such participating securities were automatically converted to common stock upon the Company’s IPO in July 2009. Basic net income (loss) attributable to common stockholders per share was computed after allocation of earnings to the convertible preferred stock (losses were not allocated) by using the weighted average number common shares outstanding for the period.

The following potential common shares were excluded from the computation of diluted net income (loss) per share attributable to common stockholders because they had an antidilutive impact:

 

		Years Ended December 31,
		2009				2010				2011
Options to purchase common stock			116,900				1,098,775				983,900
Conversion of redeemable convertible preferred stock			12,360,523	(1)			—				—
Total options and conversion of redeemable convertible preferred stock			12,477,423				1,098,775				983,900

 

(1)

The redeemable convertible preferred stock was considered antidilutive for the period prior to the Company’s IPO on July 7, 2009. Subsequent to the conversion it is included in common stock.

 

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

 

		Year Ended December 31, 2010
Basic:
Net income		$	21,098,644
Weighted average common shares outstanding, basic			23,244,479
Net income, basic		$	0.91
Diluted:
Net income		$	21,098,644
Weighted average common shares outstanding			23,244,479
Add: Options to purchase common shares			1,595,426
Weighted average common shares outstanding, diluted			24,839,905
Net income, diluted		$	0.85

 

		Year Ended December 31, 2011
Basic:
Net income		$	5,761,444
Weighted average common shares outstanding, basic			24,175,621
Net income, basic		$	0.24
Diluted:
Net income		$	5,761,444
Weighted average common shares outstanding			24,175,621
Add: Options to purchase common shares			978,978
Weighted average common shares outstanding, diluted			25,154,599
Net income, diluted		$	0.23

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’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third-party patents, copyrights, or trademarks and indemnify against product liability matters. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited.

Through December 31, 2011, the Company had not experienced any losses related to these indemnification obligations, and no claims with respect thereto were outstanding. The Company does not expect any significant claims related to these indemnification obligations generally and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

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 ASU 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 the goodwill accounting standard. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the new ASU to 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. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the effective date of only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-05 is effective for us in our first quarter of fiscal 2012 and should be applied retrospectively. The Company does not expect the adoption of ASU 2011-05 and ASU 2011-12 to have a material impact 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 4). ASU 2011-04 is effective for us in our first quarter of fiscal 2012 and should be applied prospectively. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its financial position, results of operations or cash flows.

 

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, 2010
Cash equivalents — money market funds		$	48,074,441			$	48,074,441			$	—			$	—
Cash equivalents — bank deposits			5,022,089				—				5,022,089				—
Short-term marketable securities — U.S. government agency securities			90,144,484				90,144,484				—				—
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

Bank deposits and certain U.S. government agency securities 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 Pachube. 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 the 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:

 

		Year Ended December 31, 2011
Balance beginning of period		$	—
Transfers into Level 3			192,561
Payments			—
Change in fair value (included within research and development expense)			19,975
Balance end of period		$	212,536

 

4.	Acquisition

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 Pachube service, for an initial cash payment of $10 million plus contingent payments totaling up to $5.2 million. The Pachube service is a cloud-based connectivity and data management platform for the Internet of Things. The Company acquired Pachube to expand its capabilities with embedded devices and enter into the Internet of Things market. The operating results of the acquired Pachube service, of which there was no revenue and $2.7 million of expenses during the year ended December 31, 2011, are included in the consolidated financial statements beginning on the acquisition date.

 

The Pachube 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 assist in determining 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 primarily to research and development expense ratably over the performance period, as it believes it is probable that the criteria will be met.

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 and will be paid on the first and second anniversary of the acquisition. 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, the Company’s service delivery platform, and the ability to leverage existing sales and marketing capacity and customer base with respect to the acquired Pachube 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.

 

5.	Goodwill and Intangible Assets

The changes in the carry amounts of goodwill for the year ended December 31, 2011 include goodwill related to the Pachube acquisition and the impact of foreign currency translation adjustments related to the asset balances that are recorded in non-US currencies.

