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EX-31.2 - EX-31.2 - Interactive Intelligence Group, Inc.inin-20140930ex312db3023.htm

     

 

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 September 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 October  31, 2014,  there were 21,088,047 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 September 30, 2014 and December 31, 2013

2

 

 

 

 

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

3

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2014 

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

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.

31

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

31

 

 

 

Item 1A.

Risk Factors.

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

32

 

 

 

Item 6.

Exhibits.

33

 

 

 

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 September 30, 2014 and December 31, 2013

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

Assets

 

unaudited

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,263 

 

$

65,881 

Short-term investments

 

 

29,608 

 

 

32,162 

Accounts receivable, net of allowance for doubtful accounts

 

 

 

 

 

 

of $840 at September 30, 2014 and  $1,233 at December 31, 2013

 

 

70,934 

 

 

80,414 

Deferred tax assets, net

 

 

30,585 

 

 

23,684 

Prepaid expenses

 

 

28,706 

 

 

21,989 

Other current assets

 

 

18,401 

 

 

13,566 

Total current assets

 

 

208,497 

 

 

237,696 

Long-term investments

 

 

9,679 

 

 

9,787 

Property and equipment, net

 

 

42,498 

 

 

36,919 

Goodwill

 

 

44,560 

 

 

37,298 

Intangible assets, net

 

 

24,208 

 

 

20,613 

Other assets, net

 

 

26,328 

 

 

10,909 

Total assets

 

$

355,770 

 

$

353,222 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,297 

 

$

8,727 

Accrued liabilities

 

 

15,570 

 

 

15,162 

Accrued compensation and related expenses

 

 

18,421 

 

 

17,494 

Deferred product revenues

 

 

6,459 

 

 

10,412 

Deferred recurring revenues

 

 

72,193 

 

 

70,762 

Deferred services revenues

 

 

8,987 

 

 

10,868 

Total current liabilities

 

 

130,927 

 

 

133,425 

Long-term deferred revenues

 

 

19,828 

 

 

23,914 

Deferred tax liabilities, net

 

 

1,565 

 

 

2,388 

Other long-term liabilities

 

 

7,323 

 

 

4,140 

Total liabilities

 

 

159,643 

 

 

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;

 

 

 

 

 

 

21,051,145 issued and outstanding at September 30, 2014,

 

 

 

 

 

 

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

 

 

211 

 

 

205 

Additional paid-in capital

 

 

190,448 

 

 

170,072 

Accumulated other comprehensive loss, net of tax

 

 

(3,782)

 

 

(1,676)

Retained earnings

 

 

9,250 

 

 

20,754 

Total shareholders' equity

 

 

196,127 

 

 

189,355 

Total liabilities and shareholders' equity

 

$

355,770 

 

$

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 Nine Months Ended September 30, 2014 and 2013

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

27,764 

 

$

26,913 

 

$

72,158 

 

$

82,813 

Recurring

 

 

48,095 

 

 

37,537 

 

 

136,121 

 

 

106,470 

Services

 

 

13,603 

 

 

13,519 

 

 

40,461 

 

 

38,166 

Total revenues

 

 

89,462 

 

 

77,969 

 

 

248,740 

 

 

227,449 

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of product

 

 

6,932 

 

 

6,599 

 

 

20,269 

 

 

21,691 

Costs of recurring

 

 

16,816 

 

 

11,466 

 

 

46,196 

 

 

31,423 

Costs of services

 

 

11,550 

 

 

9,609 

 

 

33,365 

 

 

27,316 

Amortization of intangible assets

 

 

177 

 

 

49 

 

 

363 

 

 

147 

Total costs of revenues

 

 

35,475 

 

 

27,723 

 

 

100,193 

 

 

80,577 

Gross profit

 

 

53,987 

 

 

50,246 

 

 

148,547 

 

 

146,872 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

30,651 

 

 

24,765 

 

 

89,559 

 

 

74,306 

Research and development

 

 

15,528 

 

 

