Tangoe
TANGOE INC (Form: 10-Q, Received: 11/14/2012 17:24:02)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

 

x

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

 

For the quarterly period ended September 30, 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 37,877,634 shares of our common stock outstanding on November 2, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30, 2012

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2011 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the Three and Nine Months Ended September 30, 2011 and 2012

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2012

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2011 and 2012

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

Item 6.

Exhibits

59

 

 

 

 

Signatures

60

 

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)

 

 

 

 

 

September 30,

 

 

 

December 31,

 

2012

 

 

 

2011

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

43,407

 

$

55,736

 

Accounts receivable, less allowances of $102

 

25,311

 

33,223

 

Prepaid expenses and other current assets

 

2,503

 

3,282

 

Total current assets

 

71,221

 

92,241

 

 

 

 

 

 

 

COMPUTERS, FURNITURE AND EQUIPMENT-NET

 

3,334

 

4,009

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangible assets-net

 

28,800

 

46,334

 

Goodwill

 

36,266

 

65,880

 

Security deposits and other non-current assets

 

1,241

 

1,407

 

TOTAL ASSETS

 

$

140,862

 

$

209,871

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

6,605

 

$

8,269

 

Accrued expenses

 

7,061

 

9,416

 

Deferred revenue-current portion

 

9,051

 

9,795

 

Notes payable-current portion

 

7,904

 

28,557

 

Other current liabilities

 

1,079

 

326

 

Total current liabilities

 

31,700

 

56,363

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Deferred rent and other non-current liabilities

 

1,659

 

3,620

 

Deferred revenue-less current portion

 

2,624

 

1,546

 

Notes payable-less current portion

 

8,290

 

227

 

Total liabilities

 

44,273

 

61,756

 

 

 

 

 

 

 

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 September 30, 2012; 33,152,592 and 37,859,202 shares issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

3

 

4

 

Additional paid-in capital

 

142,905

 

192,917

 

Warrants for common stock

 

10,610

 

10,610

 

Less: notes receivable for purchase of common stock

 

(93

)

 

Accumulated deficit

 

(56,795

)

(55,684

)

Other comprehensive (loss) income

 

(41

)

268

 

Total stockholders’ equity

 

96,589

 

148,115

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

140,862

 

$

209,871

 

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

$

24,456

 

$

36,138

 

$

67,893

 

$

98,969

 

Strategic consulting, software licenses and other

 

2,856

 

4,000

 

7,807

 

11,573

 

Total revenue

 

27,312

 

40,138

 

75,700

 

110,542

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

11,926

 

16,696

 

32,391

 

45,809

 

Strategic consulting, software licenses and other

 

1,142

 

1,588

 

3,659

 

4,835

 

Total cost of revenue

 

13,068

 

18,284

 

36,050

 

50,644

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

14,244

 

21,854

 

39,650

 

59,898

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

4,113

 

6,275

 

11,774

 

17,732

 

General and administrative

 

4,683

 

8,083

 

12,855

 

21,830

 

Research and development

 

3,023

 

4,263

 

8,718

 

12,126

 

Depreciation and amortization

 

1,249

 

2,297

 

3,380

 

6,168

 

Restructuring charge

 

1,549

 

 

1,549

 

 

(Loss) income from operations

 

(373

)

936

 

1,374

 

2,042

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,427

)

(256

)

(2,863

)

(683

)

Interest income

 

14

 

22

 

21

 

60

 

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

 

19

 

 

(1,996

)

 

(Loss) income before income tax provision

 

(1,767

)

702

 

(3,464

)

1,419

 

Income tax provision

 

88

 

121

 

394

 

308

 

Net (loss) income

 

(1,855

)

581

 

(3,858

)

1,111

 

Preferred dividends

 

(310

)

 

(2,168

)

 

Accretion of redeemable convertible preferred stock

 

(5

)

 

(37

)

 

(Loss) income applicable to common stockholders

 

$

(2,170

)

$

581

 

$

(6,063

)

$

1,111

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

$

0.02

 

$

(0.56

)

$

0.03

 

Diluted

 

$

(0.10

)

$

0.01

 

$

(0.56

)

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

22,769

 

37,410

 

10,831

 

36,079

 

Diluted

 

22,769

 

40,963

 

10,831

 

39,616

 

 

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

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,855

)

$

581

 

$

(3,858

)

$

1,111

 

Foreign currency translation adjustment

 

(25

)

556

 

(36

)

309

 

Total comprehensive (loss) income

 

$

(1,880

)

$

1,137

 

$

(3,894

)

$

1,420

 

 

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

 

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Table of Contents

 

TANGOE, INC.

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

For the Nine Months Ended September 30, 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) Income

 

Equity

 

Balance December 31, 2011

 

33,152,592

 

$

3

 

$

142,905

 

$

10,610

 

$

(93

)

$

(56,795

)

$

(41

)

$

96,589

 

Net income

 

 

 

 

 

 

1,111

 

 

1,111

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

309

 

309

 

Securities issued in connection with acquisition

 

165,775

 

 

1,984

 

 

 

 

 

1,984

 

Issuance of shares upon follow-on offering, net of issuance costs

 

2,200,000

 

1

 

37,728

 

 

 

 

 

37,729

 

Issuance of shares from exercise of stock options

 

1,748,391

 

 

3,649

 

 

 

 

 

3,649

 

Issuance of shares from exercise of stock warrants

 

449,167

 

 

92

 

 

 

 

 

92

 

Issuance of shares in payment of board of director fees

 

1,021

 

 

20

 

 

 

 

 

20

 

Issuance of shares from executive stock grant

 

9,639

 

 

150

 

 

 

 

 

150

 

Repayment of notes receivable

 

 

 

 

 

93

 

 

 

93

 

Stock-based compensation

 

 

 

6,389

 

 

 

 

 

6,389

 

Balance September 30, 2012

 

37,726,585

 

$

4

 

$

192,917

 

$

10,610

 

$

 

$

(55,684

)

$

268

 

$

148,115

 

 

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

 

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Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

Operating activities:

 

 

 

 

 

Net (loss) income

 

$

(3,858

)

$

1,111

 

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

 

 

 

 

 

Amortization of debt discount

 

1,181

 

570

 

Amortization of leasehold interest

 

 

(74

)

Depreciation and amortization

 

3,380

 

6,168

 

Restructuting charge

 

1,549

 

 

(Decrease) increase in deferred rent liability

 

(101

)

34

 

Amortization of marketing agreement intangible assets

 

65

 

119

 

Allowance for doubtful accounts

 

23

 

 

Deferred income taxes

 

221

 

75

 

Stock based compensation

 

2,664

 

6,539

 

Foreign exchange loss

 

 

40

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

1,996

 

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(5,831

)

(826

)

Prepaid expenses and other assets

 

86

 

783

 

Other assets

 

(327

)

(136

)

Accounts payable

 

3,189

 

459

 

Accrued expenses

 

(364

)

113

 

Deferred revenue

 

1,438

 

(1,440

)

Net cash provided by operating activities

 

5,311

 

13,535

 

Investing activities:

 

 

 

 

 

Purchases of computers, furniture and equipment

 

(482

)

(1,333

)

Cash paid in connection with acquisitions

 

(8,166

)

(38,410

)

Net cash used in investing activities

 

(8,648

)

(39,743

)

Financing activities:

 

 

 

 

 

Repayment of debt

 

(37,715

)

(2,986

)

Borrowings of debt

 

20,000

 

 

Deferred financing costs

 

(170

)

 

Proceeds from repayment of notes receivable

 

 

93

 

Proceeds from exercise of stock options and stock warrants

 

832

 

3,741

 

Proceeds from initial public offering, net of issuance costs

 

66,998

 

 

Proceeds from follow on offering, net of issuance costs

 

 

37,729

 

Net cash provided by financing activities

 

49,945

 

38,577

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

(40

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

46,608

 

12,329

 

Cash and cash equivalents, beginning of period

 

5,913

 

43,407

 

Cash and cash equivalents, end of period

 

$

52,521

 

$

55,736

 

 

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

 

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Table of Contents

 

TANGOE, INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.      Organization, Description of Business

 

Nature of Operations

 

Tangoe, Inc. (the “Company”), a Delaware corporation, was incorporated on February 9, 2000 as TelecomRFQ, Inc. During 2001, the Company changed its name to Tangoe, Inc. The Company provides communications lifecycle management software and related services to a wide range of enterprises, including large and medium-sized businesses and other organizations. Communications lifecycle management encompasses the entire lifecycle of an enterprise’s communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, mobile device management, real-time expense 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 $37.7 million, net of underwriting discounts and commissions and other offering costs of $3.0 million.

 

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 and nine months ended September 30, 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. In May 2012, the Company and HCL-EMS agreed that the amount of the first year earn-out would be $1.9 million and the Company paid a portion of that amount  to HCL-EMS.  The Company paid the remaining portion of the first year earn-out to HCL-EMS in November 2012.  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

 

 

 

 

10



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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.  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 ended June 30, 2012.  The Company has provided to Telwares notice setting forth a calculation of a potential reduction, and is engaged in discussions with Telwares concerning that calculation.

 

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

 

 

 

 

11



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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.

 

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 identifiable intangible assets

 

$

8,717

 

 

 

 

12



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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, 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 of acquisition, including recurring technology and services revenue of $0.8 million through September 30, 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

 

 

13



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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 identifiable 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 (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 $4.1 million through September 30, 2012, of which $2.9 million was recurring technology and services revenue.

 

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

 

 

14



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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 covenants

 

116

 

2.0

 

Total identifiable intangible assets

 

$

4,288

 

 

 

 

Symphony Teleca Services, Inc.

 

On August 8, 2012, the Company entered into an Asset Purchase Agreement (the “Symphony Purchase Agreement”) with Symphony Teleca Services, Inc., a Delaware corporation (“Symphony”), under which the parties agreed to the purchase by the Company of Symphony’s telecommunications expense management business (the “TEM Business”) through an asset purchase (the “Symphony Acquisition”).  As part of the Symphony Acquisition and also on August 8, 2012, a newly formed subsidiary of the Company, Tangoe India Softek Services Private Limited, an Indian private limited company (“Tangoe India”), entered into a Business Purchase Agreement (the “Indian Purchase Agreement”) with Symphony Services Corporation (India) Private Limited (“Symphony India”) with respect to the purchase of certain assets and hiring of employees of the acquired business located in India.  On the same day, the Symphony Acquisition was effected in accordance with the terms of the Symphony Purchase Agreement.  At the closing of the Symphony Acquisition, the Company acquired the TEM Business for net consideration of $40.2 million, subject to certain adjustments (the “Cash Purchase Price”), payable as described below, plus an earn-out payable in the amount of up to $4.0 million based on achievement of revenue targets for the acquired business for periods through June 30, 2013. The Cash Purchase Price, after giving effect to certain adjustments, is payable as follows: (i) approximately $29.2 million in cash paid at the closing, (ii) approximately $4.4 million in cash payable on the six-month anniversary of the closing, which includes $2.5 million related to the Indian Purchase Agreement, and (iii) approximately $6.4 million in cash payable on the one-year anniversary of the closing.  As part of the Symphony Acquisition, the Company acquired a balance sheet for the TEM Business, which included net assets of approximately $5.4 million.  Approximately $1.9 million of the installment due on February 8, 2013, the full installment due on August 8, 2013 of approximately $6.4 million, and amounts that become payable under the earn-out are subject to set-off rights of the Company with respect to indemnities given by Symphony under the Symphony Purchase Agreement.  Among other things, these indemnity obligations relate to representations and warranties given by Symphony under the Symphony Purchase Agreement and by Symphony India under the Indian Purchase Agreement.  Certain of the indemnities are subject to limitations, including a threshold and deductible, certain caps and limited survival periods.  During a post-closing transition period expected to last for 2 to 6 months, Symphony and Symphony India will provide to the Company certain transition services, including making available to the Company on a continuing basis the services previously provided by Symphony India to the TEM Business, pending completion of the opening of certain Tangoe India facilities, the procurement of certain Indian tax registrations and the subsequent transfer to Tangoe India of the Indian assets and employees being hired.  The Company has included the operating results of the TEM Business in its consolidated financial statements since the date of acquisition, including revenue of $3.5 million through September 30, 2012, of which $2.9 million was recurring technology and services revenue.

 

15



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

Symphony Purchase Price Allocation

 

The allocation of the total purchase price of Symphony’s net tangible and identifiable intangible assets was based upon management’s preliminary estimate of the fair values of those assets taking into account all relevant information available.  Actual amounts for each of the fair values of the assets acquired and liabilities assumed may vary.  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

 

$

29,208

 

Deferred cash consideration

 

10,942

 

 

 

$

40,150

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

5,777

 

Property and equipment

 

602

 

Identifiable intangible assets

 

13,790

 

Goodwill

 

20,936

 

Total assets acquired

 

41,105

 

Accounts payable and accrued expenses

 

(335

)

Deferred revenue

 

(620

)

 

 

$

40,150

 

 

The goodwill and identifiable intangible assets related to the Symphony’s acquisition are 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

 

$

9,680

 

9.0

 

Technology

 

4,050

 

5.0

 

Tradename

 

60

 

3.0

 

Total identifiable intangible assets

 

$

13,790

 

 

 

 

16



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 and nine months ended September 30, 2011 and 2012 as if the acquisitions of HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles occurred at the beginning of 2011.  Due to the inability of the Company to anticipate and estimate on a forward-looking basis incremental costs allocated to the Symphony TEM Business by Symphony and the uncertainty and difficulty of calculating the specific costs required to meaningfully present the effects of the acquisition and the costs of operating the Symphony TEM Business, the Company has not included the Symphony TEM Business in the unaudited pro forma results below.  The unaudited pro forma revenue for the Symphony TEM Business was $2.4 million for the period of July 1, 2012 through August 8, 2012, the acquisition date, and $13.0 million for the period of January 1, 2012 through August 8, 2012, the acquisition date.  The unaudited pro forma revenue for the Symphony TEM Business was $4.9 million and $14.7 million for the three and nine months ended September 30, 2011, respectively.  These results are not intended to reflect the actual operations of the Company had the acquisitions occurred at January 1, 2011.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

32,891

 

$

40,138

 

$

96,700

 

$

112,376

 

Operating (loss) income

 

(1,489

)

936

 

(1,559

)

2,035

 

Income (loss) income applicable to common stockholders

 

361

 

581

 

(9,375

)

1,085

 

Basic (loss) income per common share

 

$

(0.15

)

$

0.02

 

$

(0.87

)

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.15

)

$

0.01

 

$

(0.87

)

$

0.03

 

 

17



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

3. (Loss) Income per Share Applicable to Common Stockholders

 

The following table sets forth the computations of (loss) income per share applicable to common stockholders for the three and nine months ended September 30, 2011 and 2012:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) income per common share:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,855

)

$

581

 

$

(3,858

)

$

1,111

 

Less: Preferred stock dividends

 

(310

)

 

(2,168

)

 

Less: Accretion of redeemable convertible preferred stock

 

(5

)

 

(37

)

 

(Loss) income applicable to common stockholders

 

$

(2,170

)

$

581

 

$

(6,063

)

$

1,111

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) income per common share

 

$

(0.10

)

$

0.02

 

$

(0.56

)

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

22,769

 

37,410

 

10,831

 

36,079

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income per common share:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,855

)

$

581

 

$

(3,858

)

$

1,111

 

Less: Preferred stock dividends

 

(310

)

 

(2,168

)

 

Less: Accretion of redeemable convertible preferred stock

 

(5

)

 

(37

)

 

(Loss) income applicable to common stockholders

 

$

(2,170

)

$

581

 

$

(6,063

)

$

1,111

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.10

)

$

0.01

 

$

(0.56

)

$

0.03

 

 

 

 

 

 

 

 

 

 

 

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

 

22,769

 

40,963

 

10,831

 

39,616

 

 

 

 

 

 

 

 

 

 

 

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

 

7,004

 

263

 

7,004

 

263

 

Outstanding restricted stock units

 

 

72

 

 

72

 

Common stock warrants

 

594

 

 

594

 

 

 

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.

 

18



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

4. Computers, Furniture and Equipment-Net

 

Computers, furniture and equipment-net consist of:

 

 

 

As of

 

 

 

December 31,

 

September 30,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

Computers and software

 

$

8,192

 

$

9,650

 

Furniture and fixtures

 

748

 

942

 

Leasehold improvements

 

635

 

1,137

 

 

 

9,575

 

11,729

 

Less accumulated depreciation

 

(6,241

)

(7,720

)

Computers, furniture and equipment-net

 

$

3,334

 

$

4,009

 

 

Computers and software includes equipment under capital leases totaling approximately $2.5 million at December 31, 2011 and September 30, 2012. Accumulated depreciation on equipment under capital leases totaled approximately $1.4 million and $1.8 million as of December 31, 2011 and September 30, 2012, respectively. Depreciation and amortization expense associated with computers, furniture and equipment was $1.0 million and $1.5 million for the nine months ended September 30, 2011 and 2012, respectively.

 

In connection with the business combinations described in Note 2, the Company acquired fixed assets with fair values of $0.8 million during the nine months ended September 30, 2012.

 

5.     Intangible Assets and Goodwill

 

The following table presents the components of the Company’s intangible assets as of December 31, 2011 and September 30, 2012:

 

 

 

 

 

 

 

Weighted

 

 

 

December 31,

 

September 30,

 

Average Useful

 

(in thousands)

 

2011

 

2012

 

Life (in years)

 

 

 

 

 

 

 

 

 

Patents

 

$

1,054

 

$

1,054

 

8.0

 

Less: accumulated amortization

 

(634

)

(732

)

 

 

Patents, net

 

420

 

322

 

 

 

Technological know-how

 

7,831

 

15,167

 

6.0

 

Less: accumulated amortization

 

(2,465

)

(4,171

)

 

 

Technological know-how, net

 

5,366

 

10,996

 

 

 

Customer relationships

 

23,550

 

37,357

 

8.7

 

Less: accumulated amortization

 

(7,236

)

(9,716

)

 

 

Customer relationships, net

 

16,314

 

27,641

 

 

 

Convenants not to compete

 

198

 

888

 

2.0

 

Less: accumulated amortization

 

(163

)

(427

)

 

 

Convenants not to compete, net

 

35

 

461

 

 

 

Strategic marketing agreement

 

6,203

 

6,203

 

10.0

 

Less: accumulated amortization

 

(118

)

(237

)

 

 

Strategic marketing agreement, net

 

6,085

 

5,966

 

 

 

Tradenames

 

335

 

842

 

3.9

 

Less: accumulated amortization

 

(2

)

(141

)

 

 

Tradenames, net

 

333

 

701

 

 

 

Trademarks

 

247

 

247

 

Indefinite

 

Intangible assets, net

 

$

28,800

 

$

46,334

 

 

 

 

19



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

In June 2012, the Company converted certain channel customers to direct customers by purchase of the customer contracts from Insight Direct USA Inc., who continues as a referral partner rather than a channel partner, in exchange for consideration of $1.25 million, a portion of which has been paid and a portion of which is deferred.  The Company has included the purchase of these customer contracts in customer relationships.

 

The amortization expense of intangible assets for the nine months ended September 30, 2011 and 2012 was $2.2 million and $4.7 million, respectively.  The Company’s estimate of future amortization expense for acquired intangible assets that exists at September 30, 2012 is as follows:

 

(in thousands)

 

 

 

October 1, 2012 to December 31, 2012

 

$

2,072

 

2013

 

8,258

 

2014

 

7,368

 

2015

 

6,005

 

2016

 

5,754

 

Thereafter

 

16,630

 

Total

 

$

46,087

 

 

The following table presents the changes in the carrying amounts of goodwill for the nine months ended September 30, 2012.

 

 

 

Carrying

 

(in thousands)

 

Amount

 

 

 

 

 

Balance at December 31, 2011

 

$

36,266

 

ProfitLine leasehold interest adjustment

 

428

 

Anomalous

 

4,477

 

ttMobiles

 

3,557

 

Symphony

 

20,936

 

Foreign exchange translation effect

 

216

 

Balance at September 30, 2012

 

$

65,880

 

 

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 nine months ended September 30, 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

 

(490

)

(99

)

(589

)

Non-cash charges and other

 

 

17

 

17

 

Remaining liability at September 30, 2012

 

775

 

(13

)

762

 

 

 

 

 

 

 

 

 

 

 

less: current portion

 

 

 

(326

)

 

 

Long-term portion

 

 

 

$

436

 

 

20



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

7.      Debt

 

As of December 31, 2011 and September 30, 2012, debt outstanding included the following:

 

 

 

December 31,

 

September 30,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

HCL-EMS contingent consideration, net of unamortized discount of $59 at September 30, 2012. Payable in annual installments starting in 2012, as described below

 

$

3,731

 

$

2,928

 

 

 

 

 

 

 

Deferred Telwares purchase price, net of unamortized discount of $52 at September 30, 2012. Payable in annual installments starting in March 2012, as described below

 

2,338

 

1,198

 

 

 

 

 

 

 

Deferred ProfitLine purchase price, net of unamortized discount of $123 at September 30, 2012. Payable in annual installments starting in December 2012, as described below

 

8,682

 

8,877

 

 

 

 

 

 

 

Deferred Anomalous purchase price, net of unamortized discount of $8 at September 30, 2012. Payable in one installment in January 2013, as described below

 

 

971

 

 

 

 

 

 

 

Deferred ttMobiles purchase price, net of unamortized discount of $27 at September 30, 2012. Payable in one installment in February 2013, as described below

 

 

2,399

 

 

 

 

 

 

 

Deferred Symphony purchase price, net of unamortized discount of $193 at September 30, 2012. Payable as described below

 

 

10,596

 

 

 

 

 

 

 

Capital lease and other obligations

 

1,443

 

1,815

 

Total notes payable

 

$

16,194

 

$

28,784

 

Less current portion

 

$

(7,904

)

$

(28,557

)

Notes payable, less current portion

 

$

8,290

 

$

227

 

 

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. In May 2012, the Company and HCL-EMS agreed that the gross amount of the first year earn-out would be $1.9 million and the Company paid a portion of that amount to HCL-EMS.  The Company paid the remaining portion of the first year earn-out to HCL-EMS in November 2012.  The only adjustments to the balance in 2012 were the accretion of imputed interest and the partial payment of the first year earn-out amount.

 

21



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

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.  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 ended June 30, 2012.  The Company has provided to Telwares notice setting forth a calculation of a potential reduction, and is engaged in discussions with Telwares concerning that calculation.  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. The only adjustment to the balance in 2012 was the accretion of imputed interest.

 

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 Acquisition 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.

 

22



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

Deferred Symphony Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of the Symphony TEM Business includes deferred cash consideration.  The deferred cash consideration includes payments of $4.4 million in cash payable on the six-month anniversary of the closing of the Symphony acquisition, which includes $2.5 million of consideration related to the Indian Purchase Agreement, and $6.4 million in cash payable on the twelve-month anniversary of closing of the Symphony Acquisition.  No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.2 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. Approximately $1.9 million of the installment due on February 8, 2013, the full installment due on August 8, 2013 of approximately $6.4 million, and amounts that potentially could become payable under the earn-out are subject to set-off rights of the Company with respect to indemnities given by Symphony under the Symphony Purchase Agreement.  Among other things, these indemnity obligations relate to representations and warranties given by Symphony under the Symphony Purchase Agreement and by Symphony India under the Indian Purchase Agreement.  Certain of the indemnities are subject to limitations, including a threshold and deductible, certain caps and limited survival periods

 

8.      Stockholders’ Equity

 

Common Stock —As of December 31, 2011 and September 30, 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 37,859,202 were issued and outstanding, respectively.

 

During the nine months ended September 30, 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 and 1,021 shares of its common stock to a member of the Company’s board of directors in payment of annual director fees.

 

Preferred Stock —As of December 31, 2011 and September 30, 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 nine months ended September 30, 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.  Additionally, warrant holders exercised warrants to purchase a total of 51,107 shares of common stock.  The Company received proceeds of $92,000 related to these warrant exercises.

 

On September 10, 2012, the Company issued a warrant to purchase 10,000 shares of its common stock at an exercise price of $14.02 to a consultant.

 

23



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

On March 22, 2011, the Company issued a warrant to purchase up to 1,282,789 shares of its common stock to Dell Products, L.P. (“Dell”) in connection with the entry of the Company and Dell into a 49-month strategic relationship agreement. Under the terms of the warrant, the 1,282,789 shares of common stock may become exercisable upon the achievement of certain annual recurring revenue thresholds over the 49-month period. The warrant is exercisable at $5.987 per share. As of September 30, 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 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 could 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 could 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 below. On August 30, 2011, the Company issued 930,511 shares of its common stock to IBM upon the exercise by IBM of this warrant, pursuant to a cashless exercise feature.  As a result of the cashless exercise, 584,521 warrant shares were cancelled in lieu of the payment of cash consideration to the Company.  As of June 30, 2012, the vesting terms of the amended warrant agreement between the Company and IBM expired with IBM earning no additional warrant shares.  As a result, no further warrant shares are issuable under this warrant agreement.

 

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 nine months ended September 30, 2011 and 2012, the Company recorded $65,209 and $119,259, respectively, of amortization as a contra-revenue charge related to the common stock warrant. The warrant value was marked to market on a quarterly basis until the warrant shares were earned and vested or expired unearned and unvested.

 

24



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

A summary of warrants exercised to purchase common stock during the nine months ended September 30, 2012 is presented below:

 

 

 

Number of

 

 

 

Stock

 

 

 

Warrants

 

 

 

 

 

Outstanding at beginning of the year

 

589,941

 

Exercised

 

(449,167

)

Issued

 

10,000

 

Cancelled

 

(124,447

)

Outstanding at end of the period

 

26,327

 

 

 

 

 

Weighted average exercise price

 

$

6.78

 

 

Stock Options —As of September 30, 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 expire 10 years after the date of the grant. During the nine months ended September 30, 2012, the Company’s board of directors granted options to purchase an aggregate of 2,229,650 shares of common stock under the 2011 Plan to employees and non-employees, at a weighted average exercise price of $15.96 per share.

 

A summary of the status of stock options issued pursuant to the Plans during the nine months ended September 30, 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

 

2,229,650

 

$

15.96

 

 

 

Forfeited

 

(254,698

)

$

8.17

 

 

 

Exercised

 

(1,748,391

)

$

2.09

 

 

 

Outstanding at end of the period

 

6,896,896

 

$

7.81

 

7.7

 

 

 

 

 

 

 

 

 

Exercisable at end of the period

 

3,112,740

 

$

3.12

 

6.3

 

 

 

 

 

 

 

 

 

Available for future grants at September 30, 2012

 

1,146,866

 

 

 

 

 

 

25



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

The intrinsic values of options outstanding, vested and exercised during the nine months ended September 30, 2012 were as follows:

 

 

 

2012

 

 

 

Number of

 

Intrinsic

 

 

 

Options

 

Value

 

Outstanding

 

6,896,896

 

$

42,817,484

 

Vested

 

3,112,740

 

$

31,183,161

 

Exercised

 

1,748,391

 

$

28,834,414

 

 

During the nine months ended September 30, 2012, employees and former employees of the Company exercised options to purchase a total of 1,748,391 shares of common stock at exercise prices ranging from $0.25 to $9.83 per share. Proceeds from the stock option exercises totaled $3.7 million.

 

Restricted Stock Units —During the nine months ended September 30, 2012, the Company issued 219,814 restricted stock units to certain employees under the provisions of the 2011 Plan. These grants of restricted stock units had an aggregate fair value of $3.8 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 nine months ended September 30, 2012, the Company recorded stock-based compensation expenses of $0.6 million related to restricted stock unit awards.

 

As of September 30, 2012, there was $3.2 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.

 

A summary of the status of restricted stock units issued pursuant to the Plans during the nine months ended September 30, 2012 is presented below:

 

Restricted Stock Units

 

Number of Shares

 

Weighted
Average Fair
Value

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

 

$

 

Granted

 

219,814

 

$

17.39

 

Forfeited

 

(2,500

)

$

20.35

 

Outstanding at end of the period

 

217,314

 

$

17.35

 

 

 

 

 

 

 

Exercisable at end of the period

 

 

$

 

 

26



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

In accordance with Accounting Standards Classification  (“ASC”) 718, Share Based Payment (“ASC 718”), total compensation expense for stock-based compensation awards was $2.7 million and $6.5 million for the nine months ended September 30, 2011 and 2012, respectively, which is included on the accompanying condensed consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Cost of revenue

 

$

178

 

$

362

 

$

499

 

$

947

 

Sales and marketing

 

207

 

586

 

589

 

1,455

 

General and administrative

 

466

 

1,643

 

1,447

 

3,727

 

Research and development

 

46

 

164

 

129

 

410

 

Total stock-based employee compensation

 

$

897

 

$

2,755

 

$

2,664

 

$

6,539

 

 

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

 

$

2,616

 

2013

 

8,670

 

2014

 

6,942

 

2015

 

5,025

 

2016

 

1,011

 

 

 

$

24,264

 

 

Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes valuation model on the date of grant of equity awards. 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.

 

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 stock options and restricted stock units 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

 

0.79% to 1.16%

 

Expected term (in years)

 

5.5 - 6.1 years

 

Expected volatility

 

58.1% - 59.9%

 

 

27



Table of Contents

 

Notes to Condensed Consolidated Financial Statements – continued (Unaudited)

 

Based on the above assumptions, the weighted average fair value per share of the stock options granted during the nine months ended September 30, 2012 was approximately $8.55.

 

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 as well as stock-based compensation, and to a lesser extent because of the impact of state and foreign 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.