Tangoe
TANGOE INC (Form: 10-Q, Received: 08/09/2013 16:20:59)

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 June 30, 2013

 

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

 

06-1571143

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

35 Executive Blvd.
Orange, Connecticut

 

06477

(Address of principal executive offices)

 

(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 x

Non-accelerated filer o

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 37,537,092 shares of our common stock outstanding on August 2, 2013.

 

 

 



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, 2012 and June 30, 2013

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2013

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2013

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2013

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 6.

Exhibits

56

 

 

 

 

Signatures

57

 

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)

 

 

 

 

 

June 30,

 

 

 

December 31,

 

2013

 

 

 

2012

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

50,211

 

$

44,056

 

Accounts receivable, less allowances of $198 and $286, respectively

 

38,309

 

39,844

 

Prepaid expenses and other current assets

 

3,384

 

3,619

 

Total current assets

 

91,904

 

87,519

 

 

 

 

 

 

 

COMPUTERS, FURNITURE AND EQUIPMENT-NET

 

3,999

 

3,941

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangible assets-net

 

44,249

 

40,656

 

Goodwill

 

65,825

 

65,823

 

Security deposits and other non-current assets

 

1,291

 

1,178

 

TOTAL ASSETS

 

$

207,268

 

$

199,117

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

9,128

 

$

8,980

 

Accrued expenses

 

12,035

 

8,556

 

Deferred revenue-current portion

 

9,648

 

10,436

 

Notes payable-current portion

 

22,443

 

13,438

 

Other current liabilities

 

305

 

932

 

Total current liabilities

 

53,559

 

42,342

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Deferred rent and other non-current liabilities

 

3,543

 

3,298

 

Deferred revenue-less current portion

 

1,415

 

1,571

 

Notes payable-less current portion

 

131

 

178

 

Total liabilities

 

58,648

 

47,389

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $0.0001 per share-150,000,000 shares authorized as of December 31, 2012 and June 30, 2013; 37,613,327 and 37,464,839 shares issued and outstanding as of December 31, 2012 and June 30, 2013, respectively

 

4

 

4

 

Additional paid-in capital

 

191,581

 

194,173

 

Warrants for common stock

 

10,610

 

10,610

 

Accumulated deficit

 

(53,757

)

(52,083

)

Other comprehensive gain (loss)

 

182

 

(976

)

Total stockholders’ equity

 

148,620

 

151,728

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

207,268

 

$

199,117

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

$

32,075

 

$

41,385

 

$

62,831

 

$

81,433

 

Strategic consulting, software licenses and other

 

4,182

 

5,022

 

7,573

 

9,834

 

Total revenue

 

36,257

 

46,407

 

70,404

 

91,267

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

14,797

 

18,871

 

29,113

 

37,626

 

Strategic consulting, software licenses and other

 

1,789

 

1,965

 

3,247

 

4,026

 

Total cost of revenue

 

16,586

 

20,836

 

32,360

 

41,652

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

19,671

 

25,571

 

38,044

 

49,615

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

5,913

 

8,205

 

11,457

 

15,597

 

General and administrative

 

7,046

 

8,669

 

13,747

 

16,796

 

Research and development

 

4,174

 

4,804

 

7,863

 

9,749

 

Depreciation and amortization

 

1,996

 

2,548

 

3,871

 

5,037

 

Restructuring charge

 

 

499

 

 

654

 

Income from operations

 

542

 

846

 

1,106

 

1,782

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest expense

 

(192

)

(100

)

(427

)

(263

)

Interest income

 

21

 

16

 

38

 

35

 

Other income

 

 

203

 

 

766

 

Income before income tax provision

 

371

 

965

 

717

 

2,320

 

Income tax provision

 

33

 

415

 

187

 

646

 

Net income

 

$

338

 

$

550

 

$

530

 

$

1,674

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

Diluted

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

36,987

 

37,391

 

35,406

 

37,468

 

Diluted

 

41,124

 

40,226

 

39,384

 

40,318

 

 

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 Comprehensive Income (unaudited)

(in thousands)

 

 

 

For the Three Months ended

 

For the Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

338

 

$

550

 

$

530

 

$

1,674

 

Foreign currency translation adjustment

 

(224

)

(391

)

(247

)

(1,158

)

Total comprehensive income

 

$

114

 

$

159

 

$

283

 

$

516

 

 

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 Six Months Ended June 30, 2013

(in thousands, except share amounts)

 

 

 

Common Stock

 

Additional

 

Common

 

 

 

Other

 

Total

 

 

 

Number of

 

 

 

Paid-In

 

Stock

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Warrants

 

Deficit

 

Income (loss)

 

Equity

 

Balance December 31, 2012

 

37,480,710

 

$

4

 

$

191,581

 

$

10,610

 

$

(53,757

)

$

182

 

$

148,620

 

Net income

 

 

 

 

 

1,674

 

 

1,674

 

Foreign currency translation adjustment

 

 

 

 

 

 

(1,158

)

(1,158

)

Issuance of shares to employees and board of directors

 

64,966

 

 

149

 

 

 

 

149

 

Issuance of shares from exercise of stock options

 

203,439

 

 

625

 

 

 

 

625

 

Issuance of shares from exercise of stock warrants

 

14,907

 

 

34

 

 

 

 

34

 

Issuance of shares from vesting of restricted stock units

 

66,776

 

 

 

 

 

 

 

Repurchase of common stock

 

(365,959

)

 

(4,538

)

 

 

 

(4,538

)

Stock-based compensation

 

 

 

6,322

 

 

 

 

6,322

 

Balance June 30, 2013

 

37,464,839

 

$

4

 

$

194,173

 

$

10,610

 

$

(52,083

)

$

(976

)

$

151,728

 

 

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)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2013

 

Operating activities:

 

 

 

 

 

Net income

 

$

530

 

$

1,674

 

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

 

 

 

 

 

Amortization of debt discount

 

358

 

216

 

Amortization of leasehold interest

 

(49

)

(49

)

Depreciation and amortization

 

3,871

 

5,037

 

Increase (decrease) in deferred rent liability

 

48

 

(39

)

Amortization of marketing agreement intangible assets

 

73

 

122

 

Allowance for doubful accounts

 

 

46

 

Deferred income taxes

 

14

 

225

 

Stock based compensation

 

3,784

 

6,471

 

Restructuring charge

 

 

654

 

Foreign exchange adjustment

 

(40

)

(138

)

Decrease in fair value of contingent consideration

 

 

(666

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

25

 

(1,481

)

Prepaid expenses and other assets

 

550

 

(151

)

Other assets

 

(1

)

34

 

Accounts payable

 

105

 

(282

)

Accrued expenses

 

(938

)

(1,984

)

Deferred revenue

 

(788

)

961

 

Net cash provided by operating activities

 

7,542

 

10,650

 

Investing activities:

 

 

 

 

 

Purchases of computers, furniture and equipment

 

(750

)

(960

)

Cash paid in connection with acquisitions, net of cash received

 

(9,202

)

(9,642

)

Net cash used in investing activities

 

(9,952

)

(10,602

)

Financing activities:

 

 

 

 

 

Repayment of debt

 

(2,751

)

(400

)

Proceeds from repayment of notes receivable

 

93

 

 

Repurchase of common stock

 

 

(6,235

)

Proceeds from exercise of stock options and stock warrants

 

2,462

 

659

 

Proceeds from follow on offering, net of issuance costs

 

37,751

 

 

Net cash provided by (used in) financing activities

 

37,555

 

(5,976

)

 

 

 

 

 

 

Effect of exchange rate on cash

 

(110

)

(227

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

35,035

 

(6,155

)

Cash and cash equivalents, beginning of period

 

43,407

 

50,211

 

Cash and cash equivalents, end of period

 

$

78,442

 

$

44,056

 

 

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

 

8



Table of Contents

 

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 telecommunications expense management, invoice processing, expense allocation and accounting, forward and reverse logistics 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 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.

 

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 received proceeds from this public offering of $38.5 million, net of underwriting discounts and commissions but before offering costs of $0.7 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.

 

The Company’s common stock is traded on the NASDAQ Global Select Market.

 

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 six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, for any other interim period or for any other future year.

 

The consolidated balance sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed 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, 2012 as filed with the Securities Exchange Commission (“SEC”) on March 18, 2013 (the “2012 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, 2012 included in the 2012 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

 

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 telecommunication 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) $979,000 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 Company paid the full $979,000 of deferred cash consideration in January 2013.  In March 2013, the 132,617 unvested and unregistered shares of the Company’s common stock were cancelled and retired because the revenue targets related to sales of Anomalous products and services were not achieved.

 

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. In accordance with Accounting Standards Classification (“ASC”) 805 , Business Combinations , the Company valued the 165,775 of unregistered shares of common stock by using the closing price of the Company’s common stock on the NASDAQ Global Market on the acquisition date and applying a 20% marketability discount to the fair value of the unregistered shares.  The marketability discount was applied since the unregistered shares were subject to a lock-up period of one year.  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

 

 

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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 identifiable 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) £4.0 million in cash paid at the closing, and (ii) £1.5 million in cash payable on the first anniversary of the closing (the “Deferred Consideration”).  The Company paid the full £1.5 million of Deferred Consideration in February 2013.