12,348 

 

 

45,233 

 

 

38,040 

General and administrative

 

 

10,800 

 

 

8,994 

 

 

32,124 

 

 

25,192 

Amortization of intangible assets

 

 

472 

 

 

464 

 

 

1,420 

 

 

1,395 

Total operating expenses

 

 

57,451 

 

 

46,571 

 

 

168,336 

 

 

138,933 

Operating income (loss)

 

 

(3,464)

 

 

3,675 

 

 

(19,789)

 

 

7,939 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

274 

 

 

169 

 

 

831 

 

 

618 

Other expense

 

 

(279)

 

 

(476)

 

 

(665)

 

 

(1,851)

Total other income (expense)

 

 

(5)

 

 

(307)

 

 

166 

 

 

(1,233)

Income (loss) before income taxes

 

 

(3,469)

 

 

3,368 

 

 

(19,623)

 

 

6,706 

Income tax benefit (expense)

 

 

1,326 

 

 

(1,741)

 

 

8,119 

 

 

(721)

Net income (loss)

 

$

(2,143)

 

$

1,627 

 

$

(11,504)

 

$

5,985 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(2,641)

 

 

(461)

 

 

(1,985)

 

 

(340)

Unrealized investment gain (loss) - net of tax

 

 

(95)

 

 

78 

 

 

(121)

 

 

(150)

Comprehensive income (loss)

 

$

(4,879)

 

$

1,244 

 

$

(13,610)

 

$

5,495 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10)

 

$

0.08 

 

$

(0.55)

 

$

0.30 

Diluted

 

 

(0.10)

 

 

0.08 

 

 

(0.55)

 

 

0.29 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,904 

 

 

20,112 

 

 

20,851 

 

 

19,922 

Diluted

 

 

20,904 

 

 

21,180 

 

 

20,851 

 

 

20,978 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statement of Shareholders' Equity

For the Nine Months Ended September 30, 2014

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Earnings

 

Total

Balances, December 31, 2013

20,504 

 

$

205 

 

$

170,072 

 

$

(1,676)

 

$

20,754 

 

$

189,355 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 -

 

 

 -

 

 

11,209 

 

 

 -

 

 

 -

 

 

11,209 

Issuances of restricted shares

 -

 

 

 -

 

 

4,692 

 

 

 -

 

 

 -

 

 

4,692 

Exercise of stock options

456 

 

 

 

 

6,448 

 

 

 -

 

 

 -

 

 

6,454 

Issuances of common stock

15 

 

 

 -

 

 

914 

 

 

 -

 

 

 -

 

 

914 

Issuance of restricted stock units, net of tax withholdings

76 

 

 

 -

 

 

(2,704)

 

 

 -

 

 

 -

 

 

(2,704)

Reduction of tax benefits from stock-based payment arrangements

 -

 

 

 -

 

 

(183)

 

 

 -

 

 

 -

 

 

(183)

Net loss

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(11,504)

 

 

(11,504)

Foreign currency translation adjustment

 -

 

 

 -

 

 

 -

 

 

(1,985)

 

 

 -

 

 

(1,985)

Net unrealized investment loss - net of tax

 -

 

 

 -

 

 

 -

 

 

(121)

 

 

 -

 

 

(121)

Balances, September 30, 2014

21,051 

 

$

211 

 

$

190,448 

 

$

(3,782)

 

$

9,250 

 

$

196,127 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

4

 


 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2014 and 2013

(in thousands)

(unaudited)

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2014

 

2013

Operating activities:

 

 

 

 

 

Net income (loss)

$

(11,504)

 

$

5,985 

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

 

 

 

 

 

Depreciation

 

11,376 

 

 

7,665 

Amortization

 

1,783 

 

 

1,542 

Other non-cash items

 

(520)

 

 

1,549 

Stock-based compensation expense

 

10,278 

 

 

6,953 

Excess tax benefit from stock-based payment arrangements

 

 -

 

 

(3,352)

Deferred income tax

 

