UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

____________

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended March 31, 2015

 

Or

 

 

For the transition period from ____________to____________

 

Commission File Number: 000-54450

 

 

INTERACTIVE INTELLIGENCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

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 ☐

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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).

 

 

 

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):

 

 

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 April 30, 2015, there were 21,546,272 shares outstanding of the registrant’s common stock, $0.01 par value.

 

 

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TABLE OF CONTENTS

 

 

 

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PART I. FINANCIAL INFORMATION

 

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

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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See Accompanying Notes to Condensed Consolidated Financial Statements

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See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

 

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See Accompanying Notes to Condensed Consolidated Financial Statements

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Interactive Intelligence Group, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2015 and 2014 (unaudited)

 

1.FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Interactive Intelligence Group, Inc. (“the Company,” “we,” “us” and “our”) 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, 2014 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, 2014, included in the Company’s most recent Annual Report on Form 10-K as filed with the SEC on February 27, 2015. 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

   

During the third quarter of 2014, the Company revised certain personnel related expenses which were included in cost of recurring revenues in prior periods to sales and marketing expenses. For the three months ended March 31, 2014,  $700,000 has 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, 2014.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“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 U.S. GAAP revenue recognition guidance when it becomes effective. As already issued, the new standard is effective for the Company on January 1, 2017, and early adoption is not permitted.  In April 2015, the FASB voted to propose a one-year deferral of the effective date of the new revenue recognition standard. If the deferral is approved, the new standard will become effective for the Company beginning with the first quarter of 2018. 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.

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The Company capitalizes costs related to its PureCloud PlatformSM and certain projects described below 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 months ended March 31, 2015 and 2014, the Company capitalized $5.6 million and $1.8 million, respectively, of costs related to the development of its PureCloud Platform. The Company began amortizing the development costs related to PureCloud CollaborateSM during the first quarter of 2015. The Company will continue to capitalize development costs related to other services provided under the PureCloud Platform and will begin amortizing such costs once those services are released for general availability.

 

Additionally, the Company is implementing new business systems to meet its internal business needs. The Company has no plans to market such software externally. During the three months ended March 31, 2015 and 2014, the Company capitalized $0.9 million and $0.6 million, respectively, of costs associated with development and implementation of these systems.

 

During the three months ended March 31, 2015, there were no other material changes to the Company’s significant accounting policies or critical accounting estimates.

 

 

3.NET LOSS PER SHARE

 

Basic net 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. 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. 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 loss per share excludes shares underlying stock options outstanding that would be anti-dilutive. The following table sets forth the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

 

 

The Company’s calculation of diluted net loss per share for the three months ended March 31, 2015 and 2014 excludes RSUs and stock options to purchase approximately 374,000 and 214,000 shares of the Company’s common stock, respectively.

 

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:

 

 

 

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 March 31, 2015 and December 31, 2014 (in thousands):

 

 

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5.ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

 

The Company evaluates the creditworthiness of its customers and partners on a periodic basis and generally does not require collateral. 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 March 31, 2015 and December 31, 2014 was $8.4 million and $8.0 million, respectively.

 

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of March 31, 2015 or December 31, 2014 or for more than 10% of the Company’s revenues for the three months ended March 31, 2015 or 2014. The Company’s top five partners collectively represented 14% and 17% of the Company’s accounts receivables balance at March 31, 2015 and December 31, 2014, respectively.

 

 

Stock Option Plan

 

The Company’s  2006 Equity Incentive Plan, as amended and as assumed by Interactive Intelligence Group, Inc. (the “2006 Plan”) authorizes the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options, 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. 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 which increased 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. 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 March 31, 2015, there were 1,559,923 shares of stock available for issuance for equity compensation awards under the 2006 Plan.

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During 2014 and prior, the Company granted RSUs and three types of stock options. The first type of stock option was non-performance-based subject only to time-based vesting, and these stock options were 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 was 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 was director options granted to non-employee directors annually. These options were 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.

 

Beginning in 2015, the Company ceased granting stock options. The Company now only grants performance-based and non-performance based RSUs to directors, executives, certain key employees, and certain new employees, and the fair value of the RSUs is determined on the date of grant. Non-performance based RSUs vest in four equal annual installments beginning one year after the grant date. Performance-based RSUs vest in four equal annual installments once the individual has achieved the performance targets. 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 months ended March 31, 2015 and 2014 (in thousands):

 

 

During the three months ended March 31, 2015, the Company capitalized $630,000 of stock-based compensation expense related to capitalized software. No stock-based compensation expenses were capitalized during the three months ended March 31, 2014.

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Stock Option and RSU Valuation

 

The Company estimated the fair value of stock options using the Black-Scholes valuation model.

