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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

____________

 

FORM 10-Q

 

(Mark One)

 

 

 

 

 

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

 

For the quarterly period ended June 30, 2014

 

Or

 

 

 

 

 

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: 000-54450

 

 

INTERACTIVE INTELLIGENCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Indiana

(State or other jurisdiction

of incorporation or organization)

 

45-1505676

(I.R.S. Employer

Identification No.)

 

 

 

7601 Interactive Way

Indianapolis, IN 46278

(Address of principal executive offices, including zip code)

 

 

 

(317) 872-3000

(Registrant’s telephone number, including area code)

 

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 No 

 

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       

No     

 

 

 


 

     

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. (Check One):

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

  

 

Accelerated filer

 

Non-accelerated filer

(Do not check if a smaller reporting company)

  

 

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  No 

 

As of July  31, 2014,  there were 20,973,531 shares outstanding of the registrant’s common stock, $0.01 par value.

 

 

 

 


 

     

 

 

TABLE OF CONTENTS

 

 

 

 

PART I. FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2014 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

30

 

 

 

Item 4.

Controls and Procedures.

30

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

30

 

 

 

Item 1A.

Risk Factors.

Error! Bookmark not defined.

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 6.

Exhibits.

32

 

 

 

SIGNATURE 

34

 

 

 

1

 


 

     

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2014 and December 31, 2013

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2014

 

2013

Assets

 

unaudited

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,534 

 

$

65,881 

Short-term investments

 

 

38,664 

 

 

32,162 

Accounts receivable, net of allowance for doubtful accounts

 

 

 

 

 

 

of $1,083 at June 30, 2014 and  $1,233 at December 31, 2013

 

 

64,957 

 

 

80,414 

Deferred tax assets, net

 

 

27,673 

 

 

23,684 

Prepaid expenses

 

 

26,317 

 

 

21,989 

Other current assets

 

 

19,372 

 

 

13,566 

Total current assets

 

 

211,517 

 

 

237,696 

Long-term investments

 

 

12,784 

 

 

9,787 

Property and equipment, net

 

 

42,907 

 

 

36,919 

Goodwill

 

 

46,026 

 

 

37,298 

Intangible assets, net

 

 

25,357 

 

 

20,613 

Other assets, net

 

 

18,701 

 

 

10,909 

Total assets

 

$

357,292 

 

$

353,222 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,148 

 

$

8,727 

Accrued liabilities

 

 

18,145 

 

 

15,162 

Accrued compensation and related expenses

 

 

13,842 

 

 

17,494 

Deferred product revenues

 

 

10,399 

 

 

10,412 

Deferred services revenues

 

 

79,886 

 

 

81,630 

Total current liabilities

 

 

131,420 

 

 

133,425 

Long-term deferred revenues

 

 

21,590 

 

 

23,914 

Deferred tax liabilities, net

 

 

1,901 

 

 

2,388 

Other long-term liabilities

 

 

7,423 

 

 

4,140 

Total liabilities

 

 

162,334 

 

 

163,867 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value; 

 

 

 

 

 

 

10,000,000 authorized; no shares issued and outstanding

 

 

 -

 

 

 -

Common stock, $0.01 par value; 100,000,000 authorized;

 

 

 

 

 

 

20,957,663 issued and outstanding at June 30, 2014,

 

 

 

 

 

 

20,504,106 issued and outstanding at December 31, 2013

 

 

210 

 

 

205 

Additional paid-in capital

 

 

184,402 

 

 

170,072 

Accumulated other comprehensive loss, net of tax

 

 

(1,046)

 

 

(1,676)

Retained earnings

 

 

11,392 

 

 

20,754 

Total shareholders' equity

 

 

194,958 

 

 

189,355 

Total liabilities and shareholders' equity

 

$

357,292 

 

$

353,222 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

2

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three and Six Months Ended June 30, 2014 and 2013

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

21,548 

 

$

27,909 

 

$

44,394 

 

$

55,900 

Recurring

 

 

44,617 

 

 

35,106 

 

 

88,026 

 

 

68,933 

Services

 

 

13,665 

 

 

13,227 

 

 

26,858 

 

 

24,647 

Total revenues

 

 

79,830 

 

 

76,242 

 

 

159,278 

 

 

149,480 

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of product

 

 

6,553 

 

 

7,214 

 

 

13,337 

 

 

15,092 

Costs of recurring

 