(7,906)

 

 

4,766 

Amortization (accretion) of investment premium (discount)

 

193 

 

 

(260)

Loss on disposal of fixed assets

 

40 

 

 

 -

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

9,480 

 

 

4,062 

Prepaid expenses

 

(6,663)

 

 

(6,522)

Other current assets

 

(5,004)

 

 

(12,758)

Accounts payable

 

570 

 

 

4,384 

Accrued liabilities

 

487 

 

 

(8,001)

Accrued compensation and related expenses

 

927 

 

 

276 

Deferred product revenues

 

(3,957)

 

 

5,732 

Deferred recurring revenues

 

1,431 

 

 

1,707 

Deferred services revenues

 

(5,963)

 

 

9,213 

Other assets and liabilities

 

1,887 

 

 

603 

Net cash provided by (used in) operating activities

 

(3,065)

 

 

23,544 

Investing activities:

 

 

 

 

 

Sales of available-for-sale investments

 

35,350 

 

 

19,776 

Purchases of available-for-sale investments

 

(32,967)

 

 

(29,390)

Purchases of property and equipment

 

(17,072)

 

 

(18,732)

Capitalized internal use software cost

 

(13,320)

 

 

(2,889)

Acquisitions, net of cash acquired

 

(9,173)

 

 

(725)

Unrealized gain on investment

 

(35)

 

 

(20)

Net cash used in investing activities

 

(37,217)

 

 

(31,980)

Financing activities:

 

 

 

 

 

Proceeds from stock options exercised

 

6,454 

 

 

10,464 

Proceeds from issuance of common stock

 

914 

 

 

609 

Tax withholding on restricted stock awards

 

(2,704)

 

 

(961)

Excess tax benefit from stock-based payment arrangements

 

 -

 

 

3,352 

Net cash provided by financing activities

 

4,664 

 

 

13,464 

Net increase (decrease) in cash and cash equivalents

 

(35,618)

 

 

5,028 

Cash and cash equivalents, beginning of period

 

65,881 

 

 

45,057 

Cash and cash equivalents, end of period

$

30,263 

 

$

50,085 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

 -

 

$

Income taxes

 

2,389 

 

 

7,196 

 

 

 

 

 

 

Other non-cash item:

 

 

 

 

 

Purchase of property and equipment payable at end of period

 

2,944 

 

 

3,271 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

5

 


 

     

Interactive Intelligence Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 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 nine months ended September 30, 2013,  $243,000 and $661,000  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.  

 

During the third quarter of 2014, the Company revised certain additional personnel related expenses which were included in cost of recurring revenues in prior periods to sales and marketing expenses. For the nine months ended September 30, 2014,  $1.3 million has been revised to sales and marketing expenses based on this new expense presentation. The revision did not have any impact on the quarterly results for 2014 or 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

6

 


 

     

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 2014-09 will replace most existing GAAP revenue recognition guidance when it becomes 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 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 nine months ended September 30, 2014, the Company capitalized $5.1 million and $9.6 million, respectively, of costs related to the development of its next generation cloud communication platform, compared to the capitalization of $1.7 million during the same periods in 2013. 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 nine months ended September 30, 2014, the Company capitalized $0.5 million and $1.9 million, respectively, of costs associated with development and implementation of this software. 

 

During the three and nine months ended September 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 per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Net income (loss), as reported (A)

 

$

(2,143)

 

$

1,627 

 

$

(11,504)

 

$

5,985 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding (B)

 

 

20,904 

 

 

20,112 

 

 

20,851 

 

 

19,922 

Dilutive effect of employee stock options and RSUs

 

 

 -

 

 

1,068 

 

 

 -

 

 

1,056 

Common stock and common stock equivalents (C)

 

 

20,904 

 

 

21,180 

 

 

20,851 

 

 

20,978 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

(0.10)

 

$

0.08 

 

$

(0.55)

 

$

0.30 

Diluted (A/C)

 

 

(0.10)

 

 

0.08 

 

 

(0.55)

 

 

0.29 

 

The Company’s calculation of diluted net income (loss) per share for the three and nine months ended September 30, 2014 excludes RSUs and stock options to purchase approximately 1.2 million and 1.0 million  shares  of the Company’s common stock, respectively, as their effect would be anti-dilutive,  and excludes stock options to purchase approximately 40,000 and 212,000 shares, respectively, during the same periods in 2013.  

