LOGMEIN, INC., 10-K filed on 2/19/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2015
Feb. 12, 2016
Jun. 30, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
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
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
25,099,749 
 
Entity Public Float
 
 
$ 1,198,888,576 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 123,143 
$ 100,960 
Marketable securities
85,284 
100,209 
Accounts receivable (net of allowance for doubtful accounts of $301 and $274 as of December 31, 2014 and December 31, 2015, respectively)
16,011 
18,286 
Prepaid expenses and other current assets
11,997 
4,545 
Restricted cash, current portion
 
1,492 
Deferred tax assets
 
5,403 
Total current assets
236,435 
230,895 
Property and equipment, net
21,711 
13,476 
Restricted cash, net of current portion
2,467 
2,531 
Intangibles, net
71,590 
18,983 
Deferred tax assets
117,545 
37,928 
Other assets
5,753 
4,756 
Deferred income tax assets
198 
9,280 
Total assets
455,699 
317,849 
Current liabilities:
 
 
Accounts payable
10,327 
7,055 
Accrued liabilities
31,674 
29,482 
Deferred revenue, current portion
134,297 
101,672 
Total current liabilities
176,298 
138,209 
Long-term debt
60,000 
 
Deferred revenue, net of current portion
2,692 
3,578 
Deferred tax liabilities
5,812 
 
Other long-term liabilities
3,086 
2,218 
Total liabilities
247,888 
144,005 
Commitments and contingencies (Note 11)
   
   
Preferred stock, $0.01 par value - 5,000,000 shares authorized, 0 shares outstanding as of December 31, 2014 and December 31, 2015
   
   
Equity:
 
 
Common stock, $0.01 par value - 75,000,000 shares authorized as of December 31, 2014 and December 31, 2015; 26,530,977 and 27,540,008 shares issued as of December 31, 2014 and December 31, 2015, respectively; 24,418,760 and 25,130,330 outstanding as of December 31, 2014 and December 31, 2015, respectively
275 
267 
Additional paid-in capital
276,793 
237,203 
Retained earnings
21,074 
6,516 
Accumulated other comprehensive loss
(5,216)
(3,117)
Treasury stock, at cost - 2,112,217 and 2,409,678 shares as of December 31, 2014 and December 31, 2015, respectively
(85,115)
(67,025)
Total equity
207,811 
173,844 
Total liabilities and equity
$ 455,699 
$ 317,849 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 274 
$ 301 
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
27,540,008 
26,530,977 
Common stock, shares outstanding
25,130,330 
24,418,760 
Treasury stock, shares
2,409,678 
2,112,217 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]
 
 
 
Revenue
$ 271,600 
$ 221,956 
$ 166,258 
Cost of revenue
35,458 
28,732 
18,816 
Gross profit
236,142 
193,224 
147,442 
Operating expenses
 
 
 
Research and development
42,597 
33,516 
29,023 
Sales and marketing
138,946 
119,508 
88,794 
General and administrative
33,034 
30,526 
29,181 
Legal settlements
3,600 
 
1,688 
Amortization of acquired intangibles
1,916 
987 
682 
Total operating expenses
220,093 
184,537 
149,368 
(Loss) income from operations
16,049 
8,687 
(1,926)
Interest income
654 
604 
549 
Interest expense
(574)
(2)
(2)
Other (expense) income, net
1,389 
105 
(89)
(Loss) income before income taxes
17,518 
9,394 
(1,468)
Provision for income taxes
(2,960)
(1,439)
(6,214)
Net (loss) income
$ 14,558 
$ 7,955 
$ (7,682)
Net (loss) income per share:
 
 
 
Basic
$ 0.59 
$ 0.33 
$ (0.32)
Diluted
$ 0.56 
$ 0.31 
$ (0.32)
Weighted average shares outstanding:
 
 
 
Basic
24,826,363 
24,385,297 
24,350,913 
Diluted
25,779,928 
25,386,199 
24,350,913 
Consolidated Statements of Comprehensive (Loss) Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
Net (loss) income
$ 14,558 
$ 7,955 
$ (7,682)
Other comprehensive (loss) gain:
 
 
 
Net unrealized (losses) gains on marketable securities, (net of tax benefit of $14 and $61 for the years ended December 31, 2013 and 2014 and net of tax provision of $31 for the year ended December 31, 2015)
55 
(107)
(25)
Net translation losses
(2,154)
(1,824)
(761)
Total other comprehensive loss
(2,099)
(1,931)
(786)
Comprehensive (loss) income
$ 12,459 
$ 6,024 
$ (8,468)
Consolidated Statements of Comprehensive (Loss) Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
Net unrealized (losses) gains on marketable securities, tax (benefit) provision
$ 31 
$ (61)
$ (14)
Consolidated Statements of Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
(Accumulated Deficit) Retained Earnings [Member]
Accumulated Other Comprehensive Loss [Member]
Treasury Stock [Member]
Balance at Dec. 31, 2012
$ 184,637 
$ 248 
$ 178,546 
$ 6,243 
$ (400)
 
Balance, shares at Dec. 31, 2012
 
24,814,007 
 
 
 
 
Issuance of common stock upon exercise of stock options
3,798 
3,794 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
373,761 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(1,834)
(1,836)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
184,076 
 
 
 
 
Excess tax benefits realized from stock-based awards
17 
 
17 
 
 
 
Stock-based compensation
19,714 
 
19,714 
 
 
 
Treasury stock
(30,525)
 
 
 
 
(30,525)
Treasury stock, shares
 
(1,268,643)
 
 
 
 
Net income (loss)
(7,682)
 
 
(7,682)
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
(25)
 
 
 
(25)
 
Cumulative translation adjustments
(761)
 
 
 
(761)
 
Balance at Dec. 31, 2013
167,339 
254 
200,235 
(1,439)
(1,186)
(30,525)
Balance, shares at Dec. 31, 2013
 
24,103,201 
 
 
 
 
Issuance of common stock upon exercise of stock options
17,595 
17,586 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
858,988 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(5,766)
(5,770)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
300,145 
 
 
 
 
Excess tax benefits realized from stock-based awards
383 
 
383 
 
 
 
Stock-based compensation
24,769 
 
24,769 
 
 
 
Treasury stock
(36,500)
 
 
 
 
(36,500)
Treasury stock, shares
(843,574)
(843,574)
 
 
 
 
Net income (loss)
7,955 
 
 
7,955 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
(107)
 
 
 
(107)
 
Cumulative translation adjustments
(1,824)
 
 
 
(1,824)
 
Balance at Dec. 31, 2014
173,844 
267 
237,203 
6,516 
(3,117)
(67,025)
Balance, shares at Dec. 31, 2014
 
24,418,760 
 
 
 
 
Issuance of common stock upon exercise of stock options
17,794 
17,788 
 
 
 
Issuance of common stock upon exercise of stock options, shares
612,000 
611,947 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(11,641)
(11,643)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
397,084 
 
 
 
 
Excess tax benefits realized from stock-based awards
6,946 
 
6,946 
 
 
 
Stock-based compensation
26,499 
 
26,499 
 
 
 
Treasury stock
(18,090)
 
 
 
 
(18,090)
Treasury stock, shares
(297,461)
(297,461)
 
 
 
 
Net income (loss)
14,558 
 
 
14,558 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
55 
 
 
 
55 
 
Cumulative translation adjustments
(2,154)
 
 
 
(2,154)
 
Balance at Dec. 31, 2015
$ 207,811 
$ 275 
$ 276,793 
$ 21,074 
$ (5,216)
$ (85,115)
Balance, shares at Dec. 31, 2015
 
25,130,330 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities
 
 
 
Net (loss) income
$ 14,558 
$ 7,955 
$ (7,682)
Adjustments to reconcile net (loss) income to net cash provided by operating activities
 
 
 
Depreciation and amortization
13,698 
11,137 
7,704 
Amortization of premium on investments
328 
224 
198 
Amortization of deferred financing costs
187 
 
 
Provision for bad debts
61 
102 
116 
Provision for (benefit from) deferred income taxes
(1,062)
(2,707)
926 
Excess tax benefits realized from stock-based awards
(2,743)
(383)
(17)
Stock-based compensation
26,499 
24,769 
19,714 
Other, net
(12)
21 
 
Changes in assets and liabilities excluding effect of acquisitions:
 
 
 