Changes in goodwill for the year ended December 31, 2011, are as follows:

 

Balance, December 31, 2010		$	615,299
Goodwill related to the acquisition of Pachube			6,934,966
Foreign currency translation adjustments			(291,522	)
Balance, December 31, 2011		$	7,258,743

 

Intangible assets consist of the following:

 

						December 31, 2010												December 31, 2011
		Estimated Useful Life				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Identifiable intangible assets:
Trademark			5 years			$	635,506			$	563,105			$	72,401			$	635,506			$	635,506			$	—
Customer base			5 years				1,003,068				888,791				114,277				1,003,068				1,003,068				—
Domain names			5 years				202,120				10,038				192,082				222,826				51,499				171,327
Software			4 years				298,977				298,977				—				298,977				298,977				—
Technology			4 years				1,361,900				1,361,900				—				1,361,900				1,361,900				—
Technology and know-how			3 years				—				—				—				3,113,381				469,376				2,644,005
Internally developed software			3 years				213,942				14,887				199,055				539,612				94,332				445,280
						$	3,715,513			$	3,137,698			$	577,815			$	7,175,270			$	3,914,658			$	3,260,612

As a result of the Pachube acquisition, the Company capitalized $3,250,000 of technology and know-how as an intangible asset. Changes in the gross carrying amount of technology and know-how are due to foreign currency translation adjustments. The Company is amortizing this intangible asset on a straight line basis to cost of revenue over an estimated useful life of three years.

The Company capitalized costs related to internally developed computer software to be sold as a service incurred during the application development stage of $213,942 and $325,670 during 2010 and 2011, respectively, and is amortizing these costs over the expected lives of the related services. The Company paid $202,120 and $20,706 during 2010 and 2011, respectively, to acquire domain names.

The Company is amortizing the intangible assets on a straight-line basis over the estimated useful lives noted above. Amortization expense for intangible assets was $742,934, $589,612 and $794,112 for the years ended December 31, 2009, 2010 and 2011, respectively. Amortization relating to software, technology and know-how and internally developed software is recorded within cost of revenues and the amortization of trademark, customer base, and domain names is recorded within operating expenses. Future estimated amortization expense for intangible assets is as follows at December 31, 2011:

 

Amortization Expense (Years Ending December 31)		Amount
2012		$	1,259,329
2013			1,251,233
2014			705,670
2015			41,264
2016			3,116
Total		$	3,260,612

 

6.	Property and Equipment

Property and equipment consisted of the following:

 

		December 31,
		2010				2011
Computer equipment and software		$	10,787,862			$	12,681,306
Office equipment			1,335,671				1,593,117
Furniture & fixtures			1,276,833				1,293,481
Leasehold improvements			1,270,531				1,367,160
Total property and equipment			14,670,897				16,935,064
Less accumulated depreciation and amortization			(8,472,410	)			(11,732,343	)
Property and equipment, net		$	6,198,487			$	5,202,721

Depreciation expense for property and equipment was $2,458,095, $3,130,559 and $3,608,480 for the years ended December 31, 2009, 2010 and 2011.

 

7.	Accrued Expenses

Accrued expenses consisted of the following:

 

		December 31, 2010				December 31, 2011
Marketing programs		$	3,265,692			$	1,770,611
Payroll and payroll related			4,535,322				5,333,430
Professional fees			745,834				795,720
Other accrued liabilities			2,282,462				2,573,044
Total accrued expenses		$	10,829,310			$	10,472,805

 

8.	Income Taxes

The domestic and foreign components of income before provision for income taxes are as follows:

 

		Years Ended December 31,
		2009				2010				2011
Domestic		$	6,875,833			$	15,918,650			$	9,422,814
Foreign			2,262,957				2,688,965				372,650
Total income before provision for income taxes		$	9,138,790			$	18,607,615			$	9,795,464

 

The provision (benefit) for income taxes is as follows:

 

		Years Ended December 31,
		2009				2010				2011
Current
Federal		$	163,444			$	810,518			$	5,477,164
State			90,789				423,119				235,074
Foreign			72,608				154,318				139,636
Total			326,841				1,387,955				5,851,874
Deferred
Federal			13,947				(4,391,436	)			(2,021,938	)
State			749				521,472				187,825
Foreign			—				(9,020	)			16,259
Total			14,696				(3,878,984	)			(1,817,854	)
Total provision (benefit) for income taxes		$	341,537			$	(2,491,029	)		$	4,034,020

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

 

		For the Years Ended December 31,
		2009				2010				2011
Statutory tax rate			34.0	%			35.0	%			35.0	%
Change in valuation allowance			(27.3	)%			(45.9	)%			0.0	%
Impact of permanent differences			5.9	%			(0.2	)%			4.6	%
Foreign tax rate differential			(7.6	)%			(4.1	)%			0.3	%
Research and development credits			(3.1	)%			(2.4	)%			(2.6	)%
State taxes, net of federal benefit			—				5.2	%			3.4	%
Impact of uncertain tax positions			—				—				2.0	%
Other			1.8	%			(1.0	)%			(1.5	)%
Effective tax rate			3.7	%			(13.4	)%			41.2	%

 

The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows:

 

		December 31,
		2010				2011
Deferred tax assets:
Net operating loss carryforwards		$	1,153,000			$	1,749,000
Deferred revenue			694,000				1,191,000
Amortization			822,000				840,000
Research and development credit carryforwards			1,239,000				880,000
Bad debt reserves			43,000				43,000
Stock compensation associated with non-qualified awards			2,117,000				3,906,000
Other			594,000				1,151,000
Total deferred tax assets			6,662,000				9,760,000
Deferred tax asset valuation allowance			(2,036,000	)			(2,969,000	)
Net deferred tax assets			4,626,000				6,791,000
Deferred tax liabilities:
Depreciation			(645,000	)			(626,000	)
Goodwill amortization			(148,000	)			(266,000	)
Other			(10,000	)			(4,000	)
Total deferred tax liabilities			(803,000	)			(896,000	)
Total		$	3,823,000	)		$	5,895,000

At December 31, 2010 and 2011, deferred tax liabilities of $10,000 and approximately $26,000, respectively, are included in accrued expenses.

As of December 31, 2009, the Company provided a full valuation allowance against its deferred tax assets as it was not more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would be realized. The Company believed the objective and verifiable evidence of its historical pretax net losses outweighed the positive evidence of its pre-tax income for the year ended December 31, 2009 and forecasted future results. The decrease in the valuation allowance for the year ended December 31, 2009 was $976,000. 

During 2010, the Company reassessed the need for a valuation allowance against its deferred tax assets and concluded that it was more likely than not that it would be able to realize certain of its deferred tax assets primarily as a result of continued profitability, achievement of three years of cumulative profitability and forecasted future earnings. Accordingly, the Company reversed the valuation allowance related to its U.S. and certain foreign deferred tax assets of $8,570,000. As of December 31, 2010 and 2011, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. Additionally, as of December 31, 2011, the Company maintained a full valuation allowance against the deferred tax assets of its Pachube subsidiary. These entities have historical losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. The increase in the valuation allowance for the year ended December 31, 2011 was $933,000.

As of December 31, 2011, the Company had federal, state, and foreign net operating loss carryforwards of approximately $11,753,000, $8,817,000 and $14,708,000, respectively, which expire at varying dates through 2031 for federal purposes and primarily through 2016 for state income tax purposes. The Company’s foreign net operating loss carryforwards are not subject to expiration. The Company recognized a full valuation allowance against its Hungarian and Pachube net operating loss carryfowards. The domestic net operating loss carryforwards are available to offset future tax payments, however they are no longer recognized for book purposes as they have been utilized under the with-and-without method. The domestic net operating loss carryforwards include approximately $11,753,000 related to operating loss carryforwards resulting from excess tax benefits related to share based awards, the tax benefits of which, when recognized, will be accounted for as a credit to additional paid-in capital when they reduce taxes payable. The Company utilized approximately $5,683,000 of federal, $5,223,000 of state and added approximately $5,928,000 of foreign net operating loss carryforwards during the year ended December 31, 2011.

As of December 31, 2011, the Company had federal, state and foreign research and development credit carryforwards of approximately $757,000, $431,000 and $923,000, respectively, which are available to offset future federal and state taxes and expire through 2031. The Company’s foreign research and development credits expire beginning in 2014. The Company has recognized a full valuation allowance against its foreign research and development credit carryforwards. The domestic research and development credits are available to offset future tax payments, however they are no longer recognized for book purposes as they have been utilized under the with-and-without method.

The Company generally considers all earnings generated outside of the U.S. to be permanently reinvested offshore. Therefore, the Company does not accrue U.S. tax for the repatriation of the foreign earnings it considers to be permanently reinvested outside the U.S. As of December 31, 2011, the Company has not provided for federal income tax on approximately $1,665,823 of accumulated undistributed earnings of its foreign subsidiaries. The deferred tax liability related to these earnings would not be material.

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 had no amount recorded for any unrecognized tax benefits as December 31, 2009 or 2010. As of December 31, 2011, the Company has provided a liability of approximately $198,000 for uncertain tax positions. These uncertain tax positions would impact the Company’s effective tax rate if recognized.

The Company has provided liabilities for uncertain tax provisions as follows:

 

		Years Ended December 31,
		2010				2011
Beginning balance		$	—			$	—
Gross decreases — tax positions in prior period			—				—
Gross increases — tax positions in current period			—				198,000
Ending balance		$	—			$	198,000

The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. During the years ended 2009, 2010 and 2011, 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, 2010 and 2011.

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 of NOLs being subject to limitation. As of December 31, 2011, all NOL’s 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 carryforwards that can be utilized annually to offset future taxable income.