 

 

7

 


 

     

4.INVESTMENTS 

 

FASB ASC Topic 820, Fair Value Measurement (“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:

 

·

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 and U.S government 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 and certificates of deposit. 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 September 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 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

 

$

27,278 

 

$

27,278 

 

$

 -

 

$

 -

Money market funds

 

 

2,985 

 

 

2,985 

 

 

 -

 

 

 -

Total

 

$

30,263 

 

$

30,263 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

 

27,260 

 

 

 -

 

 

27,260 

 

 

 -

Commercial paper

 

 

2,348 

 

 

 -

 

 

2,348 

 

 

 -

Total

 

$

29,608 

 

$

 -

 

$

29,608 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

8,678 

 

$

 -

 

$

8,678 

 

$

 -

US government securities

 

 

1,001 

 

 

1,001 

 

 

-

 

 

 -

Total

 

$

9,679 

 

$

1,001 

 

$

8,678 

 

$

 -

 

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 September 30, 2014 and December 31, 2013 was $10.1 million and $6.5 million, respectively.

 

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of September 30, 2014 or December 31, 2013 or for more than 10% of the Company’s revenues for the three and nine months ended September 30, 2014 or 2013. The Company’s top five customers or partners collectively represented 20% and 27% of the Company’s accounts receivables balance at September 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 64% and 63% of the Company’s revenues in the three and nine months ended September 30, 2014,  respectively, and 65% of the Company’s revenues in both the three and nine months ended September 30, 2013. 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 the business day immediately preceding the date of grant. As of September 30, 2014, there were approximately 1.8 million shares of

9

 


 

     

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 related 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 related 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 nine months ended September 30, 2014 and 2013 (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Stock-based compensation expense by category:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of recurring revenues

 

$

385 

 

$

213 

 

$

1,059 

 

$

588 

Costs of services revenues

 

 

117 

 

 

69 

 

 

338 

 

 

185 

Sales and marketing

 

 

1,248 

 

 

821 

 

 

3,381 

 

 

2,443 

Research and development

 

 

741 

 

 

689 

 

 

3,047 

 

 

1,998 

General and administrative

 

 

851 

 

 

629 

 

 

2,453 

 

 

1,739 

Total stock-based compensation expense

 

$

3,342 

 

$

2,421 

 

$

10,278 

 

$

6,956 

 

During the three and nine months ended September 30, 2014, the Company capitalized $931,000 of stock compensation expense related to the development of the Company’s next generation cloud communication platform.

 

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, 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 nine months ended September 30, 2014 and 2013 used the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

Valuation assumptions for non-performance-based options:

 

2014

 

2013

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

60.86 

%

 

49.85 - 55.80

%

Risk-free interest rate

 

1.43 

%

 

0.61 - 1.11

%

Expected life of option (in years)

 

4.00 

 

 

4.25 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

Valuation assumptions for performance-based options:

 

2014

 

2013

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

59.51 

%

 

57.56 

%

Risk-free interest rate

 

1.60 

%

 

0.73 

%

Expected life of option (in years)

 

4.50 

 

 

4.75 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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 nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

 

Exercise

 

Options

 

Price

Balances, beginning of year

 

1,852,620 

 

$

22.25 

Options granted

 

271,250 

 

 

63.70 

Options exercised

 

(455,661)

 

 

14.29 

Options cancelled, forfeited or expired

 

(49,500)

 

 

41.69 

Options outstanding

 

1,618,709 

 

 

30.84 

Option price range

$

4.31 - 66.39

 

 

 

Weighted-average fair value of options granted

$