Accounts receivable
2,224 
(5,804)
302 
Prepaid expenses and other current assets
(2,794)
1,822 
(2,986)
Other assets
(454)
476 
(3,764)
Accounts payable
1,420 
1,727 
(2,233)
Accrued liabilities
2,288 
9,234 
3,457 
Deferred revenue
28,874 
23,983 
14,493 
Other long-term liabilities
2,698 
1,597 
(208)
Net cash provided by operating activities
85,770 
74,153 
30,020 
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(92,335)
(95,342)
(90,376)
Proceeds from sale or disposal or maturity of marketable securities
107,042 
95,045 
90,000 
Purchases of property and equipment
(14,219)
(7,471)
(10,938)
Intangible asset additions
(2,375)
(2,529)
(13,061)
Cash paid for acquisition, net of cash acquired
(107,575)
(22,449)
 
(Increase) decrease in restricted cash and deposits
1,488 
(196)
Net cash used in investing activities
(107,974)
(32,942)
(24,368)
Cash flows from financing activities
 
 
 
Borrowings under credit facility
60,000 
 
 
Proceeds from issuance of common stock upon option exercises
17,794 
17,595 
3,798 
Excess tax benefits realized from stock-based awards
2,743 
383 
17 
Payments of withholding taxes in connection with restricted stock unit vesting
(11,641)
(5,766)
(1,834)
Payment of debt issuance costs
(988)
 
 
Payment of contingent consideration
(226)
 
(104)
Purchase of treasury stock
(18,090)
(36,500)
(30,525)
Net cash (used in) provided by financing activities
49,592 
(24,288)
(28,648)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(5,205)
(5,220)
321 
Net (decrease) increase in cash and cash equivalents
22,183 
11,703 
(22,675)
Cash and cash equivalents, beginning of period
100,960 
89,257 
111,932 
Cash and cash equivalents, end of period
123,143 
100,960 
89,257 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
574 
Cash paid for income taxes
861 
1,489 
10,094 
Noncash investing and financing activities
 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
3,145 
1,032 
1,510 
Fair value of contingent consideration in connection with acquisition included in accrued liabilities and other long term liabilities
2,028 
249 
 
Debt issuance costs included in accounts payable and accrued liabilities
 
$ 13 
 
Nature of the Business
Nature of the Business
1. Nature of the Business

LogMeIn, Inc. (the “Company”) provides a portfolio of cloud-based service offerings which make it possible for people and businesses to simply and securely connect to their workplace, colleagues and customers. The Company’s product line includes AppGuru™, BoldChat®, Cubby™, join.me®, LastPass®, LogMeIn Pro®, LogMeIn® Central™, LogMeIn Rescue®, LogMeIn® Rescue+Mobile™, LogMeIn Backup®, LogMeIn for iOS, LogMeIn Hamachi®, MeldiumTM, Xively™ and RemotelyAnywhere®. The Company is headquartered in Boston, Massachusetts with wholly-owned subsidiaries located in Hungary, The Netherlands, Australia, the United Kingdom, Brazil, Bermuda, Japan, Ireland, and India.

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

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

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

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

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss 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, 2014 and 2015, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $100.3 million and $85.3 million, respectively. The securities have an aggregate fair value of $100.2 million and $85.3 million, including $9,000 and $10,000 of unrealized gains and $138,000 and $53,000 of unrealized losses, at December 31, 2014 and 2015 respectively.

Restricted Cash — 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 in accordance with the lease. In 2015, $1.5 million of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. Such amounts are classified as restricted cash in the accompanying consolidated balance sheets. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash.

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 (in thousands):

 

     December 31,  
     2013      2014      2015  

Balance beginning of period

   $ 180       $ 269       $ 301   

Provision for bad debt

     116         102         61   

Uncollectible accounts written off

     27         70         88   
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 269       $ 301       $ 274   
  

 

 

    

 

 

    

 

 

 

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 operations. 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. The Company does not amortize goodwill, but performs an impairment test of goodwill annually or 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, 2015, the fair value of the Company as a whole significantly exceeds the carrying amount of the Company. Through December 31, 2015, 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 up to eleven 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, 2015, the Company recorded no material impairments.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its LogMeIn premium services and to a lesser extent, the delivery of professional services, primarily related to its Xively business.

Revenue from the Company’s LogMeIn premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten 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.

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 of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

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 related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from multi-element arrangements accounted for as a single unit of accounting which do not have value to the customer has been immaterial to date.

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, 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, 2015 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, 2013, 2014 or 2015. As of December 31, 2014, one customer accounted for 15% of accounts receivable.

Legal Costs — Legal expenditures are expensed as incurred.

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

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.

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.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. 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 gains of approximately $0.1 million and $1.4 million for the years ended December 31, 2014 and 2015, respectively, included in other income in the consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period of the award, for those awards expected to vest, on a straight-line basis. 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 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, 2015, the Company has provided a liability for approximately $0.9 million 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, 2013, 2014 and 2015 was approximately $27.8 million, $36.8 million and $35.8 million, 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 operations.

Comprehensive Loss — Comprehensive loss 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 comprehensive loss was approximately $3.1 million at December 31, 2014 and consisted of $3.0 million related to foreign currency translation adjustments in addition to $0.1 million in unrealized losses, net of tax on available-for sale securities. Accumulated comprehensive loss was approximately $5.2 million at December 31, 2015 and consisted of $5.2 million related to foreign currency translation adjustments offset by $27,000 of unrealized losses, net of tax on available-for sale securities.

Fair Value of Financial Instruments — The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, and accounts payable, approximate their fair values due to their short maturities.

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

 

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

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

United States

   $ 109,444       $ 148,532       $ 191,300   

United Kingdom

     15,058         19,452         21,662   

International — all other

     41,756         53,972         58,638   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

Collaboration cloud

   $ 35,176       $ 62,746       $ 88,234   

Identity and Access Management cloud

     55,647         74,244         92,712   

Service and Support cloud

     75,433         82,767         88,206   

Other

     2         2,199         2,448   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2013      2014      2015  

United States

   $ 10,207       $ 9,731       $ 16,342   

Hungary

     1,224         2,018         2,525   

Ireland

     1,057         1,139         1,963   

International — all other

     710         588         881   
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,198       $ 13,476       $ 21,711   
  

 

 

    

 

 

    

 

 

 

Net (Loss) Income Per Share — Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share is computed by dividing net (loss) 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. For the year ended December 31, 2013, the Company incurred a net loss and therefore, the effect of the Company’s outstanding common stock equivalents were not included in the calculation of diluted loss per share as they were anti-dilutive. Accordingly, basic and dilutive net loss per share for each period were identical.

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net (loss) income per share either because they had an anti-dilutive impact or because the Company had a net loss in the period (in thousands):

 

     Years Ended December 31,  
       2013          2014          2015    

Options to purchase common shares

     2,389         57           

Restricted stock units

     1,192         18         204   
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     3,581         75         204   
  

 

 

    

 

 

    

 

 

 

 

Basic and diluted net (loss) income per share was calculated as follows (in thousands, except per share data):

 

     Years ended December 31,  
     2013      2014      2015  

Basic:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,351         24,385         24,826   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, basic

   $ (0.32    $ 0.33       $ 0.59   
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,351         24,385         24,826   

Add: Common stock equivalents

             1,001         954   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     24,351         25,386         25,780   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, diluted

   $ (0.32    $ 0.31       $ 0.56   
  

 

 

    

 

 

    

 

 

 

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.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or 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, in many cases, unlimited. Through December 31, 2015, the Company has not experienced any losses related to these indemnification obligations.

Recently Issued Accounting Pronouncements — On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its final standard on revenue from contracts with customers. ASU 2014-9 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property plant and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2018, with early adoption permitted, but not earlier than January 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

On June 19, 2014, the FASB issued ASU 2014-12, Stock Compensation (“ASU 2014-12”), providing guidance on accounting for stock-based payment awards when the terms of an award provide that a performance target could be achieved after the requisite service period. The update clarifies that performance targets that can be achieved after the requisite service period of a stock-based payment award be treated as performance conditions that affect vesting. These awards should be accounted for under Accounting Standards Codification Topic 718, Compensation — Stock Compensation, and existing guidance should be applied as it relates to awards with performance conditions that affect vesting. The update is effective for the Company for the interim and annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of this standard, if any, on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period and early adoption is permitted. The Company has not elected to early adopt ASU 2015-03 and instead, this standard will be effective for its fiscal year ending December 31, 2016. The Company is currently evaluating the impact of the adoption of this standard, if any, on its consolidated financial statements.

On April 15, 2015 the FASB issued Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05) which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. Under the new standard, customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. The new standard is effective for annual periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. The Company does not believe the standard will have a material impact on its consolidated financial statements.

