Tangoe
TANGOE INC (Form: 10-Q, Received: 11/14/2011 16:31:26)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from    to

 

Commission File Number: 001-35247

 


 

TANGOE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

06-1571143

(I.R.S. Employer

Identification Number)

 

 

 

35 Executive Blvd.

Orange, Connecticut

(Address of principal executive offices)

 

06477

(Zip Code)

 

(203) 859-9300

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨

 

Accelerated filer ¨

 

 

 

Non-accelerated filer x

 

Smaller reporting company ¨

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  x

 

There were 32,963,002 shares of our common stock outstanding on November 5, 2011.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Balance Sheets as of December 31, 2010 and September 30, 2011

4

 

 

 

 

Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2011

5

 

 

 

 

Statement of Changes in Stockholders’ (Deficit) Equity and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2011

6

 

 

 

 

Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 6.

Exhibits

49

 

 

 

 

Signatures

51

 

2



Table of Contents

 

PRELIMINARY NOTES

 

When we use the terms “Tangoe”, the “Company”, “we”, “us” and “our”, we mean Tangoe, Inc. and its consolidated subsidiaries.

 

Forward Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this quarterly report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

·                   our estimates regarding expenses and future revenue;

 

·                   our plans to develop, improve and market our products and services;

 

·                   the advantages of our products and services as compared to those of others;

 

·                   our ability to attract and retain customers;

 

·                   our financial performance;

 

·                   our ability to establish and maintain intellectual property rights;

 

·                   our ability to retain and hire necessary employees and appropriately staff our operations; and

 

·                   our estimates regarding capital requirements and needs for additional financing.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. The important factors discussed below under Part II - Other Information Item 1A. - Risk Factors among others could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

You should read this quarterly report and the documents that we have filed as exhibits to this quarterly report with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

We expressly qualify in their entirety all forward-looking statements attributable to us or any person acting on our behalf by the cautionary statements contained or referred to in this section.

 

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Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

TANGOE, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

 

 

September 30,

 

 

 

December 31,

 

2011

 

 

 

2010

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

5,913

 

$

52,521

 

Accounts receivable, less allowances of $245 and $102, respectively

 

14,295

 

24,405

 

Prepaid expenses and other current assets

 

1,395

 

2,098

 

Total current assets

 

21,603

 

79,024

 

COMPUTERS, FURNITURE AND EQUIPMENT-NET

 

1,795

 

2,578

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangible assets-net

 

15,785

 

20,910

 

Goodwill

 

17,636

 

22,893

 

Security deposits and other non-current assets

 

1,925

 

1,070

 

TOTAL ASSETS

 

$

58,744

 

$

126,475

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

3,303

 

$

6,439

 

Accrued expenses

 

3,364

 

4,961

 

Deferred revenue-current portion

 

8,304

 

9,252

 

Notes payable-current portion

 

6,345

 

3,558

 

Other current liabilities

 

 

766

 

Total current liabilities

 

21,316

 

24,976

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Deferred rent and other non-current liabilities

 

3,099

 

1,629

 

Deferred revenue-less current portion

 

1,788

 

2,483

 

Notes payable-less current portion

 

11,777

 

3,762

 

Warrants for redeemable convertible preferred stock

 

1,345

 

 

Total liabilities

 

39,325

 

32,850

 

 

 

 

 

 

 

REDEEMABLE CONVERTIBLE PREFERRED STOCK

 

 

 

 

 

par value $0.0001 per share-66,441,184 and 0 authorized as of December 31, 2010 and September 30, 2011, respectively; 65,055,472 and 0 shares issued and outstanding as of December 31, 2010 and September 30, 2011, respectively; liquidation preference of $47,339 and $0 as of December 31, 2010 and September 30, 2011, respectively

 

61,441

 

 

 

 

 

 

 

 

COMMITMENT AND CONTINGENCIES (NOTE 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

Series A convertible preferred stock, par value $0.0001 per share- 3,780,000 and 0 shares authorized as of December 31, 2010 and September 30, 2011, respectively; 1,928,479 and 0 shares issued and outstanding as of December 31, 2010 and September 30, 2011, respectively; liquidation preference of $482 and $0 as of December 31, 2010 and September 30, 2011, respectively

 

366

 

 

Common stock, par value $0.0001 per share-120,400,000 and 128,775,000 shares authorized as of December 31, 2010 and September 30, 2011, respectively; 4,647,731 and 32,746,785 shares issued and outstanding as of December 31, 2010 and September 30, 2011, respectively

 

 

3

 

Additional paid-in capital

 

7,317

 

140,838

 

Warrants for common stock

 

2,022

 

10,610

 

Less: notes receivable for purchase of common stock

 

(93

)

(93

)

Accumulated deficit

 

(51,635

)

(57,698

)

Other comprehensive income (loss)

 

1

 

(35

)

Total stockholders’ (deficit) equity

 

(42,022

)

93,625

 

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

$

58,744

 

$

126,475

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

TANGOE, Inc.

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

$

14,570

 

$

24,456

 

$

41,721

 

$

67,893

 

Strategic consulting, software licenses and other

 

2,568

 

2,856

 

8,077

 

7,807

 

Total revenue

 

17,138

 

27,312

 

49,798

 

75,700

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

6,720

 

11,926

 

19,177

 

32,391

 

Strategic consulting, software licenses and other

 

892

 

1,142

 

2,880

 

3,659

 

Total cost of revenue

 

7,612

 

13,068

 

22,057

 

36,050

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

9,526

 

14,244

 

27,741

 

39,650

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

3,041

 

4,113

 

8,866

 

11,774

 

General and administrative

 

2,849

 

4,683

 

8,248

 

12,855

 

Research and development

 

2,330

 

3,023

 

6,902

 

8,718

 

Depreciation and amortization

 

860

 

1,249

 

2,610

 

3,380

 

Restructuring charge

 

 

1,549

 

 

1,549

 

Income (loss) from operations

 

446

 

(373

)

1,115

 

1,374

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest expense

 

(525

)

(1,427

)

(1,601

)

(2,863

)

Interest income

 

2

 

14

 

15

 

21

 

Decrease (increase) in fair value of warrants for redeemable convertible preferred stock

 

42

 

19

 

(561

)

(1,996

)

Loss before income tax provision

 

(35

)

(1,767

)

(1,032

)

(3,464

)

Income tax provision

 

68

 

88

 

181

 

394

 

Net loss

 

(103

)

(1,855

)

(1,213

)

(3,858

)

Preferred dividends

 

(928

)

(310

)

(2,785

)

(2,168

)

Accretion of redeemable convertible preferred stock

 

(16

)

(5

)

(48

)

(37

)

Loss applicable to common stockholders

 

$

(1,047

)

$

(2,170

)

$

(4,046

)

$

(6,063

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.24

)

$

(0.10

)

$

(0.93

)

$

(0.56

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

4,402

 

22,769

 

4,361

 

10,831

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

TANGOE, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ (Deficit) Equity and Comprehensive Income (Loss) (unaudited)

For the Nine Months Ended September 30, 2011

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

 

 

Series A Convertible

 

 

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional

 

Common

 

for Purchase

 

 

 

Other

 

Total

 

 

 

Number of

 

 

 

Number of

 

 

 

Paid-In

 

Stock

 

of Common

 

Accumulated

 

Comprehensive

 

Stockhoders

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Warrants

 

Stock

 

Deficit

 

Income (Loss)

 

(Deficit)   Equity

 

Balance December 31, 2010

 

1,928,479

 

$

366

 

4,647,731

 

$

 

$

7,317

 

$

2,022

 

$

(93

)

$

(51,635

)

$

1

 

$

(42,022

)

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(3,858

)

 

(3,858

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

(36

)

(36

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,894

)

Issuance of shares from exercise of stock options

 

 

 

599,154

 

 

650

 

 

 

 

 

650

 

Issuance of shares from exercise of stock warrants

 

 

 

45,937

 

 

182

 

 

 

 

 

182

 

Cashless exercise of preferred warrant

 

 

 

931,896

 

 

19

 

 

 

 

 

19

 

Preferred stock dividends and accretion

 

 

 

 

 

 

 

 

(2,205

)

 

(2,205

)

Issuance of stock warrants

 

 

 

 

 

 

4,534

 

 

 

 

4,534

 

Conversion of preferred stock to common stock

 

(1,928,479

)

(366

)

19,022,067

 

2

 

64,015

 

 

 

 

 

63,651

 

Conversion of preferred stock warrants to common stock warrants

 

 

 

 

 

 

4,054

 

 

 

 

4,054

 

Issuance of common stock upon initial public offering, net of issuance costs

 

 

 

7,500,000

 

1

 

65,991

 

 

 

 

 

65,992

 

Stock-based compensation - options

 

 

 

 

 

2,664

 

 

 

 

 

2,664

 

Balance September 30, 2011

 

 

$

 

32,746,785

 

$

3

 

$

140,838

 

$

10,610

 

$

(93

)

$

(57,698

)

$

(35

)

$

93,625

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

TANGOE, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

Nine Months Ended 
September 30,

 

 

 

2010

 

2011

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(1,213

)

$

(3,858

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Amortization of debt discount

 

71

 

1,181

 

Depreciation and amortization

 

2,610

 

3,380

 

Restructuring charge

 

 

1,549

 

Decrease in deferred rent liability

 

(383

)

(101

)

Amortization of marketing agreement intangible assets

 

13

 

65

 

Allowance for doubtful accounts

 

32

 

23

 

Deferred income taxes

 

143

 

221

 

Stock based compensation

 

1,168

 

2,664

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

561

 

1,996

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(2,396

)

(5,831

)

Prepaid expenses and other assets

 

1

 

86

 

Other assets

 

(613

)

(327

)

Accounts payable

 

569

 

3,189

 

Accrued expenses

 

416

 

(364

)

Deferred revenue

 

1,164

 

1,438

 

Net cash provided by operating activities

 

2,143

 

5,311

 

Investing activities:

 

 

 

 

 

Purchases of computers, furniture and equipment

 

(319

)

(482

)

Cash paid in connection with acquisitions

 

 

(8,166

)

Net cash used in investing activities

 

(319

)

(8,648

)

Financing activities:

 

 

 

 

 

Repayment of debt

 

(3,646

)

(37,715

)

Borrowings of debt

 

 

20,000

 

Proceeds from initial public offering, net of issuance costs

 

 

66,998

 

Proceeds from warrant exercises

 

 

182

 

Deferred financing costs

 

 

(170

)

Proceeds from exercise of options

 

51

 

650

 

Net cash (used in) provided by financing activities

 

(3,595

)

49,945

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,771

)

46,608

 

Cash and cash equivalents, beginning of period

 

6,163

 

5,913

 

Cash and cash equivalents, end of period

 

$

4,392

 

$

52,521

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

TANGOE, INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.               Organization, Description of Business

 

Nature of Operations

 

Tangoe, Inc. (the “Company”), a Delaware corporation, was incorporated on February 9, 2000 as TelecomRFQ, Inc. During 2001, the Company changed its name to Tangoe, Inc. The Company provides communications lifecycle management software and related services to a wide range of enterprises, including large and medium-sized businesses and other organizations. Communications lifecycle management encompasses the entire lifecycle of an enterprise’s communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, invoice processing, expense allocation and accounting and asset decommissioning and disposal. The Company’s Communications Management Platform is an on-demand suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. The Company’s customers can also engage the Company through its client services group to manage their communications assets and services through its Communications Management Platform.

 

Initial Public Offering

 

In August 2011, the Company completed its initial public offering whereby it sold 7,500,000 shares of common stock at a price to the public of $10.00 per share.  The Company’s common stock is traded on the NASDAQ Global Market.  The Company received proceeds from its initial public offering of $66.0 million, net of underwriting discounts and commissions and other offering costs of $3.8 million.

 

As part of the offering, an additional 2,585,500 shares of common stock were sold by certain existing stockholders at a price to the public of $10.00 per share, including 1,315,500 shares sold by such stockholders upon the exercise of the underwriters’ option to purchase additional shares.  The Company did not receive any proceeds from the sale of such shares by the selling stockholders.

 

On June 15, 2011, the Company effected a 1-for-3.522 reverse stock split of its common stock.  All references to common stock, common stock equivalents and per share amounts in these financial statements relating to dates prior to June 15, 2011 have been retroactively adjusted to give effect to this reverse stock split.

 

Basis of Presentation of Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the Company’s financial position and results of operations for the periods presented have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, for any other interim period or for any other future year.

 

The consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) on July 27, 2011 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

 

Significant Accounting Policies

 

There have been no significant changes in the Company’s significant accounting policies during 2011 from those disclosed in its prospectus filed with the SEC on July 27, 2011.

 

2.               Business Combinations

 

HCL Expense Management Services, Inc.

 

In December 2010, the Company entered into an Asset Purchase Agreement (the “HCL-EMS APA”) to acquire substantially all of the assets and certain liabilities of HCL Expense Management Services, Inc. (“HCL-EMS”). Pursuant to the terms of the HCL-EMS APA, the Company paid $3.0 million in cash at closing, which took place on January 25, 2011 (“HCL-EMS Closing Date”). In addition, the Company is obligated to pay deferred cash consideration following each of the first and second anniversaries of the HCL-EMS Closing Date, pursuant to an earn-out formula based upon specified revenues from specified customers acquired from HCL-EMS. The Company valued this contingent consideration at $3.4 million. The Company has included the operating results of

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

HCL-EMS in its consolidated financial statements since the date of acquisition, including revenue of $9.3 million through September 30, 2011. In connection with this transaction the Company has recorded on its consolidated statement of operations in the third quarter of 2011 a restructuring charge of $1.5 million related to terminating the use of the former HCL-EMS leased facility in Rutherford, New Jersey that is subject to a lease assumed by the Company in connection with the acquisition.

 

HCL-EMS Purchase Price Allocation

 

The allocation of the total purchase price of HCL-EMS’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of the HCL-EMS Closing Date.  The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and contingent consideration and the allocation of the total purchase price (in thousands):

 

Cash

 

$

3,000

 

Fair value of contingent consideration

 

3,390

 

 

 

$

6,390

 

Accounts receivable

 

$

2,269

 

Prepaid and other current assets

 

125

 

Property and equipment

 

273

 

Intangible assets

 

2,700

 

Goodwill

 

2,243

 

Deposits and non-current assets

 

170

 

Accounts payable

 

(229

)

Accrued expenses

 

(1,042

)

Deferred revenue

 

(119

)

 

 

$

6,390

 

 

The goodwill related to the HCL-EMS acquisition is tax deductible.  The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization.  The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Technology

 

$

840

 

4.0

 

Customer relationships

 

1,860

 

9.0

 

Total intangible assets

 

$

2,700

 

 

 

 

Telwares, Inc.

 

On March 16, 2011, the Company entered into an Asset Purchase Agreement (the “Telwares APA”) with Telwares, Inc. to purchase certain assets and liabilities of Telwares, Inc. and its subsidiary Vercuity, Inc as defined in the Telwares APA (such acquired assets and liabilities, “Telwares”). Pursuant to the terms of the agreement, the Company will pay $7.7 million in cash as follows: $5.2 million at closing, which included a working capital adjustment of $0.7 million, which took place on March 16, 2011, $1,250,000 on March 16, 2012, and $1,250,000 on March 16, 2013. The Company has included the operating results of Telwares in its consolidated financial statements since the date of acquisition, including revenue of $5.5 million through September 30, 2011.

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Telwares Purchase Price Allocation

 

The allocation of the total purchase price of Telwares’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of March 16, 2011.  The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and deferred purchase price and the allocation of the total purchase price (in thousands):

 

Cash

 

$

5,166

 

Fair value of deferred purchase price

 

2,154

 

 

 

$

7,320

 

Accounts receivable

 

$

1,975

 

Prepaid and other current assets

 

72

 

Property and equipment

 

355

 

Intangible assets

 

2,428

 

Goodwill

 

3,014

 

Deposits and non-current assets

 

76

 

Accounts payable

 

(88

)

Accrued expenses

 

(444

)

Deferred revenue

 

(68

)

 

 

$

7,320

 

 

The goodwill related to the Telwares acquisition is tax deductible.  The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization. The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Non-compete agreements

 

$

58

 

2.0

 

Technology

 

350

 

3.0

 

Customer relationships

 

2,020

 

8.0

 

Total intangible assets

 

$

2,428

 

 

 

 

The following table presents the unaudited pro forma results of the Company for the three and nine months ended September 30, 2010 and September 30, 2011 as if the acquisitions of HCL-EMS and Telwares both occurred at the beginning of 2010. These results are not intended to reflect the actual operations of the Company had the acquisitions occurred at January 1, 2010.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

24,300

 

$

27,312

 

$

71,284

 

$

78,927

 

Operating (loss) income

 

(648

)

(373

)

(2,156

)

869

 

Loss applicable to common stockholders

 

(2,469

)

(2,170

)

(8,301

)

(6,738

)

Basic and diluted loss per common share

 

$

(0.56

)

$

(0.10

)

$

(1.90

)

$

(0.63

)

 

10



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

3. Loss per Share Applicable to Common Stockholders

 

The following table sets forth the computations of loss per share applicable to common stockholders for the three and nine months ended September 30, 2010 and 2011:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(103

)

$

(1,855

)

$

(1,213

)

$

(3,858

)

Less: Preferred stock dividends

 

(928

)

(310

)

(2,785

)

(2,168

)

Less: Accretion of redeemable convertible preferred stock

 

(16

)

(5

)

(48

)

(37

)

Loss applicable to common stockholders, basic and diluted

 

$

(1,047

)

$

(2,170

)

$

(4,046

)

$

(6,063

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.24

)

$

(0.10

)

$

(0.93

)

$

(0.56

)

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic and diluted shares

 

4,402

 

22,769

 

4,361

 

10,831

 

 

 

 

 

 

 

 

 

 

 

Potentially dilutive securities (1):

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

5,987

 

7,004

 

5,987

 

7,004

 

Common stock warrants

 

1,359

 

594

 

1,359

 

594

 

Convertible preferred stock

 

19,019

 

 

19,019

 

 

 


(1) The impact of potentially dilutive securities on earnings per share is anti-dilutive in a period of net loss.

 

On August 1, 2011, as a result of the initial public offering all preferred stock was converted to common stock and all preferred stock warrants converted to warrants to purchase common stock.

 

4. Computers, Furniture and Equipment-Net

 

Computers, furniture and equipment-net consist of:

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

(in thousands)

 

2010

 

2011

 

 

 

 

 

 

 

Computers and software

 

$

5,881

 

$

7,286

 

Furniture and fixtures

 

562

 

700

 

Leasehold improvements

 

229

 

462

 

 

 

6,672

 

8,448

 

Less: accumulated depreciation

 

(4,877

)

(5,870

)

Computers, furniture and equipment-net

 

$

1,795

 

$

2,578

 

 

Computers and software includes equipment under capital leases totaling approximately $1.7 million and $2.4 million at December 31, 2010 and September 30, 2011, respectively. Accumulated depreciation on equipment under capital leases totaled approximately $0.7 million and $1.2 million as of December 31, 2010 and September 30, 2011, respectively. Depreciation and amortization expense associated with computers, furniture and equipment was $0.8 million and $1.0 million for the nine months ended September 30, 2010 and 2011, respectively.

 

In connection with the business combinations described in Note 2, the Company acquired fixed assets with fair values of $0.6 million during the first quarter of 2011.

 

11



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

5.               Restructuring Charge

 

In September 2011, the Company recorded a restructuring charge as a result of the consolidation of office space in New Jersey.  The consolidation of office space eliminated redundant office space acquired in the HCL-EMS and Telwares acquisitions.  This charge reflects the fair value of the remaining rent payments for the office space the Company ceased using, net of estimated sublease income plus real estate commissions, and office relocation costs.  The liabilities related to the restructuring charge are included in other current liabilities and deferred rent and other non-current liabilities on the Company’s condensed consolidated balance sheet.  The following table summarizes the activity in the liabilities related to the restructuring charge for the three months ended September 30, 2011.

 

 

 

Lease costs, net

 

 

 

 

 

 

 

of estimated

 

 

 

 

 

(in thousands)

 

sublease income

 

Other Costs

 

Total

 

 

 

 

 

 

 

 

 

2011 restructuring charge

 

$

1,405

 

$

144

 

$

1,549

 

Cash payments

 

(62

)

 

(62

)

Remaining liability at September 30, 2011

 

1,343

 

144

 

1,487

 

 

 

 

 

 

 

 

 

 

 

less: current portion

 

 

 

(766

)

 

 

Long-term portion

 

 

 

721

 

 

6.               Intangible Assets

 

The following table presents the components of the Company’s intangible assets as of December 31, 2010 and September 30, 2011:

 

 

 

 

 

 

 

Weighted

 

 

 

December 31,

 

September 30,

 

Average Useful

 

(in thousands)

 

2010

 

2011

 

Life (in years)

 

 

 

 

 

 

 

 

 

Patents

 

$

1,054

 

$

1,054

 

8.0

 

Less: accumulated amortization

 

(502

)

(601

)

 

 

Patents, net

 

552

 

453

 

 

 

Technological know-how

 

5,029

 

6,219

 

8.2

 

Less: accumulated amortization

 

(1,608

)

(2,227

)

 

 

Technological know-how, net

 

3,421

 

3,992

 

 

 

Customer relationships

 

12,900

 

16,780

 

8.5

 

Less: accumulated amortization

 

(5,290

)

(6,716

)

 

 

Customer relationships, net

 

7,610

 

10,064

 

 

 

Convenants not to compete

 

140

 

198

 

2.0

 

Less: accumulated amortization

 

(140

)

(156

)

 

 

Convenants not to compete, net

 

 

42

 

 

 

Strategic marketing agreement

 

3,981

 

6,203

 

10.0

 

Less: accumulated amortization

 

(26

)

(91

)

 

 

Strategic marketing agreement, net

 

3,955

 

6,112

 

 

 

Trademarks

 

247

 

247

 

 

 

Intangible assets, net

 

$

15,785

 

$

20,910

 

 

 

 

12



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

The related amortization expense of intangible assets for the nine months ended September 30, 2010 and 2011 was $1.7 million and $2.2 million, respectively.  The Company’s estimate of future amortization expense for acquired intangible assets that exists at September 30, 2011 is as follows:

 

(in thousands)

 

 

 

October 1, 2011 to December 31, 2011

 

$

776

 

2012

 

3,190

 

2013

 

3,291

 

2014

 

3,061

 

2015

 

2,030

 

Thereafter

 

8,315

 

Total

 

$

20,663

 

 

7.               Debt

 

As of December 31, 2010 and September 30, 2011, borrowings outstanding included the following:

 

 

 

December 31,

 

September 30,

 

(in thousands)

 

2010

 

2011

 

Line of credit, $8.0 million limit, bears interest at an interest rate equal to the London InterBank Offer Rate plus 4%, interest rate was 4.3% at December 31, 2010

 

$

5,500

 

$

 

 

 

 

 

 

 

Term loan, bears interest at an interest rate equal to the greater of base rate (as defined) plus 6.0% or 10.25% at December 31, 2010, interest rate in effect was 10.25% at December 31, 2010. Interest-only payments through January 2010; thereafter, monthly interest and principal payments as described below. Net of unamortized discount of $70,164 at December 31, 2010

 

11,272

 

 

 

 

 

 

 

 

HCL contingent consideration, net of unamortized discount of $301 at September 30, 2011. Payable in annual installments starting January 2012, as described below

 

 

3,640

 

 

 

 

 

 

 

Deferred Telwares purchase price, net of unamortized discount of $220 at September 30, 2011. Payable in annual installments starting in March 2012, as described below

 

 

2,280

 

 

 

 

 

 

 

Deferred InterNoded purchase price, net of unamortized discount of $0 at December 31, 2010

 

500

 

 

 

 

 

 

 

 

Capital lease and other obligations

 

850

 

1,400

 

Total notes payable

 

$

18,122

 

$

7,320

 

Less: current portion

 

$

(6,345

)

$

(3,558

)

Notes payable, less current portion

 

$

11,777

 

$

3,762

 

 

Line of Credit

 

In October 2010, the Company negotiated a line of credit of up to $6.0 million based upon 80% of the Company’s eligible accounts receivable with JP Morgan Chase Bank, N.A. (“Chase”). The line of credit bears interest at the London Inter Bank Offered Rate (“Libor”) plus a 4.0% spread.  On November 2, 2010, the Company borrowed $5.5 million of the line of credit. The Company used the proceeds to pay off the $5.0 million previously outstanding revolving line of credit and used $0.5 million for general corporate overhead purposes. In February 2011, the Company negotiated an increase in the line of credit of up to $8.0 million based upon 80% of the Company’s eligible accounts receivable.  In August 2011, upon the completion of the Company’s initial public offering, the Company used a portion of the proceeds from the offering to pay all obligations under the line of credit, including the outstanding principal of $5.5 million and unpaid accrued interest of $15,702. In October 2011, the Company renewed the line of credit for one year, with the line of credit maturing in October 2012.  The line of credit has a financial covenant relative to minimum cash balance requirements, and is secured by all of the Company’s tangible and intangible property.

 

13



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Term Loan

 

In the first quarter of 2011, the Company borrowed $20.0 million pursuant to a new term loan with its existing bank in connection with the acquisitions of HCL-EMS and Telwares (the “New Term Loan”), as described in Note 2. A previous term loan with the same bank with an outstanding principal balance of $11.0 million was repaid from the proceeds of the New Term Loan. The New Term Loan required interest-only payments through January 2012. Thereafter, monthly interest payments were to be accompanied by principal payments in the following amounts: (i) $350,000 commencing on February 1, 2012 through and including January 1, 2013; (ii) $400,000 from February 1, 2013 through and including January 1, 2014; (iii) $500,000 from February 1, 2014 through and including January 1, 2015; and (iv) $5,000,000 on February 1, 2015. The interest rate on the New Term Loan was base rate plus 6.25% payable monthly with an interest rate floor of 9.75%. The base rate was defined as the greater of (a) the highest prime rate in effect during the month or (b) the highest Libor Rate in effect during such month plus 2.5% per annum or (c) the floor of 3.5% per annum. The Company also issued a warrant to purchase 625,000 shares of Series F redeemable convertible preferred stock (“Series F”) to the bank at an exercise price of $1.1776 per share (equivalent to 177,456 shares of common stock at $4.1475 per share on a post-split, as converted-to-common basis).  In August 2011, upon the completion of the Company’s initial public offering, the Company used a portion of the proceeds from the offering to pay all obligations under the New Term Loan, including the outstanding principal of $20.0 million, loan prepayment fee of $0.4 million and unpaid accrued interest of $0.2 million.  Upon the repayment of the New Term Loan, the remaining unamortized debt discount of approximately $0.6 million and debt issuance costs of $0.1 million were expensed.

 

In July 2008, the Company borrowed $14.3 million pursuant to a term loan with its existing bank in connection with the acquisition of Information Strategies Group (the “ISG Term Loan”). A previous term loan with the same bank with an outstanding principal balance of $2.2 million was repaid from the proceeds of the ISG Term Loan. The ISG Term Loan required interest-only payments through January 2010. Thereafter, monthly interest payments were to be accompanied by principal payments in the following amounts: (i) $201,250 commencing on February 1, 2010 through and including July 1, 2010; (ii) $340,000 from August 1, 2010 through and including July 1, 2011; (iii) $491,000 from August 1, 2011 through and including June 1, 2012; and (iv) $3,561,500 on July 1, 2012.  The interest rate on the ISG Term Loan was defined as, the greater of the prime rate plus 6.0% or 10.25%. The Company also issued a warrant to purchase 850,000 shares of Series F to the bank at an exercise price of $1.1776 per share (equivalent to 241,340 shares of common stock at $4.1475 per share on a post-split, as converted-to-common basis).  The Company was in compliance with all financial covenants related to the ISG Term Loan as of December 31, 2010.  The ISG Term Loan was repaid in the first quarter of 2011 with the proceeds from the New Term Loan.

 

Contingent Consideration

 

As described in Note 2, the purchase consideration for the acquisition of HCL-EMS includes deferred cash consideration. The deferred cash consideration includes contingent cash payments following each of the first and second anniversaries of the HCL-EMS Closing Date of January 25, 2011, pursuant to an earn-out formula based upon specified revenues from specified customers acquired from HCL-EMS. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.6 million based on the Company’s weighted average cost of debt as of the date of the acquisition.  The obligation to pay the deferred cash consideration is unsecured.