 

There were no stock options granted during the first quarter of 2015. The weighted-average estimated per option value of non-performance-based and performance-based options granted under the 2006 Plan during the three months ended March 31, 2014 used the following assumptions:

 

 

 

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 three months ended March 31, 2015:

 

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The following table sets forth information regarding the Company’s stock options outstanding and exercisable as of March 31, 2015:

 

 

The total intrinsic value of options exercised during the quarter ended ended March 31, 2015 was $2.0 million. The aggregate intrinsic value of options outstanding as of March 31, 2015 was $14.3 million and the aggregate intrinsic value of options currently exercisable as of March 31, 2015 was $12.4 million. The aggregate intrinsic value represents the total intrinsic value, based on the Company’s closing stock price per share of $41.18 as of March 31, 2015, which would have been realized by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of March 31, 2015 represented approximately 796,540 shares with a weighted average exercise price of $25.60.

 

As of March 31, 2015, there was $7.1 million of total unrecognized compensation expense related to non-vested stock options. This expense is expected to be recognized over the weighted average remaining vesting period of 1.75 years.

 

The following table sets forth a summary of RSU activity for the three months ended March 31, 2015:

 

As of March 31, 2015, there was $36.1 million of total unrecognized compensation expense related to non-vested RSUs. This expense is expected to be recognized over the weighted average remaining vesting period of 2.78 years.

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The Company’s effective tax rate for the three months ended March 31, 2015 was (4.7%) without the effects of a discrete item, compared to 43.4% for the same period in 2014.  During the three months ended March 31, 2015, the Company recorded a net credit to income taxes of $1.9 million to correct an error in the Company’s valuation reserve for deferred tax assets.  The error is not considered material to the current or previously reported results.  With the effects of this discrete item, the Company’s effective tax rate was 28.3%.  The Company’s effective tax rate for the three months ended March 31, 2015 was lower than the federal statutory tax rate of 35.0% primarily due to the allocation of book operating results between the US and foreign entities and the impact of permanent tax differences on pre-tax operating results for the quarter.    

 

8.COMMITMENTS AND CONTINGENCIES

Legal Proceedings

 

From time to time, the Company has received notification from competitors and other technology providers claiming that the Company’s technology infringes upon their proprietary rights. The Company cannot assure you that these matters can be resolved amicably without litigation, or that the Company will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on its business, financial condition or results of operations.

 

From time to time, the Company is also involved in certain legal proceedings in the ordinary course of conducting its business. While the ultimate liability pursuant to these actions cannot currently be determined, the Company believes these legal proceedings will not have a material adverse effect on its financial position or results of operations. Litigation, in general, and intellectual property litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

 

Guarantees

The Company provides indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of its solutions. The Company’s direct software license agreements include certain provisions for indemnifying customers, in material compliance with their license agreement, against liabilities if the Company’s software products infringe upon a third party's intellectual property rights, over the life of the agreement. There is no maximum potential amount of future payments set under the guarantee. However, the Company may at any time and at its option and expense:  (i) procure the right of the customer to continue to use the Company’s software that may infringe a third party’s rights; (ii) modify its software so as to avoid infringement; or (iii) require the customer to return its software and refund the customer the fee actually paid by the customer for its software less depreciation based on a five-year straight-line depreciation schedule. The customer’s failure to provide timely notice or reasonable assistance will relieve the Company of its obligations under this indemnification to the extent that it has been actually and materially prejudiced by such failure. To date, the Company has not incurred, nor does it expect to incur, any material related costs and, therefore, has not reserved for such liabilities, in accordance with FASB ASC Topic 460, Guarantees.  

The Company’s software license agreements also include a warranty that its software products will substantially conform to its software user documentation for a period of one year, provided the customer is in material compliance with the software license agreement. To date, the Company has not incurred any material costs associated with these product warranties, and as such, has not reserved for any such warranty liabilities in its operating results.

Lease Commitments

 

The Company’s world headquarters are located in approximately 315,000 square feet of space in three office buildings in Indianapolis, Indiana. This space was formerly leased pursuant to that certain Office Lease Agreement (the “Office Lease”), dated April 1, 2001, between the Company and Duke Realty Limited Partnership (formerly Duke-Weeks Realty Limited Partnership), as amended.  On May 6, 2014, the Company entered into a lease termination agreement with Duke Realty Limited Partnership, whereby the Office Lease (and the eight amendments thereto) was terminated.  In place of such Office Lease and amendments, on May 6, 2014, the Company entered into new separate lease agreements with Duke Realty Limited Partnership for each of the three office buildings, one of which expires on March 31, 2018 and two of which expire on or after June 30, 2025.

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On May 6, 2014, the Company also entered into a lease agreement with Duke Construction Limited Partnership to expand its world headquarters to include a fourth, build-to-suit office building in Indianapolis, Indiana.  The target date for completion of construction of the fourth office building is mid-2015 and the lease term expires 10 years after construction is completed.

 

The following amounts set forth in the table are as of March 31, 2015 (in thousands):