 

15,924 

 

 

10,024 

 

 

30,639 

 

 

19,957 

Costs of services

 

 

11,298 

 

 

9,846 

 

 

21,815 

 

 

17,707 

Amortization of intangible assets

 

 

137 

 

 

49 

 

 

186 

 

 

98 

Total costs of revenues

 

 

33,912 

 

 

27,133 

 

 

65,977 

 

 

52,854 

Gross profit

 

 

45,918 

 

 

49,109 

 

 

93,301 

 

 

96,626 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

30,151 

 

 

26,040 

 

 

57,649 

 

 

49,541 

Research and development

 

 

15,906 

 

 

13,168 

 

 

29,705 

 

 

25,692 

General and administrative

 

 

10,898 

 

 

8,584 

 

 

21,325 

 

 

16,198 

Amortization of intangible assets

 

 

476 

 

 

468 

 

 

948 

 

 

931 

Total operating expenses

 

 

57,431 

 

 

48,260 

 

 

109,627 

 

 

92,362 

Operating income (loss)

 

 

(11,513)

 

 

849 

 

 

(16,326)

 

 

4,264 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

275 

 

 

250 

 

 

557 

 

 

449 

Other income (expense)

 

 

(190)

 

 

27 

 

 

(386)

 

 

(1,375)

Total other income (expense)

 

 

85 

 

 

277 

 

 

171 

 

 

(926)

Income (loss) before income taxes

 

 

(11,428)

 

 

1,126 

 

 

(16,155)

 

 

3,338 

Income tax benefit

 

 

(4,630)

 

 

(1,775)

 

 

(6,793)

 

 

(1,020)

Net income (loss)

 

$

(6,798)

 

$

2,901 

 

$

(9,362)

 

$

4,358 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

97 

 

 

16 

 

 

656 

 

 

121 

Unrealized investment loss - net of tax

 

 

(9)

 

 

(196)

 

 

(26)

 

 

(228)

Comprehensive income (loss)

 

$

(6,710)

 

$

2,721 

 

$

(8,732)

 

$

4,251 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.33)

 

$

0.15 

 

$

(0.45)

 

$

0.22 

Diluted

 

 

(0.33)

 

 

0.14 

 

 

(0.45)

 

 

0.21 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,851 

 

 

19,946 

 

 

20,771 

 

 

19,826 

Diluted

 

 

20,851 

 

 

20,935 

 

 

20,771 

 

 

20,847 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statement of Shareholders' Equity

For the Six Months Ended June 30, 2014

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Earnings

 

Total

Balances, December 31, 2013

20,504 

 

$

205 

 

$

170,072 

 

$

(1,676)

 

$

20,754 

 

$

189,355 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 -

 

 

 -

 

 

6,936 

 

 

 -

 

 

 -

 

 

6,936 

Issuances of restricted shares

 -

 

 

 -

 

 

4,692 

 

 

 -

 

 

 -

 

 

4,692 

Exercise of stock options

373 

 

 

 

 

4,966 

 

 

 -

 

 

 -

 

 

4,971 

Issuances of common stock

 

 

 -

 

 

543 

 

 

 -

 

 

 -

 

 

543 

Issuance of restricted stock units, net of tax withholdings

73 

 

 

 -

 

 

(2,625)

 

 

 -

 

 

 -

 

 

(2,625)

Reduction of tax benefits from stock-based payment arrangements

 -

 

 

 -

 

 

(182)

 

 

 -

 

 

 -

 

 

(182)

Net loss

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(9,362)

 

 

(9,362)

Foreign currency translation adjustment

 -

 

 

 -

 

 

 -

 

 

656 

 

 

 -

 

 

656 

Net unrealized investment loss - net of tax

 -

 

 

 -

 

 

 -

 

 

(26)

 

 

 -

 

 

(26)

Balances, June 30, 2014

20,958 

 

$

210 

 

$

184,402 

 

$

(1,046)

 

$

11,392 

 

$

194,958 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

4

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2014 and 2013

(in thousands)

(unaudited)

 

 

 

 

 

 

 

June 30,

 

2014

 

2013

Operating activities:

 

 

 

 

 

Net income (loss)

$

(9,362)

 

$

4,358 

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

 

 

 

 

 

Depreciation

 

7,175 

 

 

5,023 

Amortization

 

1,134 

 

 

1,029 

Other non-cash items

 