 

Deferred Telwares Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of Telwares includes deferred cash consideration. The deferred cash consideration includes payments of $1,250,000 on March 16, 2012 and $1,250,000 on March 16, 2013. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.3 million based on the Company’s weighted average cost of debt as of the date of the acquisition. The obligation to pay the deferred cash consideration is unsecured.

 

Deferred InterNoded Purchase Price

 

The purchase consideration for the acquisition of InterNoded, Inc. (“InterNoded”), which the Company acquired in December 2008, included deferred cash payments. The deferred cash consideration included payments of $0.9 million made in January 2009 and $1.0 million made in January 2010 and a final payment of $0.5 million made on January 15, 2011.  No interest accrued on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.2 million based on

 

14



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

the Company’s weighted average cost of debt as of the date of the acquisition. The deferred cash consideration was subordinated to the line of credit and the New Term Loan and was unsecured.

 

8.               Stockholders’ Deficit

 

Common Stock —As of December 31, 2010 and September 30, 2011, the number of authorized shares of common stock, par value $0.0001 per share, was 120,400,000 and 128,775,000, respectively, of which 4,647,731 and 32,746,785 were issued and outstanding, respectively.

 

Preferred Stock —As of December 31, 2010 and September 30, 2011, the number of authorized shares of preferred stock, par value $0.0001 per share, was 70,221,184 and 5,000,000, respectively, of which 66,983,951 and 0 were issued and outstanding, respectively. On August 1, 2011, as a result of the Company’s initial public offering the outstanding preferred stock was converted into 19,022,067 shares of common stock on a one-for-3.522 basis.

 

The following table summarizes the number of shares of convertible preferred stock for the nine months ended September 30, 2011 (in thousands):

 

 

 

Balance as of

 

Conversion of

 

 

 

 

 

December 31, 2010

 

preferred stock into

 

Balance as of

 

 

 

as issued

 

as converted

 

common stock

 

September 30, 2011

 

Series A

 

1,928

 

547

 

(547

)

 

Series B

 

8,395

 

2,384

 

(2,384

)

 

Series C

 

4,112

 

1,167

 

(1,167

)

 

Series D

 

2,962

 

841

 

(841

)

 

Series D-1

 

4,236

 

1,203

 

(1,203

)

 

Series E

 

10,811

 

3,070

 

(3,070

)

 

Series F

 

10,190

 

2,893

 

(2,893

)

 

Series 1

 

21,857

 

6,206

 

(6,206

)

 

Series 2

 

2,505

 

711

 

(711

)

 

 

 

66,996

 

19,022

 

(19,022

)

 

 

The following table summarizes the preferred stock amounts for the nine months ended September 30, 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Conversion of

 

 

 

 

 

Balance as of

 

Preferred

 

Accretion of

 

 

 

preferred stock into

 

Balance as of

 

 

 

December 31, 2010

 

Dividends

 

preferred stock

 

Cashless exercise

 

common stock

 

September 30, 2011

 

Series A

 

366

 

 

 

 

(366

)

 

Series B

 

4,736

 

132

 

4

 

 

(4,872

)

 

Series C

 

2,496

 

75

 

 

5

 

(2,576

)

 

Series D

 

2,753

 

88

 

3

 

 

(2,844

)

 

Series D-1

 

3,755

 

126

 

4

 

 

(3,885

)

 

Series E

 

10,700

 

374

 

10

 

 

(11,084

)

 

Series F

 

14,259

 

560

 

16

 

 

(14,835

)

 

Series 1

 

20,132

 

720

 

 

 

(20,852

)

 

Series 2

 

2,610

 

93

 

 

 

(2,703

)

 

 

 

61,807

 

2,168

 

37

 

5

 

(64,017

)

 

 

15



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Investor Rights Agreements —Holders of a substantial portion of our outstanding common stock and warrants to purchase common stock, have rights to require the Company to register these shares under the Securities Act of 1933, as amended, under specified circumstances pursuant to the Company’s Eighth Amended and Restated Investor Rights Agreement, as amended.

 

Warrants

 

Common Stock Warrants —Since the completion of the Company’s initial public offering, the Company has received cash proceeds of $0.2 million in the aggregate from the exercise of warrants to purchase a total of 45,937 shares of common stock at exercise prices ranging from $2.24 to $4.15 per share.  In addition, warrant holders exercised warrants to purchase a total of 1,516,736 shares of common stock pursuant to a cashless exercise feature of these warrants.  As a result of the cashless exercise, 931,896 shares of common stock were issued and 584,840 warrant shares were cancelled in lieu of payment of cash consideration to the Company.

 

On March 22, 2011, the Company issued a warrant to purchase up to 1,282,789 shares of its common stock to Dell Products, L.P. (“Dell”) in connection with the entry of the Company and Dell into a 49-month strategic relationship agreement. Under the terms of the warrant, the 1,282,789 shares of common stock may become exercisable upon the achievement of certain annual recurring revenue thresholds over the 49-month period. The warrant is exercisable at $5.987 per share. As of September 30, 2011, none of the shares exercisable under this warrant were probable of being earned and accordingly no value was ascribed to this warrant. On a quarterly basis the Company will review the actual annual recurring revenue related to the Dell strategic relationship agreement to determine if it is probable that Dell will reach any of the annual recurring revenue thresholds to earn vesting of warrant shares, and to the extent the Company deems it probable that any warrant shares will vest, the Company will record the fair value of those shares to intangible assets and non-current liabilities using a Black-Scholes valuation model and mark to market each period thereafter until such time as the warrant shares are actually earned and vest.

 

On October 9, 2009, the Company issued a warrant to purchase up to 3,198,402 shares of its common stock to International Business Machines Corporation (“IBM”) in connection with the entry of the Company and IBM into a five-year strategic relationship agreement. Under the terms of the warrant, 890,277 shares of common stock were vested and exercisable immediately upon execution of the agreement. Up to an additional 2,308,125 shares of common stock may become exercisable upon the achievement of certain billing thresholds over a three-year period. The warrant is exercisable at $4.148 per share. (Certain terms of this warrant were amended on June 8, 2011, as described in the paragraph below). The Company valued the initial 890,277 shares of common stock exercisable under the warrant at $1.7 million using the Black-Scholes valuation model at the time of the signing of the agreement. The Black-Scholes valuation assumptions included an expected term of seven years, volatility of 67.77% and a risk free interest rate of 2.93%. The Company recorded the $1.7 million value of the initial 890,277 shares of common stock as an increase to warrants for common stock and an increase to other non-current assets on the Company’s consolidated balance sheet. During the three months ended December 31, 2009, the Company determined that it was probable that IBM would reach certain of the billing thresholds to have an additional 947,103 shares of common stock become exercisable. The additional shares of common stock exercisable under the warrant were valued at $1.4 million using the Black-Scholes valuation model at the time the Company determined it was probable they would reach the billing thresholds. The Company recorded the value of the additional shares of common stock to intangible assets and non-current liabilities and will reclassify the liability to equity upon reaching the billing thresholds and the additional shares of common stock become exercisable. In December 2010, the Company reviewed the actual billings to date related to the strategic relationship agreement and determined it was probable IBM would reach the billing thresholds to earn 624,755 shares of the additional 947,103 shares of common stock accrued. The Company reversed $920,000 of market value related to the 322,348 shares of common stock no longer deemed probable of being earned. The Company began to amortize the asset in the first quarter of 2010, with the related charge recorded as contra-revenue. The related charge to revenue will be in proportion to expected revenue over approximately a ten-year period. For the nine months ended September 30, 2010 and 2011, the Company recorded $12,719 and $65,209, respectively, of amortization as a contra-revenue charge related to the common stock warrant. The warrant value has been marked to market on a quarterly basis until the warrant shares are earned and vest. The Company recorded a mark-to-market valuation increase of $0.6 million to intangible assets on its consolidated balance sheet as of September 30, 2011 as a result of the increased valuation of its common stock.

 

On June 8, 2011, certain terms of the common stock warrant described above were amended by the Company and IBM. Under the terms of the amended warrant agreement, an additional 624,755 shares of common stock were vested and exercisable immediately (in addition to the 890,277 shares previously vested and exercisable), the additional warrant shares that may be earned were reduced from 2,308,125 to 651,626 shares of common stock, and the methodology for earning the additional warrant shares was revised to be based on specified new contractual revenue commitments from IBM that occur between June 8, 2011 and June 30, 2012.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Based on this amendment, the maximum number of warrant shares (issued and issuable) to IBM was reduced from 3,198,402 to 2,166,658 shares of common stock. The fair value of the 624,755 warrant shares vested as a result of this amendment was determined to be $4.5 million using the Black-Scholes valuation model. The Company recorded these vested warrant shares as an increase to warrants for common stock, reversed the non-current liability associated with the previous accrual for these warrant shares, and the difference was added to intangible assets and is being amortized in proportion to the expected revenue over the remainder of the original ten-year period noted above. On a quarterly basis the Company will also evaluate the probability of IBM vesting in any of the 651,626 additional warrant shares between June 8, 2011 and June 30, 2012, and to the extent the Company deems it probable that any portion of these additional warrant shares will be earned, the Company would record the fair value of the additional shares of common stock to intangible assets and non-current liabilities using a Black-Scholes valuation model, and mark to market each period thereafter until such time that the warrant shares are actually earned and vest. On August 30, 2011, the Company issued 930,511 shares of its common stock to IBM upon the exercise by IBM of this warrant, pursuant to a cashless exercise feature.  As a result of the cashless exercise, 584,521 warrant shares were cancelled in lieu of the payment of cash consideration to the Company.  As of September 30, 2011 there were no further vested warrant shares subject to the IBM warrant.

 

Preferred Stock Warrants — On August 1, 2011, as a result of the Company’s initial public offering all of the Company’s redeemable convertible preferred stock warrants automatically converted into common stock warrants on a 1-for-3.522 basis, resulting in warrants exercisable for 561,203 shares of common stock.

 

A summary of warrants to purchase common stock and redeemable convertible preferred stock issued and exercised during the nine months ended September 30, 2011 is presented below:

 

 

 

Redeemable Convertible

 

 

 

 

 

 

 

Preferred Stock Warrants

 

 

 

 

 

 

 

 

 

As-converted

 

Common

 

Total, as

 

 

 

 

 

to common

 

Stock

 

converted to

 

 

 

As issued

 

basis (1)

 

Warrants

 

Common basis (1)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

1,366,557

 

388,006

 

970,915

 

1,358,921

 

Exercised

 

(15,000

)

(4,259

)

(977,833

)

(982,092

)

Issued

 

625,000

 

177,456

 

624,755

 

802,211

 

Cancelled

 

 

 

(584,840

)

(584,840

)

Converted to Common Stock Warrants

 

(1,976,557

)

(561,203

)

561,203

 

 

Outstanding at end of the period

 

 

 

594,200

 

594,200

 

 

 

 

 

 

 

 

 

 

 

Weighted average exercise price

 

$

 

$

 

$

3.53

 

$

3.53

 

 


(1)    Reflects the equivalent number of common shares and exercise price, is if such preferred warrants were converted into warrants for common shares.

 

Stock Options —As of September 30, 2011, the Company had five stock-based compensation plans, the Employee Stock Option/Stock Issuance Plan (the “Employee Plan”), the Executive Stock Option/Stock Issuance Plan (the “Executive Plan”), the 2005 Stock Incentive Plan (the “2005 Plan”), the Traq Amended and Restated 1999 Stock Plan (the “1999 Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan”).   The 2011 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards.

 

As of September 30, 2011, there were options to purchase an aggregate of 6,031,811 shares of common stock outstanding under the 2005 Plan at a weighted-average exercise price of $3.88 per share and an aggregate of 588,984 shares of common stock issued upon the exercise of options granted under the 2005 Plan. As of September 30, 2011, there were 3,620,670 shares of common stock reserved for future issuance under the 2011 Plan.  The Company will only grant future stock options or other equity incentive awards under the 2011 Plan.

 

Under the provisions of the Employee Plan, the Executive Plan, the 2005 Plan, the 1999 Plan and the 2011 Plan (the “Plans”), the exercise price of each option is determined by the Company’s board of directors or by a committee appointed by the board of directors.  Under the 2011 Plan, the exercise price of all stock options must not be less than the fair market value of a share of common stock on the date of grant. The period over which options vest and become exercisable, as well as the term of the options, is determined by the board of directors or the committee appointed by the board of directors. The options generally vest over 4 years and

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

expire 10 years after the date of the grant. During the nine months ended September 30, 2011, the Company’s board of directors granted options to purchase an aggregate of 1,978,114 shares of common stock under the 2005 Plan to employees and non-employees, at a weighted average exercise price of $6.35 per share.

 

A summary of the status of stock options issued pursuant to the Plans during the nine months ended September 30, 2011 is presented below:

 

Options

 

Number of Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Contractual
Life (years)

 

 

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

5,679,003

 

$

2.14

 

 

 

Granted

 

1,978,114

 

$

6.35

 

 

 

Forfeited

 

(54,089

)

$

4.34

 

 

 

Exercised

 

(599,154

)

$

1.08

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of the period

 

7,003,874

 

$

3.40

 

7.4

 

 

 

 

 

 

 

 

 

Exercisable at end of the period

 

3,714,518

 

$

1.71

 

6.0

 

 

 

 

 

 

 

 

 

Available for future grants at September 30, 2011

 

3,620,670

 

 

 

 

 

 

The intrinsic values of options outstanding, vested and exercised during the nine months ended September 30, 2011 were as follows:

 

 

 

2011

 

 

 

Number of

 

Intrinsic

 

 

 

Options

 

Value

 

Outstanding

 

7,003,874

 

$

55,405,399

 

Vested

 

3,714,518

 

$

35,675,562

 

Exercised

 

599,154

 

$

5,080,820

 

 

During the nine months ended September 30, 2011, employees of the Company exercised options to purchase a total of 599,154 shares of common stock at exercise prices ranging from $0.25 to $4.72 per share. Proceeds from the stock option exercises totaled $0.7 million.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

In accordance with Accounting Standards Codification (“ASC”) 718, Share Based Payment (“ASC718”), total compensation expense for stock-based compensation awards was $1.2 million and $2.7 million for the nine months ended September 30, 2010 and 2011, respectively, which is included on the accompanying consolidated statements of operations as follows (in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2011

 

Cost of goods sold

 

$

195

 

$

499

 

Sales and marketing expenses

 

260

 

589

 

General and administrative expenses

 

620

 

1,447

 

Research and development

 

93

 

129

 

Total stock-based employee compensation

 

$

1,168

 

$

2,664

 

 

Stock-based compensation expense for stock options granted since January 1, 2006 will be recognized over the following periods as follows (in thousands):

 

Years Ending December 31,

 

 

 

2011

 

$

899

 

2012

 

3,058

 

2013

 

2,742

 

2014

 

1,986

 

2015

 

240

 

 

 

$

8,925

 

 

Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes valuation model on the date of grant for stock options. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected volatility, expected terms, risk-free interest rates and dividend yields. The Company determined the assumptions in the Black-Scholes valuation model as follows: expected volatility is a combination of the Company’s competitors’ historical volatility; expected term is calculated using the “simplified” method prescribed in ASC 718 ; and the risk free interest rate is based on the U.S. Treasury yield on 5 and 7-year instruments in effect at the time of grant. A dividend yield is not used, as the Company has never paid cash dividends and does not currently intend to pay cash dividends. The Company periodically reviews the assumptions and modifies the assumptions accordingly.

 

As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the statement of cash flows.

 

The fair value of the options granted during 2011 was determined at the date of grant using the Black-Scholes valuation model with the following assumptions:

 

 

 

2011

 

 

 

 

 

Expected dividend yield

 

0%

 

Risk-free interest rate

 

2.05% to 2.60%

 

Expected term (in years)

 

5.5 - 6.2 years

 

Expected volatility

 

59.58% - 60.89%

 

 

Based on the above assumptions, the weighted average fair value per share of stock options granted during the nine months ended September 30, 2011 was approximately $6.35.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

9.     Income Taxes

 

The income tax provision differs from the expected tax provisions computed by applying the U.S. Federal statutory rate to loss before income taxes primarily because the Company has historically maintained a full valuation allowance on its deferred tax assets, differences between book and tax treatment of goodwill and other indefinite-lived intangible assets and to a lesser extent because of the impact of state income taxes.  As described in the Company’s prospectus filed with the SEC on July 27, 2011, the Company maintains a valuation allowance in accordance with ASC 740, Accounting for Income Taxes , on its net deferred tax assets.  Until the Company achieves and sustains an appropriate level of profitability, it plans to maintain a valuation allowance on its net deferred tax assets.

 

10.    Fair Value Measurement

 

The Company records certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair values based on that price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.

 

The prescribed fair value hierarchy and related valuation methodologies are as follows:

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, directly or indirectly, such as a quoted price for similar assets or liabilities in active markets.

 

Level 3—Inputs are unobservable and are only used to measure fair value when observable inputs are not available. The inputs reflect the entity’s own assumptions and are based on the best information available. This allows for the fair value of an asset or liability to be measured when no active market for that asset or liability exists.

 

The following table discloses the assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 and the basis for that measurement:

 

 

 

Fair Value Measurement at September 30, 2011

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

30,016

 

$

30,016

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

3,640

 

 

 

3,640

 

 

 

$

33,656

 

$

30,016

 

$

 

$

3,640

 

 

 

 

Fair Value Measurement at December 31, 2010

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

3,000

 

$

3,000

 

$

 

$

 

Warrants for redeemable convertible preferred stock

 

1,345

 

 

1,345

 

 

 

 

$

4,345

 

$

3,000

 

$

1,345

 

$

 

 

The Company’s investment in overnight money market institutional funds, which amounted to $3.0 million at December 31, 2010 and $30.0 million at September 30, 2011 is included in cash and cash equivalents on the accompanying consolidated balance sheets and is classified as a Level 1 input.

 

The Company’s warrants for redeemable convertible preferred stock were classified as a liability on the accompanying consolidated balance sheet and each reporting period the carrying value of the warrants was adjusted to its then current fair value, with

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

any resulting gain or loss reflected in the statement of operations. The fair value is determined by the Black-Scholes valuation model on the balance sheet date.

 

The acquisition of HCL-EMS includes a contingent consideration agreement that requires additional consideration to be paid by the Company following each of the first and second anniversaries of the HCL-EMS Closing Date, pursuant to an earn-out formula ranging from 7.5% to 15% of specified revenues from specified customers acquired. The fair value of the contingent consideration recognized was $3.4 million which was estimated by applying the income approach. The key assumptions include (a) a discount rate of 10.5% and (b) probability adjusted levels of revenue between approximately $12.6 million and $13.9 million. As of September 30, 2011, there were no changes in the recognized amounts except, for the accretion of interest, or potential outcome for the contingent consideration recognized as a result of the HCL-EMS acquisition.

 

The carrying amounts of the Company’s other non-cash financial instruments including accounts receivable and accounts payable approximate their fair values due to the relatively short-term nature of these instruments. The carrying amounts of the Company’s line of credit, term loan, deferred Telwares purchase price and deferred InterNoded purchase price approximate fair value as the effective interest rates approximates market rates.

 

11.      Supplemental Cash Flow Information:

 

Information about other cash flow activities during the nine months ended September 30, 2010 and 2011 are as follows:

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2010

 

2011

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

1,607

 

$

1,600

 

Income tax payments

 

$

88

 

$

185

 

State income tax credits (redeemed for cash)

 

$

(43

)

$

(37

)

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Contingent consideration issued in connection with HCL-EMS acquisition

 

$

 

$

3,390

 

Deferred purchase price in connection with Telwares acquisition

 

$

 

$

2,155

 

Preferred stock dividends and accretion

 

$

2,833

 

$

2,205

 

Issuance of warrants in connection with notes payable and marketing agreement

 

$

1,747

 

$

2,598

 

Computer, furniture and equipment acquired with capital lease

 

$

538

 

$

666

 

Unpaid deferred IPO costs

 

$

1,380

 

$

477

 

Conversion of warrants for redeemable convertible preferred stock and preferred stock warrants

 

$

 

$

64,017

 

Cashless exercise of warrants

 

$

58

 

$

24

 

 

12.     Commitments and Contingencies

 

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. If the Company determines that it is probable that a loss has been incurred and the amount is reasonably estimable, the Company will record a liability. The Company has determined that it does not have any potential liabilities related to any legal proceedings or claims that would individually or in the aggregate materially adversely affect its financial conditions or operating results.

 

The Company has entered into non-cancellable operating leases for the rental of office space in various locations which expire between 2011 and 2016. Some of the leases provide for lower payments in the beginning of the term which gradually escalate during the term of the lease. The Company recognizes rent expense on a straight-line basis over the lease term, which gives rise to a deferred rent liability on the balance sheet.

 

The Company is also obligated under several leases covering computer equipment and software, which the Company has classified as capital lease items, which expire between September 2011 and December 2012.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

As of September 30, 2011, the Company’s obligation for future minimum rental payments related to these leases is as follows:

 

(in thousands)

 

Operating Leases

 

Capital Leases

 

October 1, 2011 to December 31, 2011

 

$

1,027

 

$

172

 

2012

 

4,143

 

590

 

2013

 

4,072

 

398

 

2014

 

3,946

 

87

 

2015

 

2,664

 

 

thereafter

 

969

 

 

Total future minimum lease obligations

 

$

16,821

 

$

1,247

 

 

 

 

 

 

 

Less: amount representing interest

 

 

 

(105

)

Present value of minimum lease obligations

 

 

 

$

1,142

 

 

Rent expense, included in general and administrative expense, was approximately $1.3 million and $2.6 million for the nine months ended September 30, 2010 and 2011, respectively.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to our plans and strategy for our business and related financing, include forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” and “Forward-Looking Statements” sections of this quarterly report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

Tangoe is a leading global provider of communications lifecycle management, or CLM, software and services to a wide range of enterprises, including large and medium-sized businesses and other organizations. CLM encompasses the entire lifecycle of an enterprise’s communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, invoice processing, expense allocation and accounting, and asset decommissioning and disposal. Our on-demand Communications Management Platform is a suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. Our customers can engage us through our client services group to manage their communications assets and services using our Communications Management Platform.

 

Our solution can provide a significant return on investment by enabling an enterprise to identify and resolve billing errors, to optimize communications service plans for its usage patterns and needs, and to manage used and unused communications assets and services. Our solution allows enterprises to improve the productivity of their employees by automating the provisioning of communications assets and services, and to reduce costs by controlling and allocating communications expenses. It also allows enterprises to enforce regulatory requirements and internal policies governing the use of communications assets and services.

 

We designed our business model to sell recurring technology and services leveraging our Communications Management Platform. We review three key business metrics to help us monitor the performance of our business model and to identify trends affecting our business. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:

 

Recurring technology and services revenue growth.   In 2006, we began a strategic initiative to transition our business model from selling transactional software licenses to providing recurring technology-enabled services leveraging both our technology and communications industry experience. We further implemented this initiative with the acquisition of Traq Wireless, Inc., whose revenue base was primarily recurring, which substantially increased our 2007 recurring revenue. We regularly review our recurring revenue growth to measure our success.

 

We intend to continue to focus our sales and marketing efforts on increasing our recurring technology and services-related customer base, and we expect that our recurring technology and services revenue will increase in absolute dollars and as a percentage of total revenue over the next 12 months due to our expectation that we will be able to:

 

·                   retain a high percentage of the revenue we currently derive from our existing customers;

 

·                   sell additional product and service offerings to our existing customers; and

 

·                   add a significant number of new customers.

 

We believe that we will be able to retain a high percentage of our existing recurring technology and services revenue due to our revenue retention rates, and the current levels of customer usage of our products and services, which we review on a monthly basis to provide an indication of impending increases or decreases in billed revenue for future periods.

 

We believe that we will be able to sell additional product and service offerings to our existing customers in the next year based on our analysis of revenue on a per-customer basis for the last 12 months, which indicates that our customers on an aggregate basis have generally increased their usage of our solution on a quarterly basis.

 

We believe that we will be able to add a significant number of new customers over the next 12 months as we continue to expand internationally and increase our share of the domestic market.

 

Deferred revenue.   Our deferred revenue consists of the amounts that have been invoiced but that have not yet been recognized as revenue, including advanced billed and undelivered portions of our Communication Management Platform subscriptions and related services, maintenance on our software licenses and implementation fees. We invoice our services to a

 

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majority of our customers in advance, with the intervals ranging from 1 to 12 months. We monitor our deferred revenue balance as this balance represents revenue to be recognized over the next 12 months except for implementation fees which are recognized ratably over the estimated expected life of the customer relationship. As of September 30, 2011, implementation fees represented $2.2 million of the $11.7 million deferred revenue balance.

 

Revenue retention rates.   In addition, we consider our revenue retention rates. Since we began to fully realize the benefits of our recurring revenue model in 2009, our revenue retention rates have been higher than 90%. We measure revenue retention rates by assessing on a dollar basis the recurring technology and services revenue we retain for the same customer and product set in a given period versus the prior year period. We cannot predict our revenue retention rates in future periods. Our use of a revenue retention rate has limitations as an analytical tool, and you should not consider it in isolation. Other companies in our industry may calculate revenue retention rates differently, which reduces its usefulness as a comparative measure.

 

We also review a number of other quantitative and qualitative trends in monitoring our performance, including our share of the CLM market, our customer satisfaction rates, our ability to attract, hire and retain a sufficient number of talented employees to staff our growing business and the development and performance of our solutions. Our review of these factors can affect aspects of our business and operations on an on-going basis, including potential acquisition strategies and investment in specific areas of product development or service support.

 

We used a portion of the net proceeds from our recent initial public offering to pay down in full the outstanding balances on our senior secured term loan and revolving credit facilities. By paying down in full these balances, we will be able to reduce our interest expense and believe that we will strengthen our balance sheet. We intend to use the balance of the net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new solutions and funding capital expenditures, acquisitions and investments. By using the net proceeds to invest in the growth of our business, both internally and externally, we believe that we will provide ourselves with greater opportunities to improve our overall operating results.

 

Certain Trends and Uncertainties

 

The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. This summary, however, should be considered along with the factors identified in the “ Risk Factors ” section of this quarterly report.

 

·       The CLM market is characterized by rapid technological change and frequent new product and service introductions, including frequent introductions of new technologies and devices. To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed.

 

·       We believe that competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations.

 

·       We continue to closely monitor current economic conditions, as any decline in the general economic environment that negatively affects the financial condition of our customers could have an adverse effect on our financial condition and results of operations. For example, during the most recent economic downturn, our customer cancellation rate during the first quarter of 2009 increased to a quarterly rate of over three times the average of the prior four quarters, partly as a result of customer bankruptcies. Although economic conditions have generally improved, there has not been a full recovery to the levels that generally existed prior to the downturn. If economic conditions in the United States and other countries do not continue to improve, we may face greater risks in operating our business.

 

Initial Public Offering

 

In August 2011, we completed our initial public offering whereby we sold 7,500,000 shares of common stock at a price to the public of $10.00 per share.  Our common stock is traded on the NASDAQ Global Market.  We received proceeds from our public offering of $66.0 million, net of underwriting discounts and commissions and offering costs of $3.8 million.

 

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As part of the offering, an additional 2,585,500 shares of common stock were sold by certain existing stockholders at a price to the public of $10.00 per share including 1,315,500 shares sold by such stockholders upon the exercise of the underwriters’ option to purchase additional shares.  We did not receive any proceeds from the sale of such shares by the selling stockholders.

 

Acquisitions

 

On January 25, 2011, we acquired substantially all of the assets of HCL Expense Management Services Inc., or HCL-EMS, a provider of telecommunications expense management, invoice processing and mobility management solutions, for $3.0 million in cash plus potential earnout payments of up to $3.4 million based on revenues derived from providing selected services to former HCL-EMS customers over the two years following the acquisition as well as transaction costs of approximately $0.1 million. These transaction costs were expensed as incurred.

 

On March 16, 2011, we acquired substantially all of the assets of the telecommunications expense management division of Telwares, Inc. and its subsidiary Vercuity Solutions, Inc., or Telwares, for $4.5 million in cash (excluding working capital adjustments) plus deferred cash of up to an additional $2.5 million payable over the two years following the acquisition and transaction costs of approximately $0.2 million. These transaction costs were expensed as incurred.