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1. | Nature of the Business |
LogMeIn, Inc. (the “Company”) provides essential cloud-based services for remote access, device management, collaboration, data management and customer care. The Company’s product line includes BoldChat®, CosmTM, CubbyTM, join.me®, LogMeIn Free®, LogMeIn Pro®, LogMeIn® CentralTM, LogMeIn Rescue®, LogMeIn® Rescue+MobileTM, 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.
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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”).
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.
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, 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 December 31, 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 $100,082,602 and an aggregate fair value of $95,040,045 and $100,160,889, including $102,552 and $82,787 of unrealized gains and $114,315 and $4,500 of unrealized losses, respectively.
Restricted Cash — As of December 31, 2011 and 2012, 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, 2012, this amount was classified as short-term restricted cash and included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
At December 31, 2011 and 2012, the Company had a security deposit with a bank related to its Budapest, Hungary office lease in the amount of 170,295 Euro and 230,660 Euro, respectively (which totaled $219,988 and $305,844 at December 31, 2011 and 2012, respectively). At December 31, 2011 and 2012, the Company had a bank guarantee related to its Sydney, Australia office in the amount of 24,375 AUD and 25,177 AUD respectively, (which totaled $24,808 and $26,119 at December 31, 2011 and 2012, respectively). In April 2012, the Company entered into a lease for a new corporate headquarters located in Boston, Massachusetts. 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. 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, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Balance, beginning |
$ | 83,116 | $ | 110,751 | $ | 108,742 | ||||||
Provision for bad debt |
87,500 | 85,000 | 100,000 | |||||||||
Uncollectible accounts written off |
59,865 | 87,009 | 29,241 | |||||||||
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Balance, ending |
$ | 110,751 | $ | 108,742 | $ | 179,501 | ||||||
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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 |
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Shorter of lease term or estimated useful life |
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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 Bold acquisition in January 2012 and the Cosm 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, 2012, the fair value of the Company as a whole significantly exceeds the carrying amount of the Company. Through December 31, 2012, 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 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, which range from one to seven 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, 2012, 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 subscription 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 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 may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all the revenue recognition criteria have been met. In cases where 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, the arrangement is accounted for as a single unit of accounting and the total consideration is recognized ratably over the term of the related agreement, or the estimated customer life, commencing when all of the significant performance obligations 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 and 2012, 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, 2010, 2011, or 2012.
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 $371,000 and $279,000 for the years ended December 31, 2010, and 2011, respectively. The Company did not receive any reimbursements related to this grant for the year ended December 31, 2012 and does not expect to receive any additional reimbursements related to this grant going forward.
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 $219,000, $564,000, and $641,000 for the years ended December 31, 2010, 2011, and 2012 included in other expense in the consolidated statements of income.
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, 2012, the Company has provided a liability for approximately $251,000 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, 2010, 2011, and 2012 was approximately $17,678,000, $20,458,000, and $23,755,000 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. Accumulated other comprehensive loss was approximately $1,557,000 at December 31, 2011 and consisted of $1,550,000 related to foreign currency translation adjustments and $7,000 of unrealized losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was approximately $400,000 at December 31, 2012 and consisted of $450,000 related to foreign currency translation adjustments offset by $50,000 of unrealized gains, 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 chief operating decision maker 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, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Revenues: |
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United States(1) |
$ | 68,960,000 | $ | 79,050,000 | $ | 90,233,000 | ||||||
United Kingdom |
8,871,000 | 10,652,000 | 12,846,000 | |||||||||
International — all other |
23,226,000 | 29,759,000 | 35,758,000 | |||||||||
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Total revenue |
$ | 101,057,000 | $ | 119,461,000 | $ | 138,837,000 | ||||||
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Long-lived assets: |
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United States |
$ | 3,894,000 | $ | 3,177,000 | $ | 4,129,000 | ||||||
Hungary |
1,700,000 | 1,373,000 | 1,599,000 | |||||||||
United Kingdom |
385,000 | 264,000 | 530,000 | |||||||||
International — all other |
219,000 | 389,000 | 318,000 | |||||||||
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Total long-lived assets |
$ | 6,198,000 | $ | 5,203,000 | $ | 6,576,000 | ||||||
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(1) | United States revenue for the year ended December 31, 2010 includes $9,580,000 in revenue associated with the Intel Agreement. |
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 the following options to purchase common shares and restricted stock units because they had anti-dilutive impact:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Options to purchase common shares |
1,098,775 | 983,900 | 1,679,168 | |||||||||
Restricted stock units |
— | — | 146,452 | |||||||||
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Total options and restricted stock units |
1,098,775 | 983,900 | 1,825,620 | |||||||||
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Basic and diluted net income per share was calculated as follows:
Year Ended December 31, 2010 |
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Basic: |
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Net income |
$ | 21,098,644 | ||
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Weighted average common shares outstanding, basic |
23,244,479 | |||
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Net income, basic |
$ | 0.91 | ||
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Diluted: |
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Net income |
$ | 21,098,644 | ||
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Weighted average common shares outstanding |
23,244,479 | |||
Add: Options to purchase common shares |
1,595,426 | |||
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Weighted average common shares outstanding, diluted |
24,839,905 | |||
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Net income, diluted |
$ | 0.85 | ||
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Year Ended December 31, 2011 |
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Basic: |
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Net income |
$ | 5,761,444 | ||
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Weighted average common shares outstanding, basic |
24,175,621 | |||
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Net income, basic |
$ | 0.24 | ||
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Diluted: |
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Net income |
$ | 5,761,444 | ||
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Weighted average common shares outstanding |
24,175,621 | |||
Add: Options to purchase common shares |
978,978 | |||
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Weighted average common shares outstanding, diluted |
25,154,599 | |||
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Net income, diluted |
$ | 0.23 | ||
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Year Ended December 31, 2012 |
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Basic: |
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Net income |
$ | 3,565,634 | ||
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Weighted average common shares outstanding, basic |
24,711,242 | |||
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Net income, basic |
$ | 0.14 | ||
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Diluted: |
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Net income |
$ | 3,565,634 | ||
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Weighted average common shares outstanding |
24,711,242 | |||
Add: Common stock equivalents |
645,063 | |||
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Weighted average common shares outstanding, diluted |
25,356,305 | |||
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Net income, diluted |
$ | 0.14 | ||
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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 contractually obligate the Company to indemnify the customer from 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. Through December 31, 2012, the Company has not experienced any losses related to these indemnification obligations.
On March 15, 2012, the Company received a request for indemnification from a customer in connection with a third-party claim that the customer’s use of a LogMeIn service infringed the third party’s patent. The Company was able to utilize funds from a designated escrow arrangement associated with a recent acquisition to settle this matter in September 2012 without any impact on the Company’s financial statements.
In October 2012, the Company was notified by four of its customers that they have received letters from Pragmatus Telecom LLC, or Pragmatus, claiming that their use of certain LogMeIn services infringe upon three patents allegedly owned by Pragmatus. The Company received similar notifications from two other customers during November 2012. On November 21, 2012, the Company filed suit against Pragmatus in the U.S. District Court for the District of Delaware seeking a declaratory judgment that the Company’s products do not infringe the three patents allegedly owned by Pragmatus and further requesting a declaratory judgment that those three patents are invalid. See Note 12 for additional information about the Pragmatus proceedings. The Company is unable to reasonably estimate a potential range of loss or expense associated with this matter at this time.
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 adopted this new 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. 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 was effective for the Company in its first quarter of fiscal 2012 and was applied retrospectively. The Company adopted ASU 2011-05 and ASU 2011-12 and they did not 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 3). ASU 2011-04 was effective for the Company in its first quarter of fiscal 2012 and was applied prospectively. The Company adopted ASU 2011-04 and it did not have a material impact on its financial position, results of operations or cash flows.
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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) |
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Balance at December 31, 2011 |
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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 December 31, 2012 |
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Cash equivalents — money market funds |
49,209,098 | 49,209,098 | — | — | ||||||||||||
Cash equivalents — bank deposits |
5,037,169 | — | 5,037,169 | — | ||||||||||||
Short-term marketable securities — U.S. government agency securities |
100,160,889 | 90,138,019 | 10,022,870 | — | ||||||||||||
Contingent consideration liability |
161,494 | — | — | 161,494 |
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 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 an assumption that the earn-out will be achieved. The current portion of contingent consideration is included in Accrued liabilities. A reconciliation of the beginning and ending Level 3 liability is as follows:
Years Ended December 31, |
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2011 | 2012 | |||||||
Balance beginning of period |
$ | — | $ | 212,536 | ||||
Additions to Level 3 |
192,561 | — | ||||||
Payments |
— | (89,012 | ) | |||||
Change in fair value (included within research and development expense) |
19,975 | 37,970 | ||||||
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Balance end of period |
$ | 212,536 | $ | 161,494 | ||||
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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 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 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 | |||
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Total purchase price |
10,192,561 | |||
Liability for contingent consideration |
(192,561 | ) | ||
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Cash paid |
$ | 10,000,000 | ||
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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 paid approximately $1.7 million of contingent payments in July 2012 and expects to pay the remaining $3.2 million in July 2013.
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 value of $192,561 at the acquisition date. The Company continues to re-measure the fair value of the consideration at each subsequent reporting period and recognizes any adjustments to fair value as part of earnings. The Company classifies the cash payments made to the non-employee shareholder as a financing activity within the statement of cash flows, while changes in the fair value of the liability are classified as cash flows from operations.
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 $0.3 million 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 $4.4 million of revenue, and $5.3 million of expenses as of December 31, 2012, are included in the condensed 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 pro forma results of operations for the year ended December 31, 2011 assuming the Company had acquired Bold on January 1, 2011, do not differ materially from those reported in the Company’s consolidated statement of income for that year.
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. On January 15, 2013, the Company paid $484,000 in contingent, retention-based bonus payments and expects to pay $1.0 million in January 2014.
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 $0.1 million of acquisition-related for the year ended December 31, 2012.
|
5. | Goodwill and Intangible Assets |
The changes in the carry amounts of goodwill for the years ended December 31, 2011 and 2012 are due to the addition of goodwill resulting from the Cosm and Bold acquisitions 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 years ended December 31, 2011 and 2012, are as follows:
Balance, December 31, 2010 |
$ | 615,299 | ||
Goodwill related to the acquisition of Cosm |
6,934,966 | |||
Foreign currency translation adjustments |
(291,522 | ) | ||
|
|
|||
Balance, December 31, 2011 |
$ | 7,258,743 | ||
Goodwill related to the acquisition of Bold |
11,178,000 | |||
Foreign currency translation adjustments |
446,706 | |||
|
|
|||
Balance, December 31, 2012 |
$ | 18,883,449 | ||
|
|
Intangible assets consist of the following:
December 31, 2011 | December 31, 2012 | |||||||||||||||||||||||||||
Estimated Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||||
Identifiable intangible assets: |
||||||||||||||||||||||||||||
Trademark |
1-5 years | $ | 635,506 | $ | 635,506 | $ | — | $ | 665,844 | $ | 665,844 | $ | — | |||||||||||||||
Customer base |
5-7 years | 1,003,068 | 1,003,068 | — | 3,789,117 | 1,447,297 | 2,341,820 | |||||||||||||||||||||
Domain names |
5 years | 222,826 | 51,499 | 171,327 | 534,257 | 137,378 | 396,879 | |||||||||||||||||||||
Software |
4 years | 298,977 | 298,977 | — | 298,977 | 298,977 | — | |||||||||||||||||||||
Technology |
3-6 years | 1,361,900 | 1,361,900 | — | 2,463,402 | 1,580,896 | 882,506 | |||||||||||||||||||||
Technology and know-how |
3-6 years | 3,113,381 | 469,376 | 2,644,005 | 3,256,803 | 1,576,600 | 1,680,203 | |||||||||||||||||||||
Non-Compete agreements |
5 years | — | — | — | 161,691 | 8,721 | 152,970 | |||||||||||||||||||||
Internally developed software |
3 years | 539,612 | 94,332 | 445,280 | 1,281,589 | 367,943 | 913,646 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 7,175,270 | $ | 3,914,658 | $ | 3,260,612 | $ | 12,451,680 | $ | 6,083,656 | $ | 6,368,024 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
In 2012, 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 costs related to internally developed computer software to be sold as a service incurred during the application development stage of $325,670 and $741,977 during 2011 and 2012, respectively, and is amortizing these costs over the expected lives of the related services. The Company paid $20,706 and $311,431 during 2011 and 2012, respectively, to acquire domain names.
The Company is amortizing the intangible assets over the estimated useful lives noted above. Amortization expense for intangible assets was $589,612, $794,112 and $2,117,590 for the years ended December 31, 2010, 2011 and 2012, 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, 2012:
Amortization Expense (Years Ending December 31) |
Amount | |||
2013 |
2,325,692 | |||
2014 |
1,783,789 | |||
2015 |
944,588 | |||
2016 |
602,563 | |||
2017 |
412,704 | |||
Thereafter |
298,688 | |||
|
|
|||
Total |
$ | 6,368,024 | ||
|
|
|
6. | Property and Equipment |
Property and equipment consisted of the following:
December 31, | ||||||||
2011 | 2012 | |||||||
Computer equipment and software |
$ | 12,681,306 | $ | 15,616,589 | ||||
Office equipment |
1,593,117 | 1,947,310 | ||||||
Furniture & fixtures |
1,293,481 | 1,438,211 | ||||||
Construction in Progress |
— | 1,071,892 | ||||||
Leasehold improvements |
1,367,160 | 1,845,103 | ||||||
|
|
|
|
|||||
Total property and equipment |
16,935,064 | 21,919,105 | ||||||
Less accumulated depreciation and amortization |
(11,732,343 | ) | (15,343,434 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 5,202,721 | $ | 6,575,671 | ||||
|
|
|
|
Depreciation expense for property and equipment was $3,130,559, $3,608,480 and $3,982,003 for the years ended December 31, 2010, 2011 and 2012.
|
7. | Accrued Expenses |
Accrued expenses consisted of the following:
December 31, 2011 |
December 31, 2012 |
|||||||
Marketing programs |
$ | 1,770,611 | $ | 2,688,818 | ||||
Payroll and payroll related |
5,333,430 | 7,970,443 | ||||||
Professional fees |
795,720 | 1,711,926 | ||||||
Other accrued liabilities |
2,573,044 | 4,285,614 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 10,472,805 | $ | 16,656,801 | ||||
|
|
|
|
|
8. | Income Taxes |
The domestic and foreign components of income before provision for income taxes are as follows:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Domestic |
$ | 15,918,650 | $ | 9,422,814 | $ | 7,789,014 | ||||||
Foreign |
2,688,965 | 372,650 | (1,532,649 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total income before provision for income taxes |
$ | 18,607,615 | $ | 9,795,464 | $ | 6,256,365 | ||||||
|
|
|
|
|
|
The provision for (benefit from) income taxes is as follows:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Current |
||||||||||||
Federal |
$ | 810,518 | $ | 5,477,164 | $ | 8,324,149 | ||||||
State |
423,119 | 235,074 | 1,180,472 | |||||||||
Foreign |
154,318 | 139,636 | 126,434 | |||||||||
|
|
|
|
|
|
|||||||
Total |
1,387,955 | 5,851,874 | 9,631,055 | |||||||||
|
|
|
|
|
|
|||||||
Deferred |
||||||||||||
Federal |
(4,391,436 | ) | (2,021,938 | ) | (4,926,220 | ) | ||||||
State |
521,472 | 187,825 | 44,104 | |||||||||
Foreign |
(9,020 | ) | 16,259 | (2,058,208 | ) | |||||||
|
|
|
|
|
|
|||||||
Total |
(3,878,984 | ) | (1,817,854 | ) | (6,940,324 | ) | ||||||
|
|
|
|
|
|
|||||||
Total provision for (benefit from) income taxes |
($ | 2,491,029 | ) | $ | 4,034,020 | $ | 2,690,731 | |||||
|
|
|
|
|
|
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, |
||||||||||||
2010 | 2011 | 2012 | ||||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Change in valuation allowance |
(45.9 | ) | 0.0 | (10.8 | ) | |||||||
Impact of permanent differences |
(0.2 | ) | 4.6 | 15.6 | ||||||||
Foreign tax rate differential |
(4.1 | ) | 0.3 | (11.5 | ) | |||||||
Research and development credits |
(2.4 | ) | (2.6 | ) | — | |||||||
State taxes, net of federal benefit |
5.2 | 3.4 | 13.8 | |||||||||
Impact of uncertain tax positions |
— | 2.0 | 0.8 | |||||||||
Other |
(1.0 | ) | (1.5 | ) | 0.1 | |||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
(13.4 | )% | 41.2 | % | 43.0 | % | ||||||
|
|
|
|
|
|
The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows:
December 31, | ||||||||
2011 | 2012 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 1,749,000 | $ | 3,222,000 | ||||
Deferred revenue |
1,191,000 | 1,715,000 | ||||||
Amortization |
840,000 | 897,000 | ||||||
Research and development credit carryforwards |
880,000 | 383,000 | ||||||
Bad debt reserves |
43,000 | 71,000 | ||||||
Stock compensation associated with non-qualified awards |
3,906,000 | 8,242,000 | ||||||
Other |
1,151,000 | 2,136,000 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
9,760,000 | 16,666,000 | ||||||
Deferred tax asset valuation allowance |
(2,969,000 | ) | (2,463,000 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
6,791,000 | 14,203,000 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Depreciation |
(626,000 | ) | (313,000 | ) | ||||
Goodwill amortization |
(266,000 | ) | (655,000 | ) | ||||
Other |
(4,000 | ) | — | |||||
|
|
|
|
|||||
Total deferred tax liabilities |
(896,000 | ) | (968,000 | ) | ||||
|
|
|
|
|||||
Total |
$ | 5,895,000 | $ | 13,235,000 | ||||
|
|
|
|
At December 31, 2011 and 2012, deferred tax liabilities of approximately $4,000 and $28,000, respectively, are included in accrued expenses, and approximately $22,000 and $15,000 respectively, are included in long term liabilities.
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. 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, 2011, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian and Cosm subsidiaries. The increase in the valuation allowance for the year ended December 31, 2011 was $933,000.
During 2012, the Company reassessed the need for a valuation allowance against its deferred tax assets relating to its Cosm subsidiary and concluded that it was more likely than not that it would be able to realize its deferred tax assets as a result of forecasted future earnings. Accordingly, the Company reversed the valuation allowance related to its Cosm deferred tax assets of approximately $677,000. As of December 31, 2012, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. The decrease in the valuation allowance for the year ended December 31, 2012 was $506,000.
As of December 31, 2012, the Company had federal, state, and foreign net operating loss carryforwards of approximately $0, $261,000 and $23,630,000, respectively, which expire at varying dates through 2017 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 net operating loss carryfowards. The Company utilized approximately $11,753,000 of federal, $8,556,000 of state and added approximately $8,922,000 of foreign net operating loss carryforwards during the year ended December 31, 2012.
As of December 31, 2012, the Company had federal, state and foreign research and development credit carryforwards of approximately $0, $143,000 and $593,000, respectively, which are available to offset future 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 indefinitely reinvested offshore. Therefore, the Company does not accrue U.S. tax for the repatriation of the foreign earnings it considers to be indefinitely reinvested outside the U.S. As of December 31, 2012, the Company has not provided for federal income tax on approximately $2,636,000 of accumulated undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed foreign earnings.
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 and 2012, the Company has provided a liability of $198,000 and $251,000 respectively 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, |
||||||||
2011 | 2012 | |||||||
Beginning balance |
$ | — | $ | 198,000 | ||||
Gross decreases — tax positions in prior period |
— | — | ||||||
Gross increases — tax positions in current period |
198,000 | 53,000 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 198,000 | $ | 251,000 | ||||
|
|
|
|
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 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, 2011. During 2012, the Company recognized approximately $2,000 in its statement of operations at December 31, 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 of NOLs being subject to limitation. As of December 31, 2012, 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.
|
9. | Common Stock and Equity |
Authorized Shares — On June 9, 2009, the Company’s Board of Directors approved a Restated Certificate of Incorporation to be effective upon the closing of the Company’s IPO. This Restated Certificate of Incorporation, among other things, increased the Company’s authorized common shares to 75,000,000 and authorized 5,000,000 shares of undesignated preferred stock.
Common Stock Reserved — As of December 31, 2011 and 2012, the Company has reserved the following number of shares of common stock for the exercise of stock options and restricted stock units:
Number of Shares as of | ||||||||
December 31, 2011 |
December 31, 2012 |
|||||||
Common stock options and restricted stock units |
4,169,866 | 4,908,311 | ||||||
|
|
|
|
|||||
Total reserved |
4,169,866 | 4,908,311 | ||||||
|
|
|
|
|
10. | Stock Incentive Plan |
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 1,184,804 shares available for grant under the 2009 Plan as of December 31, 2012.
The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $4,834,883, $6,207,129 and $2,681,861 in cash from stock option exercises during the years ended December 31, 2010, 2011 and 2012, respectively.
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:
Years Ended December 31, | ||||||
2010 | 2011 | 2012 | ||||
Expected dividend yield |
0.00% | 0.00% | 0.00% | |||
Risk-free interest rate |
1.03% - 2.46% | 0.91% - 2.28% | 0.64% - 0.87% | |||
Expected term (in years) |
5.56 - 6.25 | 5.56 - 6.25 | 5.56 - 6.25 | |||
Volatility |
65% - 75% | 60% | 55% - 60% |
The following table summarizes stock option activity:
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding, January 1, 2012 |
2,626,260 | $ | 22.34 | 7.4 | ||||||||||||
Granted |
775,816 | 34.31 | ||||||||||||||
Exercised |
(262,366 | ) | 10.22 | $ | 5,429,363 | |||||||||||
|
|
|||||||||||||||
Forfeited |
(198,612 | ) | 10.22 | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding, December 31, 2012 |
2,941,098 | $ | 25.90 | 7.2 | $ | 14,173,945 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at December 31, 2012 |
1,361,728 | $ | 17.16 | 5.6 | $ | 13,090,809 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested or expected to vest at December 31, 2012 |
2,811,971 | $ | 25.54 | 7.1 | $ | 14,121,204 | ||||||||||
|
|
|
|
|
|
|
|
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, 2012 of $22.41 per share or at time of exercise, and the exercise price of the options.
The weighted average grant date fair value of stock options issued was $14.63, $22.42 and $18.57 per share for the years ended December 31, 2010, 2011 and 2012, respectively.
During the year ended December 31, 2012, the Company granted 795,599 restricted stock units containing time-based vesting conditions which generally 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 December 31, 2012, the Company estimates that 589,824 shares of restricted stock units with an intrinsic value of approximately $18,367,110 and a weighted average remaining contractual term of 2.4 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 |
795,599 | 31.21 | ||||||
Restricted stock units vested |
— | — | ||||||
Restricted stock units forfeited |
(12,794 | ) | 35.70 | |||||
|
|
|
|
|||||
Unvested as of December 31, 2012 |
782,805 | $ | 31.14 | |||||
|
|
|
|
The Company recognized stock based compensation expense within the accompanying consolidated statements of income as summarized in the following table:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Cost of revenue |
$ | 260,554 | $ | 316,109 | $ | 484,408 | ||||||
Research and development |
638,383 | 1,476,638 | 2,825,579 | |||||||||
Sales and marketing |
1,552,584 | 2,700,178 | 4,962,355 | |||||||||
General and administrative |
2,540,194 | 4,431,698 | 6,519,811 | |||||||||
|
|
|
|
|
|
|||||||
$ | 4,991,715 | $ | 8,924,623 | $ | 14,792,153 | |||||||
|
|
|
|
|
|
As of December 31, 2012, there was approximately $40,207,275 of total unrecognized share-based compensation cost, net of estimated forfeitures, related to unvested stock option grants and unvested restricted stock units which are expected to be recognized over a weighted average period of 2.5 years. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.
|
11. | 401(k) Plan |
On January 1, 2007, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan is available to all employees upon employment and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company may contribute to the plan at the discretion of the Board of Directors. The Company has not made any contributions to the plan through December 31, 2012.
|
12. | Commitments and Contingencies |
Operating Leases — The Company has operating lease agreements for offices in Massachusetts, Hungary, The Netherlands, Australia, the United Kingdom, Ireland 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 April 2013 and extend through June 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 $5.2 million, of which $4.1 million will be paid in 2013. 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.
In October 2012, the Company entered into a lease for new office space in Dublin, Ireland. The term of the new office space began in October 2012 and extends through September 2022. The approximate annual lease payments for the new office space are $161,000 (EUR 122,000). The lease agreement required a security deposit of approximately $247,000 (EUR 187,000) and contains a termination option which allows the Company to terminate the lease pursuant to certain lease provisions.
Rent expense under all leases was approximately $2,300,000, $2,898,000, and $3,200,000 for the years ended December 31, 2010, 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 $1,618,000, $1,924,000, and $3,153,000 for the years ended December 31, 2010, 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 December 31, 2012:
Years Ending December 31 |
||||
2013 |
9,564,000 | |||
2014 |
5,818,000 | |||
2015 |
5,542,000 | |||
2016 |
5,529,000 | |||
2017 |
4,388,000 | |||
Thereafter |
25,248,000 | |||
|
|
|||
Total minimum lease payments |
$ | 56,089,000 |
||
|
|
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) alleging 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. The court 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. On July 31, 2012, the U.S. Court of Appeals for the Federal Circuit vacated the lower court’s summary judgment of non-infringement ruling and remanded the case back to the U.S. District Court for the Eastern District of Virginia with revised claim construction. Pursuant to a Scheduling Order entered by the court on January 17, 2013, the trial in this matter is set to begin on March 18, 2013. The Company continues to believe that it has strong defenses to the claims made by 01 and intends to vigorously defend against them. However, an unfavorable outcome in this matter could prevent the Company from offering all or a portion of the Company’s services to customers due to an injunction or require the Company to pay damages or on-going license fees, which could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The Company has not accrued for a loss contingency related to this matter because litigation is inherently unpredictable and, although a loss is reasonably possible, an unfavorable outcome is not considered by management to be probable at this time and the Company 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) alleging 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.
On November 21, 2012, the Company filed suit against Pragmatus Telecom LLC, or Pragmatus, in the U.S. District Court for the District of Delaware (Civil Action No. 12-1507) seeking a declaratory judgment that the Company’s products do not infringe three patents allegedly owned by Pragmatus and further requesting a declaratory judgment that those three patents are invalid. The three patents in question are U.S. Patent Nos. 6,311,231, 6,668,286 and 7,159,043, which allegedly are owned by Pragmatus and generally relate to systems for communicating with customers over traditional telephone lines and the Internet. Pragmatus has previously alleged that these patents were infringed upon by certain of the Company’s customers through their use of the Company’s products. On January 11, 2013, Pragmatus answered the Company’s complaint and asserted counterclaims against the Company alleging infringement. As of February 22, 2013, no trial calendar has been set in this matter. At this time, the Company is unable to reasonably estimate a possible loss or range of loss associated with this litigation.
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. The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable. 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.
Other Contingencies — In 2011, the Company was contacted by a representative from a state tax assessor’s office requesting remittance of uncollected sales taxes due for the period from 2005 to the present. While the Company does not believe it was responsible for collecting sales taxes in this state, after vigorously defending its position and exhausting all defenses against this claim, in September 2011, the Company agreed to make a settlement payment of $1.3 million with the state tax assessor’s office. The Company recorded the amount in general and administrative expense. The Company paid the settlement in December 2011.
|
13. | Related Party |
In December 2007, the Company entered into a strategic agreement with Intel Corporation to jointly develop a service that delivers connectivity to computers built with Intel components. Under the terms of the multi-year agreement, the Company adapted its service delivery platform, Gravity, to work with specific technology delivered with Intel hardware and software products. The agreement provides that Intel will market and sell the service to its customers. Intel pays the Company a minimum license and service fee on a quarterly basis during the multi-year term of the agreement. The Company began recognizing revenue associated with the Intel service and marketing agreement upon receipt of acceptance in the quarter ended September 30, 2008. In addition, the Company and Intel share revenue generated by the use of the service by third parties to the extent it exceeds the minimum payments. In conjunction with this agreement, Intel Capital purchased 2,222,223 shares of our Series B-1 redeemable convertible preferred stock for $10,000,004, which were converted into 888,889 shares of common stock in connection with the closing of the IPO on July 7, 2009.
In September 2010, Intel notified the Company that it intended to terminate the connectivity service and marketing agreement effective on December 26, 2010. In accordance with the termination provisions of the agreement, Intel paid the Company a one-time termination fee of $2.5 million in lieu of the $5 million in annual fees associated with 2011. Intel paid the Company the $2.5 million termination fee in December 2010.
In June 2009, the Company entered into a license, royalty and referral agreement with Intel Americas, Inc., pursuant to which the Company will pay Intel specified royalties with respect to subscriptions to its products that incorporate the Intel technology covered by the service and marketing agreement with Intel Corporation. In addition, in the event Intel refers customers to the Company under this agreement, the Company will pay Intel specified fees.
The Company recognized $9,580,000, $0 and $0 of net revenue relating to these agreements for the years ended December 31, 2010, 2011 and 2012, respectively. The Company recorded expenses relating to referral fees of approximately $4,000, $0 and $0 relating to this agreement for the years ended December 31, 2010, 2011 and 2012.
|
14. | Subsequent Event |
On February 14, 2013, the Company announced that its board of directors approved a $25 million share repurchase program. Any share repurchases made pursuant to the program will be made from time-to-time in the open market, in privately negotiated transactions or otherwise, in accordance with applicable securities laws and regulations. The timing and amount of any share repurchases will be determined by the Company’s management based on its evaluation of market conditions, the trading price of the stock, regulatory requirements and other factors. The share repurchase program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice.
|
15. | Quarterly Information (Unaudited) |
For the Three Months Ended, | ||||||||||||||||||||||||||||||||
March 31, 2011(1) |
June 30, 2011 |
September 30, 2011(2) |
December 31, 2011 |
March 31, 2012 |
June 30, 2012 |
September 30, 2012 |
December 31, 2012(3) |
|||||||||||||||||||||||||
(in thousands, except for per share data) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||
Revenue |
$ | 27,039 | $ | 29,098 | $ | 31,002 | $ | 32,322 | $ | 32,688 | $ | 33,797 | $ | 35,368 | $ | 36,985 | ||||||||||||||||
Gross profit |
24,503 | 26,652 | 28,404 | 29,328 | 29,271 | 30,372 | 31,681 | 33,010 | ||||||||||||||||||||||||
Income (loss) from operations |
(202 | ) | 4,005 | 1,972 | 3,723 | 1,172 | 2,256 | 1,549 | 1,034 | |||||||||||||||||||||||
Net income (loss) |
(65 | ) | 2,682 | 1,128 | 2,017 | 76 | 576 | 718 | 2,196 | |||||||||||||||||||||||
Net income (loss) per share-basic |
0.00 | 0.11 | 0.05 | 0.08 | 0.00 | 0.02 | 0.03 | 0.14 | ||||||||||||||||||||||||
Net income (loss) per share-diluted |
0.00 | 0.11 | 0.04 | 0.08 | 0.00 | 0.02 | 0.03 | 0.14 |
(1) | Comparability affected by a $1.3 million Gemini IP, LLC settlement and $2.9 million of patent litigation expense related to the Company’s defense against the patent infringement claim brought by 01 Communique. |
(2) | Comparability affected by a $1.3 million state sales tax settlement. |
(3) | Comparability affected by the reversal of the valuation allowance related to its Cosm deferred tax assets of approximately $677,000. |
|
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”).
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.
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, 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 December 31, 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 $100,082,602 and an aggregate fair value of $95,040,045 and $100,160,889, including $102,552 and $82,787 of unrealized gains and $114,315 and $4,500 of unrealized losses, respectively.
Restricted Cash — As of December 31, 2011 and 2012, 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, 2012, this amount was classified as short-term restricted cash and included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
At December 31, 2011 and 2012, the Company had a security deposit with a bank related to its Budapest, Hungary office lease in the amount of 170,295 Euro and 230,660 Euro, respectively (which totaled $219,988 and $305,844 at December 31, 2011 and 2012, respectively). At December 31, 2011 and 2012, the Company had a bank guarantee related to its Sydney, Australia office in the amount of 24,375 AUD and 25,177 AUD respectively, (which totaled $24,808 and $26,119 at December 31, 2011 and 2012, respectively). In April 2012, the Company entered into a lease for a new corporate headquarters located in Boston, Massachusetts. 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. 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, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Balance, beginning |
$ | 83,116 | $ | 110,751 | $ | 108,742 | ||||||
Provision for bad debt |
87,500 | 85,000 | 100,000 | |||||||||
Uncollectible accounts written off |
59,865 | 87,009 | 29,241 | |||||||||
|
|
|
|
|
|
|||||||
Balance, ending |
$ | 110,751 | $ | 108,742 | $ | 179,501 | ||||||
|
|
|
|
|
|
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 Bold acquisition in January 2012 and the Cosm 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, 2012, the fair value of the Company as a whole significantly exceeds the carrying amount of the Company. Through December 31, 2012, 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 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, which range from one to seven 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, 2012, 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 subscription 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 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 may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all the revenue recognition criteria have been met. In cases where 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, the arrangement is accounted for as a single unit of accounting and the total consideration is recognized ratably over the term of the related agreement, or the estimated customer life, commencing when all of the significant performance obligations 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 and 2012, 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, 2010, 2011, or 2012.
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 $371,000 and $279,000 for the years ended December 31, 2010, and 2011, respectively. The Company did not receive any reimbursements related to this grant for the year ended December 31, 2012 and does not expect to receive any additional reimbursements related to this grant going forward.
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 $219,000, $564,000, and $641,000 for the years ended December 31, 2010, 2011, and 2012 included in other expense in the consolidated statements of income.
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, 2012, the Company has provided a liability for approximately $251,000 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, 2010, 2011, and 2012 was approximately $17,678,000, $20,458,000, and $23,755,000 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. Accumulated other comprehensive loss was approximately $1,557,000 at December 31, 2011 and consisted of $1,550,000 related to foreign currency translation adjustments and $7,000 of unrealized losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was approximately $400,000 at December 31, 2012 and consisted of $450,000 related to foreign currency translation adjustments offset by $50,000 of unrealized gains, 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 chief operating decision maker 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, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Revenues: |
||||||||||||
United States(1) |
$ | 68,960,000 | $ | 79,050,000 | $ | 90,233,000 | ||||||
United Kingdom |
8,871,000 | 10,652,000 | 12,846,000 | |||||||||
International — all other |
23,226,000 | 29,759,000 | 35,758,000 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
$ | 101,057,000 | $ | 119,461,000 | $ | 138,837,000 | ||||||
|
|
|
|
|
|
|||||||
Long-lived assets: |
||||||||||||
United States |
$ | 3,894,000 | $ | 3,177,000 | $ | 4,129,000 | ||||||
Hungary |
1,700,000 | 1,373,000 | 1,599,000 | |||||||||
United Kingdom |
385,000 | 264,000 | 530,000 | |||||||||
International — all other |
219,000 | 389,000 | 318,000 | |||||||||
|
|
|
|
|
|
|||||||
Total long-lived assets |
$ | 6,198,000 | $ | 5,203,000 | $ | 6,576,000 | ||||||
|
|
|
|
|
|
(1) | United States revenue for the year ended December 31, 2010 includes $9,580,000 in revenue associated with the Intel Agreement. |
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 the following options to purchase common shares and restricted stock units because they had anti-dilutive impact:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Options to purchase common shares |
1,098,775 | 983,900 | 1,679,168 | |||||||||
Restricted stock units |
— | — | 146,452 | |||||||||
|
|
|
|
|
|
|||||||
Total options and restricted stock units |
1,098,775 | 983,900 | 1,825,620 | |||||||||
|
|
|
|
|
|
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 | ||
|
|
Year Ended December 31, 2012 |
||||
Basic: |
||||
Net income |
$ | 3,565,634 | ||
|
|
|||
Weighted average common shares outstanding, basic |
24,711,242 | |||
|
|
|||
Net income, basic |
$ | 0.14 | ||
|
|
|||
Diluted: |
||||
Net income |
$ | 3,565,634 | ||
|
|
|||
Weighted average common shares outstanding |
24,711,242 | |||
Add: Common stock equivalents |
645,063 | |||
|
|
|||
Weighted average common shares outstanding, diluted |
25,356,305 | |||
|
|
|||
Net income, diluted |
$ | 0.14 | ||
|
|
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 contractually obligate the Company to indemnify the customer from 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. Through December 31, 2012, the Company has not experienced any losses related to these indemnification obligations.
On March 15, 2012, the Company received a request for indemnification from a customer in connection with a third-party claim that the customer’s use of a LogMeIn service infringed the third party’s patent. The Company was able to utilize funds from a designated escrow arrangement associated with a recent acquisition to settle this matter in September 2012 without any impact on the Company’s financial statements.
In October 2012, the Company was notified by four of its customers that they have received letters from Pragmatus Telecom LLC, or Pragmatus, claiming that their use of certain LogMeIn services infringe upon three patents allegedly owned by Pragmatus. The Company received similar notifications from two other customers during November 2012. On November 21, 2012, the Company filed suit against Pragmatus in the U.S. District Court for the District of Delaware seeking a declaratory judgment that the Company’s products do not infringe the three patents allegedly owned by Pragmatus and further requesting a declaratory judgment that those three patents are invalid. See Note 12 for additional information about the Pragmatus proceedings. The Company is unable to reasonably estimate a potential range of loss or expense associated with this matter at this time.
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 adopted this new 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. 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 was effective for the Company in its first quarter of fiscal 2012 and was applied retrospectively. The Company adopted ASU 2011-05 and ASU 2011-12 and they did not 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 3). ASU 2011-04 was effective for the Company in its first quarter of fiscal 2012 and was applied prospectively. The Company adopted ASU 2011-04 and it did not have a material impact on its financial position, results of operations or cash flows.
|
Activity in the allowance for doubtful accounts was as follows:
December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Balance, beginning |
$ | 83,116 | $ | 110,751 | $ | 108,742 | ||||||
Provision for bad debt |
87,500 | 85,000 | 100,000 | |||||||||
Uncollectible accounts written off |
59,865 | 87,009 | 29,241 | |||||||||
|
|
|
|
|
|
|||||||
Balance, ending |
$ | 110,751 | $ | 108,742 | $ | 179,501 | ||||||
|
|
|
|
|
|
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 |
|
The Company’s revenue (based on customer address) and long-lived assets by geography are as follows:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Revenues: |
||||||||||||
United States(1) |
$ | 68,960,000 | $ | 79,050,000 | $ | 90,233,000 | ||||||
United Kingdom |
8,871,000 | 10,652,000 | 12,846,000 | |||||||||
International — all other |
23,226,000 | 29,759,000 | 35,758,000 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
$ | 101,057,000 | $ | 119,461,000 | $ | 138,837,000 | ||||||
|
|
|
|
|
|
|||||||
Long-lived assets: |
||||||||||||
United States |
$ | 3,894,000 | $ | 3,177,000 | $ | 4,129,000 | ||||||
Hungary |
1,700,000 | 1,373,000 | 1,599,000 | |||||||||
United Kingdom |
385,000 | 264,000 | 530,000 | |||||||||
International — all other |
219,000 | 389,000 | 318,000 | |||||||||
|
|
|
|
|
|
|||||||
Total long-lived assets |
$ | 6,198,000 | $ | 5,203,000 | $ | 6,576,000 | ||||||
|
|
|
|
|
|
(1) | United States revenue for the year ended December 31, 2010 includes $9,580,000 in revenue associated with the Intel Agreement. |
The Company excluded the following options to purchase common shares and restricted stock units because they had anti-dilutive impact:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Options to purchase common shares |
1,098,775 | 983,900 | 1,679,168 | |||||||||
Restricted stock units |
— | — | 146,452 | |||||||||
|
|
|
|
|
|
|||||||
Total options and restricted stock units |
1,098,775 | 983,900 | 1,825,620 | |||||||||
|
|
|
|
|
|
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 | ||
|
|
Year Ended December 31, 2012 |
||||
Basic: |
||||
Net income |
$ | 3,565,634 | ||
|
|
|||
Weighted average common shares outstanding, basic |
24,711,242 | |||
|
|
|||
Net income, basic |
$ | 0.14 | ||
|
|
|||
Diluted: |
||||
Net income |
$ | 3,565,634 | ||
|
|
|||
Weighted average common shares outstanding |
24,711,242 | |||
Add: Common stock equivalents |
645,063 | |||
|
|
|||
Weighted average common shares outstanding, diluted |
25,356,305 | |||
|
|
|||
Net income, diluted |
$ | 0.14 | ||
|
|
|
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 December 31, 2012 |
||||||||||||||||
Cash equivalents — money market funds |
49,209,098 | 49,209,098 | — | — | ||||||||||||
Cash equivalents — bank deposits |
5,037,169 | — | 5,037,169 | — | ||||||||||||
Short-term marketable securities — U.S. government agency securities |
100,160,889 | 90,138,019 | 10,022,870 | — | ||||||||||||
Contingent consideration liability |
161,494 | — | — | 161,494 |
A reconciliation of the beginning and ending Level 3 liability is as follows:
Years Ended December 31, |
||||||||
2011 | 2012 | |||||||
Balance beginning of period |
$ | — | $ | 212,536 | ||||
Additions to Level 3 |
192,561 | — | ||||||
Payments |
— | (89,012 | ) | |||||
Change in fair value (included within research and development expense) |
19,975 | 37,970 | ||||||
|
|
|
|
|||||
Balance end of period |
$ | 212,536 | $ | 161,494 | ||||
|
|
|
|
|
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 | ||
|
|
|
Changes in goodwill for the years ended December 31, 2011 and 2012, are as follows:
Balance, December 31, 2010 |
$ | 615,299 | ||
Goodwill related to the acquisition of Cosm |
6,934,966 | |||
Foreign currency translation adjustments |
(291,522 | ) | ||
|
|
|||
Balance, December 31, 2011 |
$ | 7,258,743 | ||
Goodwill related to the acquisition of Bold |
11,178,000 | |||
Foreign currency translation adjustments |
446,706 | |||
|
|
|||
Balance, December 31, 2012 |
$ | 18,883,449 | ||
|
|
Intangible assets consist of the following:
December 31, 2011 | December 31, 2012 | |||||||||||||||||||||||||||
Estimated Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||||
Identifiable intangible assets: |
||||||||||||||||||||||||||||
Trademark |
1-5 years | $ | 635,506 | $ | 635,506 | $ | — | $ | 665,844 | $ | 665,844 | $ | — | |||||||||||||||
Customer base |
5-7 years | 1,003,068 | 1,003,068 | — | 3,789,117 | 1,447,297 | 2,341,820 | |||||||||||||||||||||
Domain names |
5 years | 222,826 | 51,499 | 171,327 | 534,257 | 137,378 | 396,879 | |||||||||||||||||||||
Software |
4 years | 298,977 | 298,977 | — | 298,977 | 298,977 | — | |||||||||||||||||||||
Technology |
3-6 years | 1,361,900 | 1,361,900 | — | 2,463,402 | 1,580,896 | 882,506 | |||||||||||||||||||||
Technology and know-how |
3-6 years | 3,113,381 | 469,376 | 2,644,005 | 3,256,803 | 1,576,600 | 1,680,203 | |||||||||||||||||||||
Non-Compete agreements |
5 years | — | — | — | 161,691 | 8,721 | 152,970 | |||||||||||||||||||||
Internally developed software |
3 years | 539,612 | 94,332 | 445,280 | 1,281,589 | 367,943 | 913,646 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 7,175,270 | $ | 3,914,658 | $ | 3,260,612 | $ | 12,451,680 | $ | 6,083,656 | $ | 6,368,024 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Future estimated amortization expense for intangible assets is as follows at December 31, 2012:
Amortization Expense (Years Ending December 31) |
Amount | |||
2013 |
2,325,692 | |||
2014 |
1,783,789 | |||
2015 |
944,588 | |||
2016 |
602,563 | |||
2017 |
412,704 | |||
Thereafter |
298,688 | |||
|
|
|||
Total |
$ | 6,368,024 | ||
|
|
|
Property and equipment consisted of the following:
December 31, | ||||||||
2011 | 2012 | |||||||
Computer equipment and software |
$ | 12,681,306 | $ | 15,616,589 | ||||
Office equipment |
1,593,117 | 1,947,310 | ||||||
Furniture & fixtures |
1,293,481 | 1,438,211 | ||||||
Construction in Progress |
— | 1,071,892 | ||||||
Leasehold improvements |
1,367,160 | 1,845,103 | ||||||
|
|
|
|
|||||
Total property and equipment |
16,935,064 | 21,919,105 | ||||||
Less accumulated depreciation and amortization |
(11,732,343 | ) | (15,343,434 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 5,202,721 | $ | 6,575,671 | ||||
|
|
|
|
|
Accrued expenses consisted of the following:
December 31, 2011 |
December 31, 2012 |
|||||||
Marketing programs |
$ | 1,770,611 | $ | 2,688,818 | ||||
Payroll and payroll related |
5,333,430 | 7,970,443 | ||||||
Professional fees |
795,720 | 1,711,926 | ||||||
Other accrued liabilities |
2,573,044 | 4,285,614 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 10,472,805 | $ | 16,656,801 | ||||
|
|
|
|
|
The domestic and foreign components of income before provision for income taxes are as follows:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Domestic |
$ | 15,918,650 | $ | 9,422,814 | $ | 7,789,014 | ||||||
Foreign |
2,688,965 | 372,650 | (1,532,649 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total income before provision for income taxes |
$ | 18,607,615 | $ | 9,795,464 | $ | 6,256,365 | ||||||
|
|
|
|
|
|
The provision for (benefit from) income taxes is as follows:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Current |
||||||||||||
Federal |
$ | 810,518 | $ | 5,477,164 | $ | 8,324,149 | ||||||
State |
423,119 | 235,074 | 1,180,472 | |||||||||
Foreign |
154,318 | 139,636 | 126,434 | |||||||||
|
|
|
|
|
|
|||||||
Total |
1,387,955 | 5,851,874 | 9,631,055 | |||||||||
|
|
|
|
|
|
|||||||
Deferred |
||||||||||||
Federal |
(4,391,436 | ) | (2,021,938 | ) | (4,926,220 | ) | ||||||
State |
521,472 | 187,825 | 44,104 | |||||||||
Foreign |
(9,020 | ) | 16,259 | (2,058,208 | ) | |||||||
|
|
|
|
|
|
|||||||
Total |
(3,878,984 | ) | (1,817,854 | ) | (6,940,324 | ) | ||||||
|
|
|
|
|
|
|||||||
Total provision for (benefit from) income taxes |
($ | 2,491,029 | ) | $ | 4,034,020 | $ | 2,690,731 | |||||
|
|
|
|
|
|
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, |
||||||||||||
2010 | 2011 | 2012 | ||||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Change in valuation allowance |
(45.9 | ) | 0.0 | (10.8 | ) | |||||||
Impact of permanent differences |
(0.2 | ) | 4.6 | 15.6 | ||||||||
Foreign tax rate differential |
(4.1 | ) | 0.3 | (11.5 | ) | |||||||
Research and development credits |
(2.4 | ) | (2.6 | ) | — | |||||||
State taxes, net of federal benefit |
5.2 | 3.4 | 13.8 | |||||||||
Impact of uncertain tax positions |
— | 2.0 | 0.8 | |||||||||
Other |
(1.0 | ) | (1.5 | ) | 0.1 | |||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
(13.4 | )% | 41.2 | % | 43.0 | % | ||||||
|
|
|
|
|
|
The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows:
December 31, | ||||||||
2011 | 2012 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 1,749,000 | $ | 3,222,000 | ||||
Deferred revenue |
1,191,000 | 1,715,000 | ||||||
Amortization |
840,000 | 897,000 | ||||||
Research and development credit carryforwards |
880,000 | 383,000 | ||||||
Bad debt reserves |
43,000 | 71,000 | ||||||
Stock compensation associated with non-qualified awards |
3,906,000 | 8,242,000 | ||||||
Other |
1,151,000 | 2,136,000 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
9,760,000 | 16,666,000 | ||||||
Deferred tax asset valuation allowance |
(2,969,000 | ) | (2,463,000 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
6,791,000 | 14,203,000 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Depreciation |
(626,000 | ) | (313,000 | ) | ||||
Goodwill amortization |
(266,000 | ) | (655,000 | ) | ||||
Other |
(4,000 | ) | — | |||||
|
|
|
|
|||||
Total deferred tax liabilities |
(896,000 | ) | (968,000 | ) | ||||
|
|
|
|
|||||
Total |
$ | 5,895,000 | $ | 13,235,000 | ||||
|
|
|
|
The Company has provided liabilities for uncertain tax provisions as follows:
Years
Ended December 31, |
||||||||
2011 | 2012 | |||||||
Beginning balance |
$ | — | $ | 198,000 | ||||
Gross decreases — tax positions in prior period |
— | — | ||||||
Gross increases — tax positions in current period |
198,000 | 53,000 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 198,000 | $ | 251,000 | ||||
|
|
|
|
|
Common Stock Reserved — As of December 31, 2011 and 2012, the Company has reserved the following number of shares of common stock for the exercise of stock options and restricted stock units:
Number of Shares as of | ||||||||
December 31, 2011 |
December 31, 2012 |
|||||||
Common stock options and restricted stock units |
4,169,866 | 4,908,311 | ||||||
|
|
|
|
|||||
Total reserved |
4,169,866 | 4,908,311 | ||||||
|
|
|
|
|
The Company used the following assumptions to apply the Black-Scholes option-pricing model:
Years Ended December 31, | ||||||
2010 | 2011 | 2012 | ||||
Expected dividend yield |
0.00% | 0.00% | 0.00% | |||
Risk-free interest rate |
1.03% - 2.46% | 0.91% - 2.28% | 0.64% - 0.87% | |||
Expected term (in years) |
5.56 - 6.25 | 5.56 - 6.25 | 5.56 - 6.25 | |||
Volatility |
65% - 75% | 60% | 55% - 60% |
The following table summarizes stock option activity:
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding, January 1, 2012 |
2,626,260 | $ | 22.34 | 7.4 | ||||||||||||
Granted |
775,816 | 34.31 | ||||||||||||||
Exercised |
(262,366 | ) | 10.22 | $ | 5,429,363 | |||||||||||
|
|
|||||||||||||||
Forfeited |
(198,612 | ) | 10.22 | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding, December 31, 2012 |
2,941,098 | $ | 25.90 | 7.2 | $ | 14,173,945 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Exercisable at December 31, 2012 |
1,361,728 | $ | 17.16 | 5.6 | $ | 13,090,809 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested or expected to vest at December 31, 2012 |
2,811,971 | $ | 25.54 | 7.1 | $ | 14,121,204 | ||||||||||
|
|
|
|
|
|
|
|
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 |
795,599 | 31.21 | ||||||
Restricted stock units vested |
— | — | ||||||
Restricted stock units forfeited |
(12,794 | ) | 35.70 | |||||
|
|
|
|
|||||
Unvested as of December 31, 2012 |
782,805 | $ | 31.14 | |||||
|
|
|
|
The Company recognized stock based compensation expense within the accompanying consolidated statements of income as summarized in the following table:
Years Ended December 31, | ||||||||||||
2010 | 2011 | 2012 | ||||||||||
Cost of revenue |
$ | 260,554 | $ | 316,109 | $ | 484,408 | ||||||
Research and development |
638,383 | 1,476,638 | 2,825,579 | |||||||||
Sales and marketing |
1,552,584 | 2,700,178 | 4,962,355 | |||||||||
General and administrative |
2,540,194 | 4,431,698 | 6,519,811 | |||||||||
|
|
|
|
|
|
|||||||
$ | 4,991,715 | $ | 8,924,623 | $ | 14,792,153 | |||||||
|
|
|
|
|
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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 December 31, 2012:
Years Ending December 31 |
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2013 |
9,564,000 | |||
2014 |
5,818,000 | |||
2015 |
5,542,000 | |||
2016 |
5,529,000 | |||
2017 |
4,388,000 | |||
Thereafter |
25,248,000 | |||
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Total minimum lease payments |
$ | 56,089,000 |
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For the Three Months Ended, | ||||||||||||||||||||||||||||||||
March 31, 2011(1) |
June 30, 2011 |
September 30, 2011(2) |
December 31, 2011 |
March 31, 2012 |
June 30, 2012 |
September 30, 2012 |
December 31, 2012(3) |
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(in thousands, except for per share data) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: |
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Revenue |
$ | 27,039 | $ | 29,098 | $ | 31,002 | $ | 32,322 | $ | 32,688 | $ | 33,797 | $ | 35,368 | $ | 36,985 | ||||||||||||||||
Gross profit |
24,503 | 26,652 | 28,404 | 29,328 | 29,271 | 30,372 | 31,681 | 33,010 | ||||||||||||||||||||||||
Income (loss) from operations |
(202 | ) | 4,005 | 1,972 | 3,723 | 1,172 | 2,256 | 1,549 | 1,034 | |||||||||||||||||||||||
Net income (loss) |
(65 | ) | 2,682 | 1,128 | 2,017 | 76 | 576 | 718 | 2,196 | |||||||||||||||||||||||
Net income (loss) per share-basic |
0.00 | 0.11 | 0.05 | 0.08 | 0.00 | 0.02 | 0.03 | 0.14 | ||||||||||||||||||||||||
Net income (loss) per share-diluted |
0.00 | 0.11 | 0.04 | 0.08 | 0.00 | 0.02 | 0.03 | 0.14 |
(1) | Comparability affected by a $1.3 million Gemini IP, LLC settlement and $2.9 million of patent litigation expense related to the Company’s defense against the patent infringement claim brought by 01 Communique. |
(2) | Comparability affected by a $1.3 million state sales tax settlement. |
(3) | Comparability affected by the reversal of the valuation allowance related to its Cosm deferred tax assets of approximately $677,000. |
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