363 

 

 

1,255 

Stock-based compensation expense

 

6,936 

 

 

4,535 

Excess tax benefit from stock-based payment arrangements

 

 -

 

 

(525)

Deferred income tax

 

(4,658)

 

 

729 

Accretion of investment discount

 

(161)

 

 

(385)

Loss on disposal of fixed assets

 

23 

 

 

 -

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

12,201 

 

 

(1,903)

Prepaid expenses

 

(4,274)

 

 

(3,592)

Other current assets

 

(2,718)

 

 

(6,115)

Accounts payable

 

421 

 

 

278 

Accrued liabilities

 

2,793 

 

 

(6,807)

Accrued compensation and related expenses

 

(3,652)

 

 

(1,962)

Deferred product revenues

 

(15)

 

 

6,025 

Deferred services revenues

 

(4,066)

 

 

10,271 

Other assets and liabilities

 

1,702 

 

 

585 

Net cash provided by operating activities

 

3,842 

 

 

12,799 

Investing activities:

 

 

 

 

 

Sales of available-for-sale investments

 

22,785 

 

 

13,576 

Purchases of available-for-sale investments

 

(32,167)

 

 

(22,100)

Purchases of property and equipment

 

(13,078)

 

 

(12,893)

Capitalized internal use software cost

 

(6,339)

 

 

(208)

Acquisitions, net of cash acquired

 

(9,297)

 

 

(725)

Unrealized loss (gain) on investment

 

18 

 

 

(54)

Net cash used in investing activities

 

(38,078)

 

 

(22,404)

Financing activities:

 

 

 

 

 

Proceeds from stock options exercised

 

4,971 

 

 

7,569 

Proceeds from issuance of common stock

 

543 

 

 

404 

Tax withholding on restricted stock awards

 

(2,625)

 

 

(899)

Excess tax benefit from stock-based payment arrangements

 

 

 

525 

Net cash provided by financing activities

 

2,889 

 

 

7,599 

Net decrease in cash and cash equivalents

 

(31,347)

 

 

(2,006)

Cash and cash equivalents, beginning of period

 

65,881 

 

 

45,057 

Cash and cash equivalents, end of period

$

34,534 

 

$

43,051 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

 -

 

$

 -

Income taxes

 

1,687 

 

 

6,954 

 

 

 

 

 

 

Other non-cash item:

 

 

 

 

 

Purchase of property and equipment payable at end of period

 

892 

 

 

355 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

5

 


 

     

Interactive Intelligence Group, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2014 and 2013 (unaudited)

 

1.FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Interactive Intelligence Group, Inc. (“the Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions for Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, certain information and note disclosures normally included in the Company’s financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

 

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, at the respective balance sheet dates, and the reported amounts of revenues and expenses during the respective reporting periods. Despite management’s best effort to establish good faith estimates and assumptions, actual results could differ from these estimates. In management’s opinion, the Company’s accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature, except as otherwise noted) for the fair presentation of the results of the interim periods presented.

 

The Company’s accompanying condensed consolidated financial statements as of December 31, 2013 have been derived from the Company’s audited consolidated financial statements at that date but do not include all of the information and notes required by GAAP for complete financial statements. These accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2013, included in the Company’s most recent Annual Report on Form 10-K as filed with the SEC on March 12, 2014. The Company’s results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. 

 

Revisions and Adjustments

   

Effective January 1, 2014, the Company revised certain personnel related expenses which were included in cost of recurring revenues in prior periods to sales and marketing expenses. In prior years, these costs were not significant; however, as these costs have continued to increase in line with the Company’s growth strategy related to its cloud offerings, the Company concluded that it is appropriate to report these personnel related expenses as sales and marketing. For the three and six months ended June 30, 2013,  $209,000 and $418,000  have been revised to sales and marketing expenses based on this new expense presentation. The revision did not have any impact on the overall results previously reported.  

 

 

 

2.SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING  PRONOUNCEMENTS

 

For a complete summary of the Company’s significant accounting policies and critical accounting estimates, refer to Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) 2013-11, Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This updated guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. This ASU does not require new recurring disclosures. The Company adopted this guidance in the first quarter of 2014 and noted no material impact on its consolidated financial statements upon adoption.

