LOGMEIN, INC., 10-K filed on 2/22/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Feb. 19, 2013
Jun. 30, 2012
Entity Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
LOGM 
 
 
Entity Registrant Name
LogMeIn, Inc. 
 
 
Entity Central Index Key
0001420302 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
24,814,207 
 
Entity Public Float
 
 
$ 665,263,305 
Consolidated Balance Sheets (USD $)
Dec. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 111,931,599 
$ 103,603,684 
Marketable securities
100,160,889 
95,040,045 
Accounts receivable (net of allowance for doubtful accounts of $109,000 and $180,000 as of December 31, 2011 and December 31, 2012, respectively)
13,231,017 
8,747,104 
Prepaid expenses and other current assets
3,619,864 
2,411,640 
Deferred income tax assets
3,214,311 
1,980,342 
Total current assets
232,157,680 
211,782,815 
Property and equipment, net
6,575,671 
5,202,721 
Restricted cash
3,806,603 
369,792 
Intangibles, net
6,368,024 
3,260,612 
Goodwill
18,883,449 
7,258,743 
Other assets
1,550,497 
242,122 
Deferred income tax assets
10,195,860 
3,940,312 
Total assets
279,537,784 
232,057,117 
Current liabilities:
 
 
Accounts payable
7,773,102 
6,275,163 
Accrued liabilities
16,656,801 
10,472,805 
Deferred revenue, current portion
65,874,832 
55,961,859 
Total current liabilities
90,304,735 
72,709,827 
Deferred revenue, net of current portion
3,774,049 
2,302,465 
Other long-term liabilities
821,736 
1,239,136 
Total liabilities
94,900,520 
76,251,428 
Commitments and contingencies (Note 12)
   
   
Preferred stock, $0.01 par value - 5,000,000 shares authorized, 0 shares outstanding as of December 31, 2011 and December 31, 2012
   
   
Equity:
 
 
Common stock, $0.01 par value - 75,000,000 shares authorized as of December 31, 2011 and December 31, 2012; 24,551,641 and 24,814,007 shares issued and outstanding as of December 31, 2011 and December 31, 2012, respectively
248,140 
245,516 
Additional paid-in capital
178,546,385 
154,440,369 
Retained earnings
6,242,762 
2,677,128 
Accumulated other comprehensive loss
(400,023)
(1,557,324)
Total equity
184,637,264 
155,805,689 
Total liabilities and equity
$ 279,537,784 
$ 232,057,117 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Allowance for doubtful accounts
$ 180,000 
$ 109,000 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
75,000,000 
75,000,000 
Common stock, shares issued
24,814,007 
24,551,641 
Common stock, shares outstanding
24,814,007 
24,551,641 
Consolidated Statements of Income (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue (including $9,580,000, $0 and $0 from a related party during the years ended December 31, 2010, 2011 and 2012, respectively)
$ 138,837,125 
$ 119,460,926 
$ 101,057,207 
Cost of revenue
14,503,859 
10,573,781 
9,124,645 
Gross profit
124,333,266 
108,887,145 
91,932,562 
Operating expenses
 
 
 
Research and development
26,361,324 
20,780,061 
15,213,902 
Sales and marketing
70,058,389 
57,155,727 
45,868,817 
General and administrative
21,337,507 
19,975,048 
12,319,316 
Legal settlements
 
1,250,000 
 
Amortization of acquired intangibles
565,205 
228,138 
337,753 
Total operating expenses
118,322,425 
99,388,974 
73,739,788 
Income from operations
6,010,841 
9,498,171 
18,192,774 
Interest income
887,315 
862,966 
634,657 
Interest expense
(352)
(1,207)
(1,000)
Other expense
(641,439)
(564,466)
(218,816)
Income before income taxes
6,256,365 
9,795,464 
18,607,615 
Benefit from (provision for) income taxes
(2,690,731)
(4,034,020)
2,491,029 
Net income
$ 3,565,634 
$ 5,761,444 
$ 21,098,644 
Net income per share:
 
 
 
Basic
$ 0.14 
$ 0.24 
$ 0.91 
Diluted
$ 0.14 
$ 0.23 
$ 0.85 
Weighted average shares outstanding:
 
 
 
Basic
24,711,242 
24,175,621 
23,244,479 
Diluted
25,356,305 
25,154,599 
24,839,905 
Consolidated Statements of Income (Parenthetical) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue from related party
$ 0 
$ 0 
$ 9,580,000 
Consolidated Statements of Comprehensive Income (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Net income
$ 3,565,634 
$ 5,761,444 
$ 21,098,644 
Other comprehensive (loss) gain:
 
 
 
Net unrealized gains (losses) on marketable securities, net of tax
56,952 
(32,978)
79,570 
Net translation (losses) gains
1,100,349 
(1,323,237)
(283,130)
Total other comprehensive (loss) gain
1,157,301 
(1,356,215)
(203,560)
Comprehensive income
$ 4,722,935 
$ 4,405,229 
$ 20,895,084 
Consolidated Statements of Equity (USD $)
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
(Accumulated Deficit) Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Balance at Dec. 31, 2009
$ 98,509,351 
$ 224,488 
$ 122,465,372 
$ (24,182,960)
$ 2,451 
Balance, shares at Dec. 31, 2009
 
22,448,808 
 
 
 
Issuance of common stock upon exercise of stock options
4,834,883 
14,097 
4,820,786 
 
 
Issuance of common stock upon exercise of stock options, shares
 
1,409,706 
 
 
 
Income tax benefit from stock options exercises
1,149,843 
 
1,149,843 
 
 
Reversal of accrued offering costs in connection with secondary public offering
25,222 
 
25,222 
 
 
Stock-based compensation
4,963,875 
 
4,963,875 
 
 
Net income
21,098,644 
 
 
21,098,644 
 
Unrealized gain on available-for-sale securities
79,570 
 
 
 
79,570 
Cumulative translation adjustments
(283,130)
 
 
 
(283,130)
Balance at Dec. 31, 2010
130,378,258 
238,585 
133,425,098 
(3,084,316)
(201,109)
Balance, shares at Dec. 31, 2010
 
23,858,514 
 
 
 
Issuance of common stock upon exercise of stock options
6,207,129 
6,931 
6,200,198 
 
 
Issuance of common stock upon exercise of stock options, shares
 
693,127 
 
 
 
Income tax benefit from stock options exercises
5,886,968 
 
5,886,968 
 
 
Stock-based compensation
8,928,105 
 
8,928,105 
 
 
Net income
5,761,444 
 
 
5,761,444 
 
Unrealized gain on available-for-sale securities
(32,978)
 
 
 
(32,978)
Cumulative translation adjustments
(1,323,237)
 
 
 
(1,323,237)
Balance at Dec. 31, 2011
155,805,689 
245,516 
154,440,369 
2,677,128 
(1,557,324)
Balance, shares at Dec. 31, 2011
 
24,551,641 
 
 
 
Issuance of common stock upon exercise of stock options
2,681,861 
2,624 
2,679,237 
 
 
Issuance of common stock upon exercise of stock options, shares
262,366 
262,366 
 
 
 
Income tax benefit from stock options exercises
6,634,626 
 
6,634,626 
 
 
Stock-based compensation
14,792,153 
 
14,792,153 
 
 
Net income
3,565,634 
 
 
3,565,634 
 
Unrealized gain on available-for-sale securities
56,952 
 
 
 
56,952 
Cumulative translation adjustments
1,100,349 
 
 
 
1,100,349 
Balance at Dec. 31, 2012
$ 184,637,264 
$ 248,140 
$ 178,546,385 
$ 6,242,762 
$ (400,023)
Balance, shares at Dec. 31, 2012
 
24,814,007 
 
 
 
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities
 
 
 
Net income
$ 3,565,634 
$ 5,761,444 
$ 21,098,644 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
6,099,593 
4,402,592 
3,719,721 
Amortization of premium on investments
53,855 
133,547 
239,090 
Provision for bad debts
100,000 
85,000 
87,500 
(Benefit from) provision for deferred income taxes
(830,599)
3,793,440 
(2,673,141)
Income tax benefit from the exercise of stock options
(6,634,625)
(5,886,968)
(1,149,843)
Stock-based compensation
14,792,153 
8,924,623 
4,991,715 
(Gain) loss on disposal of equipment
12,551 
(396)
(1,882)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(4,471,236)
(4,087,712)
(682,247)
Prepaid expenses and other current assets
(1,070,297)
493,978 
(1,071,375)
Other assets
(1,308,375)
(215,102)
2,899 
Accounts payable
1,552,346 
3,787,188 
(331,753)
Accrued liabilities
5,815,827 
(530,853)
3,643,713 
Deferred revenue
10,959,853 
15,471,169 
8,690,287 
Other long-term liabilities
(417,399)
738,980 
(94,775)
Fair value adjustment to contingent consideration
37,970 
 
 
Net cash provided by operating activities
28,257,251 
32,870,930 
36,468,553 
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(135,084,650)
(150,065,750)
(185,348,800)
Proceeds from sale or disposal of marketable securities
130,000,000 
145,000,000 
125,000,000 
Purchases of property and equipment
(5,277,226)
(2,322,480)
(4,243,166)
Intangible asset additions
(1,048,830)
(346,375)
(416,062)
Cash paid for acquisition, net of cash acquired
(14,831,525)
(10,000,000)
 
Decrease (increase) in restricted cash and deposits
(3,557,760)
(25,569)
5,118 
Net cash used in investing activities
(29,799,991)
(17,760,174)
(65,002,910)
Cash flows from financing activities
 
 
 
Payments of issuance costs related to secondary offering of common stock
 
 
(195,840)
Proceeds from issuance of common stock upon option exercises
2,681,861 
6,207,129 
4,834,883 
Income tax benefit from the exercise of stock options
6,634,625 
5,886,968 
1,149,843 
Payment of contingent consideration
(89,012)
 
 
Net cash provided by financing activities
9,227,474 
12,094,097 
5,788,886 
Effect of exchange rate changes on cash and cash equivalents and restricted cash
643,181 
(881,156)
(264,543)
Net (decrease) increase in cash and cash equivalents
8,327,915 
26,323,697 
(23,010,014)
Cash and cash equivalents, beginning of period
103,603,684 
77,279,987 
100,290,001 
Cash and cash equivalents, end of period
111,931,599 
103,603,684 
77,279,987 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
352 
1,207 
1,000 
Cash paid for income taxes
1,802,439 
356,162 
612,566 
Noncash investing and financing activities
 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
742,142 
670,744 
388,501 
Fair value of contingent consideration in connection with acquisition included in accrued liabilities and other long term liabilities
$ 161,494 
$ 212,536 
 
Nature of the Business
Nature of the Business
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.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies

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

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.

Fair Value of Financial Instruments
Fair Value of Financial Instruments
3. Fair Value of Financial Instruments

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

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

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

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

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

 

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

(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Balance at December 31, 2011

           

Cash equivalents — money market funds

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

Cash equivalents — bank deposits

     5,032,135                 5,032,135           

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

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

Contingent consideration liability

     212,536                         212,536   

Balance at 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   

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,
 
     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   
  

 

 

    

 

 

 
Acquisitions
Acquisitions
4. Acquisitions

On July 19, 2011, the Company acquired substantially all of the assets of Connected Environments (BVI) Limited, a British Virgin Island limited company and Connected Environments, Limited, a U.K. limited company (collectively, “Connected Environments”), primarily including their Cosm service, for an initial cash payment of $10 million plus contingent payments totaling up to $5.2 million. The Cosm service is a cloud-based connectivity and data management platform for the Internet of Things. The Company acquired Cosm to expand its capabilities with embedded devices and enter into the Internet of Things market.

The 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   
  

 

 

 

Total purchase price

     10,192,561   

Liability for contingent consideration

     (192,561 )
  

 

 

 

Cash paid

   $ 10,000,000   
  

 

 

 

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

Goodwill and Intangible Assets
Goodwill and Intangible Assets
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   
  

 

 

 
Property and Equipment
Property and Equipment
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.

Accrued Expenses
Accrued Expenses
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   
  

 

 

    

 

 

 
Income Taxes
Income Taxes
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.

Common Stock and Equity
Common Stock and Equity
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   
  

 

 

    

 

 

 
Stock Incentive Plan
Stock Incentive Plan
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.

401(k) Plan
401(k) Plan
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.

Commitments and Contingencies
Commitments and Contingencies
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.

Related Party
Related Party
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.

Subsequent Event
Subsequent Event
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.

Quarterly Information (Unaudited)
Quarterly Information (Unaudited)
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.
Summary of Significant Accounting Policies (Policies)

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

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.

Summary of Significant Accounting Policies (Tables)

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   
  

 

 

 
Fair Value of Financial Instruments (Tables)

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

 

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

(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Balance at December 31, 2011

           

Cash equivalents — money market funds

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

Cash equivalents — bank deposits

     5,032,135                 5,032,135           

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

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

Contingent consideration liability

     212,536                         212,536   

Balance at 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   
  

 

 

    

 

 

 
Acquisitions (Tables)

The purchase price was allocated as follows:

 

     Amount  

Tangible assets

   $ 7,595   

Technology and know-how

     3,250,000   

Goodwill

     6,934,966   
  

 

 

 

Total purchase price

     10,192,561   

Liability for contingent consideration

     (192,561 )
  

 

 

 

Cash paid

   $ 10,000,000   
  

 

 

 

The purchase price was allocated as follows:

 

     Amount  

Cash

   $ 482,000   

Current assets

     126,000   

Other assets

     19,000   

Deferred revenue

     (424,000

Other liabilities

     (107,000

Completed technology

     1,090,000   

Trade name and trademark

     30,000   

Customer relationships

     2,760,000   

Non-compete agreements

     160,000   

Goodwill

     11,178,000   
  

 

 

 

Total purchase price

   $ 15,314,000   
  

 

 

 
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the 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 (Tables)
Schedule of 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   
  

 

 

   

 

 

 
Accrued Expenses (Tables)
Summary of 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   
  

 

 

    

 

 

 
Income Taxes (Tables)

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 and Equity (Tables)
Reserved Common Stock for Stock Options and Restricted Stock Units

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   
  

 

 

    

 

 

 
Stock Incentive Plan (Tables)

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   
  

 

 

    

 

 

    

 

 

 
Commitments and Contingencies (Tables)
Schedule of Minimum Future Lease Payments Receivable

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

 

 

 
Quarterly Information (Unaudited) (Tables)
Statement of Operations Data
    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 $677,000.
Summary of Significant Accounting Policies - Additional Information (Detail)
1 Months Ended 12 Months Ended 12 Months Ended
Nov. 30, 2012
Customer
Patents
Oct. 31, 2012
Customer
Dec. 31, 2012
USD ($)
Customer
Dec. 31, 2011
USD ($)
Customer
Dec. 31, 2010
USD ($)
Customer
Dec. 31, 2012
EUR (€)
Mar. 31, 2012
USD ($)
Dec. 31, 2012
Minimum [Member]
Dec. 31, 2012
Maximum [Member]
Dec. 31, 2012
Budapest [Member]
EUR (€)
Dec. 31, 2011
Budapest [Member]
EUR (€)
Dec. 31, 2012
Hungary [Member]
USD ($)
Dec. 31, 2011
Hungary [Member]
USD ($)
Dec. 31, 2012
Sydney [Member]
AUD ($)
Dec. 31, 2011
Sydney [Member]
AUD ($)
Dec. 31, 2012
Australia office [Member]
USD ($)
Dec. 31, 2011
Australia office [Member]
USD ($)
Mar. 31, 2012
Massachusetts [Member]
USD ($)
Organization And Summary Of Significant Accounting Policies [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents maturity period
 
 
Less than three months 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities, maturities remaining
 
 
2 years