Tangoe
TANGOE INC (Form: 10-Q, Received: 05/15/2012 17:26:52)

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 March 31, 2012

 

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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(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 37,180,306 shares of our common stock outstanding on April 30, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2011 and 2012

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2012

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 6.

Exhibits

54

 

 

 

 

Signatures

55

 

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,” “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.

 

3



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)

 

 

 

December 31,

 

March 31,

 

 

 

2011

 

2012

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

43,407

 

$

37,866

 

Accounts receivable, less allowances of $102

 

25,311

 

26,551

 

Prepaid expenses and other current assets

 

2,503

 

3,428

 

Total current assets

 

71,221

 

67,845

 

 

 

 

 

 

 

COMPUTERS, FURNITURE AND EQUIPMENT-NET

 

3,334

 

3,496

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangible assets-net

 

28,800

 

34,543

 

Goodwill

 

36,266

 

44,728

 

Security deposits and other non-current assets

 

1,241

 

1,906

 

TOTAL ASSETS

 

$

140,862

 

$

152,518

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

6,605

 

$

8,555

 

Accrued expenses

 

7,061

 

7,925

 

Deferred revenue-current portion

 

9,051

 

9,457

 

Notes payable-current portion

 

7,904

 

13,187

 

Other current liabilities

 

1,079

 

746

 

Total current liabilities

 

31,700

 

39,870

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Deferred rent and other non-current liabilities

 

1,659

 

3,601

 

Deferred revenue-less current portion

 

2,624

 

2,274

 

Notes payable-less current portion

 

8,290

 

4,918

 

Total liabilities

 

44,273

 

50,663

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $0.0001 per share-150,000,000 shares authorized as of December 31, 2011 and March 31, 2012; 33,152,592 and 34,349,633 shares issued and outstanding as of December 31, 2011 and March 31, 2012, respectively

 

3

 

3

 

Additional paid-in capital

 

142,905

 

147,909

 

Warrants for common stock

 

10,610

 

10,610

 

Less: notes receivable for purchase of common stock

 

(93

)

 

Accumulated deficit

 

(56,795

)

(56,603

)

Other comprehensive loss

 

(41

)

(64

)

Total stockholders’ equity

 

96,589

 

101,855

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

140,862

 

$

152,518

 

 

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

 

4



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2012

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

Recurring technology and services

 

$

19,927

 

$

30,756

 

Strategic consulting, software licenses and other

 

2,414

 

3,391

 

Total revenue

 

22,341

 

34,147

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

Recurring technology and services

 

9,057

 

14,316

 

Strategic consulting, software licenses and other

 

1,272

 

1,458

 

Total cost of revenue

 

10,329

 

15,774

 

 

 

 

 

 

 

Gross profit

 

12,012

 

18,373

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

3,698

 

5,544

 

General and administrative

 

3,736

 

6,701

 

Research and development

 

2,862

 

3,689

 

Depreciation and amortization

 

1,008

 

1,875

 

Income from operations

 

708

 

564

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

Interest expense

 

(659

)

(235

)

Interest income

 

4

 

17

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

(540

)

 

(Loss) income before income tax provision

 

(487

)

346

 

Income tax provision

 

126

 

154

 

Net (loss) income

 

(613

)

192

 

Preferred dividends

 

(929

)

 

Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

Basic

 

$

(0.33

)

$

0.01

 

Diluted

 

$

(0.33

)

$

0.00

 

 

 

 

 

 

 

Weighted average number of common share:

 

 

 

 

 

Basic

 

4,672

 

33,826

 

Diluted

 

4,672

 

39,431

 

 

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

 

5



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)

(in thousands)

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2011

 

2012

 

 

 

 

 

 

 

Net (loss) income

 

(613

)

192

 

Foreign currency translation adjustment

 

(4

)

(23

)

Total

 

$

(617

)

$

169

 

 

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

 

6



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2012

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Common

 

for Purchase

 

 

 

Other

 

Total

 

 

 

Number of

 

 

 

Paid-In

 

Stock

 

of Common

 

Accumulated

 

Comprehensive

 

Stockholders

 

 

 

Shares

 

Amount

 

Capital

 

Warrants

 

Stock

 

Deficit

 

Loss

 

Equity

 

Balance December 31, 2011

 

33,152,592

 

$

3

 

$

142,905

 

$

10,610

 

$

(93

)

$

(56,795

)

$

(41

)

$

96,589

 

Net income

 

 

 

 

 

 

192

 

 

192

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(23

)

(23

)

Securities issued in connection with acquisition

 

165,775

 

 

1,984

 

 

 

 

 

1,984

 

Issuance of shares from exercise of stock options

 

490,950

 

 

1,396

 

 

 

 

 

1,396

 

Issuance of shares from cashless exercise of stock warrants

 

398,060

 

 

 

 

 

 

 

 

Issuance of shares from executive stock grant

 

9,639

 

 

150

 

 

 

 

 

150

 

Repayment of notes receivable

 

 

 

 

 

70

 

 

 

70

 

Reclassification of notes receivable

 

 

 

 

 

23

 

 

 

23

 

Stock-based compensation

 

 

 

1,474

 

 

 

 

 

1,474

 

Balance March 31, 2012

 

34,217,016

 

$

3

 

$

147,909

 

$

10,610

 

$

 

$

(56,603

)

$

(64

)

$

101,855

 

 

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

 

7



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2012

 

Operating activities:

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Amortization of debt discount

 

180

 

191

 

Amortization of leasehold interest

 

 

(24

)

Depreciation and amortization

 

1,008

 

1,875

 

(Decrease) increase in deferred rent liability

 

(125

)

43

 

Amortization of marketing agreement intangible assets

 

19

 

32

 

Allowance for doubful accounts

 

11

 

 

Deferred income taxes

 

126

 

6

 

Stock based compensation

 

835

 

1,624

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

540

 

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(1,606

)

190

 

Prepaid expenses and other assets

 

94

 

 

Other assets

 

(444

)

10

 

Accounts payable

 

815

 

928

 

Accrued expenses

 

(424

)

(1,112

)

Deferred revenue

 

713

 

(426

)

Net cash provided by operating activities

 

1,129

 

3,529

 

Investing activities:

 

 

 

 

 

Purchases of computers, furniture and equipment

 

(86

)

(426

)

Cash paid in connection with acquisitions

 

(8,166

)

(8,577

)

Net cash used in investing activities

 

(8,252

)

(9,003

)

Financing activities:

 

 

 

 

 

Repayment of debt

 

(11,949

)

(1,544

)

Borrowings of debt

 

20,000

 

 

Deferred financing costs

 

(170

)

 

Proceeds from repayment of notes receivable

 

 

70

 

Proceeds from exercise of stock options

 

205

 

1,396

 

Net cash provided by (used in) financing activities

 

8,086

 

(78

)

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

11

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

963

 

(5,541

)

Cash and cash equivalents, beginning of period

 

5,913

 

43,407

 

Cash and cash equivalents, end of period

 

$

6,876

 

$

37,866

 

 

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

 

8



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, mobile device 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.

 

Public Offerings

 

In April 2012, the Company completed a public offering whereby it sold 2,200,000 shares of common stock at a price to the public of $18.50 per share.  The Company’s common stock is traded on the NASDAQ Global Market.  The Company received proceeds from this public offering of $38.5 million, net of underwriting discounts and commissions but before offering costs of $0.7 million.  Offering costs at March 31, 2012 of $0.7 million that are recorded in other non-current assets will be reclassified as a reduction to additional paid-in capital in the second quarter of 2012.

 

As part of this public offering, an additional 7,000,000 shares of common stock were sold by certain existing stockholders at a price to the public of $18.50 per share, including 1,200,000 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.

 

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 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 initial public 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.

 

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 months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, for any other interim period or for any other future year.

 

The consolidated balance sheet at December 31, 2011 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2011filed with the Securities Exchange Commission (“SEC”) on March 29, 2012, as amended by the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011 filed with the SEC on April 26, 2012 (collectively, the “2011 Form 10-K”).

 

Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2011 included in the 2011 Form 10-K.  Since the date of those financial statements, there have been no material changes to the Company’s significant accounting policies.

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

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, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. The Company valued this contingent consideration at $3.4 million. The Company has included the operating results of HCL-EMS in its consolidated financial statements since the date of acquisition, including revenue of $5.9 million. In connection with this transaction the Company has recorded on its consolidated statement of operations in the third quarter of 2011 a restructuring charge 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

 

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

 

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 includes a working capital adjustment of $0.7 million, which took place on March 16, 2011, and deferred cash consideration, subject to set-off rights of the Company with respect to indemnities given by Telwares under the Telwares APA, of $1,250,000 on March 16, 2012, and $1,250,000 on March 16, 2013.  The Company made the first installment payment of $1,250,000 on March 16, 2012.

 

10



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

 

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

 

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

 

 

 

 

ProfitLine, Inc.

 

On December 19, 2011, the Company and Snow Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (the “Acquisition Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ProfitLine, Inc., a Delaware corporation (“ProfitLine”), and Doug Carlisle, solely in his capacity as Stockholder Representative under the Merger Agreement, under which the parties agreed to the merger of the Acquisition Sub with and into ProfitLine (the “Merger”) with ProfitLine surviving the Merger as a wholly owned subsidiary of the Company. Pursuant to the terms of the agreement, the Company paid $14,500,000 in cash at closing. In addition, an additional $9,000,000 is payable in cash in installments of $4,500,000 each on December 19, 2012 and June 19, 2013, subject to set-off rights of the Company and the surviving corporation with respect to indemnities given by the former stockholders of ProfitLine under the Merger Agreement. Among other things, these indemnity obligations relate to representations and warranties given by ProfitLine under the Merger Agreement. Certain indemnities are subject to limitations, including a threshold, certain caps and a limited survival period. Under the Merger Agreement, the Company is required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that the Company’s cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20,000,000 at any time prior to payment of the first $4,500,000 installment of deferred consideration, or $15,000,000 at any time after payment of the first and before payment of the second $4,500,000 installment of deferred consideration.

 

11



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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

ProfitLine Purchase Price Allocation

 

The allocation of the total purchase price of ProfitLine’s net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of December 19, 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):

 

Purchase consideration:

 

 

 

Cash

 

$

14,500

 

Deferred cash consideration

 

8,674

 

 

 

$

23,174

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

3,183

 

Property and equipment

 

675

 

Other assets

 

117

 

Identifiable intangible assets

 

8,717

 

Goodwill

 

13,801

 

Total assets acquired

 

26,493

 

Accounts payable and accrued expenses

 

(3,167

)

Deferred revenue

 

(152

)

 

 

$

23,174

 

 

The goodwill amount has been revised from the preliminary purchase price allocation previously disclosed as a result of an unfavorable leasehold interest related to the Company’s office lease in San Diego.  The leasehold interest amount of $0.4 million will be amortized over the remaining term of the facility lease.

 

The goodwill and identifiable intangible assets related to the ProfitLine acquisition are not 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)

 

Tradenames

 

$

335

 

4.0

 

Technology

 

1,612

 

2.5

 

Customer relationships

 

6,770

 

9.0

 

Total intangible assets

 

$

8,717

 

 

 

 

Anomalous Networks, Inc.

 

On January 10, 2012 (the “Anomalous Acquisition Date”), the Company entered into a Share Purchase Agreement (the “Anomalous Purchase Agreement”) with Anomalous Networks Inc., a corporation incorporated under the laws of Canada (“Anomalous”), and the shareholders of Anomalous, under which the Company agreed to purchase all of the outstanding equity of Anomalous (the “Anomalous Share Purchase”). This acquisition reflects the Company’s strategy to broaden its suite of offerings and to provide real time telecom expense management capabilities. On the same day, the Anomalous Share Purchase was effected in accordance with the terms of the Anomalous Purchase Agreement with the Company acquiring all of the outstanding equity of Anomalous for aggregate consideration of (i) approximately $3,500,000 in cash paid at the closing, (ii) approximately $1,000,000 in cash payable on the first anniversary of the closing, (iii) 165,775 unregistered shares of the Company’s common stock and (iv) 132,617 unvested and unregistered shares of the Company’s common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013 (the “Earn-Out Period”). With the exception of the cash paid at the closing, substantially all of the consideration paid and payable by the Company remains subject to set-off rights of the Company with respect to indemnities given by the former shareholders of Anomalous under the Anomalous Purchase Agreement. Among other things, these indemnity obligations relate to representations and warranties given by Anomalous under the Anomalous Purchase Agreement. The indemnities are subject to limitations, including a threshold, certain caps and limited survival periods. The vested shares issued by the Company at closing are subject to a one-year lock-up period,

 

12



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

the unvested shares are also subject to a lock-up unless and until they become vested following the end of the Earn-Out Period and substantially all of the shares are subject to the set-off rights described above. Under the Anomalous Purchase Agreement, the Company is required to make an advance deposit into escrow of the $1,000,000 of deferred consideration in the event that the Company’s cash and cash equivalents is below $15,000,000 at any time before payment of the $1,000,000 of deferred consideration.  The Company has included the operating results of Anomalous in its consolidated financial statements since the date acquisition, including revenue of $0.2 million through March 31, 2012.