 

In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (“FASB ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. FASB ASU No. 2014-09 will replace most existing GAAP revenue recognition guidance when it becomes

6

 


 

     

effective. This guidance becomes effective for the Company on January 1, 2017. Early adoption is not permitted. This guidance permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that FASB ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

 

The Company capitalizes costs related to its next generation cloud communication platform and certain projects for internal use in accordance with FASB Accounting Standards Codification (“ASC”) 350-40, Internal Use Software. Once a solution has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. The capitalization of costs ceases upon completion of all substantial testing. Costs incurred in the preliminary stages of development, maintenance and training costs are expensed as incurred. During the three and six months ended June 30, 2014, the Company capitalized $2.7 million and $4.5 million, respectively, of costs related to the development of its next generation cloud communication platform. The Company will continue to capitalize development costs related to this project and will begin amortizing such costs once the software is released for general availability, which is expected to be in the fourth quarter of 2014.

 

Additionally, in 2013 the Company purchased new business software to meet its internal administrative needs and it has no plans to market such software externally. During the three and six months ended June 30, 2014, the Company capitalized $0.8 million and $1.4 million, respectively, of costs associated with development and implementation of this software. 

 

During the three and six months ended June 30, 2014, there were no other material changes to the Company’s significant accounting policies or critical accounting estimates.

 

 

 

3.NET INCOME (LOSS) PER SHARE 

 

Basic net income (loss) per share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. Potential common shares consist of shares of common stock issuable upon the exercise of stock options and vesting of restricted stock units (“RSUs”). The calculation of diluted net income per share excludes shares underlying stock options outstanding that would be anti-dilutive. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2014

 

2013

 

2014

 

2013

Net income (loss), as reported (A)

 

$

(6,798)

 

$

2,901 

 

$

(9,362)

 

$

4,358 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding (B)

 

 

20,851 

 

 

19,946 

 

 

20,771 

 

 

19,826 

Dilutive effect of employee stock options and RSUs

 

 

 -

 

 

989 

 

 

 -

 

 

1,021 

Common stock and common stock equivalents (C)

 

 

20,851 

 

 

20,935 

 

 

20,771 

 

 

20,847 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

(0.33)

 

$

0.15 

 

$

(0.45)

 

$

0.22 

Diluted (A/C)

 

 

(0.33)

 

 

0.14 

 

 

(0.45)

 

 

0.21 

 

The Company’s calculation of diluted net income (loss) per share for the three and six months ended June 30, 2014 excludes RSUs and stock options to purchase approximately 969,000 and 1.1 million  shares  of the Company’s common stock, respectively, as their effect would be anti-dilutive, compared to 253,000 and 223,000 during the same periods in 2013.  

 

 

4.INVESTMENTS

 

FASB ASC 820, as amended, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes the following three levels of inputs that may be used to measure fair value:

 

7

 


 

     

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  

 

·

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company’s short-term investments all mature in less than one year and its long-term investments all mature within three years. Both short-term and long-term investments are considered available for sale. The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include money market securities. Such instruments are classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include corporate notes, agency bonds, commercial paper, certificates of deposit and U.S. government securities. Such instruments are classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. 

 

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents, short-term investments and long-term investments on its condensed consolidated balance sheets, measured at fair value as of June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2014 Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash & cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

30,399 

 

$

30,399 

 

$

 -

 

$

 -

Money market funds

 

 

4,135 

 

 

4,135 

 

 

 -

 

 

 -

Total

 

$

34,534 

 

$

34,534 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Agency bonds

 

$

1,002 

 

$

 -

 

$

1,002 

 

$

 -

Corporate notes

 

 

33,717 

 

 

 -

 

 

33,717 

 

 

 -

Commercial paper

 

 

3,945 

 

 

 -

 

 

3,945 

 

 

 -

Total

 

$

38,664 

 

$

 -

 

$

38,664 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

11,783 

 

$

 -

 

$

11,783 

 

$

 -

US government securities

 

 

1,001 

 

 

 -

 

 

1,001 

 

 

 -

Total

 

$

12,784 

 

$

 -

 

$

12,784 

 

$

 -

 

8

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2013 Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash & cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

57,715 

 

$

57,715 

 

$

 -

 

$

 -

Money market funds

 

 

8,166 

 

 

8,166 

 

 

 -

 

 

 -

Total

 

$

65,881 

 

$

65,881 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Agency bonds

 

$

1,008 

 

$

 -

 

$

1,008 

 

$

 -

Corporate notes

 

 

28,307 

 

 

 -

 

 

28,307 

 

 

 -

Commercial paper

 

 

2,297 

 

 

 -

 

 

2,297 

 

 

 -

Certificates of deposit

 

 

550 

 

 

 -

 

 

550 

 

 

 -

Total

 

$

32,162 

 

$

 -

 

$

32,162 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

9,787 

 

$

 -

 

$

9,787 

 

$

 -

Total

 

$

9,787 

 

$

 -

 

$

9,787 

 

$

 -

 

 

 

 

5.ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

 

The Company records unbilled accounts receivable, which represents amounts recognized as revenues for invoices that have not yet been sent to customers. This balance fluctuates depending on the contractual billing milestones and work performed related to projects specified in the contract. When the work performed is ahead of the billing milestones related to a services engagement, unbilled accounts receivable will be recorded. The balance of unbilled accounts receivable recorded as of June 30, 2014 and December 31, 2013 was $9.4 million and $6.5 million, respectively.

 

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of June 30, 2014 or December 31, 2013 or for more than 10% of the Company’s revenues for the three and six months ended June 30, 2014 or 2013. The Company’s top five customers or partners collectively represented 19% and 27% of the Company’s accounts receivables balance at June 30, 2014 and December 31, 2013, respectively.

 

No individual country accounted for more than 10% of the Company’s revenues except for the United States, which accounted for 62% and 63% of the Company’s revenues in the three and six months ended June 30, 2014, and 64% and 65% of the Company’s revenues in the three and six months ended June 30, 2013, respectively. The Company attributes revenues to countries based on the country in which the customer or partner is located.

 

 

6.

STOCK-BASED COMPENSATION

 

Stock Option Plans

 

The Company’s stock option plans, adopted in 1995, 1999 and 2006, authorize the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options, and, in the case of the 2006 Equity Incentive Plan, as amended and as assumed by the Company (the “2006 Plan”), stock appreciation rights, restricted stock, RSUs, performance shares, performance units and other stock-based awards. After adoption of the 2006 Plan by the Company’s shareholders in May 2006, the Company may no longer make any grants under previous plans, but any shares subject to awards under the 1999 Stock Option and Incentive Plan and the Outside Directors Stock Option Plan (collectively, the “1999 Plans”) that are cancelled are added to shares available under the 2006 Plan. At the Company’s 2013 Annual Meeting of Shareholders held on May 22, 2013, the Company’s shareholders approved an amendment to the 2006 Plan to increase the number of shares available for issuance under the 2006 Plan by 2,000,000 shares. A maximum of 9,050,933 shares are available for delivery under the 2006 Plan, which consists of (i) 5,350,000 shares, plus (ii) 320,000 shares available for issuance under the 1999 Plans, but not underlying any outstanding stock options or other awards under the 1999 Plans, plus (iii) up to 3,380,933 shares subject to outstanding stock options or other awards under the 1999 Plans that expire, are forfeited or otherwise terminate unexercised on or after May 18, 2006. The number of shares available under the 2006 Plan is subject to adjustment for certain changes in the Company’s capital structure. The exercise price of options granted under the 2006 Plan is equal to the closing price of the Company’s common stock, as reported by The NASDAQ Global Select Market, on

9

 


 

     

the business day immediately preceding the date of grant. As of June 30, 2014, there were approximately 1.8 million shares of stock available for issuance for equity compensation awards under the 2006 Plan.

 

The Company grants RSUs and three types of stock options. The first type of stock option is non-performance-based subject only to time-based vesting, and these stock options are granted by the Company as annual grants to executives, to certain new employees and to newly-elected non-employee directors.  These stock options vest in four equal annual installments beginning one year after the grant date.  The fair value of these option grants is determined on the date of grant and the related compensation expense is recognized for the entire award on a straight-line basis over the requisite service period.  

 

The second type of stock option granted by the Company is performance-based subject to cancellation if the specified performance targets are not met. If the applicable performance targets have been achieved, the options will vest in four equal annual installments beginning one year after the performance-related period has ended. The fair value of these stock option grants is determined on the date of grant and the related compensation expense is recognized over the requisite service period, including the initial period for which the specified performance targets must be met.

 

The third type of stock option granted by the Company is director options granted to non-employee directors annually. These options are similar to the non-performance-based options described above except that the director options vest one year after the grant date. The fair value of these option grants is determined on the date of the grant and the related compensation expense is recognized over one year. These director options are generally granted at the Company’s Annual Meeting of Shareholders during the second quarter of each fiscal year.