On September 25, 2015 the FASB issued Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16) that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for the Company for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

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 are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table summarizes the basis used to measure certain of the Company’s financial assets and contingent consideration liability that are carried at fair value (in thousands):

 

       Fair Value Measurements at December 31, 2014 Using     
       Level 1          Level 2          Level 3          Total    

Financial Assets:

           

Cash equivalents — money market funds

   $ 13,139       $       $       $ 13,139   

Cash equivalents — bank deposits

             5,003                 5,003   

Short-term marketable securities :

           

U.S. government agency securities

     59,903         19,950                 79,853   

Corporate bond securities

             20,356                 20,356   

Contingent consideration liability

                     249         249   
     Fair Value Measurements at December 31, 2015 Using  
     Level 1      Level 2      Level 3      Total  

Financial Assets:

           

Cash equivalents — money market funds

   $ 10,138       $       $       $ 10,138   

Cash equivalents — bank deposits

             1                 1   

Short-term marketable securities :

           

U.S. government agency securities

     50,237         17,994                 68,231   

Corporate bond securities

             17,053                 17,053   

Contingent consideration liability

                     2,028         2,028   

Bank deposits, corporate bonds and certain U.S. government agency securities are classified within the second level of the fair value hierarchy as the fair value of those assets are determined based upon quoted prices for similar assets.

The Level 3 liability consists of contingent consideration related to the August 27, 2014 acquisition of Meldium, the September 5, 2014 acquisition of Zamurai and the October 15, 2015 acquisition of LastPass, each as further described in Note 4 below. The LastPass contingent consideration of up to $2.5 million is based on the achievement of certain bookings goals. The fair value of the LastPass contingent consideration was estimated at $2.0 million by applying a probability based model, which utilizes inputs that are unobservable in the market. A reconciliation of the beginning and ending Level 3 liability is as follows:

 

     Years Ended
December 31,
 
       2014           2015    

Balance beginning of period

   $       $ 249   

Additions to Level 3

     239         2,000   

Payments

             (226

Change in fair value of contingent consideration liability

     10         5   
  

 

 

    

 

 

 

Balance end of period

   $ 249       $ 2,028   
  

 

 

    

 

 

 

 

Acquisitions
Acquisitions
4. Acquisitions

In 2015, we completed the acquisition of LastPass (on October 15, 2015), and in 2014, we completed the acquisitions of Ionia (on March 7, 2014), Meldium (on August 27, 2014) and Zamurai (on September 5, 2014). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates.

These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

Acquisition-related costs of $1.5 million, $4.5 million and $6.4 million were recorded in 2013, 2014 and 2015, respectively. These costs include $0.1 million, $0.4 million, and $0.7 million in 2013, 2014 and 2015, respectively, of direct costs of completing an acquisition including professional fees, which include legal and valuation services, and expenses related to acquisition integration activities and $1.4 million, $4.1 million, and $5.6 million in 2013, 2014 and 2015, respectively, of retention-based bonus payment expense, which are typically earned over the first two years following the acquisition.

2015 Acquisition

LastPass

On October 15, 2015, the Company acquired all of the outstanding equity interests in LastPass, a Fairfax, Virginia-based provider of an identity and password management service, for $107.6 million, net of cash acquired, plus contingent payments totaling up to $15 million which are expected to be paid over a two-year period following the date of acquisition. The operating results of LastPass, which are included in the consolidated financial statements beginning on the acquisition date, are comprised of $2.7 million of revenue and approximately $3.8 million of expenses for the year ended December 31, 2015, including amortization of acquired intangible assets of $0.9 million and contingent retention-based bonuses of $1.4 million.

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Cash

   $ 2,518   

Accounts receivable

     639   

Property and equipment

     40   

Deferred tax asset

     3,050   

Current and other assets

     134   

Intangible assets:

  

Completed technology

     29,400   

Customer relationships

     23,900   

Trade name and trademark

     3,000   

Deferred revenue

     (6,600 )

Accrued expenses

     (66 )

Deferred tax liability

     (23,478 )

Goodwill

     79,617   
  

 

 

 

Total purchase price

     112,154   

Liability for contingent consideration

     (2,000 )
  

 

 

 

Total cash paid

   $ 110,154   
  

 

 

 

The allocation of the purchase price related to income taxes is preliminary, including the Company finalizing the valuation of the acquired net operating loss carryforwards. The Company expects to complete this review in the first quarter of 2016.

The stock purchase agreement included contingent and/or retention-based bonus payments requiring the Company to make additional payments totaling up to $12.5 million to employees, including former LastPass stockholders now employed by the Company, on the first and second anniversaries of the acquisition date, contingent upon their continued employment and, for the first anniversary payment, the achievement of certain bookings goals. 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 stock purchase agreement also includes non-retention based payments to LastPass stockholders, contingent on the achievement of certain bookings goals, for up to $2.5 million, which the Company has concluded is contingent consideration and is part of the purchase price. This contingent liability was recorded at its fair value of $2.0 million at the acquisition date which is included in accrued expenses on the accompanying consolidated balance sheet as of December 31, 2015. The Company will re-measure the fair value of the contingent consideration at each subsequent reporting period and recognize any adjustments to fair value as part of earnings.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its IT management offerings, customer base, sales force and IT management business plan with LastPass’ product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax asset of $3.1 million primarily related to net operating losses that were acquired as a part of the acquisition. The Company recorded a long-term deferred tax liability of $23.5 million primarily related to the amortization of intangible assets which cannot be deducted for tax purposes.

The unaudited financial information in the table below summarizes the combined results of operations of the Company and LastPass, on a pro forma basis, as though the companies had been combined. The pro forma information for the period presented includes the effects of business combination accounting resulting from the acquisition as though the acquisition had been consummated as of the beginning of 2014, including amortization charges from acquired intangible assets; the fair value adjustment of acquired deferred revenue being recorded primarily in 2014; interest expense on borrowings and lower interest income in connection with the Company funding the acquisition with existing cash and investments and borrowings under its credit facility; the exclusion of acquisition-related costs of the Company and LastPass; the inclusion of expense related to contingent retention-based bonuses assuming full achievement of the financial metric and retention requirements ($7.0 million in 2014 and $5.5 million in 2015), offset by the exclusion of LastPass historical bonuses paid to the LastPass shareholders in 2014 of $4.6 million and paid to LastPass non-shareholder employees in 2015 in connection with the acquisition close of $6.1 million; and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2014.

Unaudited Pro Forma Financial Information

 

     Year Ended
December 31,
 
     2014      2015  
     (in thousands, except
per share amounts)
 

Revenue

   $ 230,477       $ 281,980   

Net income

   $ 1,687       $ 12,038   

Earnings per share—Basic

   $ 0.07       $ 0.48   

Earnings per share—Diluted

   $ 0.07       $ 0.47   

2014 Acquisitions

Ionia

On March 7, 2014, the Company acquired all of the outstanding capital stock of Ionia, a Boston, Massachusetts based systems integrator, for a cash purchase price of $7.5 million plus contingent retention-based bonuses totaling up to $4.0 million to employees, including former Ionia stockholders now employed by the Company, on the first and second anniversaries of the acquisition, contingent upon their continued employment and achievement of certain bookings goals. 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 $2.0 million in March 2015 and expects to pay the remainder in 2016.

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 67   

Current and other assets

     322   

Deferred revenue

     (70 )

Other liabilities

     (864 )

Customer backlog

     120   

Trade name and trademark

     10   

Customer relationships

     1,340   

Documented know-how

     280   

Goodwill

     6,295   
  

 

 

 

Total purchase price

   $ 7,500   
  

 

 

 

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 Xively platform, customer base, sales force and Internet of Things business plan with Ionia’s technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax liability of $0.7 million related to the amortization of intangible assets which cannot be deducted for tax purposes and is included in the accompanying table above as other liabilities.

Meldium

On August 27, 2014, the Company acquired Meldium, a San Francisco, California-based provider of single sign-on password management software, through a merger transaction for a cash purchase price of $10.6 million plus contingent payments totaling up to $4.6 million to employees, including former Meldium stockholders now employed by the Company. These contingent payments include retention-based bonuses which are expected to be paid in the first two years from the date of acquisition, contingent upon their continued employment and achievement of certain product integration goals. 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 $2.0 million in contingent payments in 2015 and the remaining $2.6 million in February 2016.

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 120   

Current and other assets

     526   

Deferred revenue

     (5 )

Other liabilities

     (935 )

Completed technology

     1,580   

Trade name and trademark

     30   

Customer relationships

     100   

Goodwill

     9,437   
  

 

 

 

Total purchase price

     10,853   

Liability for contingent consideration

     (216
  

 

 

 

Cash paid

   $ 10,637   
  

 

 

 

 

The contingent payments also included payments to non-employee stockholders of $0.2 million, which the Company has concluded is contingent consideration and is part of the purchase price. This contingent liability was recorded at its fair value of $216,000 at the acquisition date and was paid in 2015.

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 IT management offerings, customer base, sales force and IT management business plan with Meldium’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded deferred tax assets of $0.5 million, primarily related to net operating losses that were acquired as a part of the acquisition and are shown in the accompanying table above as current and other assets. The Company also recorded a long-term deferred tax liability of $0.7 million related to the amortization of intangible assets which cannot be deducted for tax purposes and are included in the accompanying table above as other liabilities.

Zamurai

On September 5, 2014, the Company acquired all of the outstanding capital stock of Zamurai, a San Francisco, California-based collaboration software provider, for a cash purchase price of $4.5 million plus contingent payments totaling up to $1.5 million to employees, including former Zamurai stockholders now employed by the Company. These contingent payments include retention-based bonuses which are expected to be paid on the second anniversary of the acquisition, contingent upon their continued employment and achievement of certain product integration goals. 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 following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 2   

Current and other assets

     417   

Other liabilities

     (439 )

Completed technology

     960   

Trade name and trademark

     100   

Goodwill

     3,484   
  

 

 

 

Total purchase price

     4,524   

Liability for contingent consideration

     (24
  

 

 

 

Cash paid

   $ 4,500   
  

 

 

 

The stock purchase agreement includes contingent payments to non-employee stockholders of $30,000, which the Company has concluded is contingent consideration and is part of the purchase price. This contingent liability was recorded at its fair value of $24,000 at the acquisition date. The Company continues to re-measure the fair value of the contingent consideration at each subsequent reporting period and recognizes any adjustments to fair value as part of earnings.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its join.me product, customer base, sales force and join.me business plan with the collaboration software provider’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax asset of $0.4 million related to net operating losses that were acquired as a part of the acquisition, which is included in the accompanying table above as current and other assets. The Company also recorded a long-term deferred tax liability of $0.4 million related to the amortization of intangible assets which cannot be deducted for tax purposes and is included in the accompanying table above as other liabilities.

Goodwill and Intangible Assets
Goodwill and Intangible Assets
5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill for the years ended December 31, 2014 and 2015 are due to the addition of goodwill resulting from the acquisitions of Ionia, Meldium, Zamurai and LastPass (See Note 4 to the Consolidated Financial Statements).

Changes in goodwill for the years ended December 31, 2014 and 2015 are as follows (in thousands):

 

Balance, January 1, 2014

   $ 18,712   

Goodwill related to the acquisition of Ionia

     6,295   

Goodwill related to the acquisition of Meldium

     9,437   

Goodwill related to the acquisition of Zamurai

     3,484   
  

 

 

 

Balance, December 31, 2014

     37,928   

Goodwill related to the acquisition of LastPass

     79,617   
  

 

 

 

Balance, December 31, 2015

   $ 117,545   
  

 

 

 

Intangible assets consist of the following (in thousands):

 

          December 31, 2014     December 31, 2015  
    Estimated
Useful
Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Identifiable intangible assets:

             

Trade names and trademarks

    1-11 years      $ 806      $ 682      $ 124      $ 3,806      $ 824      $ 2,982   

Customer relationships

    5-8 years        5,229        2,546        2,683        29,129        4,089        25,040   

Customer backlog

    4 months        120        120               120        120          

Domain names

    5 years        907        507        400        915        665        250   

Software

    4 years        299        299               299        299          

Completed technology

    3-9 years        16,903        3,981        12,922        46,503        6,893        39,610   

Technology and know-how

    3 years        3,176        3,176               3,176        3,176          

Documented know-how

    4 years        280        57        223        280        127        153   

Non-Compete agreements

    5 years        162        71        91        162        114        48   

Internally developed software

    3 years        4,591        2,051        2,540        6,754        3,247        3,507   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 32,473      $ 13,490      $ 18,983      $ 91,144      $ 19,554      $ 71,590   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the year ended December 31, 2015, the Company capitalized $29.4 million for completed technology, $23.9 million for customer relationships and $3.0 million for a trade name and trademark as intangible assets in connection with the LastPass acquisition. The Company also capitalized $2.1 million and $2.2 million during the years ended December 31, 2014 and 2015, respectively, of costs related to internally developed computer software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services. The Company also acquired $0.2 million of intellectual property during the year ended December 31, 2015.

 

The Company is amortizing its intangible assets over the estimated lives noted above 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 four months to eleven years. Amortization expense for intangible assets was $2.5 million, $4.9 million and $6.1 million for the years ended December 31, 2013, 2014 and 2015, respectively. Amortization relating to software, completed technology, technology and know-how, documented know-how, and internally developed software is recorded within cost of revenues and the amortization of trade name and trademark, customer relationships, customer backlog, domain names, and non-compete agreements is recorded within operating expenses. Future estimated amortization expense for intangible assets at December 31, 2015 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2016

   $ 11,622   

2017

     11,424   

2018

     10,894   

2019

     8,273   

2020

     7,631   

Thereafter

     21,746   
  

 

 

 

Total

   $ 71,590   
  

 

 

 

 

Property and Equipment
Property and Equipment
6. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

     December 31,  
     2014      2015  

Computer equipment and software

   $ 24,968       $ 30,030   

Office equipment

     3,624         5,428   

Furniture & fixtures

     4,075         8,448   

Construction in progress

     684         93   

Leasehold improvements

     3,752         8,121   
  

 

 

    

 

 

 

Total property and equipment

     37,103         52,120   

Less accumulated depreciation and amortization

     (23,627      (30,409
  

 

 

    

 

 

 

Property and equipment, net

   $ 13,476       $ 21,711   
  

 

 

    

 

 

 

Depreciation expense for property and equipment was $5.2 million, $6.2 million and $7.6 million for the years ended December 31, 2013, 2014 and 2015.

Accrued Liabilities
Accrued Liabilities
7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     December 31,  
     2014      2015  

Marketing programs

   $ 7,626       $ 4,323   

Payroll and payroll related

     14,873         18,239   

Professional fees

     1,961         1,944   

Other accrued liabilities

     5,022         7,168   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 29,482       $ 31,674   
  

 

 

    

 

 

 
Income Taxes
Income Taxes
8. Income Taxes

The domestic and foreign components of (loss) income before provision for income taxes are as follows (in thousands):

 

     December 31,  
     2013      2014      2015  

Domestic

   $ 10,389       $ (4,462    $ 1,059   

Foreign

     (11,857      13,856         16,459   
  

 

 

    

 

 

    

 

 

 

Total (loss) income before provision for income taxes

   $ (1,468    $ 9,394       $ 17,518   
  

 

 

    

 

 

    

 

 

 

The provision for income taxes is as follows (in thousands):

 

     Years Ended December 31,  
     2013      2014      2015  

Current

        

Federal

   $ 5,480       $ 2,804       $ 2,521   

State

     1,346         1,184         274   

Foreign

     952         1,052         1,227   
  

 

 

    

 

 

    

 

 

 

Total

     7,778         5,040         4,022   
  

 

 

    

 

 

    

 

 

 

Deferred

        

Federal

     (1,379      (3,069      (1,281

State

     (177      (748      278   

Foreign

     (8      216         (59
  

 

 

    

 

 

    

 

 

 

Total

     (1,564      (3,601      (1,062
  

 

 

    

 

 

    

 

 

 

Total provision for income taxes

   $ 6,214       $ 1,439       $ 2,960   
  

 

 

    

 

 

    

 

 

 

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

 

     Years Ended December 31,  
         2013             2014             2015      

Statutory tax rate

     35.0     35.0     35.0

Change in valuation allowance

                     

Impact of permanent differences

     (9.3     1.6        1.1   

Non-deductible stock-based compensation

     (73.0     14.6        8.4   

Foreign tax rate differential

     (346.9     (39.1     (26.7

Research and development credits

     23.1        (2.6     (1.3

State taxes, net of federal benefit

     (51.9     2.9        2.4   

Impact of uncertain tax positions

     (3.6     3.8        1.4   

Other

     3.4        (0.8     (3.4
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     (423.2 )%      15.4     16.9
  

 

 

   

 

 

   

 

 

 

The Company recorded a tax provision for income taxes of $1.4 million on profit before income taxes of $9.4 million and $3.0 million on profit before income taxes of $17.5 million for the years ended December 31, 2014 and 2015, respectively. The Company recorded a provision as a result of taxable income, excluding the direct effects of windfall tax deductions, generated in the United States as well as in certain foreign jurisdictions. The Company’s effective tax rates for the years ended December 31, 2014 and 2015 were lower than the U.S. federal statutory rate of 35% due to profits earned in certain foreign jurisdictions, primarily by our Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate.

 

For the year ended December 31, 2013, the Company recorded a tax provision for federal, state and foreign income taxes of $6.2 million on a loss before income taxes of $1.5 million as a result of income generated in the United States offset by losses incurred in certain foreign jurisdictions where there is no corresponding benefit.

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

 

     December 31,  
     2014      2015  

Deferred tax assets:

     

Net operating loss carryforwards

   $ 2,783       $ 4,033   

Deferred revenue

     775         583   

Amortization

     1,806         2,287   

Stock-based compensation

     11,584         10,268   

Accrued bonus

     3,579         4,032   

Other

     1,278         2,311   
  

 

 

    

 

 

 

Total deferred tax assets

     21,805         23,514   

Deferred tax asset valuation allowance

     (2,203      (1,829
  

 

 

    

 

 

 

Net deferred tax assets

     19,602         21,685   
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Depreciation

     (1,234      (466

Goodwill amortization

     (1,963      (2,638

Acquired intangibles not deductible

     (1,677      (23,561

Other

     (45      (634
  

 

 

    

 

 

 

Total deferred tax liabilities

     (4,919      (27,299
  

 

 

    

 

 

 

Total

   $ 14,683       $ (5,614
  

 

 

    

 

 

 

Deferred tax assets, related valuation allowances, current tax liabilities, and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, the Company estimates deferred tax assets, current tax liabilities, and deferred tax liabilities, and the Company assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. As of December 31, 2015, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical tax losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. The valuation allowance decreased by $0.4 million as a result of a tax return to provision adjustment which decreased the net operating loss carryforwards.

For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2015, the Company had federal and state net operating loss carryforwards of $8 million and $22 million, respectively, which expire on various dates from 2025 through 2035.

The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code and has determined that the net operating loss carryforwards acquired from the acquisitions of Meldium, Zamurai, and LastPass are subject to limitation. As of December 31, 2015, all net operating loss carryforwards generated by the Company, including those subject to limitation, are available for utilization. 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.

As of December 31, 2015, the Company had foreign net operating loss carryforwards of $17.3 million. These net operating loss carryforwards are related to the Company’s Hungarian subsidiary, are not subject to expiration, and the Company has recognized a full valuation allowance against these carryforwards.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and deferred tax assets are required to be classified as non-current on the consolidated balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016 with early adoption permitted. During 2015, the Company elected to early adopt ASU 2015-17, prospectively, as permitted, thus reclassifying $5.8 million of deferred tax assets and $29,000 of current deferred tax liabilities to non-current on the accompanying consolidated balance sheet. The prior reporting period was not retroactively adjusted. The adoption of the guidance had no impact on the Company’s consolidated results of income and comprehensive income.

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, 2015, the Company has not provided for federal income tax on $27 million 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. In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the IRS in the United States. As of December 31, 2015 we remained subject to examination in the following major tax jurisdictions for the years indicated:

 

Major Tax Jurisdictions

   Open Tax Years  

United States (Federal)

     2012-2015   

United States (State)

     2010-2015   

Hungary

     2010-2015   

Ireland

     2012-2015   

The Company incurred expenses related to stock-based compensation in 2013, 2014 and 2015 of $19.7 million, $24.8 million and $26.5 million, respectively. Accounting for the tax effects of stock-based awards requires the recording of a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and will be recorded as increases to APIC in the period when the tax deduction reduces income taxes payable. The Company follows the with-and-without approach for the direct effects of windfall tax deductions to determine the timing of the recognition of benefits for windfall tax deductions. In 2015, the Company recorded a windfall tax benefit to additional paid-in capital of $6.9 million, due in part to the Company’s intention to carryback federal net operating losses and research and development credits to prior tax years. The Company has recorded a receivable of $4.4 million in other current assets on the consolidated balance sheet to reflect the estimated cash refund. As of December 31, 2015, the “windfall tax benefit pool” available to offset future shortfalls was $21 million.

As of December 31, 2014 and 2015, the Company has provided a liability of $0.7 million and $0.9 million, 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 (in thousands):

 

     Years Ended December 31,  
         2014              2015      

Balance beginning of period

   $ 304       $ 652   

Tax positions related to prior periods:

     

Increases

     7         2   

Decreases

     (11      (3

Tax positions related to current period:

     

Increases

     397         428   

Settlements

     (45      (195

Statute expiration

     —           —     
  

 

 

    

 

 

 

Balance end of period

   $ 652       $ 884   
  

 

 

    

 

 

 

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. The Company recognized $11,000 and $3,000 of interest expense during the years ended December 31, 2014 and 2015, respectively.

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 million and authorized 5 million shares of undesignated preferred stock.

Common Stock Reserved — As of December 31, 2014 and 2015, the Company has reserved shares of common stock for the exercise of stock options and restricted stock units of 4.9 million and 4.8 million, respectively.

On August 13, 2013, the Board of Directors approved a $50 million share repurchase program and approved an additional $75 million share repurchase program on October 20, 2014. Share repurchases are 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 are 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.

During the year ended December 31, 2014 and 2015, the Company repurchased 843,574 and 297,461 shares of its common stock at an average price of $43.27 and $60.81 per share for a total cost of $36.5 million and $18.1 million, respectively. At December 31, 2015, $56.3 million remained available under the Company’s current share repurchase program.

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 with time-based vesting conditions generally vest over a three-year period while restricted stock units with market-based vesting conditions generally vest over two or three-year periods. Certain stock-based awards provide for accelerated vesting if the Company experiences a change in control. On May 21, 2015, the Company’s stockholders approved an amendment to the 2009 Plan that increased the shares available for grant under the plan by 1.3 million shares. As of December 31, 2015, there were 2.6 million shares available for grant under the 2009 Plan.

 

The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $3.8 million, $17.6 million and $17.8 million in cash from stock option exercises during the years ended December 31, 2013, 2014 and 2015, respectively.

The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of stock options. 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 option 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 option forfeiture rates. The compensation expense is amortized on a straight-line basis over the requisite service period of the stock option, which is generally four years.

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

 

     Years Ended December 31,
     2013   2014   2015(1)

Expected dividend yield

   -%   -%   -%

Risk-free interest rate

   0.87 - 1.36%   1.48%   -%

Expected term (in years)

   6.25   6.25   -

Volatility

   55%   55%   -%

 

  (1) There were no stock options granted during the twelve months ended December 31, 2015

The following table summarizes stock option activity (shares and intrinsic value in thousands):

 

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

Outstanding, January 1, 2015

    1,407      $ 30.02        6.2     

Granted

                 

Exercised

    (612     29.08        $ 19,779   
       

 

 

 

Forfeited

    (27     30.74       
 

 

 

   

 

 

     

Outstanding, December 31, 2015

    768      $ 30.74        5.4      $ 27,942   
 

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2015

    598      $ 30.54        5.0      $ 21,881   
 

 

 

   

 

 

   

 

 

   

 

 

 

Vested or expected to vest at December 31, 2015

    765      $ 30.77        5.4      $ 27,774   
 

 

 

   

 

 

   

 

 

   

 

 

 

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, 2015 of $67.10 per share or at time of exercise, and the exercise price of the options.

 

The weighted average grant date fair value of stock options granted was $11.60 and $21.78 per share for the years ended December 31, 2013 and 2014, respectively. There were no stock options granted in the twelve months ended December 31, 2015.

During the year ended December 31, 2015, the Company granted 942,090 restricted stock units, which contained time-based vesting conditions. Restricted stock units with time-based vesting conditions are valued on the grant date using the grant date closing price of the underlying shares. The Company recognizes the expense on a straight-line basis over the requisite service period of the restricted stock unit, which is generally three years.

In August 2013, May 2014 and May 2015, the Company granted to certain key executives restricted stock unit awards with market-based vesting conditions, which are tied to the individual executive’s continued employment with the Company throughout the applicable performance period and the level of the Company’s achievement of a pre-established relative total shareholder return, or TSR, goal, as measured over an applicable performance period ranging from two to three years as compared to the TSR realized for that same period by the Russell 2000 Index (the “TSR Units”). The target number of shares underlying the August 2013, May 2014 and May 2015 TSR Units were a total of 74,000, 71,000 and 85,000 shares, respectively. The number of shares that may be earned under these TSR Units can range from 0% to 200% of the target number of shares awarded, or up to 148,000, 142,000 and 170,000 shares for the August 2013, May 2014 and May 2015 grants, respectively, based on the Company’s level of achievement of its relative TSR goal for the applicable performance period. Compensation cost for TSR Units is recognized on a straight-line basis over the requisite service period and is recognized regardless of the actual number of awards that are earned based on the market condition. As of December 31, 2015, 20,000 shares from the August 2013 TSR Unit grant, 42,000 shares from the May 2014 TSR Unit grant, and 25,000 shares from the May 2015 TSR Unit grant have been forfeited or are expected to be forfeited.

The assumptions used in the Monte Carlo simulation model include (but are not limited to) the following:

 

     August 2013 Grant     May 2014 Grant     May 2015 Grant  

Risk-free interest rate

     0.62 %     0.78     0.93

Volatility

     54     54     50

In August 2015, the first performance period for the August 2013 grant ended and, based on the Company’s level of achievement of its relative TSR goal, 200% of the shares granted from the August 2013 grant were earned and 54,000 shares were issued as a result.

The following table summarizes restricted stock unit activity, including performance-based TSR Units (shares in thousands):

 

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

Unvested as of January 1, 2015

     1,279       $ 37.42   

Restricted stock units granted

     942         63.49   

Restricted stock units vested

     (551      35.11   

Restricted stock units forfeited

     (232      45.19   
  

 

 

    

 

 

 

Unvested as of December 31, 2015

     1,438       $ 54.37   
  

 

 

    

 

 

 

 

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

 

     Years Ended December 31,  
     2013      2014      2015  

Cost of revenue

   $ 706       $ 1,107       $ 1,560   

Research and development

     3,761         3,653         5,188   

Sales and marketing

     7,242         9,033         11,090   

General and administrative

     8,005         10,976         8,661   
  

 

 

    

 

 

    

 

 

 
   $ 19,714       $ 24,769       $ 26,499   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2015, there was approximately $55.1 million of total unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock awards which are expected to be recognized over a weighted average period of 2.1 years. The total unrecognized stock-based compensation cost will be adjusted for future changes in estimated forfeitures.

Commitments and Contingencies
Commitments and Contingencies
11. Commitments and Contingencies

Operating Leases — The Company has operating lease agreements for offices in the United States, Hungary, Australia, the United Kingdom, Ireland and India that expire through 2028.

In December 2015, the Company amended its current lease for its Budapest, Hungary office space to provide for an expansion of leased space and to extend the term of the lease. The term of the amended lease will begin on February 26, 2016 and will extend through April 29, 2021. The aggregate amount of minimum lease payments to be made over the term of the lease is approximately $8.5 million (EUR 7.8 million). The lease agreement required a bank guarantee of $0.4 million (EUR 0.4 million). The bank guarantee is classified as restricted cash.

In December 2014, the Company entered into a lease for new office space in Boston, Massachusetts. The landlord was obligated to rehabilitate the existing building and the lease term began in December 2015 and will extend through June 2028. The aggregate amount of minimum lease payments to be made over the term of the lease is approximately $47 million. Pursuant to the terms of the lease, the landlord was 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 $4 million, of which $2.1 million was paid as of December 31, 2015. The lease required a security deposit of approximately $3.3 million in the form of an irrevocable, unsecured standby letter of credit. The lease includes an option to extend the original term of the lease for two successive five year periods.

In December 2014, the Company entered into a lease for new office space in San Francisco, California. The term of the new office space began in February 2015 and extends through April 2020. The aggregate amount of minimum lease payments to be made over the term of the lease is approximately $2.4 million. The lease required a security deposit of $41,000. The security deposit is classified as a long-term deposit.

Rent expense under all leases was $6.0 million, $7.1 million and $8.2 million for the years ended December 31, 2013, 2014 and 2015, 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 $4.7 million, $5.1 million and $6.9 million for the years ended December 31, 2013, 2014 and 2015, 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, 2015 (in thousands):

 

Years Ending December 31

      

2016

   $ 14,568   

2017

     11,213   

2018

     11,014   

2019

     10,966   

2020

     10,781   

Thereafter

     45,211   
  

 

 

 

Total minimum lease payments

   $ 103,753   
  

 

 

 

 

In May 2015, the Company entered into an agreement to sublease a portion of the office space it currently leases in Dublin, Ireland. The sublease term began in May 2015 and extends to August 2017 which aligns with the non-cancelable term of the Company’s head lease. The tenant will pay $0.2 million per year, which recovers the Company’s costs under the remaining term.

Litigation — 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.

On April 24, 2015, the Company entered into a Settlement Agreement with Sensory Technologies, LLC, or Sensory, whereby Sensory agreed to assign its JOIN ® trademark to the Company and the parties agreed to mutually release each other from any and all claims related to the complaint filed by Sensory against the Company in the U.S. District Court for the Southern District of Indiana on August 26, 2014. In the second quarter of 2015, the Company paid Sensory a one-time fee of $8.3 million, $4.7 million of which was reimbursed by the Company’s insurance provider, in connection with the Settlement Agreement. The Company believed that the JOIN ® trademark had de minimis value and therefore expensed $3.6 million in the first quarter of 2015 as legal settlement expense.

On August 28, 2014, a putative class action complaint was filed against the Company in the U.S. District Court for the Eastern District of California (Case No. 1:14-cv-01355) by an individual on behalf of himself and purportedly on behalf of all other similarly situated individuals, or collectively, the Ignition Plaintiffs. The Ignition Plaintiffs amended their initial complaint on February 17, 2015, May 6, 2015 and September 18, 2015. The amended complaint included claims made under California’s False Advertising Law and Unfair Competition Law relating to the Company’s sale of its Ignition for iOS application, or the App, and the Ignition Plaintiffs’ continued use of the App. On January 27, 2016, the U.S. District Court for the Eastern District of California granted the Company’s motion for summary judgment and dismissed all of the Ignition Plaintiffs’ claims.

On June 29, 2015, a putative class action complaint was filed against the Company in the U.S. District Court for the Central District of California (Case No. 5:15-cv-01258) by an individual on behalf of himself and purportedly on behalf of all other similarly situated individuals, or collectively, the Central Plaintiffs, under California’s Automatic Purchase Renewal Statute and Unfair Competition Law related to pricing changes and billing practices for subscriptions to the Company’s LogMeIn Central service. On October 7, 2015, the Company entered into a Settlement Agreement resolving the matter in exchange for a one-time settlement payment of $25,000. As a result, the U.S. District Court for the Central District of California dismissed the class action complaint on October 30, 2015.

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

401(k) Plan
401(k) Plan
12. 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, 2015.

Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss
13. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of foreign currency translation adjustments and changes in unrealized losses and gains (net of tax) on marketable securities. For the purposes of comprehensive income disclosures, we do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equity and, as of December 31, 2014 and 2015, was comprised of cumulative translation adjustment losses of $3.0 million and $5.2 million, respectively, and unrealized losses (net of tax) on marketable securities of $0.1 million and $27,000, respectively. There were no material reclassifications to earnings in the years ended December 31, 2014 or 2015.

Credit Facility
Credit Facility
14. Credit Facility

On February 18, 2015, the Company entered into a multi-currency credit agreement with a syndicate of banks, financial institutions and other lending entities (the “Credit Agreement”), pursuant to which a secured revolving credit facility of up to $100 million in the aggregate was made available to the Company. On January 22, 2016, the Company exercised its option to increase the credit facility to up to $150 million with the existing lenders and an additional lender. The credit facility is available to the Company on a revolving basis during the period from February 18, 2015 through February 18, 2020. The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions and costs in the case of Eurodollar rate loans. The Company and its subsidiaries expect to use the credit facility for general corporate purposes, including, but not limited to, the potential acquisition of complementary products or businesses, share repurchases, as well as for working capital. As of December 31, 2015, the Company had borrowed $60 million under the credit facility in order to partially fund the LastPass acquisition.

Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by the Company as described below. As of December 31, 2015, the annual rate on the $60 million revolving loan was 1.875% and was reset to 1.9375% on January 19, 2016. As of December 31, 2015, the fair value of the credit facility approximated its book value.

The currencies that are currently available for borrowing under the credit facility are U.S Dollars, Euros, and British Pound Sterling. Additional currencies may be added with the approval of all lenders under the credit facility. The maximum amount of borrowings in currencies other than U.S. Dollars is $20 million. Interest rates for U.S. Dollar loans under the credit facility are determined, at the option of the Company, by reference to a Eurodollar rate or a base rate, and range from 1.50% to 2.00% above the Eurodollar rate for Eurodollar-based borrowings or from 0.50% to 1.00% above the defined base rate for base rate borrowings, in each case based upon the Company’s total leverage ratio. Interest rates for loans in currencies other than U.S. Dollars range from 1.50% to 2.00% above the respective London Interbank Offered Rates, or LIBOR, for those currencies, also based on the Company’s total leverage ratio. The quarterly commitment fee on the undrawn portion of the credit facility ranges from 0.20% to 0.30% per annum, based upon the Company’s total leverage ratio.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, change the nature of its business, make investments and acquisitions, pay dividends or make distributions, or enter into certain transactions with affiliates, in each case subject to customary and other exceptions for a credit facility of this size and type, each as further described in the Credit Agreement. The Credit Agreement also imposes limits on capital expenditures of the Company and its subsidiaries and requires the Company to maintain a maximum total leverage ratio (not greater than 2.75:1.00) and a minimum interest coverage ratio (not less than 3.00:1.00), each as further defined in the Credit Agreement. As of December 31, 2015, the total leverage ratio was 0.85:1.00, the minimum interest coverage ratio was 63.9:1.00 and the Company was in compliance with all financial and operating covenants of the Credit Agreement.

Any failure to comply with the financial or operating covenants of the Credit Agreement would prevent the Company from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility.

The Company incurred $1.0 million of origination costs in 2015 in connection with entering into the Credit Agreement. These origination costs were recorded as deferred debt issuance costs when incurred and are being expensed over the remaining term of the credit facility. The average interest rate on borrowings outstanding during 2015 was approximately 1.78%.

Subsequent Event
Subsequent Event
15. Subsequent Event

On January 22, 2016, the Company entered into the First Amendment to the Credit Agreement dated February 18, 2015. The First Amendment to the Credit Agreement amends the existing Credit Agreement to, among other things:

 

   

Exercise the Company’s option to increase the existing credit facility made available under the Credit Agreement by an additional $50 million, so that the Company now has access to a credit facility of up to $150 million in the aggregate;

 

   

Provide the Company with an option to further increase the credit facility by an additional $50 million, subject to further commitment from the lenders or additional lenders, which, if exercised, would provide the Company with access to a secured revolving credit facility of up to $200 million in the aggregate; and

 

   

Add a fifth bank to the Credit Agreement as an augmenting lender.

We incurred $0.3 million of origination costs in connection with the First Amendment to the Credit Agreement.

Quarterly Information (Unaudited)
Quarterly Information (Unaudited)
16. Quarterly Information (Unaudited)

 

    For the Three Months Ended  
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
 
    (in thousands, except for per share data)  

Statement of Operations Data:

               

Revenue

  $ 49,020      $ 54,975      $ 58,062      $ 59,899      $ 61,109      $ 64,834      $ 69,573      $ 76,084   

Gross profit

    42,900        47,578        50,728        52,018        53,127        56,299        60,895        65,821   

Income (loss) from operations

    1,598        782        2,771        3,536        (964     2,549        7,844        6,620   

Net income

    1,004        1,330        2,308        3,313        372        2,388        5,563        6,235   

Net income per share-basic

  $ 0.04      $ 0.05      $ 0.09      $ 0.14      $ 0.02      $ 0.10      $ 0.22      $ 0.25   

Net income per share-diluted

  $ 0.04      $ 0.05      $ 0.09      $ 0.13      $ 0.01      $ 0.09      $ 0.22      $ 0.24   
Summary of Significant Accounting Policies (Policies)

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

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

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

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss 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, 2014 and 2015, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $100.3 million and $85.3 million, respectively. The securities have an aggregate fair value of $100.2 million and $85.3 million, including $9,000 and $10,000 of unrealized gains and $138,000 and $53,000 of unrealized losses, at December 31, 2014 and 2015 respectively.

Restricted Cash — 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 in accordance with the lease. In 2015, $1.5 million of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. Such amounts are classified as restricted cash in the accompanying consolidated balance sheets. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash.

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 (in thousands):

 

     December 31,  
     2013      2014      2015  

Balance beginning of period

   $ 180       $ 269       $ 301   

Provision for bad debt

     116         102         61   

Uncollectible accounts written off

     27         70         88   
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 269       $ 301       $ 274   
  

 

 

    

 

 

    

 

 

 

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 operations. 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. The Company does not amortize goodwill, but performs an impairment test of goodwill annually or 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, 2015, the fair value of the Company as a whole significantly exceeds the carrying amount of the Company. Through December 31, 2015, 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 up to eleven 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, 2015, the Company recorded no material impairments.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its LogMeIn premium services and to a lesser extent, the delivery of professional services, primarily related to its Xively business.

Revenue from the Company’s LogMeIn premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten 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.

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 of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

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 related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from multi-element arrangements accounted for as a single unit of accounting which do not have value to the customer has been immaterial to date.

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, 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, 2015 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, 2013, 2014 or 2015. As of December 31, 2014, one customer accounted for 15% of accounts receivable.

Legal Costs — Legal expenditures are expensed as incurred.

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

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.

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.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. 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 gains of approximately $0.1 million and $1.4 million for the years ended December 31, 2014 and 2015, respectively, included in other income in the consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period of the award, for those awards expected to vest, on a straight-line basis. 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 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, 2015, the Company has provided a liability for approximately $0.9 million 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, 2013, 2014 and 2015 was approximately $27.8 million, $36.8 million and $35.8 million, 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 operations.

Comprehensive Loss — Comprehensive loss 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 comprehensive loss was approximately $3.1 million at December 31, 2014 and consisted of $3.0 million related to foreign currency translation adjustments in addition to $0.1 million in unrealized losses, net of tax on available-for sale securities. Accumulated comprehensive loss was approximately $5.2 million at December 31, 2015 and consisted of $5.2 million related to foreign currency translation adjustments offset by $27,000 of unrealized losses, net of tax on available-for sale securities.

Fair Value of Financial Instruments — The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable, and accounts payable, approximate their fair values due to their short maturities.

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

 

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

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

United States

   $ 109,444       $ 148,532       $ 191,300   

United Kingdom

     15,058         19,452         21,662   

International — all other

     41,756         53,972         58,638   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

Collaboration cloud

   $ 35,176       $ 62,746       $ 88,234   

Identity and Access Management cloud

     55,647         74,244         92,712   

Service and support cloud

     75,433         82,767         88,206   

Other

     2         2,199         2,448   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2013      2014      2015  

United States

   $ 10,207       $ 9,731       $ 16,342   

Hungary

     1,224         2,018         2,525   

Ireland

     1,057         1,139         1,963   

International — all other

     710         588         881   
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,198       $ 13,476       $ 21,711   
  

 

 

    

 

 

    

 

 

 

Net (Loss) Income Per Share — Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share is computed by dividing net (loss) 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. For the year ended December 31, 2013, the Company incurred a net loss and therefore, the effect of the Company’s outstanding common stock equivalents were not included in the calculation of diluted loss per share as they were anti-dilutive. Accordingly, basic and dilutive net loss per share for each period were identical.

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net (loss) income per share either because they had an anti-dilutive impact or because the Company had a net loss in the period (in thousands):

 

     Years Ended December 31,  
       2013          2014          2015    

Options to purchase common shares

     2,389         57           

Restricted stock units

     1,192         18         204   
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     3,581         75         204   
  

 

 

    

 

 

    

 

 

 

 

Basic and diluted net (loss) income per share was calculated as follows (in thousands, except per share data):

 

     Years ended December 31,  
     2013      2014      2015  

Basic:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,351         24,385         24,826   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, basic

   $ (0.32    $ 0.33       $ 0.59   
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,351         24,385         24,826   

Add: Common stock equivalents

             1,001         954   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     24,351         25,386         25,780   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, diluted

   $ (0.32    $ 0.31       $ 0.56   
  

 

 

    

 

 

    

 

 

 

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.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or 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, in many cases, unlimited. Through December 31, 2015, the Company has not experienced any losses related to these indemnification obligations.

Recently Issued Accounting Pronouncements — On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its final standard on revenue from contracts with customers. ASU 2014-9 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property plant and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2018, with early adoption permitted, but not earlier than January 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

On June 19, 2014, the FASB issued ASU 2014-12, Stock Compensation (“ASU 2014-12”), providing guidance on accounting for stock-based payment awards when the terms of an award provide that a performance target could be achieved after the requisite service period. The update clarifies that performance targets that can be achieved after the requisite service period of a stock-based payment award be treated as performance conditions that affect vesting. These awards should be accounted for under Accounting Standards Codification Topic 718, Compensation — Stock Compensation, and existing guidance should be applied as it relates to awards with performance conditions that affect vesting. The update is effective for the Company for the interim and annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of this standard, if any, on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period and early adoption is permitted. The Company has not elected to early adopt ASU 2015-03 and instead, this standard will be effective for its fiscal year ending December 31, 2016. The Company is currently evaluating the impact of the adoption of this standard, if any, on its consolidated financial statements.

On April 15, 2015 the FASB issued Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05) which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. Under the new standard, customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. The new standard is effective for annual periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. The Company does not believe the standard will have a material impact on its consolidated financial statements.

On September 25, 2015 the FASB issued Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16) that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for the Company for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 
Summary of Significant Accounting Policies (Tables)

Activity in the allowance for doubtful accounts was as follows (in thousands):

 

     December 31,  
     2013      2014      2015  

Balance beginning of period

   $ 180       $ 269       $ 301   

Provision for bad debt

     116         102         61   

Uncollectible accounts written off

     27         70         88   
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 269       $ 301       $ 274   

 

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 by geography (based on customer address) is as follows (in thousands):

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

United States

   $ 109,444       $ 148,532       $ 191,300   

United Kingdom

     15,058         19,452         21,662   

International — all other

     41,756         53,972         58,638   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2013      2014      2015  

Revenues:

        

Collaboration cloud

   $ 35,176       $ 62,746       $ 88,234   

Identity and Access Management cloud

     55,647         74,244         92,712   

Service and Support cloud

     75,433         82,767         88,206   

Other

     2         2,199         2,448   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 166,258       $ 221,956       $ 271,600   
  

 

 

    

 

 

    

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2013      2014      2015  

United States

   $ 10,207       $ 9,731       $ 16,342   

Hungary

     1,224         2,018         2,525   

Ireland

     1,057         1,139         1,963   

International — all other

     710         588         881   
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,198       $ 13,476       $ 21,711   
  

 

 

    

 

 

    

 

 

 

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income (loss) per share either because they had an anti-dilutive impact or because the Company had a net loss in the period (in thousands):

 

     Years Ended December 31,  
       2013          2014          2015    

Options to purchase common shares

     2,389         57           

Restricted stock units

     1,192         18         204   
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     3,581         75         204   
  

 

 

    

 

 

    

 

 

 

 

Basic and diluted net (loss) income per share was calculated as follows (in thousands, except per share data):

 

     Years ended December 31,  
     2013      2014      2015  

Basic:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,351         24,385         24,826   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, basic

   $ (0.32    $ 0.33       $ 0.59   
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net (loss) income

   $ (7,682    $ 7,955       $ 14,558   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,351         24,385         24,826   

Add: Common stock equivalents

             1,001         954   
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     24,351         25,386         25,780   
  

 

 

    

 

 

    

 

 

 

Net (loss) income per share, diluted

   $ (0.32    $ 0.31       $ 0.56   
  

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments (Tables)

The following table summarizes the basis used to measure certain of the Company’s financial assets and contingent consideration liability that are carried at fair value (in thousands):

 

       Fair Value Measurements at December 31, 2014 Using     
       Level 1          Level 2          Level 3          Total    

Financial Assets:

           

Cash equivalents — money market funds

   $ 13,139       $       $       $ 13,139   

Cash equivalents — bank deposits

             5,003                 5,003   

Short-term marketable securities :

           

U.S. government agency securities

     59,903         19,950                 79,853   

Corporate bond securities

             20,356                 20,356   

Contingent consideration liability

                     249         249   
     Fair Value Measurements at December 31, 2015 Using  
     Level 1      Level 2      Level 3      Total  

Financial Assets:

           

Cash equivalents — money market funds

   $ 10,138       $       $       $ 10,138   

Cash equivalents — bank deposits

             1                 1   

Short-term marketable securities :

           

U.S. government agency securities

     50,237         17,994                 68,231   

Corporate bond securities

             17,053                 17,053   

Contingent consideration liability

                     2,028         2,028  

A reconciliation of the beginning and ending Level 3 liability is as follows:

 

     Years Ended
December 31,
 
       2014           2015    

Balance beginning of period

   $       $ 249   

Additions to Level 3

     239         2,000   

Payments

             (226

Change in fair value of contingent consideration liability

     10         5   
  

 

 

    

 

 

 

Balance end of period

   $ 249       $ 2,028   
  

 

 

    

 

 

 
Acquisitions (Tables)

Unaudited Pro Forma Financial Information

 

     Year Ended
December 31,
 
     2014      2015  
     (in thousands, except
per share amounts)
 

Revenue

   $ 230,477       $ 281,980   

Net income

   $ 1,687       $ 12,038   

Earnings per share—Basic

   $ 0.07       $ 0.48   

Earnings per share—Diluted

   $ 0.07       $ 0.47

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Cash

   $ 2,518   

Accounts receivable

     639   

Property and equipment

     40   

Deferred tax asset

     3,050   

Current and other assets

     134   

Intangible assets:

  

Completed technology

     29,400   

Customer relationships

     23,900   

Trade name and trademark

     3,000   

Deferred revenue

     (6,600 )

Accrued expenses

     (66 )

Deferred tax liability

     (23,478 )

Goodwill

     79,617   
  

 

 

 

Total purchase price

     112,154   

Liability for contingent consideration

     (2,000 )
  

 

 

 

Total cash paid

   $ 110,154   
  

 

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 67   

Current and other assets

     322   

Deferred revenue

     (70 )

Other liabilities

     (864 )

Customer backlog

     120   

Trade name and trademark

     10   

Customer relationships

     1,340   

Documented know-how

     280   

Goodwill

     6,295   
  

 

 

 

Total purchase price

   $ 7,500   
  

 

 

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 120   

Current and other assets

     526   

Deferred revenue

     (5 )

Other liabilities

     (935 )

Completed technology

     1,580   

Trade name and trademark

     30   

Customer relationships

     100   

Goodwill

     9,437   
  

 

 

 

Total purchase price

     10,853   

Liability for contingent consideration

     (216
  

 

 

 

Cash paid

   $ 10,637   
  

 

 

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash

   $ 2   

Current and other assets

     417   

Other liabilities

     (439 )

Completed technology

     960   

Trade name and trademark

     100   

Goodwill

     3,484   
  

 

 

 

Total purchase price

     4,524   

Liability for contingent consideration

     (24
  

 

 

 

Cash paid

   $ 4,500   
  

 

 

 
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the years ended December 31, 2014 and 2015 are as follows (in thousands):

 

Balance, January 1, 2014

   $ 18,712   

Goodwill related to the acquisition of Ionia

     6,295   

Goodwill related to the acquisition of Meldium

     9,437   

Goodwill related to the acquisition of Zamurai

     3,484   
  

 

 

 

Balance, December 31, 2014

     37,928   

Goodwill related to the acquisition of LastPass

     79,617   
  

 

 

 

Balance, December 31, 2015

   $ 117,545   
  

 

 

 

Intangible assets consist of the following (in thousands):

 

          December 31, 2014     December 31, 2015  
    Estimated
Useful
Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Identifiable intangible assets:

             

Trade names and trademarks

    1-11 years      $ 806      $ 682      $ 124      $ 3,806      $ 824      $ 2,982   

Customer relationships

    5-8 years        5,229        2,546        2,683        29,129        4,089        25,040   

Customer backlog

    4 months        120        120               120        120          

Domain names

    5 years        907        507        400        915        665        250   

Software

    4 years        299        299               299        299          

Completed technology

    3-9 years        16,903        3,981        12,922        46,503        6,893        39,610   

Technology and know-how

    3 years        3,176        3,176               3,176        3,176          

Documented know-how

    4 years        280        57        223        280        127        153   

Non-Compete agreements

    5 years        162        71        91        162        114        48   

Internally developed software

    3 years        4,591        2,051        2,540        6,754        3,247        3,507   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 32,473      $ 13,490      $ 18,983      $ 91,144      $ 19,554      $ 71,590   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Future estimated amortization expense for intangible assets at December 31, 2015 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2016

   $ 11,622   

2017

     11,424   

2018

     10,894   

2019

     8,273   

2020

     7,631   

Thereafter

     21,746   
  

 

 

 

Total

   $ 71,590