 

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

 

 

11



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 identifiable 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

 

 

 

 

12



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

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.  The Company made the six-month anniversary payment of $4.4 million in February 2013.  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.   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 that lasted through February 2013, Symphony and Symphony India provided to the Company certain transition services 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.  These services included making available to the Company on a continuing basis the services previously provided by Symphony India to the TEM Business.

 

Symphony Purchase Price Allocation

 

The allocation of the total purchase price of Symphony’s net tangible and identifiable intangible assets was based upon estimated fair values of those assets as of August 8, 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

 

$

29,208

 

Deferred cash consideration

 

10,793

 

 

 

$

40,001

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

5,628

 

Property and equipment

 

602

 

Identifiable intangible assets

 

13,790

 

Goodwill

 

20,936

 

Total assets acquired

 

40,956

 

Accounts payable and accrued expenses

 

(335

)

Deferred revenue

 

(620

)

 

 

$

40,001

 

 

13



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

The goodwill and identifiable intangible assets related to the Symphony 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 identifiable 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

 

 

 

 

oneTEM GmbH

 

On April 18, 2013 (“oneTEM Closing Date”), the Company entered into a Share Purchase Agreement (the “oneTEM Purchase Agreement”), with the holders of all of the issued share capital of oneTEM GmbH, a private limited company incorporated in Germany (“oneTEM”), under which the Company agreed to purchase all of the issued share capital of oneTEM (the “oneTEM Share Purchase”).  This acquisition reflects the Company’s continued strategy to expand in the European marketplace.   On the oneTEM Closing Date, the oneTEM Share Purchase was effected in accordance with the terms of the oneTEM Purchase Agreement, with the Company acquiring all of the outstanding equity of oneTEM for aggregate consideration of (i) €0.9 million in cash paid at the closing, and (ii) deferred consideration of €0.4 million in cash payable on the first anniversary of the closing.  In addition, the Company is obligated to pay additional deferred cash consideration following the first four anniversaries of the oneTEM Closing Date, pursuant to an earn-out formula based upon year-over-year increases in annual recurring revenue from specified customers during the earn-out periods.  The earn-out period begins with the first full month after the oneTEM Closing Date and continues for four consecutive 12-month periods.  The Company valued this contingent consideration at €0.2 million. The purchase is subject to a net asset adjustment pursuant to which the purchase price would be increased or decreased to the extent the net asset position of oneTEM is more or less than a specified target.  The deferred consideration is subject to set-off rights of the Company with respect to certain indemnities given by the former holders of the issued share capital of oneTEM under the oneTEM Purchase Agreement until the deferred consideration is paid in full. The Company has included the operating results of oneTEM in its consolidated financial statements since the date of acquisition, including $0.1 million of strategic consulting, software licenses and other revenue.

 

14



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

oneTEM Purchase Price Allocation

 

The allocation of the total purchase price of oneTEM’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

 

$

1,221

 

Deferred cash consideration

 

433

 

Fair value of contingent consideration

 

183

 

 

 

$

1,837

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

565

 

Property and equipment

 

10

 

Identifiable intangible assets

 

870

 

Goodwill

 

655

 

Total assets acquired

 

2,100

 

Accounts payable and accrued expenses

 

(152

)

Taxes payable

 

(111

)

 

 

$

1,837

 

 

The goodwill and identifiable intangible assets related to the oneTEM 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 identifiable intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Customer relationships

 

$

535

 

8.0

 

Covenants not to compete

 

298

 

2.0

 

Tradename

 

37

 

2.7

 

Total identifiable intangible assets

 

$

870

 

 

 

 

15



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 six months ended June 30, 2012 and 2013 as if the acquisitions of Anomalous, ttMobiles and oneTEM occurred at the beginning of 2012.  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 for the three and six months ended June 30, 2012 below.  The unaudited pro forma revenue for the Symphony TEM Business was $5.5 million and $10.6 million for the three and six months ended June 30, 2012, respectively.  The unaudited pro forma revenue for the Symphony TEM Business for the three and six months ended June 30, 2012 is not included in the unaudited pro forma results below.  These results are not intended to reflect the actual operations of the Company had these acquisitions occurred at January 1, 2012.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

36,577

 

$

46,515

 

$

72,878

 

$

91,518

 

Operating income

 

573

 

843

 

1,161

 

1,680

 

Net income

 

341

 

548

 

510

 

1,572

 

Basic income per common share

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

Diluted income per common share

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

 

16



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

3.                                       Income per Share Applicable to Common Stockholders

 

The following table sets forth the computations of income per share applicable to common stockholders for the three and six months ended June 30, 2012 and 2013:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

338

 

$

550

 

$

530

 

$

1,674

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

36,987

 

37,391

 

35,406

 

37,468

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

338

 

$

550

 

$

530

 

$

1,674

 

 

 

 

 

 

 

 

 

 

 

Diluted income per common share

 

$

0.01

 

$

0.01

 

$

0.01

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

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

 

41,124

 

40,226

 

39,384

 

40,318

 

 

Diluted 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

 

1,909

 

2,742

 

1,987

 

2,742

 

Outstanding restricted stock units

 

162

 

726

 

132

 

574

 

Common stock warrants

 

5

 

10

 

5

 

10

 

 

17



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,

 

June 30,

 

(in thousands)

 

2012

 

2013

 

 

 

 

 

 

 

Computers and software

 

$

10,018

 

$

10,837

 

Furniture and fixtures

 

1,032

 

1,094

 

Leasehold improvements

 

1,166

 

1,235

 

 

 

12,216

 

13,166

 

Less accumulated depreciation

 

(8,217

)

(9,225

)

Computers, furniture and equipment-net

 

$

3,999

 

$

3,941

 

 

Computers and software includes equipment under capital leases totaling approximately $2.5 million at December 31, 2012 and June 30, 2013. Accumulated depreciation on equipment under capital leases totaled approximately $2.0 million and $2.2 million as of December 31, 2012 and June 30, 2013, respectively. Depreciation and amortization expense associated with computers, furniture and equipment was $1.0 million for the six months ended June 30, 2012 and 2013.

 

5.                    Intangible Assets and Goodwill

 

The following table presents the components of the Company’s intangible assets as of December 31, 2012 and June 30, 2013:

 

 

 

 

 

 

 

Weighted

 

 

 

December 31,

 

June 30,

 

Average Useful

 

(in thousands)

 

2012

 

2013

 

Life (in years)

 

 

 

 

 

 

 

 

 

Patents

 

$

1,054

 

$

1,054

 

8.0

 

Less: accumulated amortization

 

(766

)

(831

)

 

 

Patents, net

 

288

 

223

 

 

 

Technological know-how

 

15,141

 

14,964

 

6.1

 

Less: accumulated amortization

 

(4,913

)

(6,354

)

 

 

Technological know-how, net

 

10,228

 

8,610

 

 

 

Customer relationships

 

37,358

 

37,723

 

8.7

 

Less: accumulated amortization

 

(10,793

)

(12,934

)

 

 

Customer relationships, net

 

26,565

 

24,789

 

 

 

Convenants not to compete

 

881

 

1,143

 

2.0

 

Less: accumulated amortization

 

(517

)

(698

)

 

 

Convenants not to compete, net

 

364

 

445

 

 

 

Strategic marketing agreement

 

6,203

 

6,203

 

10.0

 

Less: accumulated amortization

 

(293

)

(415

)

 

 

Strategic marketing agreement, net

 

5,910

 

5,788

 

 

 

Tradenames

 

843

 

853

 

3.8

 

Less: accumulated amortization

 

(196

)

(299

)

 

 

Tradenames, net

 

647

 

554

 

 

 

Trademarks

 

247

 

247

 

Indefinite

 

Intangible assets, net

 

$

44,249

 

$

40,656

 

 

 

 

18



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

The related amortization expense of intangible assets for the six months ended June 30, 2012 and 2013 was $2.9 million and $4.0 million, respectively.  The Company’s estimate of future amortization expense for acquired intangible assets that exist at June 30, 2013 is as follows:

 

(in thousands)

 

 

 

July 1, 2013 to December 31, 2013

 

$

4,215

 

2014

 

7,518

 

2015

 

6,050

 

2016

 

5,738

 

2017

 

5,951

 

Thereafter

 

10,937

 

Total

 

$

40,409

 

 

The following table presents the changes in the carrying amounts of goodwill for the six months ended June 30, 2013.

 

 

 

Carrying

 

(in thousands)

 

Amount

 

 

 

 

 

Balance at December 31, 2012

 

$

65,825

 

oneTEM

 

655

 

Foreign exchange translation effect

 

(657

)

Balance at June 30, 2013

 

$

65,823

 

 

19



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 as part of the acquisition of substantially all of the assets and certain liabilities of HCL Expense Management Services, Inc. (“HCL-EMS”) in January 2011 and of certain assets and liabilities of Telwares, Inc. and its subsidiary Vercuity, Inc. (“Telwares”) in March 2011. The original charge reflected 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. During the three months ended March 31, 2013, the Company recorded an adjustment of $0.1 million to the original restructuring charge as a result of the Company’s inability to sublease the office space in the time period originally expected. During the three months ended June 30, 2013, the Company negotiated a lease termination agreement with the landlord of its New Jersey office space. The agreement terminates the remaining term of the lease effective June 30, 2013 for a settlement fee of $0.9 million. The Company recorded an adjustment of $0.5 million to the restructuring charge as a result of the lease termination agreement. The liability related to the restructuring charge is included in other current liabilities on the Company’s condensed consolidated balance sheet. The following table summarizes the activity in the liabilities related to the restructuring charge for the six months ended June 30, 2013:

 

 

 

Lease costs, net

 

 

 

 

 

 

 

of estimated

 

 

 

 

 

(in thousands)

 

sublease income

 

Other Costs

 

Total

 

 

 

 

 

 

 

 

 

Remaining liability at December 31, 2012

 

$

613

 

$

(8

)

$

605

 

 

 

 

 

 

 

 

 

Cash payments

 

(336

)

 

(336

)

Non-cash charges and other

 

1

 

8

 

9

 

Restructuring charge

 

654

 

 

654

 

Remaining liability at June 30, 2013

 

932

 

0

 

932

 

 

 

 

 

 

 

 

 

 

 

less: current portion

 

(932

)

 

 

Long-term portion

 

$

 

 

20



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

7.      Debt

 

As of December 31, 2012 and June 30, 2013, debt outstanding included the following:

 

 

 

December 31,

 

June 30,

 

(in thousands)

 

2012

 

2013

 

 

 

 

 

 

 

HCL-EMS contingent consideration, net of unamortized discount of $12 and $0 at December 31, 2012 and June 30, 2013, respectively. Payable as described below.

 

$

2,046

 

$

1,891

 

 

 

 

 

 

 

Deferred Telwares purchase price, net of unamortized discount of $24 and $0 at December 31, 2012 and June 30, 2013, respectively.

 

1,226

 

 

 

 

 

 

 

 

Deferred ProfitLine purchase price, net of unamortized discount of $62 and $0 at December 31, 2012 and June 30, 2013, respectively.

 

4,438

 

4,500

 

 

 

 

 

 

 

Deferred Anomalous purchase price, net of unamortized discount of $1 and $0 at December 31, 2012 and June 30, 2013, respectively.

 

978

 

 

 

 

 

 

 

 

Deferred ttMobiles purchase price, net of unamortized discount of $10 and $0 at December 31, 2012 and June 30, 2013, respectively.

 

2,420

 

 

 

 

 

 

 

 

Deferred Symphony purchase price, net of unamortized discount of $128 and $21 at December 31, 2012 and June 30, 2013, respectively. Payable as decribed below.

 

10,662

 

6,206

 

 

 

 

 

 

 

Deferred oneTEM purchase price and contingent consideration, net of unamortized discount of $155 at June 30, 2013. Payable as described below.

 

 

616

 

 

 

 

 

 

 

Capital lease and other obligations

 

804

 

403

 

Total notes payable

 

$

22,574

 

$

13,616

 

Less current portion

 

$

(22,443

)

$

(13,438

)

Notes payable, less current portion

 

$

131

 

$

178

 

 

Contingent HCL-EMS Consideration

 

Th e 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 closing date of the HCL-EMS acquisition on January 25, 2011 (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 Asset Purchase Agreement entered into in December 2010 in connection with the HCL-EMS acquisition (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 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 that amount to HCL-EMS.  In April 2013, the Company and HCL-EMS agreed that the gross amount of the second year earn-out would be $1.9 million.  In early August 2013, the Company paid $1.0 million of the second year earn-out to HCL-EMS, and retained the balance of the second year earn-out in the amount of $0.9 million pending resolution of an outstanding indemnity matter.  The only adjustments to the balance during the six months ended June 30, 2013 were the accretion of imputed interest and adjustment of the second year earn-out estimate to actual.

 

Deferred Telwares Purchase Price

 

The purchase consideration for the acquisition of Telwares included deferred cash consideration. The deferred cash consideration included payments of $1.25 million on March 16, 2012 and $1.25 million on March 16, 2013, subject to set-off rights of the Company with respect to indemnities given by Telwares under an Asset Purchase Agreement entered into in March 2011 in connection with the Telwares acquisition .  The Company paid the first installment of $1.25 million on March 16, 2012.  The installment payable on March 16, 2013 was subject to a potential reduction of up to $0.5 million relating to the achievement of certain recurring revenue goals during the three months ended June 30, 2012.  The Company

 

21



Table of Contents

 

Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

and Telwares agreed that the amount of that reduction would be $0.4 million and the Company paid the resulting installment of deferred cash consideration of $0.9 million in March 2013.  No interest accrued 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 was unsecured. The only adjustments to the balance in 2013 were the accretion of imputed interest, the reduction in deferred consideration as described above and the payment of the second installment.

 

Deferred ProfitLine Purchase Price

 

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.  The purchase consideration for the acquisition of ProfitLine includes deferred cash consideration.  The deferred cash consideration includes payments of $9.0 million in installments of $4.5 million 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.  The Company paid $4.1 million in December 2012, which represented the first installment of $4.5 million less indemnity claims of $0.4 million. The Company paid $4.1 million in July 2013, which represented the second and final installment of $4.5 million less indemnity claims of $0.4 million.  No interest accrued 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 was unsecured.  The only adjustment to the balance during the six months ended June 30, 2013 was the accretion of imputed interest.

 

Deferred Anomalous Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of Anomalous included deferred cash consideration.  The deferred cash consideration included a payment of $979,000 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.  The Company paid the full $979,000 of deferred cash consideration in January 2013. No interest accrued 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 was unsecured.  The only adjustments to the balance in 2013 were the accretion of imputed interest and the payment of the deferred cash consideration.

 

Deferred ttMobiles Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of ttMobiles included deferred cash consideration.  The deferred cash consideration included a payment of £1.5 million in cash payable on the first anniversary of the ttMobiles Acquisition Date. The Company paid this £1.5 million of deferred consideration in February 2013. No interest accrued 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 was unsecured.  The only adjustments to the balance in 2013 were the accretion of imputed interest, foreign exchange adjustment and payment of the deferred cash consideration.

 

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.  In addition, the acquisition consideration included 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 Company made the six-month anniversary payment of $4.4 million in February 2013.  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.  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

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

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.   The only adjustments to the balance in 2013 were the accretion of imputed interest and the payment of the six-month installment.

 

Deferred oneTEM Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of oneTEM includes deferred cash consideration.  The deferred cash consideration includes a payment of €0.4 million in cash payable on the first year anniversary of the closing of the oneTEM acquisition.  In addition, the acquisition consideration includes an earn-out payable pursuant to an earn-out formula based upon year-over-year increases in annual recurring revenue from specified customers during the earn out periods.  The earn-out period begins with the first full month after the oneTEM Closing Date and continues for four consecutive 12-month periods.  The Company valued this contingent consideration at €0.2 million.  No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of €0.1 million based on weighted average cost of capital as of the date of the acquisition.  The deferred consideration is subject to set-off rights of the Company with respect to certain indemnities given by the former holders of the issued share capital of oneTEM under the oneTEM Purchase Agreement until the deferred consideration is paid.

 

8.      Stockholders’ Equity

 

Common Stock —As of December 31, 2012 and June 30, 2013, the number of authorized shares of common stock, par value $0.0001 per share, was 150,000,000, of which 37,613,327 and 37,464,839 were issued and outstanding, respectively.

 

During the six months ended June 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.  During the six months ended June 30, 2013, the Company cancelled and retired the 132,617 unvested and unregistered shares of its common stock.  Additionally, the Company issued 5,991 and 58,975 shares of its common stock to certain of its employees and members of its board of directors, respectively, during the six months ended June 30, 2013 under the provisions of the Company’s 2011 Stock Incentive Plan (the “2011 Plan”).

 

At the June 5, 2013 annual meeting of the Company’s stockholders, an amendment to the 2011 Plan to reserve an additional 1,000,000 shares of common stock for issuance under the 2011 Plan was approved by a majority of the Company’s stockholders.  The Company’s board of directors had previously approved such amendment.

 

In November 2012, the Company’s board of directors authorized a share repurchase program under which the Company may repurchase up to $20 million of its outstanding common stock on the open market or in privately negotiated transactions.  During the six months ended June 30, 2013, the Company repurchased 365,959 shares of common stock at an average price per share, including broker commissions, of $12.40, for an aggregate purchase price of $4.5 million.

 

Preferred Stock —As of December 31, 2012 and June 30, 2013, 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 Investor Rights Agreement, as amended.

 

Common Stock Warrants —During the six months ended June 30, 2013, warrant holders exercised warrants to purchase a total of 14,907 shares of common stock.  The Company received proceeds of $34,700 related to these warrant exercises.

 

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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 June 30, 2013, 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 were to become exercisable upon the achievement of certain billing thresholds over a three-year period. The warrant was 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 Black-Scholes valuation assumptions included an expected term of 5.8 years, volatility of 61.15% and a risk free interest rate of 2.28%. 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 at the time of the amendment. The Black-Scholes valuation assumptions included an expected term of 5.3 years, volatility of 59.58% and a risk free interest rate of 1.64%. 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 six months ended June 30, 2012 and 2013, the Company recorded $72,936 and $122,189, 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.

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

A summary of warrants exercised to purchase common stock during the six months ended June 30, 2013 is presented below:

 

 

 

Number of

 

 

 

Stock

 

Warrants

 

Warrants

 

 

 

 

 

Outstanding at beginning of the year

 

25,617

 

Exercised

 

(14,907

)

Issued

 

 

Cancelled

 

 

Outstanding at end of the period

 

10,710

 

 

 

 

 

Weighted average exercise price

 

$

13.26

 

 

Stock Options —As of June 30, 2013, 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 Plan.  In connection with the Company’s initial public offering, the Company’s board of directors determined that no future stock awards would be made under the Employee Plan, the Executive Plan, the 2005 Plan and the 1999 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 six months ended June 30, 2013, the Company’s board of directors granted options to purchase an aggregate of 458,475 shares of common stock under the 2011 Plan to employees and non-employees, at a weighted average exercise price of $14.18 per share.

 

A summary of the status of stock options issued pursuant to the Plans during the six months ended June 30, 2013 is presented below:

 

Options

 

Number of Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Contractual
Life (years)

 

 

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

6,854,369

 

$

7.92

 

 

 

Granted

 

458,475

 

$

14.18

 

 

 

Forfeited

 

(49,162

)

$

11.60

 

 

 

Exercised

 

(203,439

)

$

3.07

 

 

 

Outstanding at end of the period

 

7,060,243

 

$

8.44

 

7.2

 

 

 

 

 

 

 

 

 

Exercisable at end of the period

 

4,198,192

 

$

5.98

 

6.4

 

 

 

 

 

 

 

 

 

Available for future grants at June 30, 2013

 

961,528

 

 

 

 

 

 

The intrinsic values of options outstanding, vested and exercised during the six months ended June 30, 2013 were as follows:

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

 

 

2013

 

 

 

Number of

 

Intrinsic

 

 

 

Options

 

Value

 

Outstanding

 

7,060,243

 

$

50,877,300

 

Vested

 

4,198,192

 

$

40,607,694

 

Exercised

 

203,439

 

$

2,272,707

 

 

During the six months ended June 30, 2013, employees and former employees of the Company exercised options to purchase a total of 203,439 shares of common stock at exercise prices ranging from $0.25 to $12.56 per share. Proceeds from the stock option exercises totaled $0.6 million.

 

Restricted Stock Units —During the six months ended June 30, 2013, the Company issued 620,034 restricted stock units to certain employees under the provisions of the 2011 Plan and 66,776 restricted stock units vested resulting in an equal number of shares of common stock being issued. The grants of restricted stock units made during the six months ended June 30, 2013 had an aggregate value of $9.2 million.  The value of a restricted stock unit award is determined based on the closing price of the Company’s common stock on 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 six months ended June 30, 2013, the Company recorded stock-based compensation expenses of $1.8 million related to restricted stock units.

 

As of June 30, 2013, there was $10.3 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 six months ended June 30, 2013 is presented below:

 

Restricted Stock Units

 

Number of Shares

 

Weighted
Average Fair
Value

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

221,314

 

$

17.27

 

Granted

 

620,034

 

$

14.78

 

Vested

 

(66,776

)

$

17.78

 

Forfeited

 

(800

)

$

15.08

 

Outstanding at end of the period

 

773,772

 

$

15.24

 

 

In accordance with ASC 718, Share Based Payment (“ASC 718”), total compensation expense for stock-based compensation awards was $3.8 million and $6.5 million for the six months ended June 30, 2012 and 2013, respectively, which is included on the accompanying condensed consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

Cost of goods sold

 

$

335

 

$

525

 

$

585

 

$

1,080

 

Sales and marketing expenses

 

503

 

956

 

869

 

1,769

 

General and administrative expenses

 

1,169

 

1,641

 

2,084

 

3,113

 

Research and development

 

153

 

249

 

246

 

509

 

Total stock-based employee compensation

 

$

2,160

 

$

3,371

 

$

3,784

 

$

6,471

 

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

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,

 

 

 

2013

 

$

6,192

 

2014

 

11,401

 

2015

 

8,199

 

2016

 

2,354

 

2017

 

119

 

 

 

$

28,265

 

 

Stock-based compensation costs for stock options are generally based on the fair value calculated from the Black-Scholes valuation model on the date of grant. 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 options granted during 2013 was determined at the date of grant using the Black-Scholes valuation model with the following assumptions:

 

 

 

2013

 

 

 

 

 

Expected dividend yield

 

0%

 

Risk-free interest rate

 

1.04% to 1.25%

 

Expected term (in years)

 

5.7 - 6.1 years

 

Expected volatility

 

56.34% - 56.84%

 

 

Based on the above assumptions, the weighted average fair value per share of stock options granted during the six months ended June 30, 2013 was approximately $7.49.

 

9.      Income Taxes

 

The income tax provision differs from the expected tax provisions computed by applying the U.S. Federal statutory rate to income before income taxes primarily because the Company has historically maintained a full valuation allowance on its deferred tax assets, tax deductions related to stock-based compensation, and to a lesser extent because of the impact of state income taxes.  As described in the 2012 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.

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

10.   Fair Value Measurement

 

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

 

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

 

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

 

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

 

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

 

The following table discloses the assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 and the basis for that measurement:

 

 

 

Fair Value Measurement at June 30, 2013

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

23,326

 

$

23,326

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

1,891

 

 

 

1,891

 

Contingent oneTEM acquisition consideration

 

181

 

 

 

 

 

181

 

 

 

$

25,398

 

$

23,326

 

$

 

$

2,072

 

 

 

 

Fair Value Measurement at December 31, 2012

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

28,094

 

$

28,094

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

2,046

 

 

 

2,046

 

 

 

$

30,140

 

$

28,094

 

$

 

$

2,046

 

 

The changes in the fair value of the Level 3 liability for the six months ended June 30, 2013 are as follows:

 

 

 

Contingent acquisition consideration

 

 

 

Six Months Ended June 30, 2013

 

(in thousands)

 

HCL-EMS

 

oneTEM

 

Balance, beginning of period

 

$

2,046

 

$

 

Initial earn-out consideration

 

 

181

 

Imputed Interest

 

12

 

 

Second year earn-out adjustment

 

(167

)

 

Balance, end of period

 

$

1,891

 

$

181

 

 

The Company’s investment in overnight money market institutional funds, which amounted to $28.1 million and $23.3 million at December 31, 2012 and June 30, 2013, respectively, is included in cash and cash equivalents on the accompanying condensed 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 June 30, 2013, there were no changes in the recognized amounts, except for the accretion of interest and adjustment of the second year earn-out estimate to actual.

 

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Notes to Condensed Consolidated Financial Statements - continued (Unaudited)

 

The acquisition of oneTEM includes a contingent consideration agreement that requires additional consideration to be paid by the Company following each of the first four anniversaries of the oneTEM Closing Date, pursuant to an earn-out formula of 9% of the year-over-year increase in annual recurring revenue growth from specified customers during the earn-out periods.  The earn-out period begins with the first full month after the oneTEM Closing Date and continues for four consecutive 12- month periods.  The contingent consideration is subject to set-off rights of the Company with respect to indemnities given by the former holders of the issued share capital of oneTEM under the oneTEM Purchase Agreement.  The fair value of the contingent consideration recognized was $0.2 million, which was estimated by applying the income approach. The key assumptions include (a) a discount rate of 15% and (b) probability adjusted levels of increased annual recurring revenue between approximately $0.2 million and $0.3 million.

 

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 ProfitLine and Symphony approximate fair value as the effective interest rates approximate market rates.

 

11.      Supplemental Cash Flow Information

 

Information about other cash flow activities during the six months ended June 30, 2012 and 2013 is as follows:

 

 

 

Six months ended June 30,

 

(in thousands)

 

2012

 

2013

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

66

 

$

41

 

Income tax payments

 

$

235

 

$

264

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Deferred purchase price in connection with Anomalous acquisition

 

$

950

 

$

 

Deferred purchase price in connection with ttMobiles acquisition

 

$

2,315

 

$

 

Deferred purchase price in connection with oneTEM acquisition

 

$

 

$

616

 

Issuance of common stock in payment of board of directors fees

 

$

20

 

$

 

Cashless exercise of warrants

 

$

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, employee matters and acquisition-related post-closing disputes.  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 that expire between 2013 and 2019.  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 2013 and 2016.

 

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 June 2013 and July 2015.

 

Rent expense, included in general and administrative expense, was approximately $2.4 million and $2.7 million for the six months ended June 30, 2012 and 2013, respectively.

 

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

 

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

 

Overview

 

Tangoe is a leading global provider of communications lifecycle management, or CLM, software and services to a wide range of large and medium-sized commercial enterprises and governmental agencies. 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, real-time telecommunications expense management, invoice processing, expense allocation and accounting, forward and reverse logistics, 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 plus interest expense, income tax provision, depreciation and amortization, amortization of marketing agreement intangible assets, stock-based compensation expense and, for 2013 only, restructuring charge; less amortization of leasehold interest, for 2013 only, other income and interest income and also include in Adjusted EBITDA adjustments for other non-cash and non-recurring items applicable for the periods presented.  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, 2013.

 

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 a portion of implementation and software subscription fees.  Implementation fees are recognized ratably over twice the term of the contract, which we estimate to be the expected life of the customer relationship.  Software subscription fees are recognized ratably over the service period.  As of June 30, 2013, implementation fees and software subscription fees represented $2.0 million and $0.2 million, respectively, of the $12.0 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 10, 2012, we acquired all of the outstanding equity of Anomalous Networks Inc., or Anomalous, a provider of real-time telecommunicati