 

The Company grants RSUs to certain key employees, executives and certain new employees. The fair value of the RSUs is determined on the date of grant and the RSUs vest in four equal annual installments beginning one year after the grant date. RSUs are not included in issued and outstanding common stock until the shares are vested and settlement has occurred.

 

The plans may be terminated by the Company’s Board of Directors at any time.

 

Stock-Based Compensation Expense Information

 

The following table summarizes the allocation of stock-based compensation expense related to employee and director stock options and RSUs under FASB ASC Topic 718,  Compensation – Stock Compensation (“FASB ASC 718”) for the three and six months ended June 30, 2014 and 2013 (in thousands except for per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2014

 

2013

 

2014

 

2013

Stock-based compensation expense by category:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of recurring revenues

 

$

367 

 

$

208 

 

$

674 

 

$

375 

Costs of services revenues

 

 

115 

 

 

67 

 

 

221 

 

 

116 

Sales and marketing

 

 

1,037 

 

 

817 

 

 

2,133 

 

 

1,625 

Research and development

 

 

1,352 

 

 

693 

 

 

2,306 

 

 

1,309 

General and administrative

 

 

825 

 

 

576 

 

 

1,602 

 

 

1,110 

Total stock-based compensation expense

 

$

3,696 

 

$

2,361 

 

$

6,936 

 

$

4,535 

 

Stock Option and RSU Valuation 

 

The Company estimated the fair value of stock options using the Black-Scholes valuation model. During the fourth quarter of 2013, the Company re-evaluated the expected life of its stock options based on historical exercise data by reviewing the exercise, expiration and termination patterns of the Company’s three types of stock options. Based on the results of this analysis: the expected life of performance-based stock options issued in the first quarter of 2014 changed from an expected life of 4.75 years used in 2013 to an expected life of 4.5 years,  the expected life of non-performance-based stock options issued in the first quarter of 2014 changed from an expected life of 4.25 years used in 2013 to an expected life of 4.0 years and the expected life of annual director options issued in the second quarter of 2014 changed from an expected life of 3.5 years used in 2013 to an expected life of 4.0 years.  

 

10

 


 

     

Non-performance-based options are granted during the year to newly-elected non-employee directors, if any, during the second quarter of each year to non-employee directors, and during the first quarter of each year to senior management. Performance-based options are only granted to sales employees during the first quarter of each year. The weighted-average estimated per option value of non-performance-based and performance-based options granted under the 2006 Plan during the six months ended June 30, 2014 and 2013 used the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

Valuation assumptions for non-performance-based options:

 

2014

 

2013

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

60.89 

%

 

55.67 - 55.80

%

Risk-free interest rate

 

1.17 

%

 

0.61 -  0.63

%

Expected life of option (in years)

 

4.00 

 

 

4.25 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

Valuation assumptions for performance-based options:

 

2014

 

2013

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

61.00 

%

 

57.56 

%

Risk-free interest rate

 

1.39 

%

 

0.73 

%

Expected life of option (in years)

 

4.50 

 

 

4.75 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

Valuation assumptions for annual director options

 

2014

 

2013

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

61.70 

%

 

49.33 

%

Risk-free interest rate

 

1.17 

%

 

0.54 

%

Expected life of option (in years)

 

4.00 

 

 

3.50 

 

 

RSUs are valued using the fair market value of the Company’s stock on the date of grant and expense is recognized on a straight line basis taking into account an estimated forfeiture rate.   

 

Stock Option and RSU Activity

 

The following table sets forth a summary of stock option activity for the six months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

 

Exercise

 

Options

 

Price

Balances, beginning of year

 

1,852,620 

 

$

22.25 

Options granted

 

271,250 

 

 

63.69 

Options exercised

 

(372,306)

 

 

13.18 

Options cancelled, forfeited or expired

 

(1,250)

 

 

17.11 

Options outstanding

 

1,750,314 

 

 

30.61 

Option price range

$

3.56 - 66.39

 

 

 

Weighted-average fair value of options granted

$

31.92 

 

 

 

Options exercisable

 

1,005,316 

 

 

21.18 

 

11

 


 

     

The following table sets forth information regarding the Company’s stock options outstanding and exercisable as of June 30, 2014: