Attached files
| file | filename |
|---|---|
| EX-10.2 - EXHIBIT 10.2 - IntraLinks Holdings, Inc. | exhibit102-secondamendedan.htm |
| EX-32.2 - EXHIBIT 32.2 - IntraLinks Holdings, Inc. | exhibit322il-20160930x10q.htm |
| EX-32.1 - EXHIBIT 32.1 - IntraLinks Holdings, Inc. | exhibit321il-20160930x10q.htm |
| EX-31.2 - EXHIBIT 31.2 - IntraLinks Holdings, Inc. | exhibit312il-20160930x10q.htm |
| EX-31.1 - EXHIBIT 31.1 - IntraLinks Holdings, Inc. | exhibit311il-20160930x10q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended September 30, 2016
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 001-34832
INTRALINKS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-8915510 | ||
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification Number) | ||
150 East 42nd Street 8th Floor New York, New York | 10017 | ||
(Address of principal executive offices) | (Zip Code) | ||
(212) 543-7700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 þ 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,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | 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 þ
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Class | Outstanding at October 28, 2016 | |
Common Stock, par value $0.001 per share | 57,755,261 | |
INTRALINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2016
Table of Contents
Page Number | |
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRALINKS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 47,862 | $ | 47,875 | ||||
Investments | — | 12,425 | ||||||
Accounts receivable, net of allowances of $5,801 and $4,265, respectively | 53,074 | 50,360 | ||||||
Prepaid expenses | 8,779 | 8,595 | ||||||
Other current assets | 3,454 | 3,399 | ||||||
Total current assets | 113,169 | 122,654 | ||||||
Fixed assets, net | 15,700 | 20,789 | ||||||
Capitalized software, net | 51,910 | 46,636 | ||||||
Goodwill | 229,848 | 224,383 | ||||||
Other intangibles, net | 21,561 | 38,106 | ||||||
Other non-current assets | 5,575 | 7,619 | ||||||
Total assets | $ | 437,763 | $ | 460,187 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,007 | $ | 10,094 | ||||
Current portion of long-term debt, net of debt issuance costs | 1,885 | 1,829 | ||||||
Deferred revenue | 56,291 | 52,005 | ||||||
Accrued expenses and other current liabilities | 26,577 | 29,856 | ||||||
Total current liabilities | 89,760 | 93,784 | ||||||
Long-term debt, net of debt issuance costs | 78,155 | 79,457 | ||||||
Other long-term liabilities | 4,640 | 4,795 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Undesignated preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding, respectively | — | — | ||||||
Common stock, $0.001 par value; authorized 300,000,000 shares; issued 59,162,325 and 58,434,464 shares; outstanding 57,752,961 and 58,434,464 shares, respectively | 59 | 58 | ||||||
Additional paid-in capital | 464,629 | 456,141 | ||||||
Accumulated deficit | (183,669 | ) | (169,594 | ) | ||||
Accumulated other comprehensive loss | (4,322 | ) | (4,454 | ) | ||||
Treasury stock, 1,409,634 and 0 shares of common stock at cost, respectively | (11,489 | ) | — | |||||
Total stockholders' equity | 265,208 | 282,151 | ||||||
Total liabilities and stockholders' equity | $ | 437,763 | $ | 460,187 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue | $ | 75,414 | $ | 69,588 | $ | 219,088 | $ | 204,869 | ||||||||
Cost of revenue | 19,401 | 19,304 | 59,007 | 57,189 | ||||||||||||
Gross profit | 56,013 | 50,284 | 160,081 | 147,680 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 32,897 | 29,496 | 96,236 | 91,666 | ||||||||||||
General and administrative | 15,614 | 18,652 | 50,795 | 55,406 | ||||||||||||
Product development | 6,858 | 6,859 | 20,828 | 19,107 | ||||||||||||
Total operating expenses | 55,369 | 55,007 | 167,859 | 166,179 | ||||||||||||
Income (loss) from operations | 644 | (4,723 | ) | (7,778 | ) | (18,499 | ) | |||||||||
Interest expense | 1,165 | 1,124 | 3,415 | 3,323 | ||||||||||||
Amortization of debt issuance costs | 143 | 143 | 429 | 429 | ||||||||||||
Other (income) expense, net | (133 | ) | 151 | 979 | 989 | |||||||||||
Net loss before income tax | (531 | ) | (6,141 | ) | (12,601 | ) | (23,240 | ) | ||||||||
Income tax expense | 700 | 420 | 1,474 | 1,164 | ||||||||||||
Net loss | $ | (1,231 | ) | $ | (6,561 | ) | $ | (14,075 | ) | $ | (24,404 | ) | ||||
Net loss per common share: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.43 | ) | ||||
Diluted | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.43 | ) | ||||
Weighted average number of shares: | ||||||||||||||||
Basic | 56,916,485 | 57,446,774 | 57,303,394 | 56,970,515 | ||||||||||||
Diluted | 56,916,485 | 57,446,774 | 57,303,394 | 56,970,515 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net loss | $ | (1,231 | ) | $ | (6,561 | ) | $ | (14,075 | ) | $ | (24,404 | ) | ||||
Change in foreign currency translation adjustment (1) | (19 | ) | (1,542 | ) | 132 | (2,554 | ) | |||||||||
Total other comprehensive (loss) income, net of tax | (19 | ) | (1,542 | ) | 132 | (2,554 | ) | |||||||||
Comprehensive loss | $ | (1,250 | ) | $ | (8,103 | ) | $ | (13,943 | ) | $ | (26,958 | ) | ||||
(1) Net of tax benefit of $0.01 million and expense of $0.1 million for the three and nine months ended September 30, 2016, respectively, and net of tax benefit of $0 for both the three and nine months ended September 30, 2015
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended September 30, | ||||||||
2016 | 2015 | |||||||
Net loss | $ | (14,075 | ) | $ | (24,404 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 19,539 | 20,222 | ||||||
Amortization of intangible assets | 18,145 | 17,961 | ||||||
Stock-based compensation expense | 8,288 | 8,932 | ||||||
Other, net | 3,433 | 3,192 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (4,590 | ) | (7,419 | ) | ||||
Prepaid expenses and other assets | 278 | (2,510 | ) | |||||
Accounts payable | (4,351 | ) | 2,254 | |||||
Accrued expenses and other liabilities | (3,130 | ) | 349 | |||||
Deferred revenue | 3,525 | 3,577 | ||||||
Net cash provided by operating activities | 27,062 | 22,154 | ||||||
Cash flows from investing activities: | ||||||||
Capitalized software development costs | (19,108 | ) | (18,594 | ) | ||||
Capital expenditures | (1,413 | ) | (10,589 | ) | ||||
Maturities of investments | 12,384 | 6,750 | ||||||
Acquisition, net of cash acquired | (6,334 | ) | — | |||||
Purchase of a cost method investment | — | (1,000 | ) | |||||
Net cash used in investing activities | (14,471 | ) | (23,433 | ) | ||||
Cash flows from financing activities: | ||||||||
Purchases of treasury stock | (11,489 | ) | — | |||||
Payments on long-term debt | (1,727 | ) | (600 | ) | ||||
Other, net | 200 | 1,887 | ||||||
Net cash (used in) provided by financing activities | (13,016 | ) | 1,287 | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | 412 | (1,255 | ) | |||||
Net decrease in cash and cash equivalents | (13 | ) | (1,247 | ) | ||||
Cash and cash equivalents at beginning of period | 47,875 | 40,682 | ||||||
Cash and cash equivalents at end of period | $ | 47,862 | $ | 39,435 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
1. Intralinks Holdings, Inc. and Summary of Significant Accounting Policies
Intralinks Holdings, Inc. ("Intralinks Holdings") and its subsidiaries (collectively, the "Company") is a leading global provider of Software-as-a-Service ("SaaS") solutions for secure enterprise content collaboration within and among organizations. The Company was incorporated in Delaware in June 1996. The Company's cloud-based solutions enable organizations to manage, control, track, search, exchange and collaborate on sensitive information, inside and outside of the firewall, all within a secure and easy-to-use environment.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements include the accounts of Intralinks Holdings and its subsidiaries. All intercompany balances and transactions have been eliminated. The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all normal and recurring adjustments necessary for the fair statement of the Company's consolidated financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results to be expected for a full year. The financial statements contained herein are unaudited and should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of the Company's Consolidated Financial Statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
On an ongoing basis, the Company evaluates its estimates and assumptions including those related to (a) allowances for doubtful accounts and reserves for customer credits, (b) the fair values of the Company's single operating segment and reporting unit, goodwill, definite-lived intangible assets and long-term investments, (c) the recoverability of its definite-lived intangible assets, capitalized software and fixed assets (and their related useful lives), (d) certain components of the income tax provision (including the valuation allowance on net deferred tax assets and liabilities for uncertain tax positions), (e) accruals for certain compensation and benefit expenses and (f) the fair value of stock-based awards including estimated forfeitures of such awards. The Company bases its estimates, judgments and assumptions on historical experience, its forecasts and budgets and on various other factors that it believes to be reasonable under the circumstances.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue. ASU 2014-09 supersedes current revenue recognition guidance and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update deferred the effective date of implementation of ASU 2014-09 by one year and is now effective for annual and interim reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), amending the principal-versus-agent implementation guidance set forth in ASU 2014-09. The amendment clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance set forth in the FASB's new revenue standard related to identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
7
Expedients, which clarifies implementation guidance in ASU 2014-09 on assessing collectability, noncash consideration, presentation of sales tax and completed contracts and contract modifications at transition. The Company is currently evaluating the impact of the adoption of these standards on its Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related liability rather than as an asset. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the line-of-credit. As a result of the retrospective adoption of ASU 2015-03, at December 31, 2015, the Company reclassified capitalized deferred debt issuance costs of $0.5 million from "Other current assets" to "Current portion of long-term debt, net of debt issuance costs" and $1.0 million from "Other non-current assets" to "Long-term debt, net of debt issuance costs."
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for employee stock-based payment. This update provides clarification on guidance for employee share-based payments, in particular areas including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of these standards on its Consolidated Financial Statements.
2. Investments and Fair Value Measurements
The Company has classified its investments in corporate securities as held-to-maturity and, as such, has recorded them at amortized cost. Interest earned on these corporate securities is included in “Other expense (income), net” within the Consolidated Statements of Operations. The gross unrealized holding gains and losses for the three and nine months ended September 30, 2016 and 2015 were not material.
The Company held no investments at September 30, 2016. The following table summarizes these investments at December 31, 2015:
December 31, 2015 | ||||||||
Security Type | Remaining Maturity | Consolidated Balance Sheet Classification | Amortized Cost | |||||
(In thousands) | ||||||||
Corporate Securities | 15 to 202 Days | Investments (current) | $ | 12,425 | ||||
The Company categorizes its financial instruments measured at fair value into a three-level fair value hierarchy that prioritizes the inputs used in determining the fair value of the asset or liability. The three levels of the fair value hierarchy are as follows:
• | Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities; |
• | Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and |
• | Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability. |
8
The following tables present the Company's financial instruments that are measured at fair value on a recurring basis:
September 30, 2016 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Asset: | ||||||||||||||||
Money market funds as cash equivalents | $ | 16,331 | $ | 16,331 | $ | — | $ | — | ||||||||
December 31, 2015 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Asset: | ||||||||||||||||
Money market funds as cash equivalents | $ | 17,143 | $ | 17,143 | $ | — | $ | — | ||||||||
The Company's non-financial assets, which include goodwill, intangible assets, fixed assets, capitalized software and cost method investments, are adjusted to fair value only when an impairment charge is recognized. These fair value measurements are based predominantly on Level 3 inputs.
At September 30, 2016 and December 31, 2015, the carrying value of the Company's investments accounted for under the cost method totaled $3.0 million and $4.5 million, respectively, and are included in "Other non-current assets" on the Company's Consolidated Balance Sheets. During the nine months ended September 30, 2016, the Company recognized an impairment charge of $1.5 million related to the write-down of a cost method investment to its estimated fair value of zero. The decline in value was determined to be other-than-temporary due to the investee company’s inability to continue operations without new outside financing. The impairment charge is included in “Other (income) expense, net” in the Consolidated Statements of Operations.
3. Goodwill and Other Intangibles
At September 30, 2016 and December 31, 2015, the Company had $229.8 million and $224.4 million of goodwill, respectively. The additions to goodwill and other intangibles relate to the Company’s acquisition of Verilume, Inc., a cloud infrastructure company. The Company completed the purchase price allocation related to this transaction and recorded the acquired assets and assumed liabilities at their estimated fair values.
At September 30, 2016, other intangibles consisted of the following:
Definite–Lived Intangible Assets | ||||||||||||
Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||
(In thousands) | ||||||||||||
Customer relationships | $ | 141,973 | $ | (131,789 | ) | $ | 10,184 | |||||
Developed technology | 135,792 | (128,023 | ) | 7,769 | ||||||||
Trade name | 14,629 | (11,330 | ) | 3,299 | ||||||||
Non-compete agreements | 1,687 | (1,378 | ) | 309 | ||||||||
Total | $ | 294,081 | $ | (272,520 | ) | $ | 21,561 | |||||
At December 31, 2015, other intangibles consisted of the following:
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Definite–Lived Intangible Assets | ||||||||||||
Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||
(In thousands) | ||||||||||||
Customer relationships | $ | 141,973 | $ | (121,141 | ) | $ | 20,832 | |||||
Developed technology | 134,542 | (121,634 | ) | 12,908 | ||||||||
Trade name | 14,629 | (10,416 | ) | 4,213 | ||||||||
Non-compete agreements | 1,337 | (1,184 | ) | 153 | ||||||||
Total | $ | 292,481 | $ | (254,375 | ) | $ | 38,106 | |||||
Amortization of intangible assets is classified in each of the operating expense categories as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue | $ | 2,145 | $ | 2,083 | $ | 6,389 | $ | 6,248 | ||||||||
Sales and marketing | 3,550 | 3,549 | 10,648 | 10,648 | ||||||||||||
General and administrative | 373 | 354 | 1,108 | 1,065 | ||||||||||||
Total | $ | 6,068 | $ | 5,986 | $ | 18,145 | $ | 17,961 | ||||||||
At September 30, 2016, amortization of intangible assets for each of the next five years and thereafter is estimated to be as follows:
Amount | ||||
(In thousands) | ||||
Remainder of 2016 | $ | 6,069 | ||
2017 | 12,224 | |||
2018 | 1,911 | |||
2019 | 966 | |||
2020 | 281 | |||
Thereafter | 110 | |||
Total | $ | 21,561 | ||
4. Fixed Assets
Fixed assets consisted of the following:
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Computer equipment and software | $ | 37,499 | $ | 37,200 | ||||
Furniture, fixtures and office equipment | 3,074 | 3,058 | ||||||
Leasehold improvements | 6,355 | 6,213 | ||||||
Total fixed assets | 46,928 | 46,471 | ||||||
Less: Accumulated depreciation and amortization | (31,228 | ) | (25,682 | ) | ||||
Fixed assets, net | $ | 15,700 | $ | 20,789 | ||||
Depreciation expense is classified in each of the operating expense categories as follows:
10
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue | $ | 1,419 | $ | 1,181 | $ | 4,248 | $ | 3,416 | ||||||||
Sales and marketing | 302 | 304 | 985 | 918 | ||||||||||||
General and administrative | 190 | 245 | 608 | 750 | ||||||||||||
Product development | 134 | 133 | 433 | 430 | ||||||||||||
Total | $ | 2,045 | $ | 1,863 | $ | 6,274 | $ | 5,514 | ||||||||
5. Capitalized Software
Capitalized software consisted of the following:
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Capitalized internal-use software development costs | $ | 164,669 | $ | 146,261 | ||||
Less: Accumulated amortization | (112,759 | ) | (99,625 | ) | ||||
Capitalized software, net | $ | 51,910 | $ | 46,636 | ||||
Amortization expense is classified in each of the operating expense categories as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue | $ | 4,175 | $ | 4,625 | $ | 12,774 | $ | 14,224 | ||||||||
Sales and marketing | 59 | 51 | 163 | 117 | ||||||||||||
General and administrative | 97 | 122 | 328 | 367 | ||||||||||||
Total | $ | 4,331 | $ | 4,798 | $ | 13,265 | $ | 14,708 | ||||||||
6. Income Tax
The Company recorded an income tax expense of $0.7 million and $1.5 million despite a pre-tax loss of $0.5 million and $12.6 million for the three and nine months ended September 30, 2016, respectively, and recorded an income tax expense of $0.4 million and $1.2 million despite a pre-tax loss of $6.1 million and $23.2 million for the three and nine months ended September 30, 2015, respectively, primarily because the income tax benefit related to the U.S. pre-tax loss generated was subject to a valuation allowance. In addition, certain foreign jurisdictions generated pre-tax income that resulted in tax expense.
The Company is routinely under audit by federal, state, local and foreign tax authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service recently completed an audit of the Company’s federal tax returns for the years ended December 31, 2010 and 2011. Various other jurisdictions are open to examination for various tax years. Management believes it has adequately provided for all uncertain tax positions and any potential audit adjustments would not have a material impact on the Company’s liquidity, results of operations or financial condition.
Unrecognized tax benefits totaled $6.8 million and $5.5 million at September 30, 2016 and December 31, 2015, respectively. Management does not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months. If unrecognized tax benefits at September 30, 2016 are subsequently recognized, the Company's income tax expense would be reduced by $5.7 million ($0.7 million net of the impact of the Company’s valuation allowance).
11
7. Debt
Long-term debt consisted of the following:
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Term Loan Credit Facility | $ | 78,000 | $ | 78,600 | ||||
Equipment Loan Facility | 3,591 | 4,719 | ||||||
Term Loan original issue discount | (387 | ) | (507 | ) | ||||
Term Loan unamortized debt issuance costs | (1,164 | ) | (1,526 | ) | ||||
Total debt, net of debt issuance costs | 80,040 | 81,286 | ||||||
Less: current portion (Term Loan Credit Facility) | (318 | ) | (318 | ) | ||||
Less: current portion (Equipment Loan Facility) | (1,567 | ) | (1,511 | ) | ||||
Total current portion of debt, net of debt issuance costs | (1,885 | ) | (1,829 | ) | ||||
Total long-term debt, net of debt issuance costs | $ | 78,155 | $ | 79,457 | ||||
Based on available market information, the estimated fair value of the Company’s long-term debt was $79.2 million and $81.0 million as of September 30, 2016 and December 31, 2015, respectively. These fair value measurements were determined using Level 2 observable inputs, as defined in Note 2. The estimated fair value of our facility related to the purchase of equipment ("Equipment Loan Facility") approximates its carrying value at each reporting period.
As of September 30, 2016, the Company had $2.9 million in outstanding letters of credit issued under its Revolving Credit Facility.
The Term Loan Credit Facility and the Revolving Credit Facility (collectively, the "Credit Facilities") include covenants that restrict certain activities by the Company, as well as require the Company to comply with certain financial ratios such as a Consolidated Net Leverage Ratio and a springing Fixed Charge Coverage Ratio, as these terms are defined in the agreements governing the Credit Facilities. The agreements governing the Credit Facilities also contain other affirmative and negative covenants with which the Company is required to comply. The Term Loan Credit Facility requires partial prepayment of a portion of the principal outstanding in the event that the Company generates Consolidated Excess Cash Flow (as defined under the Term Loan Credit Facility) in excess of a certain threshold. This determination is to be made 90 days following the end of the preceding fiscal year, with any payment, if required, due within 105 days following the end of the preceding fiscal year. The Company was in compliance with all applicable covenants set forth in the Credit Facilities as of September 30, 2016 and there was no required prepayment for the year ended December 31, 2015.
8. Employee Stock Plans
Stock-based compensation expense is measured at the grant date based on the fair value of the award and recognized as expense over the requisite service period, net of an estimated forfeiture rate. The Company maintains several stock-based compensation plans, which are more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Stock-based compensation expense related to all of the Company’s stock awards is included in operating expense categories, as follows:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue | $ | 217 | $ | 142 | $ | 544 | $ | 358 | ||||||||
Sales and marketing | 737 | 487 | 1,839 | 1,537 | ||||||||||||
General and administrative | 1,411 | 2,086 | 4,477 | 6,002 | ||||||||||||
Product development | 519 | 353 | 1,428 | 1,035 | ||||||||||||
Total | $ | 2,884 | $ | 3,068 | $ | 8,288 | $ | 8,932 | ||||||||
9. Net Loss per Share
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per common share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss (in thousands) | $ | (1,231 | ) | $ | (6,561 | ) | $ | (14,075 | ) | $ | (24,404 | ) | ||||
Denominator: | ||||||||||||||||
Weighted-average shares used to compute basic net loss per share | 56,916,485 | 57,446,774 | 57,303,394 | 56,970,515 | ||||||||||||
Effect of dilutive options, unvested shares of restricted stock awards and unvested restricted stock units | — | — | — | — | ||||||||||||
Weighted-average shares used to compute diluted net loss per share | 56,916,485 | 57,446,774 | 57,303,394 | 56,970,515 | ||||||||||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.43 | ) | ||||
Diluted | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.25 | ) | $ | (0.43 | ) | ||||
The following outstanding options to purchase common stock, unvested shares of restricted stock awards and unvested restricted stock units were excluded from the computation of diluted net loss per share for the periods presented as their inclusion would have been anti-dilutive:
September 30, | September 30, | |||||
2016 | 2015 | |||||
Options to purchase common stock | 3,875,077 | 4,170,107 | ||||
Unvested shares of restricted stock awards | 662,605 | 562,055 | ||||
Unvested shares of restricted stock units | 3,702,917 | 2,143,793 | ||||
10. Contingencies
In the ordinary course of business, the Company and its subsidiaries are subject to various claims, charges, disputes, litigation and regulatory inquiries and investigations. The Company establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company's liquidity, results of operations or financial condition, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. These matters, if resolved adversely against the Company, may result in monetary
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damages, fines and penalties or require changes in business practices. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the Company's liquidity, results of operations or financial condition.
The Company is not currently aware of any pending or threatened material claims, charges, disputes, litigation and regulatory inquiries and investigations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. Some of the statements in this Quarterly Report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our operations and are based on our current expectations, estimates and projections. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “goals,” “in our view” and similar expressions are used to identify these forward-looking statements. The forward-looking statements included in this Quarterly Report include, but are not limited to, statements about our internal control over financial reporting, our results of operations and financial condition and our plans, strategies and developments. Forward-looking statements are only predictions and, as such, are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events or our future financial performance that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Many of the reasons for these differences include changes that occur in our continually changing business environment and other important factors. These risks, uncertainties and other factors are more fully described in this section and under the heading "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission, or the SEC, on March 4, 2016. You are strongly encouraged to read those sections carefully as the occurrence of the events described therein and elsewhere in this report could materially harm our business. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these statements speak only as of the date they were made and, except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Part I, Item 1. "Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q and the audited consolidated financial statements included in Part II, Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Intralinks is a leading global technology provider of Software-as-a-Service, or SaaS, solutions for secure enterprise content collaboration within and among organizations. Our cloud-based solutions enable organizations to manage, control, track, search, exchange and collaborate on sensitive information, inside and outside the firewall, all within a secure and easy-to-use environment.
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Results of Operations
The following table sets forth Consolidated Statements of Operations data as a percentage of revenue.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of revenue | 25.7 | % | 27.7 | % | 26.9 | % | 27.9 | % | ||||
Gross profit | 74.3 | % | 72.3 | % | 73.1 | % | 72.1 | % | ||||
Operating expenses: | ||||||||||||
Sales and marketing | 43.6 | % | 42.4 | % | 43.9 | % | 44.7 | % | ||||
General and administrative | 20.7 | % | 26.8 | % | 23.2 | % | 27.0 | % | ||||
Product development | 9.1 | % | 9.9 | % | 9.5 | % | 9.3 | % | ||||
Total operating expenses | 73.4 | % | 79.0 | % | 76.6 | % | 81.1 | % | ||||
Income (loss) from operations | 0.9 | % | (6.8 | )% | (3.6 | )% | (9.0 | )% | ||||
Interest expense | 1.5 | % | 1.6 | % | 1.6 | % | 1.6 | % | ||||
Amortization of debt issuance costs | 0.2 | % | 0.2 | % | 0.2 | % | 0.2 | % | ||||
Other (income) expense, net | (0.2 | )% | 0.2 | % | 0.4 | % | 0.5 | % | ||||
Net loss before income tax | (0.7 | )% | (8.8 | )% | (5.8 | )% | (11.3 | )% | ||||
Income tax expense | 0.9 | % | 0.6 | % | 0.7 | % | 0.6 | % | ||||
Net loss | (1.6 | )% | (9.4 | )% | (6.4 | )% | (11.9 | )% | ||||
Comparison of the Three and Nine Months Ended September 30, 2016 and 2015
Revenue
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
M&A | $ | 39,226 | $ | 35,563 | $ | 3,663 | 10.3 | % | $ | 111,439 | $ | 103,496 | $ | 7,943 | 7.7 | % | ||||||||||||||
Enterprise | 29,294 | 27,113 | 2,181 | 8.0 | % | 86,507 | 79,703 | 6,804 | 8.5 | % | ||||||||||||||||||||
DCM | 6,894 | 6,912 | (18 | ) | (0.3 | )% | 21,142 | 21,670 | (528 | ) | (2.4 | )% | ||||||||||||||||||
Total revenue | $ | 75,414 | $ | 69,588 | $ | 5,826 | 8.4 | % | $ | 219,088 | $ | 204,869 | $ | 14,219 | 6.9 | % | ||||||||||||||
Total revenue for the three and nine months ended September 30, 2016 increased 8.4% and 6.9%, or 9.1% and 8.3% excluding the effects of foreign exchange, from 2015 to 2016, respectively.
M&A revenue for the three and nine months ended September 30, 2016 increased 10.3% and 7.7%, or 11.1% and 9.3% excluding the effects of foreign exchange, from 2015 to 2016, respectively. The growth in M&A revenue for the three and nine months ended September 30, 2016 was largely driven by a higher volume of strategic business transactions.
Enterprise revenue for the three and nine months ended September 30, 2016 increased 8.0% and 8.5%, or 8.9% and 9.8% excluding the effects of foreign exchange, from 2015 to 2016, respectively. The growth in Enterprise revenue for the three and nine months ended September 30, 2016 was primarily due to an increase in the number of enterprise customers year-over-year and revenue expansion within the existing customer base.
DCM revenue for the three and nine months ended September 30, 2016 remained comparable to 2015 with a decrease of 0.3% and 2.4% as reported and excluding the effects of foreign exchange from 2015 to 2016, respectively.
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Cost of Revenue and Gross Profit
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
Cost of revenue | $ | 19,401 | $ | 19,304 | $ | 97 | 0.5 | % | $ | 59,007 | $ | 57,189 | $ | 1,818 | 3.2 | % | ||||||||||||||
Gross profit | $ | 56,013 | $ | 50,284 | $ | 5,729 | 11.4 | % | $ | 160,081 | $ | 147,680 | $ | 12,401 | 8.4 | % | ||||||||||||||
Gross margin | 74.3 | % | 72.3 | % | 2.0 points | 73.1 | % | 72.1 | % | 1.0 point | ||||||||||||||||||||
Cost of revenue for the three months ended September 30, 2016 was comparable to 2015.
Cost of revenue for the nine months ended September 30, 2016 increased $1.8 million, or 3.2%, from 2015 to 2016, primarily due increases in employee compensation and related expenses and higher software license and maintenance and hosting fees to support continued customer growth and investments in our platform.
Operating Expenses
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||
Sales and marketing | $ | 32,897 | $ | 29,496 | $ | 3,401 | 11.5 | % | $ | 96,236 | $ | 91,666 | $ | 4,570 | 5.0 | % | ||||||||||||||
General and administrative | 15,614 | 18,652 | (3,038 | ) | (16.3 | )% | 50,795 | 55,406 | (4,611 | ) | (8.3 | )% | ||||||||||||||||||
Product development | 6,858 | 6,859 | (1 | ) | — | % | 20,828 | 19,107 | 1,721 | 9.0 | % | |||||||||||||||||||
Total operating expenses | $ | 55,369 | $ | 55,007 | $ | 362 | 0.7 | % | $ | 167,859 | $ | 166,179 | $ | 1,680 | 1.0 | % | ||||||||||||||
Sales and marketing expense for the three and nine months ended September 30, 2016 increased $3.4 million and $4.6 million, or 11.5% and 5.0%, from 2015 to 2016, respectively, largely due to an increase in headcount as we continue to expand our sales capacity, partially offset by decreases in marketing expense and commissions to third-party partners primarily due to an initiative to expand our internal renewals department, which was previously primarily outsourced.
General and administrative expense for the three and nine months ended September 30, 2016 decreased $3.0 million and $4.6 million, or 16.3% and 8.3%, from 2015 to 2016, respectively, primarily due to management's focus on reducing our overall general and administrative expenses. In addition, stock-based compensation expense decreased $0.7 million and $1.5 million for the three and nine months ended September 30, 2016 primarily due to awards granted to key employees in prior years that became fully vested during the year ended December 31, 2015.
Product development expense for the three months ended September 30, 2016 was comparable to 2015. The increase in product development expense for the nine months ended September 30, 2016 of $1.7 million, or 9.0%, from 2015 to 2016, consisted of an increase in employee compensation and related expenses due to an increase in headcount, partially offset by an increase in the percentage of employee compensation and related expenses that were capitalized during the period, as well as a decrease in third-party labor expenses.
Total product development costs comprise product development expense and capitalized software, including capitalized interest.
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||
Product development expense | $ | 6,858 | $ | 6,859 | $ | (1 | ) | — | % | $ | 20,828 | $ | 19,107 | $ | 1,721 | 9.0 | % | |||||||||||||
Capitalized software development costs | 5,731 | 6,333 | (602 | ) | (9.5 | )% | 18,366 | 19,062 | (696 | ) | (3.7 | )% | ||||||||||||||||||
Total product development costs | $ | 12,589 | $ | 13,192 | $ | (603 | ) | (4.6 | )% | $ | 39,194 | $ | 38,169 | $ | 1,025 | 2.7 | % | |||||||||||||
As a percentage of revenue | 16.7 | % | 19.0 | % | 17.9 | % | 18.6 | % | ||||||||||||||||||||||
The decrease in total product development costs for the three months ended September 30, 2016 of $0.6 million, or 4.6%, was driven primarily by a decrease in third-party labor costs, partially offset by an increase in employee compensation and related expenses due to an increase in headcount. The increase in total product development costs for the nine months ended September
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30, 2016 of $1.0 million, or 2.7%, from 2015 to 2016 was driven primarily by an increase in headcount, partially offset by a decrease in third-party labor costs.
Non-Operating Expenses
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||
Interest expense | $ | 1,165 | $ | 1,124 | $ | 41 | 3.6 | % | $ | 3,415 | $ | 3,323 | $ | 92 | 2.8 | % | ||||||||||||||
Amortization of debt issuance costs | $ | 143 | $ | 143 | $ | — | — | % | $ | 429 | $ | 429 | $ | — | — | % | ||||||||||||||
Other (income) expense, net | $ | (133 | ) | $ | 151 | $ | (284 | ) | >(100)% | $ | 979 | $ | 989 | $ | (10 | ) | (1.0 | )% | ||||||||||||
Interest expense and amortization of debt issuance costs for the three and nine months ended September 30, 2016 were comparable to 2015.
Other (income) expense, net comprises impairment charges, foreign currency transaction (gains) losses and interest income. Foreign currency transaction (gains) losses largely relate to the remeasurement of Euro and British Pound Sterling denominated accounts receivable held by entities where the Euro or British Pound Sterling is not the functional currency. Net foreign currency transaction (gains) losses were $(0.1) and $(0.5) and $0.2 and $1.1 for the three and nine months ended September 30, 2016 and 2015, respectively. During the nine months ended September 30, 2016, we recognized an other-than-temporary impairment charge of $1.5 million related to the write-down of a cost method investment to its estimated fair value of zero due to the investee company's inability to continue operations without new outside financing.
Income Tax Expense
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Income tax expense | $ | 700 | $ | 420 | $ | 1,474 | $ | 1,164 | ||||||||
We recorded an income tax expense of $0.7 million and $1.5 million despite a pre-tax loss of $0.5 million and $12.6 million for the three and nine months ended September 30, 2016, respectively, and recorded an income tax expense of $0.4 million and $1.2 million despite a pre-tax loss of $6.1 million and $23.2 million for the three and nine months ended September 30, 2015, respectively, primarily because the income tax benefit related to the U.S. pre-tax loss generated was subject to a valuation allowance. In addition, certain foreign jurisdictions generated pre-tax income that resulted in tax expense.
We have a valuation allowance on our net U.S. deferred tax assets as we currently believe the assets will not be recoverable. Given expected improvements in business performance and other potential actions it is possible we could conclude in the near future that a valuation allowance will no longer be required. If we were to release the valuation allowance in the future, the current estimate of the GAAP income tax benefit that would be recognized could be as much as $26 million.
Business Measurements
We believe annualized recurring revenue ("ARR") and non-GAAP adjusted operating income are key business measurements as we use them internally to help us evaluate our performance, identify trends affecting our business, establish budgets, assess operational efficiencies, make strategic decisions and compensate our management.
ARR growth represents the percentage increase in the value attributable to all of our renewable subscription contracts for which revenue is recognized on a ratable basis as compared to the same date in the prior year. ARR is calculated as the annualized value of all renewable subscription contracts in effect at a specific point in time, without regard to the duration of the contract. ARR growth at September 30, 2016 was approximately 6% year-over-year, excluding the effects of foreign exchange.
Non-GAAP adjusted operating income represents the corresponding GAAP measure adjusted to exclude, if applicable: (1) amortization of intangible assets, (2) stock-based compensation expense and (3) impairment charges or asset write-offs. The table below provides a reconciliation of U.S. GAAP income (loss) from operations to non-GAAP adjusted operating income:
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Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Income (loss) from operations | $ | 644 | $ | (4,723 | ) | $ | (7,778 | ) | $ | (18,499 | ) | |||||
Amortization of intangible assets | 6,068 | 5,986 | 18,145 | 17,961 | ||||||||||||
Stock-based compensation expense | 2,884 | 3,068 | 8,288 | 8,932 | ||||||||||||
Non-GAAP adjusted operating income | $ | 9,596 | $ | 4,331 | $ | 18,655 | $ | 8,394 | ||||||||
We report non-GAAP adjusted operating income as a supplemental measure that is not prepared in accordance with generally accepted accounting principles in the United States, or GAAP or U.S. GAAP. Our definition of this non-GAAP financial measure may differ from the definition used by other companies, including peer companies, and therefore comparability may be limited. This non-GAAP financial measure should be considered in addition to our results prepared in accordance with U.S. GAAP and should not be considered a substitute for or superior to our U.S. GAAP results. We endeavor to compensate for the limitations of this non-GAAP financial measure by providing the comparable GAAP measure with equal or greater prominence.
Management believes that this non-GAAP financial measure, when viewed with our results under U.S. GAAP and the accompanying reconciliation, provides useful information about our period-over-period growth and provides additional information that is useful for evaluating our operating performance. Management also believes that this non-GAAP financial measure provides a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-over-period basis, because this measure excludes items that are not representative of our operating performance, such as amortization of intangible assets and stock-based compensation expense.
Financial Position, Liquidity and Capital Resources
Cash Flows
September 30, | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents | $ | 47,862 | $ | 39,435 | ||||
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities | $ | 27,062 | $ | 22,154 | ||||
Net cash used in investing activities | (14,471 | ) | (23,433 | ) | ||||
Net cash (used in) provided by financing activities | (13,016 | ) | 1,287 | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | 412 | (1,255 | ) | |||||
Net decrease in cash and cash equivalents | $ | (13 | ) | $ | (1,247 | ) | ||
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2016 was $27.1 million as a result of $35.3 million in cash generated from results of operations after adjusting for non-cash items, partially offset by a net decrease in our operating assets and liabilities of $8.3 million. The net decrease in operating assets and liabilities consisted primarily of an increase of $4.6 million in accounts receivable, primarily related to timing of cash collections, a decrease of $4.4 million in accounts payable related to timing of payments and a decrease of $3.1 million in accrued expenses and other liabilities, primarily related to payment of bonus and commissions related to 2015, partially offset by an increase of $3.5 million in deferred revenue. Additionally, net cash provided by operating activities during the nine months ended September 30, 2016 consisted of a net loss of $14.1 million plus adjustments for non-cash items of $49.4 million including (a) depreciation and amortization of $19.5 million, (b) amortization of intangible assets of $18.1 million, (c) stock-based compensation expense of $8.3 million and (d) an impairment charge of $1.5 million related to the write-down of a cost method investment to its fair value of zero.
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Net cash provided by operating activities for the nine months ended September 30, 2015 was $22.2 million as a result of $25.9 million in cash generated from results of operations after adjusting for non-cash items, partially offset by a net decrease in our operating assets and liabilities of $3.7 million. The net decrease in operating assets and liabilities consisted primarily of an increase of $7.4 million in accounts receivable, primarily related to the timing of cash collections, partially offset by an increase of $3.6 million in deferred revenue. Additionally, net cash provided by operating activities during the nine months ended September 30, 2015 consisted of a net loss of $24.4 million, plus adjustments for non-cash items of $50.3 million including (a) depreciation and amortization of $20.2 million, (b) amortization of intangible assets of $18.0 million and (c) stock-based compensation expense of $8.9 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2016 and 2015 was $14.5 million and $23.4 million, respectively. Investments in capitalized software development costs for the nine months ended September 30, 2016 and 2015 were $19.1 million and $18.6 million, respectively. Cash used in investing activities related to capital expenditures during the nine months ended September 30, 2016 was $1.4 million compared to $10.6 million during the nine months ended September 30, 2015, which was primarily related to infrastructure projects. During the nine months ended September 30, 2016 and 2015, maturities of investments, comprising corporate securities, were $12.4 million and $6.8 million, respectively. During the nine months ended September 30, 2016, we used $6.3 million in cash for the acquisition of Verilume, Inc. During the nine months ended September 30, 2015, we purchased a minority interest in a privately held company for $1.0 million, which is accounted for under the cost method.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2016 of $13.0 million includes $11.5 million for the repurchase of 1.4 million shares of common stock at an average price of $8.13 per share and $1.7 million of debt repayments.
Net cash provided by financing activities for the nine months ended September 30, 2015 of $1.3 million includes $2.7 million related to the exercise of stock options and issuance of common stock, a $0.5 million payment of a holdback related to the acquisition of docTrackr, Inc. and $0.2 million of repayments of outstanding financing arrangements recorded in "Other, net" financing activities, partially offset by $0.6 million of debt repayments.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash, cash equivalents and investments, as well as the cash flows we generate from operations. At September 30, 2016, we had $47.9 million in cash and cash equivalents and $53.1 million in accounts receivable, net of allowances. We have a $15.0 million Revolving Credit Facility, which expires on February 24, 2019, and is available as an additional source of financing. At September 30, 2016, we had $2.9 million in outstanding letters of credit under our Revolving Credit Facility.
On February 19, 2016, our Board of Directors authorized the repurchase of up to $20 million of shares of our common stock. We may purchase shares from time to time on the open market or in privately negotiated transactions, depending on those factors management deems relevant at any particular time, including without limitation, market conditions, share price, future outlook and other corporate liquidity requirements and priorities. For detailed information on our share repurchase activity, see Part II, Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds" of this Quarterly Report on Form 10-Q.
We believe that our sources of funding will be sufficient to satisfy our normal operating requirements, including capital expenditures, share repurchases and principal payments on long-term debt, for at least the next twelve months. Our liquidity could be negatively affected by a decrease in demand for our services. In addition, we may make acquisitions and strategic investments or increase our capital expenditures that could reduce our cash and cash equivalents balances and as a result, we may need to raise additional capital through future debt or equity financing to provide for greater financial flexibility to fund these activities. Additional financing may not be available at all or on terms favorable to us.
The Term Loan Credit Facility requires us to comply with a Consolidated Net Leverage Ratio (as defined in the Term Loan Credit Facility) that must be less than or equal to 3.00 to 1.00. The calculation of our Consolidated Net Leverage Ratio permits us to net from our outstanding total indebtedness up to $20.0 million of our cash and cash equivalents. The Term Loan Credit Facility also requires partial prepayment of a portion of the principal outstanding in the event that we generate Consolidated Excess Cash Flow (as defined under the Term Loan Credit Facility) in excess of a certain threshold. If required, the prepayment is equal to 50% of our excess cash flow as measured on an annual basis, with step-downs to 25% and to 0% of our excess cash flow if our Consolidated Net Leverage Ratio (as defined in the Term Loan Credit Facility), is less than 2.00 to 1.00 and 1.00 to 1.00, respectively. Excess cash flow is generally defined as our adjusted EBITDA (as defined in the Term Loan Credit Facility) less debt service costs, unfinanced capital expenditures, unfinanced acquisition expenditures, and current income taxes paid, as adjusted for changes in our working capital. This determination is to be made 90 days following the end of the preceding fiscal year, with any payment, if required, due within 105 days following the end of the preceding fiscal year. Additionally, the Term Loan Credit Facility requires mandatory prepayment of the term loans from the net proceeds of certain asset sales outside the ordinary course of business and
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from proceeds of property insurance and condemnation events, in each case subject to our right to reinvest those proceeds in assets used in our business. The Revolving Credit Facility includes a springing Fixed Charge Coverage Ratio (as defined in the Revolving Credit Facility), which we must comply with any time our cash and cash equivalents held in deposit or securities accounts subject to a lien in favor of our revolving loan lenders falls below $10.0 million or if an Event of Default (as defined in the Revolving Credit Facility) occurs, in either case, a "Fixed Charge Coverage Trigger Event." In the event a Fixed Charge Coverage Trigger Event occurs, the Fixed Charge Coverage Ratio must be greater than or equal to 1.10 to 1.00. We were in compliance with all applicable covenants at September 30, 2016 and there was no required prepayment for the year ended December 31, 2015.
The agreements governing our Credit Facilities include the following customary restrictions on certain activities, which are subject to lender approval, with certain exceptions: (i) incurring additional indebtedness other than in the normal course of business; (ii) creating liens or other encumbrances on our assets; (iii) engaging in merger or acquisition transactions; (iv) making investments; and (v) entering into asset sale agreements or paying dividends, making distributions on or repurchasing our stock.
The agreements governing our Credit Facilities also contain customary events of default, including, but not limited to, uncured cross-defaults among these agreements. In addition, an uncured default under our facility related to the purchase of equipment ("Equipment Loan Facility") would result in a cross-default under our Term Loan Credit Facility and our Revolving Credit Facility. Although we currently expect to remain in compliance with these existing covenants, any breach of these covenants or a change in control could result in a default and subsequent cross-defaults, under our credit agreements, which could cause all of the outstanding indebtedness to become immediately due and payable and terminate all commitments from our lenders to extend further credit.
Each of our Credit Facilities is secured by liens on substantially all our assets, including a pledge of 100% of the equity interests in our domestic subsidiaries and an obligation to pledge 65% of the equity interests in our direct foreign subsidiaries. Our Revolving Credit Facility is secured by a first lien on our cash, accounts receivable and certain other liquid collateral and a second lien on our other assets. Our Term Loan Credit Facility is secured by a second lien on our cash, accounts receivable and certain other liquid collateral and a first lien on our other assets. Our Equipment Loan Facility is secured by liens on the equipment financed under that facility.
All obligations under each of our Credit Facilities are unconditionally guaranteed by our direct and indirect domestic subsidiaries. These guarantees are secured by substantially all the present and future property of the guarantors.
Our corporate credit ratings and rating agency outlooks as of September 30, 2016 are summarized in the table below.
Rating Agency | Rating | Outlook | ||
Moody's | B2 | Stable | ||
Standard & Poor's | B+ | Negative | ||
Contractual Obligations and Commitments
At September 30, 2016, there have been no material changes to our contractual obligations, commitments and off-balance sheet arrangements since the disclosure included in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 2 - "Summary of Significant Accounting Policies" included in Part II, Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
On an ongoing basis, we evaluate our estimates and assumptions including those related to (a) allowances for doubtful accounts and reserves for customer credits, (b) the fair values of our single operating segment and reporting unit, goodwill, definite-lived intangible assets and long-term investments, (c) the recoverability of definite-lived intangible assets, capitalized software and fixed assets (and their related useful lives), (d) certain components of the income tax provision (including the valuation allowance on net deferred tax assets and liabilities for uncertain tax positions), (e) accruals for certain compensation and benefit expenses and (f) the fair value of stock-based awards including estimated forfeitures of such awards. We base our estimates, judgments and assumptions on historical experience, forecasts and budgets and on various other factors that we believe to be reasonable under the circumstances.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements see Note 1 - "Intralinks Holdings, Inc. and Summary of Significant Accounting Policies" included in Part I, Item 1. "Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2016, there have been no material changes to our exposure to market risk since the disclosure included in Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Management believes that the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP, and our principal executive officer and principal financial officer have certified that they fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 1A: RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors included in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described in our Annual Report.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
During the three and nine months ended September 30, 2016, we did not issue or sell any shares of our common stock pursuant to unregistered transactions.
Issuer Purchases of Equity Securities
In February 2016, we announced the Board of Directors' authorization of a $20 million share repurchase program. This stock repurchase program extends for one year and may be suspended or terminated at any time without prior notice. During the three months ended September 30, 2016, we did not repurchase any shares of our common stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit Number | Description | |
10.1 | Intralinks Holdings, Inc. 2010 Equity Incentive Plan as Amended and Restated, together with forms of award agreements (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 28, 2016). | |
10.2* | Intralinks Holdings, Inc. Second Amended and Restated 2010 Employee Stock Purchase Plan. | |
31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS+ | XBRL Instance Document | |
101.SCH+ | XBRL Taxonomy Extension Schema Document | |
101.CAL+ | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB+ | XBRL Taxonomy Label Linkbase Document | |
101.PRE+ | XBRL Taxonomy Presentation Linkbase Document | |
101.DEF+ | XBRL Taxonomy Definitions Linkbase Document | |
* Filed herewith.
+ Attached as Exhibits 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) related notes to these financial statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
INTRALINKS HOLDINGS, INC. | ||
By: /s/ Ronald W. Hovsepian | ||
Date: November 2, 2016 | Ronald W. Hovsepian President and Chief Executive Officer | |
By: /s/ Christopher J. Lafond | ||
Date: November 2, 2016 | Christopher J. Lafond Chief Financial Officer | |
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