 

Anomalous Purchase Price Allocation

 

The allocation of the total purchase price of Anomalous’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of January 10, 2012. 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):

 

Purchase consideration:

 

 

 

Cash

 

$

3,521

 

Common stock

 

1,984

 

Deferred cash consideration

 

1,495

 

 

 

$

7,000

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

1,140

 

Property and equipment

 

47

 

Other assets

 

10

 

Identifiable intangible assets

 

2,857

 

Goodwill

 

4,477

 

Total assets acquired

 

8,531

 

Accounts payable and accrued expenses

 

(394

)

Deferred taxes

 

(767

)

Deferred revenue

 

(370

)

 

 

$

7,000

 

 

The goodwill and identifiable intangible assets related to the Anomalous acquisition are not 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

 

$

2,017

 

5.0

 

Non-compete covenants

 

553

 

2.0

 

Customer relationships

 

236

 

4.0

 

Tradenames

 

51

 

3.0

 

Total intangible assets

 

$

2,857

 

 

 

 

ttMobiles Limited.

 

On February 21, 2012 (the “ttMobiles Acquisition Date”), the Company entered into a Share Purchase Agreement (the “ttMobiles Purchase Agreement”), with the holders of all of the issued share capital of ttMobiles Limited, a private limited company incorporated in England (“ttMobiles”), under which the Company agreed to purchase all of the issued share capital of ttMobiles

 

13



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

(the “ttMobiles Share Purchase”). On the same day, the ttMobiles Share Purchase was effected in accordance with the terms of the ttMobiles Purchase Agreement, with the Company acquiring all of the outstanding equity of ttMobiles for aggregate consideration of (i) £4,000,000 in cash paid at the closing, and (ii) £1,500,000 in cash payable on the first anniversary of the closing (the “Deferred Consideration”). The purchase price is subject to a net asset adjustment pursuant to which the purchase price will be increased or decreased to the extent that the net asset position of ttMobiles is more or less than a specified target by an amount that exceeds 5% of the target. The Deferred Consideration remains subject to set-off rights of the Company with respect to claims for breach of warranties and certain indemnities given by the former holders of the issued share capital of ttMobiles under the ttMobiles Purchase Agreement. Any breach claims and indemnities would be subject to limitations, including a threshold, certain baskets, caps and limited survival periods.  The Company has included the operating results of ttMobiles in its consolidated financial statements since the date of acquisition, including revenue of $0.8 million through March 31, 2012.

 

ttMobiles Purchase Price Allocation

 

The allocation of the total purchase price of ttMobiles’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of February 21, 2012. 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):

 

Purchase consideration:

 

 

 

Cash

 

$

6,359

 

Deferred cash consideration

 

2,315

 

 

 

$

8,674

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

2,469

 

Property and equipment

 

188

 

Identifiable intangible assets

 

4,288

 

Goodwill

 

3,557

 

Total assets acquired

 

10,502

 

Accounts payable and accrued expenses

 

(848

)

Deferred taxes

 

(954

)

Deferred revenue

 

(26

)

 

 

$

8,674

 

 

The goodwill and identifiable intangible assets related to the ttMobiles acquisition are not 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)

 

Customer relationships

 

$

2,606

 

9.0

 

Technology

 

1,178

 

5.0

 

Tradenames

 

388

 

4.0

 

Non-compete covenant

 

116

 

2.0

 

Total intangible assets

 

$

4,288

 

 

 

 

14



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Unaudited Pro Forma Results

 

The following table presents the unaudited pro forma results of the Company for the three months ended March 31, 2011 and 2012 as if the acquisitions of HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles occurred at the beginning of 2011.  These results are not intended to reflect the actual operations of the Company had the acquisitions occurred at January 1, 2011.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

 

 

 

 

 

 

Revenue

 

$

32,169

 

$

35,981

 

Operating (loss) income

 

(775

)

557

 

(Loss) income applicable to common stockholders

 

(3,277

)

166

 

Basic (loss) income per common share

 

$

(0.70

)

$

0.00

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.70

)

$

0.00

 

 

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 months ended March 31, 2011 and 2012:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

 

 

 

 

 

 

Basic net (loss) income per common share

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

Less: Preferred stock dividends

 

(929

)

 

Less: Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

Basic (loss) income per common share

 

$

(0.33

)

$

0.01

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

4,672

 

33,826

 

 

 

 

 

 

 

Diluted net (loss) income per common share

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

Less: Preferred stock dividends

 

(929

)

 

Less: Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.33

)

$

0.00

 

 

 

 

 

 

 

Weighted-average common shares used to compute diluted net (loss) income per share

 

4,672

 

39,431

 

 

Diluted (loss) income per common share for the periods presented does not reflect the following potential common shares as the effect would be anti-dilutive.

 

 

Outstanding stock options

 

6,026

 

35

 

 

Outstanding restricted stock units

 

 

48

 

 

Common stock warrants

 

1,359

 

 

 

15



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

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,

 

March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

Computers and software

 

$

8,192

 

$

8,642

 

Furniture and fixtures

 

748

 

860

 

Leasehold improvements

 

635

 

739

 

 

 

9,575

 

10,241

 

Less accumulated depreciation

 

(6,241

)

(6,745

)

Computers, furniture and equipment-net

 

$

3,334

 

$

3,496

 

 

Computers and software includes equipment under capital leases totaling approximately $2.5 million at December 31, 2011 and March 31, 2012. Accumulated depreciation on equipment under capital leases totaled approximately $1.4 million and $1.5 million as of December 31, 2011 and March 31, 2012, respectively. Depreciation and amortization expense associated with computers, furniture and equipment was $0.3 million and $0.5 million for the three months ended March 31, 2011 and 2012, respectively.

 

In connection with the business combinations described in Note 2, the Company acquired fixed assets with fair values of $0.2 million during the first quarter of 2012.

 

16



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

5.      Intangible Assets and Goodwill

 

The following table presents the components of the Company’s intangible assets as of December 31, 2011 and March 31, 2012:

 

 

 

 

 

 

 

Weighted

 

 

 

December 31,

 

March 31,

 

Average Useful

 

(in thousands)

 

2011

 

2012

 

Life (in years)

 

 

 

 

 

 

 

 

 

Patents

 

$

1,054

 

$

1,054

 

8.0

 

Less: accumulated amortization

 

(634

)

(667

)

 

 

Patents, net

 

420

 

387

 

 

 

Technological know-how

 

7,831

 

11,026

 

6.4

 

Less: accumulated amortization

 

(2,465

)

(2,962

)

 

 

Technological know-how, net

 

5,366

 

8,064

 

 

 

Customer relationships

 

23,550

 

26,392

 

8.6

 

Less: accumulated amortization

 

(7,236

)

(7,966

)

 

 

Customer relationships, net

 

16,314

 

18,426

 

 

 

Convenants not to compete

 

198

 

867

 

2.0

 

Less: accumulated amortization

 

(163

)

(239

)

 

 

Convenants not to compete, net

 

35

 

628

 

 

 

Strategic marketing agreement

 

6,203

 

6,203

 

10.0

 

Less: accumulated amortization

 

(118

)

(149

)

 

 

Strategic marketing agreement, net

 

6,085

 

6,054

 

 

 

Tradenames

 

335

 

774

 

3.9

 

Less: accumulated amortization

 

(2

)

(37

)

 

 

Tradenames, net

 

333

 

737

 

 

 

Trademarks

 

247

 

247

 

Indefinite

 

Intangible assets, net

 

$

28,800

 

$

34,543

 

 

 

 

The related amortization expense of intangible assets for the three months ended March 31, 2011 and 2012 was $0.6 million and $1.4 million, respectively.  The Company’s estimate of future amortization expense for acquired intangible assets that exists at March 31, 2012 is as follows:

 

(in thousands)

 

 

 

April 1, 2012 to December 31, 2012

 

$

4,593

 

2013

 

6,175

 

2014

 

5,293

 

2015

 

3,935

 

2016

 

3,694

 

Thereafter

 

10,606

 

Total

 

$

34,296

 

 

The following table presents the changes in the carrying amounts of goodwill for the three months ended March 31, 2012.

 

 

 

Carrying

 

(in thousands)

 

Amount

 

 

 

 

 

Balance at December 31, 2011

 

$

36,266

 

ProfitLine leasehold interest adjustment

 

428

 

Anomalous

 

4,477

 

ttMobiles

 

3,557

 

Balance at March 31, 2012

 

$

44,728

 

 

17



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

6.     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 described in Note 2. 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 consolidated balance sheet. The following table summarizes the activity in the liabilities related to the restructuring charge for the three months ended March 31, 2012:

 

 

 

Lease costs, net

 

 

 

 

 

 

 

of estimated

 

 

 

 

 

(in thousands)

 

sublease income

 

Other Costs

 

Total

 

 

 

 

 

 

 

 

 

Remaining liability at December 31, 2011

 

$

1,265

 

$

69

 

$

1,334

 

Cash payments

 

(163

)

 

(163

)

Non-cash charges and other

 

 

5

 

5

 

Remaining liability at March 31, 2012

 

1,102

 

74

 

1,176

 

 

 

 

 

 

 

 

 

 

 

less: current portion

 

 

 

(746

)

 

 

Long-term portion

 

 

 

430

 

 

7.      Debt

 

As of December 31, 2011 and March 31, 2012, debt outstanding included the following:

 

 

 

December 31,

 

March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

HCL contingent consideration, net of unamortized discount of $152 at March 31, 2012. Payable in annual installments starting in 2012, as described below

 

$

3,731

 

$

3,789

 

 

 

 

 

 

 

Deferred Telwares purchase price, net of unamortized discount of $109 at March 31, 2012. Payable in annual installments starting in March 2012, as described below

 

2,338

 

1,141

 

 

 

 

 

 

 

Deferred ProfitLine purchase price, net of unamortized discount of $253 at March 31, 2012. Payable in annual installments starting in December 2012, as described below

 

8,682

 

8,747

 

 

 

 

 

 

 

Deferred Anomalous purchase price, net of unamortized discount of $22 at March 31, 2012. Payable in one installment in January 2013, as described below

 

 

957

 

 

 

 

 

 

 

Deferred ttMobiles purchase price, net of unamortized discount of $62 at March 31, 2012. Payable in one installment in February 2013, as described below

 

 

2,322

 

 

 

 

 

 

 

Capital lease and other obligations

 

1,443

 

1,149

 

Total notes payable

 

$

16,194

 

$

18,105

 

Less current portion

 

$

(7,904

)

$

(13,187

)

Notes payable, less current portion

 

$

8,290

 

$

4,918

 

 

18



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Contingent HCL-EMS 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, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. 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. The only adjustment to this balance in 2012 was the accretion of imputed interest.

 

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, subject to set-off rights of the Company with respect to indemnities given by Telwares under the Telwares APA. The Company paid the first installment of $1,250,000 on March 16, 2012.  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. The only adjustments to the balance in 2012 were the accretion of imputed interest and the payment of the first installment.

 

Deferred ProfitLine Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of ProfitLine includes deferred cash consideration. The deferred cash consideration includes payments of $9,000,000 in installments of $4,500,000 each on December 19, 2012 and June 19, 2013, subject to set-off rights of the Company and the surviving corporation with respect to indemnities given by the former stockholders of ProfitLine under the Merger Agreement. 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. The only adjustment to this balance in 2012 was the accretion of imputed interest.  Under the Merger Agreement, the Company is required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that the Company’s cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20,000,000 at any time prior to payment of the first $4,500,000 installment of deferred consideration, or $15,000,000 at any time after payment of the first and before payment of the second $4,500,000 installment of deferred consideration.

 

Deferred Anomalous Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of Anomalous includes deferred cash consideration.  The deferred cash consideration includes a payment of $1,000,000 in cash on the first anniversary of the Anomalous Closing Date, subject to set-off rights of the Company with respect to indemnities given by the former shareholders of Anomalous under the Anomalous Purchase Agreement. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $29,000 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.  Under the Anomalous Purchase Agreement, the Company is required to make an advance deposit into escrow of the $1,000,000 of deferred consideration in the event that the Company’s cash and cash equivalents is below $15,000,000 at any time before payment of the $1,000,000 of deferred consideration.

 

Deferred ttMobiles Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of ttMobiles includes deferred cash consideration.  The Deferred Consideration includes a payment of £1.5 million (or approximately $2.4 million) in cash payable on the first anniversary of the ttMobiles Acquisition Date.  No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.1 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. The Deferred Consideration remains subject to set-off rights of the Company with respect to claims for breach of warranties and certain indemnities given by the former holders of the issued share capital of ttMobiles under the ttMobiles Purchase Agreement. Any breach claims and indemnities would be subject to limitations, including a threshold, certain baskets, caps and limited survival periods.

 

19



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

8.     Stockholders’ Equity

 

Common Stock —As of December 31, 2011 and March 31, 2012, the number of authorized shares of common stock, par value $0.0001 per share was 150,000,000, of which 33,152,592 and 34,349,633 were issued and outstanding, respectively.

 

During the three months ended March 31, 2012, the Company issued 165,775 unregistered shares of its common stock and 132,617 unvested and unregistered shares of its common stock as part of the Anomalous purchase consideration, as described in Note 2.  Additionally, the Company issued 9,639 shares of its common stock to two of its officers under the provisions of the 2011 Plan.

 

Preferred Stock —As of December 31, 2011 and March 31, 2012, the number of authorized shares of preferred stock, par value $0.0001 per share, was 5,000,000 of which 0 were issued and outstanding.

 

Investor Rights Agreements —Holders of a substantial portion of the Company’s 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 Investors Rights Agreement, as amended.

 

Warrants

 

Common Stock Warrants —During the three months ended March 31, 2012, warrant holders exercised warrants to purchase a total of 522,507 shares of common stock pursuant to a cashless exercise feature of these warrants.  As a result of the cashless exercise, 398,060 shares of common stock were issued and 124,447 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 March 31, 2012, none of the shares that may become exercisable under this warrant were probable of being earned and becoming vested and accordingly no value was ascribed to this warrant. On a quarterly basis the Company reviews 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 that would result in warrant shares being earned and becoming vested, and to the extent the Company deems it probable that any warrant shares will be earned and become vested, 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.  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

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

stock no longer deemed probable of being earned.

 

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. 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 evaluates 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.

 

The Company began to amortize the intangible 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 three months ended March 31, 2011 and 2012, the Company recorded $18,647 and $31,505, 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 were earned and vested.

 

A summary of warrants exercised to purchase common stock during the three months ended March 31, 2012 is presented below:

 

 

 

Number of

 

 

 

Stock

 

 

 

Warrants

 

 

 

 

 

Outstanding at beginning of the year

 

589,941

 

Exercised

 

(398,060

)

Issued

 

 

Cancelled

 

(124,447

)

Outstanding at end of the period

 

67,434

 

 

 

 

 

Weighted average exercise price

 

$

1.93

 

 

Stock Options —As of March 31, 2012, 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.

 

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 three months ended March 31, 2012, the Company’s board of directors granted options to purchase an aggregate of 1,667,424 shares of common stock under the 2011 Plan to employees and non-employees, at a weighted average exercise price of $15.58 per share.

 

A summary of the status of stock options issued pursuant to the Plans during the three months ended March 31, 2012 is presented below:

 

Options

 

Number of Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Contractual
Life (years)

 

 

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

6,670,335

 

$

3.60

 

 

 

Granted

 

1,667,424

 

$

15.58

 

 

 

Forfeited

 

(143,911

)

$

5.39

 

 

 

Exercised

 

(490,950

)

$

2.84

 

 

 

Outstanding at end of the period

 

7,702,898

 

$

6.21

 

7.6

 

 

 

 

 

 

 

 

 

Exercisable at end of the period

 

3,796,175

 

$

2.34

 

6.1

 

 

 

 

 

 

 

 

 

Available for future grants at March 31, 2012

 

1,732,050

 

 

 

 

 

 

The intrinsic values of options outstanding, vested and exercised during the three months ended March 31, 2012 were as follows:

 

 

 

2012

 

 

 

Number of

 

Intrinsic

 

 

 

Options

 

Value

 

Outstanding

 

7,702,898

 

$

97,053,027

 

Vested

 

3,796,175

 

$

62,519,474

 

Exercised

 

490,950

 

$

6,813,792

 

 

During the three months ended March 31, 2012, employees and former employees of the Company exercised options to purchase a total of 490,950 shares of common stock at exercise prices ranging from $0.25 to $5.99 per share. Proceeds from the stock option exercises totaled $1.4 million.

 

Restricted Stock Units —During the three months ended March 31, 2012, the Company issued 130,500 restricted stock units to certain employees under the provisions of the 2011 Plan. This grant of restricted stock units had an aggregate value of $2.1 million.  The value of a restricted stock unit award is determined based on the closing price of the Company’s stock price at the date of grant.  A restricted stock unit award entitles the holder to receive shares of the Company’s common stock as the award vests. The restricted stock units vest over periods that range from 2 to 4 years.  Stock-based compensation expense is amortized on a straight-line basis over the vesting period.

 

For the three months ended March 31, 2012, the Company recorded stock-based compensation expenses of $0.1 million related to restricted stock unit awards.

 

As of March 31, 2012, there was $2.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock units. This amount will be amortized on a straight-line basis over the requisite service period related to the restricted unit grants.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

A summary of the status of restricted stock units issued pursuant to the Plans during the three months ended March 31, 2012 is presented below:

 

Restricted Stock Units

 

Number of Shares

 

Weighted
Average Fair
Value

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

 

$

 

Granted

 

130,500

 

$

16.05

 

Outstanding at end of the period

 

130,500

 

$

16.05

 

 

 

 

 

 

 

Exercisable at end of the period

 

 

$

 

 

In accordance with Accounting Standards Classification (“ASC”) 718, Share Based Payment (“ASC 718”), total compensation expense for stock-based compensation awards was $0.8 million and $1.6 million for the three months ended March 31, 2011 and 2012, respectively, which is included on the accompanying consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2012

 

Cost of goods sold

 

$

149

 

$

250

 

Sales and marketing expenses

 

173

 

366

 

General and administrative expenses

 

472

 

915

 

Research and development

 

41

 

93

 

Total stock-based employee compensation

 

$

835

 

$

1,624

 

 

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

 

Years Ending December 31,

 

 

 

2012

 

$

5,902

 

2013

 

6,795

 

2014

 

5,854

 

2015

 

4,006

 

2016

 

406

 

 

 

$

22,963

 

 

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 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.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

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 2012 was determined at the date of grant using the Black-Scholes valuation model with the following assumptions:

 

 

 

2012

 

 

 

 

 

Expected dividend yield

 

0%

 

Risk-free interest rate

 

0.96% to 1.16%

 

Expected term (in years)

 

5.5 - 6.1 years

 

Expected volatility

 

59.78% - 59.92%

 

 

Based on the above assumptions, the weighted average fair value per share of stock options granted during the three months ended March 31, 2012 was approximately $8.61.

 

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 and to a lesser extent because of the impact of state income taxes.  As described in the 2011 Form 10-K, the Company maintains a full 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.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

The following table discloses the assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 and the basis for that measurement:

 

 

 

Fair Value Measurement at March 31, 2012

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

28,045

 

$

28,045

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

3,789

 

 

 

3,789

 

 

 

$

31,834

 

$

28,045

 

$

 

$

3,789

 

 

 

 

Fair Value Measurement at December 31, 2011

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

30,031

 

$

30,031

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

3,731

 

 

 

3,731

 

 

 

$

33,762

 

$

30,031

 

$

 

$

3,731

 

 

The Company’s investment in overnight money market institutional funds, which amounted to $30.0 million and $28.0 million at December 31, 2011 and March 31, 2012, respectively, is included in cash and cash equivalents on the accompanying consolidated balance sheets and is classified as a Level 1 input.

 

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, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. 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 March 31, 2012, 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 deferred purchase price consideration to Telwares, ProfitLine, Anomalous and ttMobiles approximate fair value as the effective interest rates approximates market rates.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

11.  Supplemental Cash Flow Information:

 

Information about other cash flow activities during the three months ended March 31, 2011 and 2012 are as follows:

 

 

 

Three months ended March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

399

 

$

36

 

Income tax payments

 

$

43

 

$

14

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Contingent consideration issued in connection with HCL-EMS acquisition

 

$

3,390

 

$

 

Deferred purchase price in connection with Telwares acquisition

 

$

2,154

 

$

 

Deferred purchase price in connection with Anomalous acquisition

 

$

 

$

950

 

Deferred purchase price in connection with ttMobiles acquisition

 

$

 

$

2,315

 

Preferred stock dividends and accretion

 

$

945

 

$

 

Issuance of warrants in connection with notes payable and marketing agreement

 

$

1,356

 

$

 

Computer, furniture and equipment acquired with capital lease

 

$

297

 

$

 

Unpaid deferred secondary offering costs

 

$

266

 

$

640

 

Cashless exercise of warrants

 

$

24

 

$

479

 

 

12.  Commitments and Contingencies

 

During the normal course of business, the Company becomes involved in various routine legal proceedings including issues pertaining to patent infringement, customer disputes and employee matters. The Company does not believe that the outcome of these matters will have a material adverse effect on its financial condition.

 

The Company has entered into non-cancellable operating leases for the rental of office space in various locations which expire between 2012 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 also has entered into agreements with third-party hosting facilities, which expire between 2012 and 2015.

 

The Company is also obligated under several leases covering computer equipment and software, which the Company has classified as capital leases. Additionally, the Company has entered into several operating leases for various office equipment items, which expire between 2012 and 2015.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

As of March 31, 2012, the Company’s obligation for future minimum rental payments related to these leases is as follows:

 

(in thousands)

 

Operating Leases

 

Capital Leases

 

April 1, 2012 to December 31, 2012

 

$

4,651

 

$

602

 

2013

 

5,883

 

492

 

2014

 

5,537

 

133

 

2015

 

3,806

 

 

2016

 

1,439

 

 

Total future minimum lease obligations

 

$

21,316

 

$

1,227

 

 

 

 

 

 

 

Less: amount representing interest

 

 

 

(78

)

Present value of minimum lease obligations

 

 

 

$

1,149

 

 

Rent expense, included in general and administrative expense, was approximately $0.6 million and $1.1 million for the three months ended March 31, 2011 and 2012, respectively.

 

13.  Subsequent Events

 

In April 2012, the Company completed a public offering whereby it sold 2,200,000 shares of common stock at a price to the public of $18.50 per share.  The Company’s common stock is traded on the NASDAQ Global Market.  The Company received proceeds from this public offering of $38.5 million, net of underwriting discounts and commissions but before offering costs of $0.7 million.  Offering costs at March 31, 2012 of $0.7 million that are recorded in other non-current assets will be reclassified as a reduction to additional paid-in capital in the second quarter of 2012.

 

As part of this public offering, an additional 7,000,000 shares of common stock were sold by certain existing stockholders at a price to the public of $18.50 per share, including 1,200,000 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.

 

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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, mobile device 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 four 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:

 

Adjusted EBITDA .  We define Adjusted EBITDA as net income (loss) plus interest expense, income tax provision, depreciation and amortization, amortization of marketing agreement intangible assets, stock-based compensation expense and decrease (increase) in fair value of warrants for redeemable convertible preferred stock; less amortization of leasehold interest and interest income.  Our management uses Adjusted EBITDA to measure our operating performance because it does not include the impact of items not directly resulting from our core business and certain non-cash expenses such as depreciation and amortization and stock-based compensation. We believe that this measure provides us with additional useful information to measure and understand our performance on a consistent basis, particularly with respect to changes in performance from period to period. We use Adjusted EBITDA in the preparation of our annual operating budgets and to measure and evaluate the effectiveness of our business strategies. Adjusted EBITDA is not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP, and is not a substitute for or superior to financial measures determined in accordance with GAAP. Other companies in our industry may calculate Adjusted EBITDA in a manner differently from us, which reduces its usefulness as a comparative measure.  Our Adjusted EBITDA has increased annually for each fiscal year since 2007 and we expect it to continue to increase in our fiscal year ending December 31, 2012.

 

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., or Traq, as discussed below. Traq’s 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

 

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·                   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 many 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 twice the term of the contract, which we estimate to be the expected life of the customer relationship. As of March 31, 2012, implementation fees represented $2.0 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.

 

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 on Form 10-Q.

 

·                   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.

 

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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, which we currently estimate will amount to approximately $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 $140,000. These transaction costs were expensed as incurred.  The earnout payments are subject to set-off rights of ours with respect to indemnities given by HCL-EMS under our Asset Purchase Agreement for HCL-EMS.

 

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 in installments of $1.25 million each on March 16, 2012 and March 16, 2013. The deferred cash is subject to set-off rights that we hold with respect to indemnities given by Telwares under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Telwares under the purchase agreement. Certain of these indemnities are subject to limitations, including certain caps and limited survival periods. In addition, the installment payable on March 16, 2013 is subject to a potential reduction of up to $500,000 relating to the achievement of certain recurring revenue goals during the three months ending June 30, 2012. In addition, we incurred transaction costs of approximately $200,000 in connection with the transaction. These transaction costs were expensed as incurred.

 

On December 19, 2011, we acquired ProfitLine, Inc., or ProfitLine, a provider of telecommunications expense management, invoice processing and mobility management solutions, through a merger with one of our subsidiaries for $14.5 million in cash paid at the closing plus deferred cash of an additional $9.0 million payable in cash installments of $4.5 million on each of December 19, 2012 and June 19, 2013, subject to set-off rights that we and ProfitLine, as our wholly owned subsidiary following the acquisition, hold with respect to indemnities given by the former stockholders of ProfitLine under the merger agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by ProfitLine under the merger agreement. Certain of these indemnities are subject to limitations, including a threshold, certain caps and a limited survival period. Under the merger agreement, we are required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that our cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20.0 million at any time prior to payment of the first $4.5 million installment of deferred consideration, or $15.0 million at any time after payment of the first and before the payment of the second $4.5 million installment of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

 

On January 10, 2012, we acquired all of the outstanding equity of Anomalous Networks Inc., or Anomalous, a provider of real-time telecommunications expense management solutions. The aggregate purchase was approximately $9.0 million, which consisted of approximately $3.5 million in cash paid at the closing, approximately $1.0 million in cash payable on the first anniversary of the closing, 165,775 unregistered shares of our common stock and 132,617 unvested and unregistered shares of our common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013. With the exception of the cash paid at the closing, substantially all of the consideration paid and payable by us remains subject to set-off rights that we hold with respect to indemnities given by the former shareholders of Anomalous under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Anomalous under the purchase agreement. The indemnities are subject to limitations, including a threshold, certain caps and limited survival periods. The vested shares that we issued at closing are subject to a one-year lock-up period, the unvested shares are also subject to a lock-up unless and until they become vested following January 31, 2013 and substantially all of the shares are subject to the set-off rights described above. Under the Anomalous purchase agreement, we are required to make an advance deposit into escrow of $1.0 million of deferred consideration in the event that our cash and cash equivalents is below $15.0 million at any time before payment of the $1.0 million of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

 

On February 21, 2012, we acquired all of the issued share capital of ttMobiles Limited, or ttMobiles, a provider of mobile communications management solutions and services based in the United Kingdom. The purchase price was 5.5 million pounds sterling, which consisted of 4.0 million pounds sterling in cash paid at the closing and 1.5 million pounds sterling in cash payable on the first anniversary of the closing. The purchase price is subject to a net asset adjustment pursuant to which the purchase price will be increased or decreased to the extent that the net asset position of ttMobiles is more or less than a specified target by an amount that exceeds 5% of the target. The deferred consideration in the transaction remains subject to set-off rights that we hold with respect to claims for breach of warranties and certain indemnities given under the purchase agreement for the transaction by the former holders of the issued share capital of ttMobiles. The breach claims and indemnities are subject to limitations, including a threshold, certain baskets, caps and limited survival periods. The transaction costs were immaterial and were expensed as incurred.

 

We are currently integrating the operations of the five businesses that we acquired during 2011 and the first quarter of 2012. With respect to three of these businesses, we are migrating the acquired customers to our platform. To date we have successfully migrated a number of these customers, however there can be no assurance that we will complete this integration and migration in a timely manner or at all and the cost of such integration and migration may be more significant than we have estimated.

 

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We intend to pursue additional acquisitions of, or investments in, businesses, services and technologies that will expand the functionality of our solution, provide access to new markets or customers, or otherwise complement our existing operations.

 

Sources of Revenue

 

Recurring technology and services revenue.   We derive our recurring technology and services revenue primarily from subscriptions and services related to our Communications Management Platform. We recognize revenue for software and related services when all of the following conditions are met: (a) there is persuasive evidence of an arrangement; (b) the service has been provided to the customer; (c) the collection of the contracted fee is probable; and (d) the amount of the fees to be paid by the customer is fixed and determinable. These services include help desk, asset procurement and provisioning, and carrier dispute resolution. The recurring technology and services revenue is recognized ratably over the contract term.

 

In 2006, we began a strategic initiative to transition our business model from selling non-recurring transactional software licenses to providing recurring technology and services leveraging both our technology and communications industry experience.

 

We license our on-demand software and sell related services primarily on a subscription basis under agreements that typically have terms ranging from 24 to 60 months. Our recurring technology and services revenue is driven primarily by the amount of communications spend that we manage for fixed line contracts and by the number of mobile devices that we manage for mobile device contracts. Our customers are typically subject to a minimum charge for up to a specified threshold amount of communications spend or number of mobile devices under management and additional charges to the extent those specified thresholds are exceeded. Prior to 2010, as a result of limited history regarding customer renewals, implementation fees related to subscription agreements for our Communications Management Platform with terms equal to or less than 36 months were recognized over 36 months and implementation fees related to subscription agreements with terms exceeding 36 months were recognized over the life of the agreement. In 2010, due to having greater evidence regarding customer renewals, we believed it was appropriate to extend the estimated expected life of the customer relationship to be equal to twice the contract life calculated on a per-customer basis and to recognize implementation fees ratably over this period. This change did not have a material impact on our consolidated financial statements. Our subscription contracts are typically non-cancelable, although customers have the right to terminate for cause if we materially fail to perform.

 

In 2010, we began to amortize the value of a warrant to purchase common stock issued to IBM as part of a strategic relationship agreement. This related charge will be recorded as contra-revenue in proportion to total expected revenue from the agreement. We recorded $18,647 and $31,505 of amortization as a contra-revenue charge during the three months ended March 31, 2011 and 2012, respectively.

 

Strategic consulting, software licenses and other revenue.   In addition to our subscription fees, revenue is generated to a lesser extent by strategic consulting, software licenses and mobile device activation fees. Strategic consulting consists primarily of fees charged for contract negotiations and bill audits. Contract negotiation fees include both fixed project fees and incentive fees driven by the amount of savings that we are able to generate over the customer’s existing communications rates. These fees are recognized when fixed and determinable, usually when the customer and carrier execute the contract. Bill audit fees are driven by the amount of savings that we are able to generate by reviewing current and prior communications invoices against the customer’s existing contracts. These fees are recognized when fixed and determinable, usually when the carrier agrees to issue a credit or refund to our customer.

 

On occasion, we license our Communications Management Platform to our customers on a perpetual basis. If we are able to derive vendor-specific objective evidence on the undelivered elements, the software portion is recognized when the revenue recognition criteria is met; otherwise the contract is recognized ratably over the contract life. Other professional services are recognized as the services are performed. We have an agreement with a carrier whereby we receive an activation fee for procuring a mobile device. The activation revenue is recognized upon confirmation from the carrier that the device has been procured.

 

We expect our strategic consulting, software licenses and other revenue to remain relatively constant in absolute dollars, but to decrease as a percentage of total revenue, as we continue to focus our sales and marketing efforts on our recurring technology and services revenue model.

 

We historically have derived substantially all of our revenue from United States-based customers. We intend to build our international sales operations by increasing our direct sales force abroad. We expect our international revenue to increase in absolute dollars and as a percentage of total revenue.

 

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Cost of Revenue and Gross Profit

 

Cost of recurring technology and services revenue.   Cost of recurring technology and services revenue consists primarily of costs associated with our data center operations, customer product support centers and client services group. This includes personnel-related costs such as salary, stock-based compensation and other compensation-related costs, subcontractor fees, hosting fees, communications costs and royalties related to third-party software included in our solution when our solution is licensed on a non-perpetual basis.

 

Cost of strategic consulting, software licenses and other revenue.   Cost of strategic consulting, software licenses and other revenue consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs and subcontractor fees directly related to delivering the service.

 

As our customer base continues to grow, we expect our cost of revenue to increase in absolute dollars as we expand our data center and customer support operations to support our continued growth. Our cost of revenue could fluctuate as a percentage of revenue on a quarterly basis but remain relatively stable on an annual basis based on the mix of software and services sold and average contractual selling price.

 

Gross profit.   Gross profit as a percentage of revenue is affected by two main factors—the mix of software and services sold and the average contractual selling price. We expect our gross profit in absolute dollars to increase, but that our gross profit as a percentage of revenue will be affected as we integrate the businesses of our recent acquisitions, which have historically operated with lower margins than our business. We believe that over time we will achieve improvements in those margins as we integrate the acquired operations and capture the operating efficiencies of the overall business.

 

Operating Expense

 

Operating expense consists of sales and marketing, general and administrative, research and development and depreciation and amortization. Other than for depreciation and amortization expense, personnel-related costs are the most significant component of all of these operating expenses. We expect to continue to hire a significant number of new employees in order to support our overall growth. In any particular period, the timing of additional hires could materially affect our operating results, both in absolute dollars and as a percentage of revenue.

 

Sales and marketing.   Sales and marketing expense consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for our sales, marketing and business development employees, the cost of marketing programs such as on-line lead generation, promotional events, such as trade shows, seminars and webinars, the cost of business development programs and sales commissions. Sales commission rates are calculated at the time a contract is signed. The sales commission rate is applied to the contract’s first year of revenue to calculate sales commission expense. Sales commission expense is accrued and expensed at the time we invoice the customer and is paid to the salesperson when the invoice is collected. Generally, new sales personnel require time to become familiar with our software and services and do not begin to generate sales immediately, which can result in increased sales and marketing expense without any immediate increase in revenue. We expect sales and marketing expense to increase in absolute dollars, but remain relatively constant as a percentage of revenue in the near term, as we continue to hire sales and marketing personnel in the United States and internationally to expand our solution globally.

 

General and administrative.   General and administrative expense consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for finance and accounting, executive, human resources and information technology personnel, rent and facility costs, legal and other professional fees, and other corporate expenses. We anticipate that we will incur additional costs associated with being a public company, including higher personnel costs, corporate insurance and professional fees, including legal and accounting as it relates to financial reporting and achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act.

 

Research and development.   Research and development expense primarily consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for development personnel, and fees to our outside contract development vendors. We anticipate that our research and development team will continue to focus on expanding our software and services and increasing the functionality of our current offerings. We expect research and development expense to increase in absolute dollars, but that the investment will likely be lower than the rate of growth in our revenue in the near term.

 

Depreciation and amortization.   Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.

 

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Other Income (Expense), Net

 

Other income (expense), net, consists primarily of interest expense on our short and long-term debt, interest income on our cash and cash equivalents balance and changes in fair value of warrant to purchase redeemable convertible preferred stock. We have historically invested our cash in money market investments. We expect our interest income to vary in each reporting period depending on our average cash balances and interest rates.

 

Income Tax Provision

 

Income tax provision consists of federal and state corporate income taxes resulting from our operations in the United States. We expect income tax expense to vary each reporting period depending upon taxable income fluctuations and our availability of tax benefits from net loss carryforwards.

 

As of December 31, 2011, we had U.S. federal net operating loss carryforwards of approximately $81.0 million, which, if unused, expire from 2020 to 2031, and U.S. federal research and development tax credit carryforwards of approximately $3.0 million, which expire through 2029. We have engaged in several transactions since our inception that have resulted in a change in control as defined by Section 382 of the Internal Revenue Code, which limits our ability to utilize these net operating loss and tax credit carryforwards in the future. As of December 31, 2011, $38.0 million of our net operating loss and tax credit carryforwards were so limited. At December 31, 2011, we recorded a valuation allowance against the full amount of our deferred tax assets, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss or tax credit carryforwards, an adjustment to our net operating loss or tax credit carryforwards would increase net income in the period in which we make such a determination.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission, or the SEC on March 29, 2012, as amended by our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011 filed with the SEC on April 26, 2012, which we refer to collectively as the 2011 Form 10-K. Since the date of those financial statements, there have been no material changes to our significant accounting policies.

 

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Results of Operations for the Three Month Periods Ended March 31, 2011 and 2012

 

The following table presents our consolidated results of operations for the periods indicated.  These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.

 

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2011

 

% of revenue

 

2012

 

% of revenue

 

Revenue: