10-Q 1 a12-8896_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 2012

 

or

 

o

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

 

For the transition period from            to            

 

Commission File Number: 001-35247

 


 

TANGOE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

06-1571143

(I.R.S. Employer

Identification Number)

 

35 Executive Blvd.

Orange, Connecticut

(Address of principal executive offices)

 


06477

(Zip Code)

 

(203) 859-9300

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

There were 37,180,306 shares of our common stock outstanding on April 30, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2011 and 2012

6

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2012

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 6.

Exhibits

54

 

 

 

 

Signatures

55

 

2



Table of Contents

 

PRELIMINARY NOTES

 

When we use the terms “Tangoe”, the “Company”, “we”, “us” and “our”, we mean Tangoe, Inc. and its consolidated subsidiaries.

 

Forward Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this quarterly report regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

·                  our estimates regarding expenses and future revenue;

 

·                  our plans to develop, improve and market our products and services;

 

·                  the advantages of our products and services as compared to those of others;

 

·                  our ability to attract and retain customers;

 

·                  our financial performance;

 

·                  our ability to establish and maintain intellectual property rights;

 

·                  our ability to retain and hire necessary employees and appropriately staff our operations; and

 

·                  our estimates regarding capital requirements and needs for additional financing.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. The important factors discussed below under Part II — “Other Information”, Item 1A. — “Risk Factors” among others could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

You should read this quarterly report and the documents that we have filed as exhibits to this quarterly report with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

We expressly qualify in their entirety all forward-looking statements attributable to us or any person acting on our behalf by the cautionary statements contained or referred to in this section.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

TANGOE, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

December 31,

 

March 31,

 

 

 

2011

 

2012

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

43,407

 

$

37,866

 

Accounts receivable, less allowances of $102

 

25,311

 

26,551

 

Prepaid expenses and other current assets

 

2,503

 

3,428

 

Total current assets

 

71,221

 

67,845

 

 

 

 

 

 

 

COMPUTERS, FURNITURE AND EQUIPMENT-NET

 

3,334

 

3,496

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangible assets-net

 

28,800

 

34,543

 

Goodwill

 

36,266

 

44,728

 

Security deposits and other non-current assets

 

1,241

 

1,906

 

TOTAL ASSETS

 

$

140,862

 

$

152,518

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

6,605

 

$

8,555

 

Accrued expenses

 

7,061

 

7,925

 

Deferred revenue-current portion

 

9,051

 

9,457

 

Notes payable-current portion

 

7,904

 

13,187

 

Other current liabilities

 

1,079

 

746

 

Total current liabilities

 

31,700

 

39,870

 

 

 

 

 

 

 

OTHER LIABILITIES:

 

 

 

 

 

Deferred rent and other non-current liabilities

 

1,659

 

3,601

 

Deferred revenue-less current portion

 

2,624

 

2,274

 

Notes payable-less current portion

 

8,290

 

4,918

 

Total liabilities

 

44,273

 

50,663

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $0.0001 per share-150,000,000 shares authorized as of December 31, 2011 and March 31, 2012; 33,152,592 and 34,349,633 shares issued and outstanding as of December 31, 2011 and March 31, 2012, respectively

 

3

 

3

 

Additional paid-in capital

 

142,905

 

147,909

 

Warrants for common stock

 

10,610

 

10,610

 

Less: notes receivable for purchase of common stock

 

(93

)

 

Accumulated deficit

 

(56,795

)

(56,603

)

Other comprehensive loss

 

(41

)

(64

)

Total stockholders’ equity

 

96,589

 

101,855

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

140,862

 

$

152,518

 

 

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

 

4



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2012

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

Recurring technology and services

 

$

19,927

 

$

30,756

 

Strategic consulting, software licenses and other

 

2,414

 

3,391

 

Total revenue

 

22,341

 

34,147

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

Recurring technology and services

 

9,057

 

14,316

 

Strategic consulting, software licenses and other

 

1,272

 

1,458

 

Total cost of revenue

 

10,329

 

15,774

 

 

 

 

 

 

 

Gross profit

 

12,012

 

18,373

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

3,698

 

5,544

 

General and administrative

 

3,736

 

6,701

 

Research and development

 

2,862

 

3,689

 

Depreciation and amortization

 

1,008

 

1,875

 

Income from operations

 

708

 

564

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

Interest expense

 

(659

)

(235

)

Interest income

 

4

 

17

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

(540

)

 

(Loss) income before income tax provision

 

(487

)

346

 

Income tax provision

 

126

 

154

 

Net (loss) income

 

(613

)

192

 

Preferred dividends

 

(929

)

 

Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

Basic

 

$

(0.33

)

$

0.01

 

Diluted

 

$

(0.33

)

$

0.00

 

 

 

 

 

 

 

Weighted average number of common share:

 

 

 

 

 

Basic

 

4,672

 

33,826

 

Diluted

 

4,672

 

39,431

 

 

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

 

5



Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)

(in thousands)

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2011

 

2012

 

 

 

 

 

 

 

Net (loss) income

 

(613

)

192

 

Foreign currency translation adjustment

 

(4

)

(23

)

Total

 

$

(617

)

$

169

 

 

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

 

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TANGOE, INC.

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2012

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Common

 

for Purchase

 

 

 

Other

 

Total

 

 

 

Number of

 

 

 

Paid-In

 

Stock

 

of Common

 

Accumulated

 

Comprehensive

 

Stockholders

 

 

 

Shares

 

Amount

 

Capital

 

Warrants

 

Stock

 

Deficit

 

Loss

 

Equity

 

Balance December 31, 2011

 

33,152,592

 

$

3

 

$

142,905

 

$

10,610

 

$

(93

)

$

(56,795

)

$

(41

)

$

96,589

 

Net income

 

 

 

 

 

 

192

 

 

192

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(23

)

(23

)

Securities issued in connection with acquisition

 

165,775

 

 

1,984

 

 

 

 

 

1,984

 

Issuance of shares from exercise of stock options

 

490,950

 

 

1,396

 

 

 

 

 

1,396

 

Issuance of shares from cashless exercise of stock warrants

 

398,060

 

 

 

 

 

 

 

 

Issuance of shares from executive stock grant

 

9,639

 

 

150

 

 

 

 

 

150

 

Repayment of notes receivable

 

 

 

 

 

70

 

 

 

70

 

Reclassification of notes receivable

 

 

 

 

 

23

 

 

 

23

 

Stock-based compensation

 

 

 

1,474

 

 

 

 

 

1,474

 

Balance March 31, 2012

 

34,217,016

 

$

3

 

$

147,909

 

$

10,610

 

$

 

$

(56,603

)

$

(64

)

$

101,855

 

 

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

 

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Table of Contents

 

TANGOE, INC.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2012

 

Operating activities:

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

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

 

 

 

 

 

Amortization of debt discount

 

180

 

191

 

Amortization of leasehold interest

 

 

(24

)

Depreciation and amortization

 

1,008

 

1,875

 

(Decrease) increase in deferred rent liability

 

(125

)

43

 

Amortization of marketing agreement intangible assets

 

19

 

32

 

Allowance for doubful accounts

 

11

 

 

Deferred income taxes

 

126

 

6

 

Stock based compensation

 

835

 

1,624

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

540

 

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(1,606

)

190

 

Prepaid expenses and other assets

 

94

 

 

Other assets

 

(444

)

10

 

Accounts payable

 

815

 

928

 

Accrued expenses

 

(424

)

(1,112

)

Deferred revenue

 

713

 

(426

)

Net cash provided by operating activities

 

1,129

 

3,529

 

Investing activities:

 

 

 

 

 

Purchases of computers, furniture and equipment

 

(86

)

(426

)

Cash paid in connection with acquisitions

 

(8,166

)

(8,577

)

Net cash used in investing activities

 

(8,252

)

(9,003

)

Financing activities:

 

 

 

 

 

Repayment of debt

 

(11,949

)

(1,544

)

Borrowings of debt

 

20,000

 

 

Deferred financing costs

 

(170

)

 

Proceeds from repayment of notes receivable

 

 

70

 

Proceeds from exercise of stock options

 

205

 

1,396

 

Net cash provided by (used in) financing activities

 

8,086

 

(78

)

 

 

 

 

 

 

Effect of exchange rate on cash

 

 

11

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

963

 

(5,541

)

Cash and cash equivalents, beginning of period

 

5,913

 

43,407

 

Cash and cash equivalents, end of period

 

$

6,876

 

$

37,866

 

 

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

 

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Table of Contents

 

TANGOE, INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.              Organization, Description of Business

 

Nature of Operations

 

Tangoe, Inc. (the “Company”), a Delaware corporation, was incorporated on February 9, 2000 as TelecomRFQ, Inc. During 2001, the Company changed its name to Tangoe, Inc. The Company provides communications lifecycle management software and related services to a wide range of enterprises, including large and medium-sized businesses and other organizations. Communications lifecycle management encompasses the entire lifecycle of an enterprise’s communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, mobile device management, invoice processing, expense allocation and accounting and asset decommissioning and disposal. The Company’s Communications Management Platform is an on-demand suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. The Company’s customers can also engage the Company through its client services group to manage their communications assets and services through its Communications Management Platform.

 

Public Offerings

 

In April 2012, the Company completed a public offering whereby it sold 2,200,000 shares of common stock at a price to the public of $18.50 per share.  The Company’s common stock is traded on the NASDAQ Global Market.  The Company received proceeds from this public offering of $38.5 million, net of underwriting discounts and commissions but before offering costs of $0.7 million.  Offering costs at March 31, 2012 of $0.7 million that are recorded in other non-current assets will be reclassified as a reduction to additional paid-in capital in the second quarter of 2012.

 

As part of this public offering, an additional 7,000,000 shares of common stock were sold by certain existing stockholders at a price to the public of $18.50 per share, including 1,200,000 shares sold by such stockholders upon the exercise of the underwriters’ option to purchase additional shares.  The Company did not receive any proceeds from the sale of such shares by the selling stockholders.

 

In August 2011, the Company completed its initial public offering whereby it sold 7,500,000 shares of common stock at a price to the public of $10.00 per share.  The Company received proceeds from its initial public offering of $66.0 million, net of underwriting discounts and commissions and other offering costs of $3.8 million.

 

As part of the initial public offering, an additional 2,585,500 shares of common stock were sold by certain existing stockholders at a price to the public of $10.00 per share, including 1,315,500 shares sold by such stockholders upon the exercise of the underwriters’ option to purchase additional shares.  The Company did not receive any proceeds from the sale of such shares by the selling stockholders.

 

Basis of Presentation of Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the Company’s financial position and results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, for any other interim period or for any other future year.

 

The consolidated balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011filed with the Securities Exchange Commission (“SEC”) on March 29, 2012, as amended by the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011 filed with the SEC on April 26, 2012 (collectively, the “2011 Form 10-K”).

 

Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2011 included in the 2011 Form 10-K.  Since the date of those financial statements, there have been no material changes to the Company’s significant accounting policies.

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

2.       Business Combinations

 

HCL Expense Management Services, Inc.

 

In December 2010, the Company entered into an Asset Purchase Agreement (the “HCL-EMS APA”) to acquire substantially all of the assets and certain liabilities of HCL Expense Management Services, Inc. (“HCL-EMS”). Pursuant to the terms of the HCL-EMS APA, the Company paid $3.0 million in cash at closing, which took place on January 25, 2011 (“HCL-EMS Closing Date”). In addition, the Company is obligated to pay deferred cash consideration following each of the first and second anniversaries of the HCL-EMS Closing Date, pursuant to an earn-out formula based upon specified revenues from specified customers acquired from HCL-EMS, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. The Company valued this contingent consideration at $3.4 million. The Company has included the operating results of HCL-EMS in its consolidated financial statements since the date of acquisition, including revenue of $5.9 million. In connection with this transaction the Company has recorded on its consolidated statement of operations in the third quarter of 2011 a restructuring charge related to terminating the use of the former HCL-EMS leased facility in Rutherford, New Jersey that is subject to a lease assumed by the Company in connection with the acquisition.

 

HCL-EMS Purchase Price Allocation

 

The allocation of the total purchase price of HCL-EMS’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of the HCL-EMS Closing Date.  The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and contingent consideration and the allocation of the total purchase price (in thousands):

 

Cash

 

$

3,000

 

Fair value of contingent consideration

 

3,390

 

 

 

$

6,390

 

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

 

Accounts receivable

 

$

2,269

 

Prepaid and other current assets

 

125

 

Property and equipment

 

273

 

Intangible assets

 

2,700

 

Goodwill

 

2,243

 

Deposits and non-current assets

 

170

 

Accounts payable

 

(229

)

Accrued expenses

 

(1,042

)

Deferred revenue

 

(119

)

 

 

$

6,390

 

 

The goodwill related to the HCL-EMS acquisition is tax deductible.  The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization.  The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Technology

 

$

840

 

4.0

 

Customer relationships

 

1,860

 

9.0

 

Total intangible assets

 

$

2,700

 

 

 

 

Telwares, Inc.

 

On March 16, 2011, the Company entered into an Asset Purchase Agreement (the “Telwares APA”) with Telwares, Inc. to purchase certain assets and liabilities of Telwares, Inc. and its subsidiary Vercuity, Inc as defined in the Telwares APA (such acquired assets and liabilities, “Telwares”). Pursuant to the terms of the agreement, the Company will pay $7.7 million in cash as follows: $5.2 million at closing, which includes a working capital adjustment of $0.7 million, which took place on March 16, 2011, and deferred cash consideration, subject to set-off rights of the Company with respect to indemnities given by Telwares under the Telwares APA, of $1,250,000 on March 16, 2012, and $1,250,000 on March 16, 2013.  The Company made the first installment payment of $1,250,000 on March 16, 2012.

 

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Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Telwares Purchase Price Allocation

 

The allocation of the total purchase price of Telwares’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of March 16, 2011.  The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and deferred purchase price and the allocation of the total purchase price (in thousands):

 

Cash

 

$

5,166

 

Fair value of deferred purchase price

 

2,154

 

 

 

$

7,320

 

 

 

 

 

 

Allocation of Purchase Consideration:

 

 

 

 

Accounts receivable

 

$

1,975

 

Prepaid and other current assets

 

72

 

Property and equipment

 

355

 

Intangible assets

 

2,428

 

Goodwill

 

3,014

 

Deposits and non-current assets

 

76

 

Accounts payable

 

(88

)

Accrued expenses

 

(444

)

Deferred revenue

 

(68

)

 

 

$

7,320

 

 

The goodwill related to the Telwares acquisition is tax deductible.  The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization. The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Non-compete agreements

 

$

58

 

2.0

 

Technology

 

350

 

3.0

 

Customer relationships

 

2,020

 

8.0

 

Total intangible assets

 

$

2,428

 

 

 

 

ProfitLine, Inc.

 

On December 19, 2011, the Company and Snow Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (the “Acquisition Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ProfitLine, Inc., a Delaware corporation (“ProfitLine”), and Doug Carlisle, solely in his capacity as Stockholder Representative under the Merger Agreement, under which the parties agreed to the merger of the Acquisition Sub with and into ProfitLine (the “Merger”) with ProfitLine surviving the Merger as a wholly owned subsidiary of the Company. Pursuant to the terms of the agreement, the Company paid $14,500,000 in cash at closing. In addition, an additional $9,000,000 is payable in cash in installments of $4,500,000 each on December 19, 2012 and June 19, 2013, subject to set-off rights of the Company and the surviving corporation with respect to indemnities given by the former stockholders of ProfitLine under the Merger Agreement. Among other things, these indemnity obligations relate to representations and warranties given by ProfitLine under the Merger Agreement. Certain indemnities are subject to limitations, including a threshold, certain caps and a limited survival period. Under the Merger Agreement, the Company is required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that the Company’s cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20,000,000 at any time prior to payment of the first $4,500,000 installment of deferred consideration, or $15,000,000 at any time after payment of the first and before payment of the second $4,500,000 installment of deferred consideration.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

ProfitLine Purchase Price Allocation

 

The allocation of the total purchase price of ProfitLine’s net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of December 19, 2011. The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and deferred purchase price and the allocation of the total purchase price (in thousands):

 

Purchase consideration:

 

 

 

Cash

 

$

14,500

 

Deferred cash consideration

 

8,674

 

 

 

$

23,174

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

3,183

 

Property and equipment

 

675

 

Other assets

 

117

 

Identifiable intangible assets

 

8,717

 

Goodwill

 

13,801

 

Total assets acquired

 

26,493

 

Accounts payable and accrued expenses

 

(3,167

)

Deferred revenue

 

(152

)

 

 

$

23,174

 

 

The goodwill amount has been revised from the preliminary purchase price allocation previously disclosed as a result of an unfavorable leasehold interest related to the Company’s office lease in San Diego.  The leasehold interest amount of $0.4 million will be amortized over the remaining term of the facility lease.

 

The goodwill and identifiable intangible assets related to the ProfitLine acquisition are not tax deductible. The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization. The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Tradenames

 

$

335

 

4.0

 

Technology

 

1,612

 

2.5

 

Customer relationships

 

6,770

 

9.0

 

Total intangible assets

 

$

8,717

 

 

 

 

Anomalous Networks, Inc.

 

On January 10, 2012 (the “Anomalous Acquisition Date”), the Company entered into a Share Purchase Agreement (the “Anomalous Purchase Agreement”) with Anomalous Networks Inc., a corporation incorporated under the laws of Canada (“Anomalous”), and the shareholders of Anomalous, under which the Company agreed to purchase all of the outstanding equity of Anomalous (the “Anomalous Share Purchase”). This acquisition reflects the Company’s strategy to broaden its suite of offerings and to provide real time telecom expense management capabilities. On the same day, the Anomalous Share Purchase was effected in accordance with the terms of the Anomalous Purchase Agreement with the Company acquiring all of the outstanding equity of Anomalous for aggregate consideration of (i) approximately $3,500,000 in cash paid at the closing, (ii) approximately $1,000,000 in cash payable on the first anniversary of the closing, (iii) 165,775 unregistered shares of the Company’s common stock and (iv) 132,617 unvested and unregistered shares of the Company’s common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013 (the “Earn-Out Period”). With the exception of the cash paid at the closing, substantially all of the consideration paid and payable by the Company remains subject to set-off rights of the Company with respect to indemnities given by the former shareholders of Anomalous under the Anomalous Purchase Agreement. Among other things, these indemnity obligations relate to representations and warranties given by Anomalous under the Anomalous Purchase Agreement. The indemnities are subject to limitations, including a threshold, certain caps and limited survival periods. The vested shares issued by the Company at closing are subject to a one-year lock-up period,

 

12



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

the unvested shares are also subject to a lock-up unless and until they become vested following the end of the Earn-Out Period and substantially all of the shares are subject to the set-off rights described above. Under the Anomalous Purchase Agreement, the Company is required to make an advance deposit into escrow of the $1,000,000 of deferred consideration in the event that the Company’s cash and cash equivalents is below $15,000,000 at any time before payment of the $1,000,000 of deferred consideration.  The Company has included the operating results of Anomalous in its consolidated financial statements since the date acquisition, including revenue of $0.2 million through March 31, 2012.

 

Anomalous Purchase Price Allocation

 

The allocation of the total purchase price of Anomalous’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of January 10, 2012. The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and deferred purchase price and the allocation of the total purchase price (in thousands):

 

Purchase consideration:

 

 

 

Cash

 

$

3,521

 

Common stock

 

1,984

 

Deferred cash consideration

 

1,495

 

 

 

$

7,000

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

1,140

 

Property and equipment

 

47

 

Other assets

 

10

 

Identifiable intangible assets

 

2,857

 

Goodwill

 

4,477

 

Total assets acquired

 

8,531

 

Accounts payable and accrued expenses

 

(394

)

Deferred taxes

 

(767

)

Deferred revenue

 

(370

)

 

 

$

7,000

 

 

The goodwill and identifiable intangible assets related to the Anomalous acquisition are not tax deductible. The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization. The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Technology

 

$

2,017

 

5.0

 

Non-compete covenants

 

553

 

2.0

 

Customer relationships

 

236

 

4.0

 

Tradenames

 

51

 

3.0

 

Total intangible assets

 

$

2,857

 

 

 

 

ttMobiles Limited.

 

On February 21, 2012 (the “ttMobiles Acquisition Date”), the Company entered into a Share Purchase Agreement (the “ttMobiles Purchase Agreement”), with the holders of all of the issued share capital of ttMobiles Limited, a private limited company incorporated in England (“ttMobiles”), under which the Company agreed to purchase all of the issued share capital of ttMobiles

 

13



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

(the “ttMobiles Share Purchase”). On the same day, the ttMobiles Share Purchase was effected in accordance with the terms of the ttMobiles Purchase Agreement, with the Company acquiring all of the outstanding equity of ttMobiles for aggregate consideration of (i) £4,000,000 in cash paid at the closing, and (ii) £1,500,000 in cash payable on the first anniversary of the closing (the “Deferred Consideration”). The purchase price is subject to a net asset adjustment pursuant to which the purchase price will be increased or decreased to the extent that the net asset position of ttMobiles is more or less than a specified target by an amount that exceeds 5% of the target. The Deferred Consideration remains subject to set-off rights of the Company with respect to claims for breach of warranties and certain indemnities given by the former holders of the issued share capital of ttMobiles under the ttMobiles Purchase Agreement. Any breach claims and indemnities would be subject to limitations, including a threshold, certain baskets, caps and limited survival periods.  The Company has included the operating results of ttMobiles in its consolidated financial statements since the date of acquisition, including revenue of $0.8 million through March 31, 2012.

 

ttMobiles Purchase Price Allocation

 

The allocation of the total purchase price of ttMobiles’ net tangible and identifiable intangible assets was based upon the estimated fair value of those assets as of February 21, 2012. The Company allocated the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. The following table presents the breakdown between cash and deferred purchase price and the allocation of the total purchase price (in thousands):

 

Purchase consideration:

 

 

 

Cash

 

$

6,359

 

Deferred cash consideration

 

2,315

 

 

 

$

8,674

 

Allocation of Purchase Consideration:

 

 

 

Current assets

 

$

2,469

 

Property and equipment

 

188

 

Identifiable intangible assets

 

4,288

 

Goodwill

 

3,557

 

Total assets acquired

 

10,502

 

Accounts payable and accrued expenses

 

(848

)

Deferred taxes

 

(954

)

Deferred revenue

 

(26

)

 

 

$

8,674

 

 

The goodwill and identifiable intangible assets related to the ttMobiles acquisition are not tax deductible. The Company estimated the fair value of intangible assets using the income, cost and market approaches to value the identifiable intangible assets, which are subject to amortization. The following table presents the Company’s estimates of fair value of the intangible assets acquired (in thousands):

 

Description

 

Fair Value

 

Weighted Average
Useful Life
(in years)

 

Customer relationships

 

$

2,606

 

9.0

 

Technology

 

1,178

 

5.0

 

Tradenames

 

388

 

4.0

 

Non-compete covenant

 

116

 

2.0

 

Total intangible assets

 

$

4,288

 

 

 

 

14



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Unaudited Pro Forma Results

 

The following table presents the unaudited pro forma results of the Company for the three months ended March 31, 2011 and 2012 as if the acquisitions of HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles occurred at the beginning of 2011.  These results are not intended to reflect the actual operations of the Company had the acquisitions occurred at January 1, 2011.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

 

 

 

 

 

 

Revenue

 

$

32,169

 

$

35,981

 

Operating (loss) income

 

(775

)

557

 

(Loss) income applicable to common stockholders

 

(3,277

)

166

 

Basic (loss) income per common share

 

$

(0.70

)

$

0.00

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.70

)

$

0.00

 

 

3. Loss per Share Applicable to Common Stockholders

 

The following table sets forth the computations of loss per share applicable to common stockholders for the three months ended March 31, 2011 and 2012:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands, except per share amounts)

 

2011

 

2012

 

 

 

 

 

 

 

Basic net (loss) income per common share

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

Less: Preferred stock dividends

 

(929

)

 

Less: Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

Basic (loss) income per common share

 

$

(0.33

)

$

0.01

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

4,672

 

33,826

 

 

 

 

 

 

 

Diluted net (loss) income per common share

 

 

 

 

 

Net (loss) income

 

$

(613

)

$

192

 

Less: Preferred stock dividends

 

(929

)

 

Less: Accretion of redeemable convertible preferred stock

 

(16

)

 

(Loss) income applicable to common stockholders

 

$

(1,558

)

$

192

 

 

 

 

 

 

 

Diluted (loss) income per common share

 

$

(0.33

)

$

0.00

 

 

 

 

 

 

 

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

 

4,672

 

39,431

 

 

Diluted (loss) income per common share for the periods presented does not reflect the following potential common shares as the effect would be anti-dilutive.

 

 

Outstanding stock options

 

6,026

 

35

 

 

Outstanding restricted stock units

 

 

48

 

 

Common stock warrants

 

1,359

 

 

 

15



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

On August 1, 2011, as a result of the initial public offering all preferred stock was converted to common stock and all preferred stock warrants converted to warrants to purchase common stock.

 

4.      Computers, Furniture and Equipment-Net

 

Computers, furniture and equipment-net consist of:

 

 

 

As of

 

 

 

December 31,

 

March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

Computers and software

 

$

8,192

 

$

8,642

 

Furniture and fixtures

 

748

 

860

 

Leasehold improvements

 

635

 

739

 

 

 

9,575

 

10,241

 

Less accumulated depreciation

 

(6,241

)

(6,745

)

Computers, furniture and equipment-net

 

$

3,334

 

$

3,496

 

 

Computers and software includes equipment under capital leases totaling approximately $2.5 million at December 31, 2011 and March 31, 2012. Accumulated depreciation on equipment under capital leases totaled approximately $1.4 million and $1.5 million as of December 31, 2011 and March 31, 2012, respectively. Depreciation and amortization expense associated with computers, furniture and equipment was $0.3 million and $0.5 million for the three months ended March 31, 2011 and 2012, respectively.

 

In connection with the business combinations described in Note 2, the Company acquired fixed assets with fair values of $0.2 million during the first quarter of 2012.

 

16



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

5.      Intangible Assets and Goodwill

 

The following table presents the components of the Company’s intangible assets as of December 31, 2011 and March 31, 2012:

 

 

 

 

 

 

 

Weighted

 

 

 

December 31,

 

March 31,

 

Average Useful

 

(in thousands)

 

2011

 

2012

 

Life (in years)

 

 

 

 

 

 

 

 

 

Patents

 

$

1,054

 

$

1,054

 

8.0

 

Less: accumulated amortization

 

(634

)

(667

)

 

 

Patents, net

 

420

 

387

 

 

 

Technological know-how

 

7,831

 

11,026

 

6.4

 

Less: accumulated amortization

 

(2,465

)

(2,962

)

 

 

Technological know-how, net

 

5,366

 

8,064

 

 

 

Customer relationships

 

23,550

 

26,392

 

8.6

 

Less: accumulated amortization

 

(7,236

)

(7,966

)

 

 

Customer relationships, net

 

16,314

 

18,426

 

 

 

Convenants not to compete

 

198

 

867

 

2.0

 

Less: accumulated amortization

 

(163

)

(239

)

 

 

Convenants not to compete, net

 

35

 

628

 

 

 

Strategic marketing agreement

 

6,203

 

6,203

 

10.0

 

Less: accumulated amortization

 

(118

)

(149

)

 

 

Strategic marketing agreement, net

 

6,085

 

6,054

 

 

 

Tradenames

 

335

 

774

 

3.9

 

Less: accumulated amortization

 

(2

)

(37

)

 

 

Tradenames, net

 

333

 

737

 

 

 

Trademarks

 

247

 

247

 

Indefinite

 

Intangible assets, net

 

$

28,800

 

$

34,543

 

 

 

 

The related amortization expense of intangible assets for the three months ended March 31, 2011 and 2012 was $0.6 million and $1.4 million, respectively.  The Company’s estimate of future amortization expense for acquired intangible assets that exists at March 31, 2012 is as follows:

 

(in thousands)

 

 

 

April 1, 2012 to December 31, 2012

 

$

4,593

 

2013

 

6,175

 

2014

 

5,293

 

2015

 

3,935

 

2016

 

3,694

 

Thereafter

 

10,606

 

Total

 

$

34,296

 

 

The following table presents the changes in the carrying amounts of goodwill for the three months ended March 31, 2012.

 

 

 

Carrying

 

(in thousands)

 

Amount

 

 

 

 

 

Balance at December 31, 2011

 

$

36,266

 

ProfitLine leasehold interest adjustment

 

428

 

Anomalous

 

4,477

 

ttMobiles

 

3,557

 

Balance at March 31, 2012

 

$

44,728

 

 

17



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

6.     Restructuring Charge

 

In September 2011, the Company recorded a restructuring charge as a result of the consolidation of office space in New Jersey. The consolidation of office space eliminated redundant office space acquired in the HCL-EMS and Telwares acquisitions described in Note 2. This charge reflects the fair value of the remaining rent payments for the office space the Company ceased using, net of estimated sublease income plus real estate commissions, and office relocation costs. The liabilities related to the restructuring charge are included in other current liabilities and deferred rent and other non-current liabilities on the Company’s consolidated balance sheet. The following table summarizes the activity in the liabilities related to the restructuring charge for the three months ended March 31, 2012:

 

 

 

Lease costs, net

 

 

 

 

 

 

 

of estimated

 

 

 

 

 

(in thousands)

 

sublease income

 

Other Costs

 

Total

 

 

 

 

 

 

 

 

 

Remaining liability at December 31, 2011

 

$

1,265

 

$

69

 

$

1,334

 

Cash payments

 

(163

)

 

(163

)

Non-cash charges and other

 

 

5

 

5

 

Remaining liability at March 31, 2012

 

1,102

 

74

 

1,176

 

 

 

 

 

 

 

 

 

 

 

less: current portion

 

 

 

(746

)

 

 

Long-term portion

 

 

 

430

 

 

7.      Debt

 

As of December 31, 2011 and March 31, 2012, debt outstanding included the following:

 

 

 

December 31,

 

March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

HCL contingent consideration, net of unamortized discount of $152 at March 31, 2012. Payable in annual installments starting in 2012, as described below

 

$

3,731

 

$

3,789

 

 

 

 

 

 

 

Deferred Telwares purchase price, net of unamortized discount of $109 at March 31, 2012. Payable in annual installments starting in March 2012, as described below

 

2,338

 

1,141

 

 

 

 

 

 

 

Deferred ProfitLine purchase price, net of unamortized discount of $253 at March 31, 2012. Payable in annual installments starting in December 2012, as described below

 

8,682

 

8,747

 

 

 

 

 

 

 

Deferred Anomalous purchase price, net of unamortized discount of $22 at March 31, 2012. Payable in one installment in January 2013, as described below

 

 

957

 

 

 

 

 

 

 

Deferred ttMobiles purchase price, net of unamortized discount of $62 at March 31, 2012. Payable in one installment in February 2013, as described below

 

 

2,322

 

 

 

 

 

 

 

Capital lease and other obligations

 

1,443

 

1,149

 

Total notes payable

 

$

16,194

 

$

18,105

 

Less current portion

 

$

(7,904

)

$

(13,187

)

Notes payable, less current portion

 

$

8,290

 

$

4,918

 

 

18



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

Contingent HCL-EMS Consideration

 

As described in Note 2, the purchase consideration for the acquisition of HCL-EMS includes deferred cash consideration. The deferred cash consideration includes contingent cash payments following each of the first and second anniversaries of the HCL-EMS Closing Date of January 25, 2011, pursuant to an earn-out formula based upon specified revenues from specified customers acquired from HCL-EMS, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.6 million based on the Company’s weighted average cost of debt as of the date of the acquisition. The obligation to pay the deferred cash consideration is unsecured. The only adjustment to this balance in 2012 was the accretion of imputed interest.

 

Deferred Telwares Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of Telwares includes deferred cash consideration. The deferred cash consideration includes payments of $1,250,000 on March 16, 2012 and $1,250,000 on March 16, 2013, subject to set-off rights of the Company with respect to indemnities given by Telwares under the Telwares APA. The Company paid the first installment of $1,250,000 on March 16, 2012.  No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.3 million based on the Company’s weighted average cost of debt as of the date of the acquisition. The obligation to pay the deferred cash consideration is unsecured. The only adjustments to the balance in 2012 were the accretion of imputed interest and the payment of the first installment.

 

Deferred ProfitLine Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of ProfitLine includes deferred cash consideration. The deferred cash consideration includes payments of $9,000,000 in installments of $4,500,000 each on December 19, 2012 and June 19, 2013, subject to set-off rights of the Company and the surviving corporation with respect to indemnities given by the former stockholders of ProfitLine under the Merger Agreement. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.3 million based on the Company’s weighted average cost of debt as of the date of the acquisition. The obligation to pay the deferred cash consideration is unsecured. The only adjustment to this balance in 2012 was the accretion of imputed interest.  Under the Merger Agreement, the Company is required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that the Company’s cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20,000,000 at any time prior to payment of the first $4,500,000 installment of deferred consideration, or $15,000,000 at any time after payment of the first and before payment of the second $4,500,000 installment of deferred consideration.

 

Deferred Anomalous Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of Anomalous includes deferred cash consideration.  The deferred cash consideration includes a payment of $1,000,000 in cash on the first anniversary of the Anomalous Closing Date, subject to set-off rights of the Company with respect to indemnities given by the former shareholders of Anomalous under the Anomalous Purchase Agreement. No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $29,000 based on the Company’s weighted average cost of debt as of the date of the acquisition.  The obligation to pay the deferred cash consideration is unsecured.  Under the Anomalous Purchase Agreement, the Company is required to make an advance deposit into escrow of the $1,000,000 of deferred consideration in the event that the Company’s cash and cash equivalents is below $15,000,000 at any time before payment of the $1,000,000 of deferred consideration.

 

Deferred ttMobiles Purchase Price

 

As described in Note 2, the purchase consideration for the acquisition of ttMobiles includes deferred cash consideration.  The Deferred Consideration includes a payment of £1.5 million (or approximately $2.4 million) in cash payable on the first anniversary of the ttMobiles Acquisition Date.  No interest accrues on the deferred cash consideration; however, the Company recorded imputed interest in the amount of $0.1 million based on the Company’s weighted average cost of debt as of the date of the acquisition.  The obligation to pay the deferred cash consideration is unsecured. The Deferred Consideration remains subject to set-off rights of the Company with respect to claims for breach of warranties and certain indemnities given by the former holders of the issued share capital of ttMobiles under the ttMobiles Purchase Agreement. Any breach claims and indemnities would be subject to limitations, including a threshold, certain baskets, caps and limited survival periods.

 

19



Table of Contents

 

Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

8.     Stockholders’ Equity

 

Common Stock—As of December 31, 2011 and March 31, 2012, the number of authorized shares of common stock, par value $0.0001 per share was 150,000,000, of which 33,152,592 and 34,349,633 were issued and outstanding, respectively.

 

During the three months ended March 31, 2012, the Company issued 165,775 unregistered shares of its common stock and 132,617 unvested and unregistered shares of its common stock as part of the Anomalous purchase consideration, as described in Note 2.  Additionally, the Company issued 9,639 shares of its common stock to two of its officers under the provisions of the 2011 Plan.

 

Preferred Stock—As of December 31, 2011 and March 31, 2012, the number of authorized shares of preferred stock, par value $0.0001 per share, was 5,000,000 of which 0 were issued and outstanding.

 

Investor Rights Agreements—Holders of a substantial portion of the Company’s outstanding common stock and warrants to purchase common stock have rights to require the Company to register these shares under the Securities Act of 1933, as amended, under specified circumstances pursuant to the Company’s Eighth Amended and Restated Investors Rights Agreement, as amended.

 

Warrants

 

Common Stock Warrants—During the three months ended March 31, 2012, warrant holders exercised warrants to purchase a total of 522,507 shares of common stock pursuant to a cashless exercise feature of these warrants.  As a result of the cashless exercise, 398,060 shares of common stock were issued and 124,447 warrant shares were cancelled in lieu of payment of cash consideration to the Company.

 

On March 22, 2011, the Company issued a warrant to purchase up to 1,282,789 shares of its common stock to Dell Products, L.P. (“Dell”) in connection with the entry of the Company and Dell into a 49-month strategic relationship agreement. Under the terms of the warrant, the 1,282,789 shares of common stock may become exercisable upon the achievement of certain annual recurring revenue thresholds over the 49-month period. The warrant is exercisable at $5.987 per share. As of March 31, 2012, none of the shares that may become exercisable under this warrant were probable of being earned and becoming vested and accordingly no value was ascribed to this warrant. On a quarterly basis the Company reviews the actual annual recurring revenue related to the Dell strategic relationship agreement to determine if it is probable that Dell will reach any of the annual recurring revenue thresholds that would result in warrant shares being earned and becoming vested, and to the extent the Company deems it probable that any warrant shares will be earned and become vested, the Company will record the fair value of those shares to intangible assets and non-current liabilities using a Black-Scholes valuation model and mark to market each period thereafter until such time as the warrant shares are actually earned and vest.

 

On October 9, 2009, the Company issued a warrant to purchase up to 3,198,402 shares of its common stock to International Business Machines Corporation (“IBM”) in connection with the entry of the Company and IBM into a five-year strategic relationship agreement. Under the terms of the warrant, 890,277 shares of common stock were vested and exercisable immediately upon execution of the agreement. Up to an additional 2,308,125 shares of common stock may become exercisable upon the achievement of certain billing thresholds over a three-year period. The warrant is exercisable at $4.148 per share. (Certain terms of this warrant were amended on June 8, 2011, as described in the paragraph below). The Company valued the initial 890,277 shares of common stock exercisable under the warrant at $1.7 million using the Black-Scholes valuation model at the time of the signing of the agreement. The Black-Scholes valuation assumptions included an expected term of seven years, volatility of 67.77% and a risk free interest rate of 2.93%. The Company recorded the $1.7 million value of the initial 890,277 shares of common stock as an increase to warrants for common stock and an increase to other non-current assets on the Company’s consolidated balance sheet. During the three months ended December 31, 2009, the Company determined that it was probable that IBM would reach certain of the billing thresholds to have an additional 947,103 shares of common stock become exercisable. The additional shares of common stock exercisable under the warrant were valued at $1.4 million using the Black-Scholes valuation model at the time the Company determined it was probable they would reach the billing thresholds. The Company recorded the value of the additional shares of common stock to intangible assets and non-current liabilities.  In December 2010, the Company reviewed the actual billings to date related to the strategic relationship agreement and determined it was probable IBM would reach the billing thresholds to earn 624,755 shares of the additional 947,103 shares of common stock accrued. The Company reversed $920,000 of market value related to the 322,348 shares of common

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

stock no longer deemed probable of being earned.

 

On June 8, 2011, certain terms of the common stock warrant described above were amended by the Company and IBM. Under the terms of the amended warrant agreement, an additional 624,755 shares of common stock were vested and exercisable immediately (in addition to the 890,277 shares previously vested and exercisable), the additional warrant shares that may be earned were reduced from 2,308,125 to 651,626 shares of common stock, and the methodology for earning the additional warrant shares was revised to be based on specified new contractual revenue commitments from IBM that occur between June 8, 2011 and June 30, 2012. Based on this amendment, the maximum number of warrant shares (issued and issuable) to IBM was reduced from 3,198,402 to 2,166,658 shares of common stock. The fair value of the 624,755 warrant shares vested as a result of this amendment was determined to be $4.5 million using the Black-Scholes valuation model. The Company recorded these vested warrant shares as an increase to warrants for common stock, reversed the non-current liability associated with the previous accrual for these warrant shares, and the difference was added to intangible assets and is being amortized in proportion to the expected revenue over the remainder of the original ten-year period noted above. On a quarterly basis the Company evaluates the probability of IBM vesting in any of the 651,626 additional warrant shares between June 8, 2011 and June 30, 2012, and to the extent the Company deems it probable that any portion of these additional warrant shares will be earned, the Company would record the fair value of the additional shares of common stock to intangible assets and non-current liabilities using a Black-Scholes valuation model, and mark to market each period thereafter until such time that the warrant shares are actually earned and vest. On August 30, 2011, the Company issued 930,511 shares of its common stock to IBM upon the exercise by IBM of this warrant, pursuant to a cashless exercise feature.  As a result of the cashless exercise, 584,521 warrant shares were cancelled in lieu of the payment of cash consideration to the Company.

 

The Company began to amortize the intangible asset in the first quarter of 2010, with the related charge recorded as contra-revenue. The related charge to revenue will be in proportion to expected revenue over approximately a ten-year period. For the three months ended March 31, 2011 and 2012, the Company recorded $18,647 and $31,505, respectively, of amortization as a contra-revenue charge related to the common stock warrant. The warrant value has been marked to market on a quarterly basis until the warrant shares were earned and vested.

 

A summary of warrants exercised to purchase common stock during the three months ended March 31, 2012 is presented below:

 

 

 

Number of

 

 

 

Stock

 

 

 

Warrants

 

 

 

 

 

Outstanding at beginning of the year

 

589,941

 

Exercised

 

(398,060

)

Issued

 

 

Cancelled

 

(124,447

)

Outstanding at end of the period

 

67,434

 

 

 

 

 

Weighted average exercise price

 

$

1.93

 

 

Stock Options—As of March 31, 2012, the Company had five stock-based compensation plans, the Employee Stock Option/Stock Issuance Plan (the “Employee Plan”), the Executive Stock Option/Stock Issuance Plan (the “Executive Plan”), the 2005 Stock Incentive Plan (the “2005 Plan”), the Traq Amended and Restated 1999 Stock Plan (the “1999 Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards.

 

Under the provisions of the Employee Plan, the Executive Plan, the 2005 Plan, the 1999 Plan and the 2011 Plan (the “Plans”), the exercise price of each option is determined by the Company’s board of directors or by a committee appointed by the board of directors.  Under the 2011 Plan, the exercise price of all stock options must not be less than the fair market value of a share of common stock on the date of grant. The period over which options vest and become exercisable, as well as the term of the options, is determined by the board of directors or the committee appointed by the board of directors. The options generally vest over 4 years and

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

expire 10 years after the date of the grant. During the three months ended March 31, 2012, the Company’s board of directors granted options to purchase an aggregate of 1,667,424 shares of common stock under the 2011 Plan to employees and non-employees, at a weighted average exercise price of $15.58 per share.

 

A summary of the status of stock options issued pursuant to the Plans during the three months ended March 31, 2012 is presented below:

 

Options

 

Number of Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Contractual
Life (years)

 

 

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

6,670,335

 

$

3.60

 

 

 

Granted

 

1,667,424

 

$

15.58

 

 

 

Forfeited

 

(143,911

)

$

5.39

 

 

 

Exercised

 

(490,950

)

$

2.84

 

 

 

Outstanding at end of the period

 

7,702,898

 

$

6.21

 

7.6

 

 

 

 

 

 

 

 

 

Exercisable at end of the period

 

3,796,175

 

$

2.34

 

6.1

 

 

 

 

 

 

 

 

 

Available for future grants at March 31, 2012

 

1,732,050

 

 

 

 

 

 

The intrinsic values of options outstanding, vested and exercised during the three months ended March 31, 2012 were as follows:

 

 

 

2012

 

 

 

Number of

 

Intrinsic

 

 

 

Options

 

Value

 

Outstanding

 

7,702,898

 

$

97,053,027

 

Vested

 

3,796,175

 

$

62,519,474

 

Exercised

 

490,950

 

$

6,813,792

 

 

During the three months ended March 31, 2012, employees and former employees of the Company exercised options to purchase a total of 490,950 shares of common stock at exercise prices ranging from $0.25 to $5.99 per share. Proceeds from the stock option exercises totaled $1.4 million.

 

Restricted Stock Units—During the three months ended March 31, 2012, the Company issued 130,500 restricted stock units to certain employees under the provisions of the 2011 Plan. This grant of restricted stock units had an aggregate value of $2.1 million.  The value of a restricted stock unit award is determined based on the closing price of the Company’s stock price at the date of grant.  A restricted stock unit award entitles the holder to receive shares of the Company’s common stock as the award vests. The restricted stock units vest over periods that range from 2 to 4 years.  Stock-based compensation expense is amortized on a straight-line basis over the vesting period.

 

For the three months ended March 31, 2012, the Company recorded stock-based compensation expenses of $0.1 million related to restricted stock unit awards.

 

As of March 31, 2012, there was $2.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock units. This amount will be amortized on a straight-line basis over the requisite service period related to the restricted unit grants.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

A summary of the status of restricted stock units issued pursuant to the Plans during the three months ended March 31, 2012 is presented below:

 

Restricted Stock Units

 

Number of Shares

 

Weighted
Average Fair
Value

 

 

 

 

 

 

 

Outstanding at beginning of the year

 

 

$

 

Granted

 

130,500

 

$

16.05

 

Outstanding at end of the period

 

130,500

 

$

16.05

 

 

 

 

 

 

 

Exercisable at end of the period

 

 

$

 

 

In accordance with Accounting Standards Classification (“ASC”) 718, Share Based Payment (“ASC 718”), total compensation expense for stock-based compensation awards was $0.8 million and $1.6 million for the three months ended March 31, 2011 and 2012, respectively, which is included on the accompanying consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2012

 

Cost of goods sold

 

$

149

 

$

250

 

Sales and marketing expenses

 

173

 

366

 

General and administrative expenses

 

472

 

915

 

Research and development

 

41

 

93

 

Total stock-based employee compensation

 

$

835

 

$

1,624

 

 

Stock-based employee compensation expense for equity awards granted since January 1, 2006 will be recognized over the following periods as follows (in thousands):

 

Years Ending December 31,

 

 

 

2012

 

$

5,902

 

2013

 

6,795

 

2014

 

5,854

 

2015

 

4,006

 

2016

 

406

 

 

 

$

22,963

 

 

Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes valuation model on the date of grant for stock options. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected volatility, expected terms, risk-free interest rates and dividend yields. The Company determined the assumptions in the Black-Scholes valuation model as follows: expected volatility is a combination of the Company’s competitors’ historical volatility; expected term is calculated using the “simplified” method prescribed in ASC 718; and the risk free rate is based on the U.S. Treasury yield on 5 and 7-year instruments in effect at the time of grant. A dividend yield is not used, as the Company has never paid cash dividends and does not currently intend to pay cash dividends. The Company periodically reviews the assumptions and modifies the assumptions accordingly.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the statement of cash flows.

 

The fair value of the options granted during 2012 was determined at the date of grant using the Black-Scholes valuation model with the following assumptions:

 

 

 

2012

 

 

 

 

 

Expected dividend yield

 

0%

 

Risk-free interest rate

 

0.96% to 1.16%

 

Expected term (in years)

 

5.5 - 6.1 years

 

Expected volatility

 

59.78% - 59.92%

 

 

Based on the above assumptions, the weighted average fair value per share of stock options granted during the three months ended March 31, 2012 was approximately $8.61.

 

9.     Income Taxes

 

The income tax provision differs from the expected tax provisions computed by applying the U.S. Federal statutory rate to loss before income taxes primarily because the Company has historically maintained a full valuation allowance on its deferred tax assets and to a lesser extent because of the impact of state income taxes.  As described in the 2011 Form 10-K, the Company maintains a full valuation allowance in accordance with ASC 740, Accounting for Income Taxes, on its net deferred tax assets.  Until the Company achieves and sustains an appropriate level of profitability, it plans to maintain a valuation allowance on its net deferred tax assets.

 

10.  Fair Value Measurement

 

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

 

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

 

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

 

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

 

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

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

The following table discloses the assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 and the basis for that measurement:

 

 

 

Fair Value Measurement at March 31, 2012

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

28,045

 

$

28,045

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

3,789

 

 

 

3,789

 

 

 

$

31,834

 

$

28,045

 

$

 

$

3,789

 

 

 

 

Fair Value Measurement at December 31, 2011

 

(in thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market

 

$

30,031

 

$

30,031

 

$

 

$

 

Contingent HCL-EMS acquisition consideration

 

3,731

 

 

 

3,731

 

 

 

$

33,762

 

$

30,031

 

$

 

$

3,731

 

 

The Company’s investment in overnight money market institutional funds, which amounted to $30.0 million and $28.0 million at December 31, 2011 and March 31, 2012, respectively, is included in cash and cash equivalents on the accompanying consolidated balance sheets and is classified as a Level 1 input.

 

The acquisition of HCL-EMS includes a contingent consideration agreement that requires additional consideration to be paid by the Company following each of the first and second anniversaries of the HCL-EMS Closing Date, pursuant to an earn-out formula ranging from 7.5% to 15% of specified revenues from specified customers acquired, subject to set-off rights of the Company with respect to indemnities given by HCL-EMS under the HCL-EMS APA. The fair value of the contingent consideration recognized was $3.4 million which was estimated by applying the income approach. The key assumptions include (a) a discount rate of 10.5% and (b) probability adjusted levels of revenue between approximately $12.6 million and $13.9 million. As of March 31, 2012, there were no changes in the recognized amounts, except for the accretion of interest, or potential outcome for the contingent consideration recognized as a result of the HCL-EMS acquisition.

 

The carrying amounts of the Company’s other non-cash financial instruments including accounts receivable and accounts payable approximate their fair values due to the relatively short-term nature of these instruments. The carrying amounts of the Company’s deferred purchase price consideration to Telwares, ProfitLine, Anomalous and ttMobiles approximate fair value as the effective interest rates approximates market rates.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

11.  Supplemental Cash Flow Information:

 

Information about other cash flow activities during the three months ended March 31, 2011 and 2012 are as follows:

 

 

 

Three months ended March 31,

 

(in thousands)

 

2011

 

2012

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

399

 

$

36

 

Income tax payments

 

$

43

 

$

14

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Contingent consideration issued in connection with HCL-EMS acquisition

 

$

3,390

 

$

 

Deferred purchase price in connection with Telwares acquisition

 

$

2,154

 

$

 

Deferred purchase price in connection with Anomalous acquisition

 

$

 

$

950

 

Deferred purchase price in connection with ttMobiles acquisition

 

$

 

$

2,315

 

Preferred stock dividends and accretion

 

$

945

 

$

 

Issuance of warrants in connection with notes payable and marketing agreement

 

$

1,356

 

$

 

Computer, furniture and equipment acquired with capital lease

 

$

297

 

$

 

Unpaid deferred secondary offering costs

 

$

266

 

$

640

 

Cashless exercise of warrants

 

$

24

 

$

479

 

 

12.  Commitments and Contingencies

 

During the normal course of business, the Company becomes involved in various routine legal proceedings including issues pertaining to patent infringement, customer disputes and employee matters. The Company does not believe that the outcome of these matters will have a material adverse effect on its financial condition.

 

The Company has entered into non-cancellable operating leases for the rental of office space in various locations which expire between 2012 and 2016. Some of the leases provide for lower payments in the beginning of the term which gradually escalate during the term of the lease. The Company recognizes rent expense on a straight-line basis over the lease term, which gives rise to a deferred rent liability on the balance sheet. The Company also has entered into agreements with third-party hosting facilities, which expire between 2012 and 2015.

 

The Company is also obligated under several leases covering computer equipment and software, which the Company has classified as capital leases. Additionally, the Company has entered into several operating leases for various office equipment items, which expire between 2012 and 2015.

 

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Notes to Condensed Consolidated Financial Statements — continued (Unaudited)

 

As of March 31, 2012, the Company’s obligation for future minimum rental payments related to these leases is as follows:

 

(in thousands)

 

Operating Leases

 

Capital Leases

 

April 1, 2012 to December 31, 2012

 

$

4,651

 

$

602

 

2013

 

5,883

 

492

 

2014

 

5,537

 

133

 

2015

 

3,806

 

 

2016

 

1,439

 

 

Total future minimum lease obligations

 

$

21,316

 

$

1,227

 

 

 

 

 

 

 

Less: amount representing interest

 

 

 

(78

)

Present value of minimum lease obligations

 

 

 

$

1,149

 

 

Rent expense, included in general and administrative expense, was approximately $0.6 million and $1.1 million for the three months ended March 31, 2011 and 2012, respectively.

 

13.  Subsequent Events

 

In April 2012, the Company completed a public offering whereby it sold 2,200,000 shares of common stock at a price to the public of $18.50 per share.  The Company’s common stock is traded on the NASDAQ Global Market.  The Company received proceeds from this public offering of $38.5 million, net of underwriting discounts and commissions but before offering costs of $0.7 million.  Offering costs at March 31, 2012 of $0.7 million that are recorded in other non-current assets will be reclassified as a reduction to additional paid-in capital in the second quarter of 2012.

 

As part of this public offering, an additional 7,000,000 shares of common stock were sold by certain existing stockholders at a price to the public of $18.50 per share, including 1,200,000 shares sold by such stockholders upon the exercise of the underwriters’ option to purchase additional shares.  The Company did not receive any proceeds from the sale of such shares by the selling stockholders.

 

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

 

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

 

Overview

 

Tangoe is a leading global provider of communications lifecycle management, or CLM, software and services to a wide range of enterprises, including large and medium-sized businesses and other organizations. CLM encompasses the entire lifecycle of an enterprise’s communications assets and services, including planning and sourcing, procurement and provisioning, inventory and usage management, mobile device management, invoice processing, expense allocation and accounting, and asset decommissioning and disposal. Our on-demand Communications Management Platform is a suite of software designed to manage and optimize the complex processes and expenses associated with this lifecycle for both fixed and mobile communications assets and services. Our customers can engage us through our client services group to manage their communications assets and services using our Communications Management Platform.

 

Our solution can provide a significant return on investment by enabling an enterprise to identify and resolve billing errors, to optimize communications service plans for its usage patterns and needs, and to manage used and unused communications assets and services. Our solution allows enterprises to improve the productivity of their employees by automating the provisioning of communications assets and services, and to reduce costs by controlling and allocating communications expenses. It also allows enterprises to enforce regulatory requirements and internal policies governing the use of communications assets and services.

 

We designed our business model to sell recurring technology and services leveraging our Communications Management Platform. We review four key business metrics to help us monitor the performance of our business model and to identify trends affecting our business. The measures that we believe are the primary indicators of our quarterly and annual performance are as follows:

 

Adjusted EBITDA.  We define Adjusted EBITDA as net income (loss) plus interest expense, income tax provision, depreciation and amortization, amortization of marketing agreement intangible assets, stock-based compensation expense and decrease (increase) in fair value of warrants for redeemable convertible preferred stock; less amortization of leasehold interest and interest income.  Our management uses Adjusted EBITDA to measure our operating performance because it does not include the impact of items not directly resulting from our core business and certain non-cash expenses such as depreciation and amortization and stock-based compensation. We believe that this measure provides us with additional useful information to measure and understand our performance on a consistent basis, particularly with respect to changes in performance from period to period. We use Adjusted EBITDA in the preparation of our annual operating budgets and to measure and evaluate the effectiveness of our business strategies. Adjusted EBITDA is not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP, and is not a substitute for or superior to financial measures determined in accordance with GAAP. Other companies in our industry may calculate Adjusted EBITDA in a manner differently from us, which reduces its usefulness as a comparative measure.  Our Adjusted EBITDA has increased annually for each fiscal year since 2007 and we expect it to continue to increase in our fiscal year ending December 31, 2012.

 

Recurring technology and services revenue growth.  In 2006, we began a strategic initiative to transition our business model from selling transactional software licenses to providing recurring technology-enabled services leveraging both our technology and communications industry experience. We further implemented this initiative with the acquisition of Traq Wireless, Inc., or Traq, as discussed below. Traq’s revenue base was primarily recurring, which substantially increased our 2007 recurring revenue. We regularly review our recurring revenue growth to measure our success.

 

We intend to continue to focus our sales and marketing efforts on increasing our recurring technology and services-related customer base, and we expect that our recurring technology and services revenue will increase in absolute dollars and as a percentage of total revenue over the next 12 months due to our expectation that we will be able to:

 

·                  retain a high percentage of the revenue we currently derive from our existing customers;

 

·                  sell additional product and service offerings to our existing customers; and

 

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·                  add a significant number of new customers.

 

We believe that we will be able to retain a high percentage of our existing recurring technology and services revenue due to our revenue retention rates, and the current levels of customer usage of our products and services, which we review on a monthly basis to provide an indication of impending increases or decreases in billed revenue for future periods.

 

We believe that we will be able to sell additional product and service offerings to our existing customers in the next year based on our analysis of revenue on a per-customer basis for the last 12 months, which indicates that our customers on an aggregate basis have generally increased their usage of our solution on a quarterly basis.

 

We believe that we will be able to add a significant number of new customers over the next 12 months as we continue to expand internationally and increase our share of the domestic market.

 

Deferred revenue.  Our deferred revenue consists of the amounts that have been invoiced but that have not yet been recognized as revenue, including advanced billed and undelivered portions of our Communication Management Platform subscriptions and related services, maintenance on our software licenses and implementation fees. We invoice our services to many of our customers in advance, with the intervals ranging from 1 to 12 months. We monitor our deferred revenue balance as this balance represents revenue to be recognized over the next 12 months except for implementation fees which are recognized ratably over twice the term of the contract, which we estimate to be the expected life of the customer relationship. As of March 31, 2012, implementation fees represented $2.0 million of the $11.7 million deferred revenue balance.

 

Revenue retention rates.  In addition, we consider our revenue retention rates. Since we began to fully realize the benefits of our recurring revenue model in 2009, our revenue retention rates have been higher than 90%. We measure revenue retention rates by assessing on a dollar basis the recurring technology and services revenue we retain for the same customer and product set in a given period versus the prior year period. We cannot predict our revenue retention rates in future periods. Our use of a revenue retention rate has limitations as an analytical tool, and you should not consider it in isolation. Other companies in our industry may calculate revenue retention rates differently, which reduces its usefulness as a comparative measure.

 

We also review a number of other quantitative and qualitative trends in monitoring our performance, including our share of the CLM market, our customer satisfaction rates, our ability to attract, hire and retain a sufficient number of talented employees to staff our growing business and the development and performance of our solutions. Our review of these factors can affect aspects of our business and operations on an on-going basis, including potential acquisition strategies and investment in specific areas of product development or service support.

 

Certain Trends and Uncertainties

 

The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. This summary, however, should be considered along with the factors identified in the “Risk Factors” section of this Quarterly Report on Form 10-Q.

 

·                  The CLM market is characterized by rapid technological change and frequent new product and service introductions, including frequent introductions of new technologies and devices. To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed.

 

·                  We believe that competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations.

 

·                  We continue to closely monitor current economic conditions, as any decline in the general economic environment that negatively affects the financial condition of our customers could have an adverse effect on our financial condition and results of operations. For example, during the most recent economic downturn, our customer cancellation rate during the first quarter of 2009 increased to a quarterly rate of over three times the average of the prior four quarters, partly as a result of customer bankruptcies. Although economic conditions have generally improved, there has not been a full recovery to the levels that generally existed prior to the downturn. If economic conditions in the United States and other countries do not continue to improve, we may face greater risks in operating our business.

 

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Acquisitions

 

On January 25, 2011, we acquired substantially all of the assets of HCL Expense Management Services Inc., or HCL-EMS, a provider of telecommunications expense management, invoice processing and mobility management solutions, for $3.0 million in cash plus potential earnout payments, which we currently estimate will amount to approximately $3.4 million, based on revenues derived from providing selected services to former HCL-EMS customers over the two years following the acquisition as well as transaction costs of approximately $140,000. These transaction costs were expensed as incurred.  The earnout payments are subject to set-off rights of ours with respect to indemnities given by HCL-EMS under our Asset Purchase Agreement for HCL-EMS.

 

On March 16, 2011, we acquired substantially all of the assets of the telecommunications expense management division of Telwares, Inc. and its subsidiary Vercuity Solutions, Inc., or Telwares, for $4.5 million in cash (excluding working capital adjustments) plus deferred cash of up to an additional $2.5 million payable in installments of $1.25 million each on March 16, 2012 and March 16, 2013. The deferred cash is subject to set-off rights that we hold with respect to indemnities given by Telwares under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Telwares under the purchase agreement. Certain of these indemnities are subject to limitations, including certain caps and limited survival periods. In addition, the installment payable on March 16, 2013 is subject to a potential reduction of up to $500,000 relating to the achievement of certain recurring revenue goals during the three months ending June 30, 2012. In addition, we incurred transaction costs of approximately $200,000 in connection with the transaction. These transaction costs were expensed as incurred.

 

On December 19, 2011, we acquired ProfitLine, Inc., or ProfitLine, a provider of telecommunications expense management, invoice processing and mobility management solutions, through a merger with one of our subsidiaries for $14.5 million in cash paid at the closing plus deferred cash of an additional $9.0 million payable in cash installments of $4.5 million on each of December 19, 2012 and June 19, 2013, subject to set-off rights that we and ProfitLine, as our wholly owned subsidiary following the acquisition, hold with respect to indemnities given by the former stockholders of ProfitLine under the merger agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by ProfitLine under the merger agreement. Certain of these indemnities are subject to limitations, including a threshold, certain caps and a limited survival period. Under the merger agreement, we are required to make an advance deposit into escrow of the deferred consideration under certain circumstances, including in the event that our cash and cash equivalents, less bank and equivalent debt (which excludes capital lease obligations and deferred consideration payable in connection with acquisitions) is below $20.0 million at any time prior to payment of the first $4.5 million installment of deferred consideration, or $15.0 million at any time after payment of the first and before the payment of the second $4.5 million installment of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

 

On January 10, 2012, we acquired all of the outstanding equity of Anomalous Networks Inc., or Anomalous, a provider of real-time telecommunications expense management solutions. The aggregate purchase was approximately $9.0 million, which consisted of approximately $3.5 million in cash paid at the closing, approximately $1.0 million in cash payable on the first anniversary of the closing, 165,775 unregistered shares of our common stock and 132,617 unvested and unregistered shares of our common stock with vesting based on achievement of revenue targets relating to sales of Anomalous products and services for periods through January 31, 2013. With the exception of the cash paid at the closing, substantially all of the consideration paid and payable by us remains subject to set-off rights that we hold with respect to indemnities given by the former shareholders of Anomalous under the purchase agreement for the acquisition. Among other things, these indemnity obligations relate to representations and warranties given by Anomalous under the purchase agreement. The indemnities are subject to limitations, including a threshold, certain caps and limited survival periods. The vested shares that we issued at closing are subject to a one-year lock-up period, the unvested shares are also subject to a lock-up unless and until they become vested following January 31, 2013 and substantially all of the shares are subject to the set-off rights described above. Under the Anomalous purchase agreement, we are required to make an advance deposit into escrow of $1.0 million of deferred consideration in the event that our cash and cash equivalents is below $15.0 million at any time before payment of the $1.0 million of deferred consideration. The transaction costs were immaterial and were expensed as incurred.

 

On February 21, 2012, we acquired all of the issued share capital of ttMobiles Limited, or ttMobiles, a provider of mobile communications management solutions and services based in the United Kingdom. The purchase price was 5.5 million pounds sterling, which consisted of 4.0 million pounds sterling in cash paid at the closing and 1.5 million pounds sterling in cash payable on the first anniversary of the closing. The purchase price is subject to a net asset adjustment pursuant to which the purchase price will be increased or decreased to the extent that the net asset position of ttMobiles is more or less than a specified target by an amount that exceeds 5% of the target. The deferred consideration in the transaction remains subject to set-off rights that we hold with respect to claims for breach of warranties and certain indemnities given under the purchase agreement for the transaction by the former holders of the issued share capital of ttMobiles. The breach claims and indemnities are subject to limitations, including a threshold, certain baskets, caps and limited survival periods. The transaction costs were immaterial and were expensed as incurred.

 

We are currently integrating the operations of the five businesses that we acquired during 2011 and the first quarter of 2012. With respect to three of these businesses, we are migrating the acquired customers to our platform. To date we have successfully migrated a number of these customers, however there can be no assurance that we will complete this integration and migration in a timely manner or at all and the cost of such integration and migration may be more significant than we have estimated.

 

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We intend to pursue additional acquisitions of, or investments in, businesses, services and technologies that will expand the functionality of our solution, provide access to new markets or customers, or otherwise complement our existing operations.

 

Sources of Revenue

 

Recurring technology and services revenue.  We derive our recurring technology and services revenue primarily from subscriptions and services related to our Communications Management Platform. We recognize revenue for software and related services when all of the following conditions are met: (a) there is persuasive evidence of an arrangement; (b) the service has been provided to the customer; (c) the collection of the contracted fee is probable; and (d) the amount of the fees to be paid by the customer is fixed and determinable. These services include help desk, asset procurement and provisioning, and carrier dispute resolution. The recurring technology and services revenue is recognized ratably over the contract term.

 

In 2006, we began a strategic initiative to transition our business model from selling non-recurring transactional software licenses to providing recurring technology and services leveraging both our technology and communications industry experience.

 

We license our on-demand software and sell related services primarily on a subscription basis under agreements that typically have terms ranging from 24 to 60 months. Our recurring technology and services revenue is driven primarily by the amount of communications spend that we manage for fixed line contracts and by the number of mobile devices that we manage for mobile device contracts. Our customers are typically subject to a minimum charge for up to a specified threshold amount of communications spend or number of mobile devices under management and additional charges to the extent those specified thresholds are exceeded. Prior to 2010, as a result of limited history regarding customer renewals, implementation fees related to subscription agreements for our Communications Management Platform with terms equal to or less than 36 months were recognized over 36 months and implementation fees related to subscription agreements with terms exceeding 36 months were recognized over the life of the agreement. In 2010, due to having greater evidence regarding customer renewals, we believed it was appropriate to extend the estimated expected life of the customer relationship to be equal to twice the contract life calculated on a per-customer basis and to recognize implementation fees ratably over this period. This change did not have a material impact on our consolidated financial statements. Our subscription contracts are typically non-cancelable, although customers have the right to terminate for cause if we materially fail to perform.

 

In 2010, we began to amortize the value of a warrant to purchase common stock issued to IBM as part of a strategic relationship agreement. This related charge will be recorded as contra-revenue in proportion to total expected revenue from the agreement. We recorded $18,647 and $31,505 of amortization as a contra-revenue charge during the three months ended March 31, 2011 and 2012, respectively.

 

Strategic consulting, software licenses and other revenue.  In addition to our subscription fees, revenue is generated to a lesser extent by strategic consulting, software licenses and mobile device activation fees. Strategic consulting consists primarily of fees charged for contract negotiations and bill audits. Contract negotiation fees include both fixed project fees and incentive fees driven by the amount of savings that we are able to generate over the customer’s existing communications rates. These fees are recognized when fixed and determinable, usually when the customer and carrier execute the contract. Bill audit fees are driven by the amount of savings that we are able to generate by reviewing current and prior communications invoices against the customer’s existing contracts. These fees are recognized when fixed and determinable, usually when the carrier agrees to issue a credit or refund to our customer.

 

On occasion, we license our Communications Management Platform to our customers on a perpetual basis. If we are able to derive vendor-specific objective evidence on the undelivered elements, the software portion is recognized when the revenue recognition criteria is met; otherwise the contract is recognized ratably over the contract life. Other professional services are recognized as the services are performed. We have an agreement with a carrier whereby we receive an activation fee for procuring a mobile device. The activation revenue is recognized upon confirmation from the carrier that the device has been procured.

 

We expect our strategic consulting, software licenses and other revenue to remain relatively constant in absolute dollars, but to decrease as a percentage of total revenue, as we continue to focus our sales and marketing efforts on our recurring technology and services revenue model.

 

We historically have derived substantially all of our revenue from United States-based customers. We intend to build our international sales operations by increasing our direct sales force abroad. We expect our international revenue to increase in absolute dollars and as a percentage of total revenue.

 

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Cost of Revenue and Gross Profit

 

Cost of recurring technology and services revenue.  Cost of recurring technology and services revenue consists primarily of costs associated with our data center operations, customer product support centers and client services group. This includes personnel-related costs such as salary, stock-based compensation and other compensation-related costs, subcontractor fees, hosting fees, communications costs and royalties related to third-party software included in our solution when our solution is licensed on a non-perpetual basis.

 

Cost of strategic consulting, software licenses and other revenue.  Cost of strategic consulting, software licenses and other revenue consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs and subcontractor fees directly related to delivering the service.

 

As our customer base continues to grow, we expect our cost of revenue to increase in absolute dollars as we expand our data center and customer support operations to support our continued growth. Our cost of revenue could fluctuate as a percentage of revenue on a quarterly basis but remain relatively stable on an annual basis based on the mix of software and services sold and average contractual selling price.

 

Gross profit.  Gross profit as a percentage of revenue is affected by two main factors—the mix of software and services sold and the average contractual selling price. We expect our gross profit in absolute dollars to increase, but that our gross profit as a percentage of revenue will be affected as we integrate the businesses of our recent acquisitions, which have historically operated with lower margins than our business. We believe that over time we will achieve improvements in those margins as we integrate the acquired operations and capture the operating efficiencies of the overall business.

 

Operating Expense

 

Operating expense consists of sales and marketing, general and administrative, research and development and depreciation and amortization. Other than for depreciation and amortization expense, personnel-related costs are the most significant component of all of these operating expenses. We expect to continue to hire a significant number of new employees in order to support our overall growth. In any particular period, the timing of additional hires could materially affect our operating results, both in absolute dollars and as a percentage of revenue.

 

Sales and marketing.  Sales and marketing expense consists primarily of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for our sales, marketing and business development employees, the cost of marketing programs such as on-line lead generation, promotional events, such as trade shows, seminars and webinars, the cost of business development programs and sales commissions. Sales commission rates are calculated at the time a contract is signed. The sales commission rate is applied to the contract’s first year of revenue to calculate sales commission expense. Sales commission expense is accrued and expensed at the time we invoice the customer and is paid to the salesperson when the invoice is collected. Generally, new sales personnel require time to become familiar with our software and services and do not begin to generate sales immediately, which can result in increased sales and marketing expense without any immediate increase in revenue. We expect sales and marketing expense to increase in absolute dollars, but remain relatively constant as a percentage of revenue in the near term, as we continue to hire sales and marketing personnel in the United States and internationally to expand our solution globally.

 

General and administrative.  General and administrative expense consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for finance and accounting, executive, human resources and information technology personnel, rent and facility costs, legal and other professional fees, and other corporate expenses. We anticipate that we will incur additional costs associated with being a public company, including higher personnel costs, corporate insurance and professional fees, including legal and accounting as it relates to financial reporting and achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act.

 

Research and development.  Research and development expense primarily consists of personnel-related costs, including salary, stock-based compensation and other compensation-related costs for development personnel, and fees to our outside contract development vendors. We anticipate that our research and development team will continue to focus on expanding our software and services and increasing the functionality of our current offerings. We expect research and development expense to increase in absolute dollars, but that the investment will likely be lower than the rate of growth in our revenue in the near term.

 

Depreciation and amortization.  Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.

 

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Other Income (Expense), Net

 

Other income (expense), net, consists primarily of interest expense on our short and long-term debt, interest income on our cash and cash equivalents balance and changes in fair value of warrant to purchase redeemable convertible preferred stock. We have historically invested our cash in money market investments. We expect our interest income to vary in each reporting period depending on our average cash balances and interest rates.

 

Income Tax Provision

 

Income tax provision consists of federal and state corporate income taxes resulting from our operations in the United States. We expect income tax expense to vary each reporting period depending upon taxable income fluctuations and our availability of tax benefits from net loss carryforwards.

 

As of December 31, 2011, we had U.S. federal net operating loss carryforwards of approximately $81.0 million, which, if unused, expire from 2020 to 2031, and U.S. federal research and development tax credit carryforwards of approximately $3.0 million, which expire through 2029. We have engaged in several transactions since our inception that have resulted in a change in control as defined by Section 382 of the Internal Revenue Code, which limits our ability to utilize these net operating loss and tax credit carryforwards in the future. As of December 31, 2011, $38.0 million of our net operating loss and tax credit carryforwards were so limited. At December 31, 2011, we recorded a valuation allowance against the full amount of our deferred tax assets, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss or tax credit carryforwards, an adjustment to our net operating loss or tax credit carryforwards would increase net income in the period in which we make such a determination.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission, or the SEC on March 29, 2012, as amended by our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2011 filed with the SEC on April 26, 2012, which we refer to collectively as the 2011 Form 10-K. Since the date of those financial statements, there have been no material changes to our significant accounting policies.

 

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Results of Operations for the Three Month Periods Ended March 31, 2011 and 2012

 

The following table presents our consolidated results of operations for the periods indicated.  These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.

 

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2011

 

% of revenue

 

2012

 

% of revenue

 

Revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

$

19,927

 

89%

 

$

30,756

 

90%

 

Strategic consulting, software licenses and other

 

2,414

 

11%

 

3,391

 

10%

 

Total revenue

 

22,341

 

100%

 

34,147

 

100%

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Recurring technology and services

 

9,057

 

41%

 

14,316

 

42%

 

Strategic consulting, software licenses and other

 

1,272

 

6%

 

1,458

 

4%

 

Total cost of revenue(1)

 

10,329

 

46%

 

15,774

 

46%

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

12,012

 

54%

 

18,373

 

54%

 

Operating expense:

 

 

 

 

 

 

 

 

 

Sales and marketing (1)

 

3,698

 

17%

 

5,544

 

16%

 

General and administrative (1)

 

3,736

 

17%

 

6,701

 

20%

 

Research and development(1)

 

2,862

 

13%

 

3,689

 

11%

 

Depreciation and amortization

 

1,008

 

5%

 

1,875

 

5%

 

Income from operations

 

708

 

3%

 

564

 

2%

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest expense

 

(659

)

(3)%

 

(235

)

(1)%

 

Interest income

 

4

 

0%

 

17

 

0%

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

(540

)

(2)%

 

 

 

(Loss) income before income tax provision

 

(487

)

(2)%

 

346

 

1%

 

Income tax provision

 

126

 

1%

 

154

 

0%

 

Net (loss) income

 

$

(613

)

(3)%

 

$

192

 

1%

 

 

 

 

 

 

 

 

 

 

 


 

(1) Amounts in table above include stock-based compensation expense, as follows:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

149

 

 

 

$

250

 

 

 

Sales and marketing

 

173

 

 

 

366

 

 

 

General and administrative

 

472

 

 

 

915

 

 

 

Research and development

 

41

 

 

 

93

 

 

 

 

 

$

835

 

 

 

$

1,624

 

 

 

 

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Table of Contents

 

Revenue

 

The following table presents our components of revenue for the periods presented:

 

 

 

Three Months Ended
March 31,

 

Increase

 

(in thousands, except percentages)

 

2011

 

2012

 

$

 

%

 

Recurring technology and services

 

$

19,927

 

$

30,756

 

$

10,829

 

54%

 

Strategic consulting, software licenses and other

 

2,414

 

3,391

 

977

 

40%

 

Total revenue

 

$

22,341

 

$

34,147

 

$

11,806

 

53%

 

 

Our recurring technology and services revenue increased $10.8 million or 54%, for the three months ended March 31, 2012 as compared to the same period of 2011, primarily due to an increase in the volume of fixed and mobile communications assets and service offerings being managed or provided through our on-demand communication management platform by current existing and new customers, combined with revenue attributable to customers acquired through our HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles strategic acquisitions.

 

Our strategic consulting, software licenses and other revenue increased $1.0 million or 40%, for the three months ended March 31, 2012 as compared to the same period of 2011, primarily due to an increase in software license fees of $0.4 million, strategic sourcing revenue of $0.4 million and telecommunication accessories sales revenue of $0.3 million.  These increases were partially offset by a decrease of $0.2 million in consulting and other revenues.

 

Costs and Expenses

 

Cost of Revenue

 

The following table presents our cost of revenue:

 

 

 

Three Months Ended
March 31,

 

Increase

 

(in thousands, except percentages)

 

2011

 

2012

 

$

 

%

 

Recurring technology and services

 

$

9,057

 

$

14,316

 

$

5,259

 

58%

 

Strategic consulting, software licenses and other

 

1,272

 

1,458

 

186

 

15%

 

Total cost of revenue

 

$

10,329

 

$

15,774

 

$

5,445

 

53%

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

12,012

 

$

18,373

 

$

6,361

 

53%

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

54%

 

54%

 

 

 

 

 

 

Our recurring technology and services cost of revenue increased $5.3 million for the three months ended March 31, 2012 as compared to the same period in 2011.  This increase is primarily due to an increase in personnel-related costs, including an increase in salary and other compensation-related costs of $4.2 million, an increase in outside contractor costs of $0.7 million and an increase in travel-related expenses and other infrastructure costs of $0.2 million.  The increases in personnel-related, outside contractor costs and travel-related expenses and other infrastructure costs were primarily attributable to providing support for customer growth in our recurring technology and services business.

 

Our strategic consulting, software licenses and other cost of revenue increased $0.2 million for the three months ended March 31, 2012 as compared to the same period in 2011, primarily as a result of costs associated with our sales of telecommunication accessories related to our mobile business.

 

As a percentage of revenue, gross profit was 54% for the three months ended March 31, 2011 and 2012.  The $6.4 million increase in gross profit in absolute dollars was primarily due to increased revenue.

 

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Operating Expense

 

The following table presents our components of operating expense for the periods presented:

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2011

 

2012

 

 

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Change

 

(in thousands, except percentages)

 

Amount

 

Revenue

 

Amount

 

Revenue

 

$

 

%

 

Sales and marketing

 

$

3,698

 

17%

 

$

5,544

 

16%

 

$

1,846

 

50

%

General and administrative

 

3,736

 

17%

 

6,701

 

20%

 

2,965

 

79

%

Research and development

 

2,862

 

13%

 

3,689

 

11%

 

827

 

29

%

Depreciation and amortization

 

1,008

 

5%

 

1,875

 

5%

 

867

 

86

%

Total operating expense

 

$

11,304

 

51%

 

$

17,809

 

52%

 

$

6,505

 

58

%

 

Sales and marketing expense.  Our sales and marketing expense increased $1.8 million for the three months ended March 31, 2012 as compared to the same period of 2011, primarily due to increases in personnel-related costs, including salary and other compensation-related costs of $1.4 million, as we increased the number of direct and indirect sales force employees to accommodate growth in sales opportunities, $0.3 million in travel expense as a result of the increased headcount and $0.2 million in marketing expense primarily attributable to attending several trade shows in an effort to increase lead generation.

 

General and administrative expense.  Our general and administrative expenses increased $3.0 million for the three months ended March 31, 2012 as compared to the same period of 2011, primarily as a result of increases in personnel-related costs, including salary and other compensation-related costs of $1.4 million, including increased employee compensation and benefits of $0.8 million as a result of increased headcount,  facility and overhead costs of $1.2 million, primarily attributable to the overhead costs associated with additional facilities, stock-based compensation expense of $0.4 million as a result of increased annual stock-based equity awards and third party contractor costs of $0.2 million.  In addition, we incurred an increase in professional fees of $0.3 million primarily attributable to the Anomalous and ttMobiles acquisitions and operating as a public company.

 

Research and development expense.  Our research and development expenses increased $0.8 million for the three months ended March 31, 2012 as compared to the same period of 2011, primarily due to increased personnel-related costs, including salary and other compensation-related costs, of $0.6 million primarily arising from increased headcount.  In addition, we incurred a $0.2 million increase in third-party consultant expenses.  The higher costs were primarily the result of an initiative to enhance the functionality of our products and improve our ability to scale to increased demand.

 

Depreciation and amortization expense.  Depreciation and amortization expenses increased $0.9 million for the three months ended March 31, 2012 as compared to the same period of 2011, primarily due to an increase in amortization expense of $0.8 million and depreciation expense of $0.1 million. The increase in amortization expense was result of higher intangible assets as result of the HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles acquisitions. The increase in depreciation expense was primarily due to an increase in capital expenditures to support our overall growth.

 

Other Income (Expense), Net

 

The following table presents our components of other income (expense), net for the periods presented:

 

 

 

Three Months Ended
March 31,

 

Increase

 

(in thousands)

 

2011

 

2012

 

$

 

Interest expense

 

$

(659

)

$

(235

)

424

 

Interest income

 

4

 

17

 

13

 

Increase in fair value of warrants for redeemable convertible preferred stock

 

(540

)

 

540

 

 

Interest Expense.  The decrease in interest expense for the three months ended March 31, 2012 as compared to the same period of 2011 was a result of higher average debt balances in 2011 as a result of the outstanding term loan related to the HCL-EMS and Telwares acquisitions.

 

Interest Income.  The increase in interest income for the three months ended March 31, 2012 as compared to the same period in 2011 was a result of higher average cash balances in interest bearing bank accounts.

 

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Increase in fair value of warrants to purchase redeemable convertible preferred stock.  The elimination of the increase in the fair value of warrants to purchase redeemable convertible preferred stock for the three months ended March 31, 2012 as compared to the same period in 2011 was the result of all warrants to purchase redeemable convertible preferred stock being converted to warrants to purchase common stock upon the completion of our initial public offering in August 2011.

 

Income tax provision.  Our income tax provision was comparable for the respective three months ended March 31, 2012 and 2011.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Since our inception, we have funded our operations primarily from cash from operations, private placements of preferred stock, subordinated notes, term loans and revolving credit facilities. In addition, in August 2011 we raised approximately $66.0 million in net proceeds through an initial public offering of our common stock. As of March 31, 2012, we had cash and cash equivalents of $37.9 million and accounts receivable of $26.6 million and amounts due under various debts and credit facilities of $16.8 million. In April 2012, we raised a further $37.8 million in net proceeds through a follow-on public offering of our common stock.  We intend to use the proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new solutions and funding capital expenditures, acquisitions and investments. Our remaining outstanding debt relates to the deferred consideration for the HCL-EMS, Telwares, ProfitLine, Anomalous and ttMobiles acquisitions and capital lease obligations.

 

We believe that our existing cash and cash equivalents, our cash flow from operating activities and the net proceeds from our follow-on public offering will be sufficient to meet our anticipated cash needs for at least the next twelve months. To the extent our cash and cash equivalents, cash flow from operating activities and net proceeds from our public offerings are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of, or investments in, businesses, services or technologies. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

 

The following table sets forth our cash and cash equivalents and the major sources and uses of cash for each of the periods set forth below:

 

 

 

As of

 

 

 

December 31,

 

March 31,

 

(in thousands)

 

2011

 

2012

 

Cash and cash equivalents

 

$

43,407

 

$

37,866

 

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2011

 

2012

 

Net cash provided by operating activities

 

$

1,129

 

$

3,529

 

Net cash used in investing activities

 

(8,252

)

(9,003

)

Net cash provided by (used in) financing activities

 

8,086

 

(78

)

Effect of exchange rate on cash

 

 

11

 

Net increase (decrease) in cash and cash equivalents

 

$

963

 

$

(5,541

)

 

Cash Flows from Operating Activities

 

Operating activities provided $3.5 million of net cash during the three months ended March 31, 2012, which resulted from our net income of $0.2 million for the three months ended March 31, 2012 and a $0.9 million increase in accounts payable and non-cash charges of depreciation and amortization of $1.9 million and stock-based compensation of $1.6 million. Cash provided by operating activities was adversely impacted by a $1.1 decrease in accrued liabilities and a $0.4 million decrease in deferred revenue during the three months ended March 31, 2012.

 

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Operating activities provided $1.1 million of net cash during the three months ended March 31, 2011, which resulted from our net loss of $0.6 million for the three months ended March 31, 2011, principally offset by a $0.8 million increase in accounts payable and a $0.7 million increase in deferred revenue, which was attributable primarily to increased sales of our software product and related services, and non-cash charges of depreciation and amortization of $1.0 million, stock-based compensation of $0.8 million and an increase in fair value of warrants for redeemable convertible preferred stock of $0.5 million. Cash provided by operating activities was adversely impacted by a $1.6 million increase in accounts receivable during the three months ended March 31, 2011.

 

Cash Flows from Investing Activities

 

Cash used in investing activities totaled $9.0 million during the three months ended March 31, 2012 and consisted of $8.6 million paid in connection with the Anomalous and ttMobiles acquisitions and capital expenditures of $0.4 million primarily related to the purchase of computer equipment and software.

 

Cash used in investing activities totaled $8.3 million during the three months ended March 31, 2011 and consisted of $8.2 million paid in connection with the HCL-EMS and Telwares acquisitions and capital expenditures of $0.1 million primarily related to the purchase of computer equipment and software.

 

Cash Flows from Financing Activities

 

Cash flows used in financing activities totaled $0.1 million during the three months ended March 31, 2012 primarily consisting of debt repayments of $1.5 million offset by $1.4 proceeds from the exercise of stock options.

 

Cash flows provided by financing activities totaled $8.1 million during the three months ended March 31, 2011 primarily consisting of net borrowings under our credit facility of $7.9 million.

 

Contractual Obligations

 

The following table summarizes our material contractual obligations at March 31, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

 

 

Payments due by period

 

 

 

 

 

Less than

 

 

 

 

 

(dollars in thousands)

 

Total

 

1 year

 

1-3 years

 

3-5 years

 

Operating lease obligations

 

$

21,315

 

$

4,651

 

$

15,226

 

$

1,438

 

Capital lease and other obligations

 

1,149

 

563

 

586

 

 

Interest on capital lease obligations

 

78

 

39

 

39

 

 

ProfitLine deferred purchase price

 

8,747

 

4,277

 

4,470

 

 

HCL-EMS contingent consideration

 

3,789

 

3,789

 

 

 

ttMobiles deferred purchase price

 

2,322

 

2,322

 

 

 

 

 

Telwares deferred purchase price

 

1,141

 

1,141

 

 

 

 

Anomalous deferred purchase price

 

957

 

957

 

 

 

 

 

 

 

$

39,498

 

$

17,739

 

$

20,321

 

$

1,438

 

 

·                  Operating lease obligations include minimum lease obligations with remaining terms in excess of one year primarily related to office space as well as certain equipment.

 

·                  Capital lease and other obligations include minimum lease obligations with remaining terms in excess of one year related to computer hardware and software.

 

·                  ProfitLine deferred purchase price includes installments of $4.5 million payable on December 19, 2012 and June 19, 2013.

 

·                  HCL-EMS contingent consideration includes payments following the first and second anniversary of the HCL-EMS closing date of January 25, 2011.

 

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·                  ttMobiles deferred purchase price includes an installment of $2.4 million payable on February 21, 2013.

 

·                  Telwares deferred purchase price consists of an installment of $1.25 million payable on March 16,  2013.

 

·                  Anomalous deferred purchase price includes an installment of $1.0 million payable on January 10, 2013.

 

Off-Balance Sheet Arrangements

 

We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

 

Recent Accounting Pronouncements

 

For information regarding recent accounting pronouncements, refer to Note 3 to our financial statements included in the 2011 Form 10-K.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates as well as, to a lesser extent, inflation. We may also face exchange rate risk in the future, as we expand our business internationally.

 

Interest Rate Risk

 

At March 31, 2012, we had unrestricted cash and cash equivalents totaling $37.9 million. These amounts were held for working capital purposes and were invested primarily in deposits and money market funds. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

 

Foreign Exchange Risk

 

We sell our solution worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets and our accounts receivable more difficult to collect. We do not currently hedge our exposure to foreign currency exchange rate fluctuations and we believe that we do not have any material exposure to changes in foreign currency exchange rates. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

 

Inflation Risk

 

Inflation and changing prices have not had a material effect on our business, and we do not expect that they will materially affect our business in the foreseeable future. However, the impact of inflation on replacement costs of equipment, cost of revenue and operating expenses, especially employee compensation costs, may not be readily recoverable in the pricing of our offerings.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.

 

Changes in Internal Controls

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are from time to time subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, our management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial statements.

 

Item 1A. Risk Factors

 

Risks Related to Our Business and Our Industry

 

We have had a history of losses since our incorporation in February 2000.

 

We were incorporated in February 2000 and have not been profitable in any fiscal year since we were formed. We experienced net losses of $2.6 million in 2009, $1.8 million in 2010 and $3.0 million in 2011. Although we were profitable for the three months ended March 31, 2012 with net income of $0.2 million, we cannot predict if we will be able to maintain profitability in the future. We expect to continue making significant future expenditures to develop and expand our business. In addition, as a public company, we incur additional significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain substantially increased revenue to maintain profitability, which we may be unable to do. We may also encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expenditures. In addition, the percentage growth rates we achieved in prior periods may not be sustainable and we may not be able to increase our revenue sufficiently in absolute dollars to maintain profitability and we may incur significant losses for the foreseeable future.

 

If the market for communications lifecycle management services does not grow as we expect, our business will be harmed.

 

The market for communications lifecycle management, or CLM, services is developing, and it is not certain whether these services will achieve market acceptance and sustain high demand. Some businesses have invested substantial personnel and financial resources into developing internal solutions for CLM, so they may not perceive the benefit of our external solution. If businesses do not perceive the benefits of outsourced CLM services, the CLM market may not continue to develop or may develop more slowly than we expect, either of which would reduce our revenue and profitability.

 

Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.

 

Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our common stock could decline substantially. Fluctuations in our quarterly operating results or guidance may be due to a number of factors, including, but not limited to:

 

·                  our ability to attract new customers, obtain renewals from existing customers and increase sales to existing customers;

 

·                  the purchasing and budgeting cycles of our customers;

 

·                  changes in our pricing policies or those of our competitors;

 

·                  the amount and timing of operating costs and capital expenditures related to the operation, maintenance and expansion of our business;

 

·                  service outages or security breaches;

 

·                  the timing and success of new service introductions and upgrades by us or our competitors;

 

·                  the timing of costs related to the development or acquisition of technologies, services or businesses;

 

·                  the financial condition of our customers; and

 

·                  general economic, industry and market conditions.

 

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In addition, the accounting treatment of the warrant shares that may become issuable to IBM and Dell and of the unvested earn-out shares issued in connection with our acquisition of Anomalous Networks in January 2012 could have an impact on our quarterly operating results. We currently value the warrant shares that are deemed probable of becoming exercisable on a mark-to-market basis until they are earned, and will value the unvested earn-out shares that are deemed probable of becoming vested and earned on a mark-to-market basis until they are vested and earned. Increases or decreases in our stock price will affect the mark-to-market adjustments of the common stock warrant shares and unvested earn-out shares, which will increase or decrease contra-revenue charges. The value of the warrant shares and unvested earn-out shares will fluctuate until the warrant shares are deemed exercisable or the unvested earn-out shares are deemed vested and earned, as the case may be, and the value is fixed. This accounting treatment is applicable whether or not our IBM, Dell or Anomalous related revenue actually increases or decreases in line with the market value of our common stock, and thus could cause significant fluctuations in our quarterly operating results.

 

Because we collect and recognize revenue over the terms of our customer agreements, the lack of customer renewals or new customer agreements may not be immediately reflected in our operating results.

 

We collect and recognize revenue from our customers over the terms of their customer agreements with us. As a result, the aggregate effect of a decline in new or renewed customer agreements in any one quarter would not be fully recognized in our revenue for that quarter and would negatively affect our revenue in future quarters. Consequently, the aggregate effect of significant downturns in sales of our solution would not be fully reflected in our results of operations until future periods. For instance, as a result of the financial crisis in the second half of 2008, we experienced a higher-than-normal cancellation rate in the first three months of 2009, much of which was attributable to customers that had gone out of business. As a result of such cancellations, our total revenue for the following periods was negatively affected. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers is generally collected and recognized over the applicable contract term.

 

If we are unable to retain our existing customers, our revenue and results of operations would grow more slowly than expected or decline and results of operations would be impaired.

 

We sell our software products pursuant to agreements that are generally two to five years in duration. Our customers have no obligation to renew their agreements after their terms expire and some of our customers may terminate their agreements for convenience. These agreements may not be maintained or renewed on the same or on more profitable terms. As a result, our ability to both maintain and grow our revenue depends in part on customer renewals. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our software products, the prices of our software products, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. In addition, customers that are acquired by companies using competing service offerings may be required to begin using those competing service offerings, rather than renew their license arrangements with us. If our customers do not renew their agreements for our software products, renew on less favorable terms, or do not purchase additional functionality, our revenue may grow more slowly than expected or decline.

 

We face intense competition, and our failure to compete successfully would make it difficult for us to add and retain customers and would impede the growth of our business.

 

The CLM market is highly fragmented, competitive and rapidly evolving. We compete with other technology and outsourced service providers selling telecommunications expense management and/or mobile device management solutions as well as with solutions developed internally by enterprises seeking to manage their communications expenses and assets. We compete with other technology and outsourced service providers primarily on the basis of customer references, ability to deliver, breadth of solution and pricing. We and other technology and outsourced service providers compete with internally developed CLM solutions primarily on the basis of the relative cost of implementing a third-party solution as compared to inefficiencies or lack of functionality in internally developed CLM solutions.

 

The intensity of competition in the CLM market has resulted in pricing pressure as the market has developed. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies, which could include one or more large communications carriers, enter our market. Some of these competitors, such as large communications carriers, may offer telecommunications expense management and/or mobile device management solutions as part of a broad outsource offering for mobile communications services. Increased competition could result in additional pricing pressure, reduced sales, shorter term lengths for customer contracts, lower margins or the failure of our solution to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be harmed.

 

Some of our actual and potential competitors may enjoy competitive advantages over us, such as greater name recognition, longer operating histories, more varied services and larger marketing budgets, as well as greater financial, technical and other resources. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can.

 

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Industry consolidation may result in increased competition.

 

The CLM market is highly fragmented, and we believe that it is likely that some of our existing competitors will consolidate or will be acquired. Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer a more comprehensive solution than they individually had offered. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships, such as with Vodafone’s acquisitions of TnT Expense Management and Quickcomm in October 2010, Emptoris’ acquisition of Rivermine in January 2011 and the subsequent acquisition of Emptoris/Rivermine by IBM in February 2012. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. The companies resulting from such combinations may create more compelling service offerings and may offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. In addition, combinations such as IBM’s acquisition of Emptoris/Rivermine may result in situations in which we may begin to compete in some CLM offerings with companies with which we have partnerships or strategic relationships.  Any of the competitive pressures described above could result in a substantial loss of customers or a reduction in our revenue.

 

We are currently integrating the operations of several businesses that we recently acquired and may in the future expand by acquiring or investing in other businesses, which may divert our management’s attention and consume resources that are necessary to sustain our business.

 

We are currently integrating the operations of five businesses that we acquired during 2011 and the first quarter of 2012. With respect to three of these businesses, we are migrating their former customers to our platform. If we encounter unforeseen technical or other challenges in the migration of these customers or the integration of these acquired businesses, our business and results of operations could be harmed. For example, with respect to one of the acquisitions during the first quarter of 2011, we have entered into an agreement for the provision of CLM services by a third party to certain of these customers during their migration and we are obligated to maintain a firewall with respect to the service provider’s software. If the availability of these outsourced services were disrupted during the customer migration process, or if we were unable to maintain the firewall required under this agreement, we could incur substantial costs in arranging for alternative services or substantial liabilities arising out the breach of our obligations.

 

Our business strategy includes the potential future acquisition of, or investment in, complementary businesses, services or technologies. These acquisitions, investments or new business relationships may result in unforeseen difficulties and expenditures. We may encounter difficulties assimilating or integrating the businesses, technologies, products, services, personnel or operations of companies we have acquired or companies that we may in the future acquire. These difficulties may arise if the key personnel of the acquired company choose not to work for us, the company’s technology or services do not easily integrate with ours or we have difficulty retaining the acquired company’s customers due to changes in its management or for other reasons. These acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities. In addition, any future acquisition may require us to:

 

·                  issue additional equity securities that would dilute our stockholders;

 

·                  use cash that we may need in the future to operate our business;

 

·                  incur debt on terms unfavorable to us or that we are unable to repay;

 

·                  incur large charges or substantial liabilities; or

 

·                  become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

 

If any of these risks materializes, our business and operating results would be harmed.

 

Our sales cycles can be long, unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.

 

Our sales cycle, which is the time between initial contact with a potential customer and the ultimate sale, is often lengthy and unpredictable. Some of our potential customers already have partial CLM solutions in place under fixed-term contracts, which limits their ability to commit to purchase our solution in a timely fashion. In addition, our potential customers typically undertake a significant evaluation process that can last six to nine months or more, and which requires us to expend substantial time, effort and money educating them about the capabilities of our offerings and the potential cost savings they can bring to an organization. Furthermore, the purchase of our solution typically also requires coordination and agreement across many departments within a potential customer’s organization, which further contributes to our lengthy sales cycle. As a result, we have limited ability to forecast the timing and size of specific sales. Any delay in completing, or failure to complete, sales in a particular quarter or year could harm our business and could cause our operating results to vary significantly.

 

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If a communications carrier prohibits customer disclosure of communications billing and usage data to us, the value of our solution to customers of that carrier would be impaired, which may limit our ability to compete for their business.

 

Certain of the software functionality and services we offer depend on our ability to access a customer’s communications billing and usage data. For example, our ability to offer outsourced or automated communications bill auditing, billing dispute resolution, bill payment, cost allocation and expense optimization depends on our ability to access this data. If a communications carrier were to prohibit its customers from disclosing this information to us, those enterprises would only be able to use these billing-related aspects of our solution on a self-serve basis, which would impair the value of our solution to those enterprises. This in turn could limit our ability to compete with the internally developed CLM solutions of those enterprises, require us to incur additional expenses to license access to that billing and usage data from the communications carrier, if such a license is made available to us at all, or put us at a competitive disadvantage against any third-party CLM service provider that licenses access to that data.

 

Our long-term success depends, in part, on our ability to expand the sales of our solution to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.

 

We are currently expanding our international sales and operations, including through the acquisition of Anomalous Networks, based in Canada, and ttMobiles, based in the United Kingdom. This international expansion will subject us to new risks that we have not faced in the United States and the countries in which we currently conduct business. These risks include:

 

·                  continued geographic localization of our software products, including translation into foreign languages and adaptation for local practices and regulatory requirements;

 

·                  lack of familiarity with and unexpected changes in foreign regulatory requirements;

 

·                  longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

·                  difficulties in managing and staffing international implementations and operations;

 

·                  challenges in integrating our software with multiple country-specific billing or communications support systems for international customers;

 

·                  challenges in providing procurement, help desk and fulfillment capabilities for our international customers;

 

·                  fluctuations in currency exchange rates;

 

·                  potentially adverse tax consequences, including the complexities of foreign value added or other tax systems and restrictions on the repatriation of earnings;

 

·                  the burdens of complying with a wide variety of foreign laws and legal standards;

 

·                  increased financial accounting and reporting burdens and complexities;

 

·                  potentially slower adoption rates of CLM services internationally;

 

·                  political, social and economic instability abroad, terrorist attacks and security concerns in general; and

 

·                  reduced or varied protection for intellectual property rights in some countries.

 

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

 

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Further expansion into international markets could require us to comply with additional billing, invoicing, communications, data privacy and similar regulations, which could make it costly or difficult to operate in these markets.

 

Many international regulatory agencies have adopted regulations related to where and how communications bills may be sent and how the data on such bills must be handled and protected. For instance, certain countries, such as Germany, restrict communications bills from being sent outside of the country, either physically or electronically, and certain countries, such as Brazil, Germany, Italy and Spain, require that certain information be encrypted or redacted before bills may be transmitted electronically. These regulations vary from jurisdiction to jurisdiction and international expansion of our business could subject us to additional similar regulations. Failure to comply with these regulations could result in significant monetary penalties and compliance with these regulations could require expenditure of significant financial and administrative resources.

 

In addition, personally identifiable information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. Our failure to comply with applicable privacy laws and regulations or any security breakdown that results in the unauthorized release of personally identifiable information or other customer data could result in fines or proceedings by governmental agencies or private individuals, which could harm our results of operations.

 

If we fail to effectively manage and develop our strategic relationships with our channel partners, or if those third parties choose not to market and sell our solution, our operating results would suffer.

 

The successful implementation of our strategic goals is dependent in part on strategic relationships with our channel partners to offer our solution to a larger customer base than we can reach through our current direct sales and marketing efforts. Some of our strategic relationships, such as our relationships with IBM and Dell Products L.P., are relatively new and, therefore, it is uncertain whether these third parties will be able to market and sell our solution successfully or provide the volume and quality of customers that we currently expect.

 

Our success depends in part on the ultimate success of our channel partners and their ability to market and sell our solution. Some of these third parties have previously entered, and may in the future enter, into strategic relationships with our competitors. For example, IBM acquired Emptoris in February 2012, and Rivermine is a subsidiary of Emptoris. Further, many of our channel partners have multiple strategic relationships and they may not regard us as significant to their businesses. Our channel partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our solution. Our channel partners also may interfere with our ability to enter into other desirable strategic relationships.

 

If we are unable to manage and develop our strategic relationships, our potential customer base may grow more slowly than we anticipate and we may have to devote substantially more resources to the distribution, sales and marketing of our solution, which would increase our costs and decrease our earnings.

 

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

 

We increased our number of full-time employees from 184 at December 31, 2007, to 347 at December 31, 2008, to 439 at December 31, 2009, to 541 at December 31, 2010 and to 1,004 at December 31, 2011, and our total revenue from $21.0 million in 2007, to $37.5 million in 2008, to $55.9 million in 2009, to $68.5 million in 2010 and to $104.9 million in 2011. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall business, customer base, headcount and operations both domestically and internationally. Growing and managing a global organization and a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively.

 

The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to grow our business.

 

We are highly dependent upon the continued service and performance of our senior management team and key technical and sales personnel, including our founder, President and Chief Executive Officer, and none of these individuals is party to an employment agreement with us. The replacement of these individuals likely would involve expenditure of significant time and financial resources, and their loss might significantly delay or prevent the achievement of our business objectives.

 

We plan to continue to expand our work force both domestically and internationally to increase our customer base and revenue. We face intense competition for qualified individuals from numerous technology, software and communications companies. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of

 

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personnel to support our growth. New hires may require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. If our recruiting, training and retention efforts are not successful or do not generate a corresponding increase in revenue, our business will be harmed.

 

Our software manages and interfaces with our customers’ mission-critical networks and systems. Disruptions in the functioning of these networks and systems caused by our software could subject us to substantial liability and damage our reputation.

 

We assist our customers in the management of their mission-critical communications networks and systems and our software directly interfaces with these networks and systems as well as with enterprise resource planning and other enterprise software and systems. Failures of software could result in significant interruptions in our customers’ communications capabilities and enterprise operations. For example, unknown defects in our mobile device management software, or unknown incompatibilities of this software with our customers’ mobile devices, could result in losses of functionality of these devices. If such interruptions occur, we may not be able to remedy them in a timely fashion and our customers’ ability to operate their enterprises could be severely compromised. Such interruptions could cause our customers to lose revenue and could damage their reputations. In turn, these disruptions could subject us to substantial liabilities and result in irreparable damage to our reputation, delays in payments from our customers or refusals by our customers to make such payments, any of which could harm our business, financial condition or results of operations.

 

The emergence of one or more widely used, standardized communications devices or billing or operational support systems could limit the value and operability of our solution and our ability to compete with the manufacturers of such devices or the carriers using such systems in providing CLM services.

 

Our solution derives its value in significant part from our software’s ability to interface with and support the interoperation of diverse communications devices, billing systems and operational support systems. The emergence of a single or a small number of widely used communications devices, billing systems or operational support systems using consolidated, consistent sets of standardized interfaces for the interaction between communications service providers and their enterprise customers could significantly reduce the value of our solution to our customers and potential customers. Furthermore, any such communications device, billing system or operational support system could make use of proprietary software or technology standards that our software might not be able to support. In addition, the manufacturer of such device, or the carrier using such billing system or operational support system, might actively seek to limit the interoperability of such device, billing system or operational support system with our software products for competitive or other reasons. The resulting lack of compatibility of our software products would put us at a significant competitive disadvantage, or entirely prevent us from competing, in that segment of the potential CLM market if such manufacturer or carrier, or its authorized licensees, were to develop one or more CLM solutions competitive with our solution.

 

A continued proliferation and diversification of communications technologies or devices could increase the costs of providing our software products or limit our ability to provide our software products to potential customers.

 

Our ability to provide our software products is dependent on the technological compatibility of our systems with the communications infrastructures and devices of our customers and their communications service providers. The development and introduction of new communications technologies and devices requires us to expend significant personnel and financial resources to develop and maintain interoperability of our software products with these technologies and devices. The communications industry has recently been characterized by rapid change and diversification in both product and service offerings. Continued proliferation of communications products and services could significantly increase our research and development costs and increase the lag time between the initial release of new technologies and products and our ability to provide support for them in our software products, which would limit the potential market of customers that we have the ability to serve.

 

We may not successfully develop or introduce new and enhanced software and service offerings, and as a result we may lose existing customers or fail to attract new customers and our revenue may suffer.

 

Our future financial performance and revenue growth depend upon the successful development, introduction and customer acceptance of new and enhanced versions of our software and service offerings. We are continually seeking to develop and acquire enhancements to our solution as well as new offerings to supplement our existing solution and we are subject to all of the risks inherent in the development and integration of new technologies, including unanticipated performance, stability, and compatibility problems, any of which could result in material delays in introduction and acceptance, significantly increased costs, adverse publicity and loss of sales. If we are unable to deliver new solutions or upgrades or other enhancements to our existing solution on a timely and cost-effective basis, our business will be harmed.

 

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We may not be able to respond to rapid technological changes with new software products and services, which could harm our sales and profitability.

 

The CLM market is characterized by rapid technological change and frequent new product and service introductions, driven in part by frequent introductions of new technologies and devices in the communications industry, frequent changes in, and resulting inconsistencies between, the billing platforms utilized by major communications carriers and the changing demands of customers regarding the means of delivery of CLM solutions. To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. Customers may require features and capabilities that our current solution does not have. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed.

 

Actual or perceived breaches of our security measures could diminish demand for our solution and subject us to substantial liability.

 

In the processing of communications transactions, we receive, transmit and store a large volume of sensitive customer information, including call records, billing records, contractual terms, and financial and payment information, including credit card information, and we have entered into contractual obligations to maintain the confidentiality of certain of this information. Any person who circumvents our security measures could steal proprietary or confidential customer information or cause interruptions in our operations and any such lapse in security could expose us to litigation, substantial contractual liabilities, loss of customers or damage to our reputation or could otherwise harm our business. We incur significant costs to protect against security breaches and may incur significant additional costs to alleviate problems caused by any breaches.

 

If customers believe that our systems and software products do not provide adequate security for the storage of confidential information or its transmission over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use, our business will be harmed. Customers’ concerns about security could deter them from using the Internet to conduct transactions that involve confidential information, including transactions of the types included in our solution, so our failure to prevent security breaches, or the occurrence of well-publicized security breaches affecting the Internet in general, could significantly harm our business and financial results.

 

If we are unable to protect our intellectual property rights and other proprietary information, it will reduce our ability to compete for business.

 

If we are unable to protect our intellectual property rights and other proprietary information, our competitors could use our intellectual property to market software products similar to our own, which could decrease demand for our solution. We rely on a combination of patent, copyright, trademark, service mark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property rights and proprietary information, all of which provide only limited protection. We have twelve issued patents and thirteen patent applications pending. We cannot assure you that our issued patents, any patents that may issue from our patent applications pending or any other intellectual property rights that we currently hold or may in the future acquire will prove to be enforceable in actions against alleged infringers or otherwise provide sufficient protection of any competitive advantages that we may have. In addition, any action that we take to enforce our patents or other intellectual property rights may be costly, time-consuming and a significant diversion of management attention from the continued growth and development of our business.

 

We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive with ours or infringe our intellectual property. Enforcement of our intellectual property rights also depends on our successful legal actions against these infringers, but these actions may not be successful, even when our rights have been infringed.

 

Furthermore, effective patent, copyright, trademark, service mark and trade secret protection may not be available in every country in which we offer our software products.

 

Assertions by a third party that our software products or technology infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.

 

There is frequent litigation in the communications and technology industries based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as a publicly traded company, the possibility of intellectual property rights claims against us may grow. These claims, whether or not successful, could:

 

·                  divert management’s attention;

 

·                  result in costly and time-consuming litigation;

 

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·                  require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or

 

·                  require us to redesign our software products to avoid infringement.

 

As a result, any third-party intellectual property claims against us could increase our expenses and impair our business.

 

In addition, although we have licensed proprietary technology, we cannot be certain that the owners’ rights in such technology will not be challenged, invalidated or circumvented. Furthermore, many of our customer agreements require us to indemnify our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our customers, may deter future customers from purchasing our software products or could expose us to litigation for these claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.

 

We outsource certain of our research and development activities to third-party contractors, and a loss of or deterioration in these relationships could adversely affect our ability to introduce new software products or enhancements in a timely fashion.

 

Certain of our research and development activities are carried out by third-party contractors, located both in the United States and abroad. The loss of or deterioration in any of these relationships for any reason could require us to establish alternative relationships or to complete these research and development activities using our internal research and development staff, either of which could result in increased costs to us and impair our ability to introduce new software products or enhancements in a timely fashion. Our use of such third-party contractors also increases the risk that our intellectual property could be misappropriated or otherwise disclosed to our competitors, either of which could harm our competitiveness and harm our future revenue.

 

Defects or errors in our software products could harm our reputation, impair our ability to sell our products and result in significant costs to us.

 

Our software products are highly complex and may contain undetected defects or errors, including defects and errors arising from the work of our outsourced development teams, that may result in product failures or otherwise cause our software products to fail to perform in accordance with customer expectations. Because our customers use our software products for important aspects of their businesses, any defects or errors in, or other performance problems with, our software products could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing customers could elect to not renew their customer agreements with us. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources from software enhancements. If our software products fail to perform or contain a technical defect, a customer might assert a claim against us for damages. We may not have contractual limitations on damages claims that could be asserted against us. Whether or not we are responsible for our software’s failure or defect, we could be required to spend significant time and money in litigation, arbitration or other dispute resolution, and potentially pay significant settlements or damages.

 

We use a limited number of data centers to deliver our software products. Disruption of service at these facilities could harm our business.

 

We host our software products and serve all of our customers from seven third-party data center facilities. We do not control the operation of these facilities. American Internet Services operates our data center in San Diego, California; AT&T operates our data center in Secaucus, New Jersey; Data Foundry operates our data center in Austin, Texas; iWeb Technologies operates our data center in Montreal, Canada; NTT Communications operates our data centers in London and Slough, United Kingdom; and Verizon Business operates our data center in Billerica, Massachusetts. Our agreements for the use of these data center facilities vary in term length, some being month-to-month and others expiring during 2013, 2014 and 2015. The owners of these facilities have no obligation to continue such arrangements beyond their current terms, which are as short as the current month in the case of month-to-month arrangements, nor are they obligated to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to continue such arrangements or renew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities and we may incur significant costs in connection with doing so. Any changes in third-party service levels at our data centers or any errors, defects, disruptions or other performance problems with our software products could harm our reputation and damage our business. Interruptions in the availability of our software products might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, cause customers to terminate their subscriptions or harm our renewal rates.

 

While we take precautions such as data redundancy, back-up and disaster recovery plans to prevent service interruptions, our data centers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, communications failures and similar events. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in the availability of our software products.

 

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If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently. Our internal control over financial reporting constitutes a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States of America. We are in the preliminary stages of the process of documenting, reviewing and improving our internal control over financial reporting for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which will require an annual management assessment of and report on the effectiveness of our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the Securities and Exchange Commission, or the SEC. In addition, if we become an accelerated filer or a large accelerated filer under the rules of the SEC, our independent registered public accounting firm will be required to audit and report on the effectiveness of our internal control over financial reporting in connection with each such report. As part of our process of documenting and testing our internal control over financial reporting, we may identify areas for further attention and improvement.

 

The technologies in our software products may be subject to open source licenses, which may restrict how we can use or distribute our software products or require that we release the source code of our software products subject to those licenses.

 

Certain of our software products incorporate so-called “open source” software, and we may incorporate further open source software into our software products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer our software products that incorporate the open source software for no cost, that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our software products that contain the open source software and required to comply with the foregoing conditions.

 

We provide minimum service-level commitments to many of our customers, and our inability to meet those commitments could result in significant loss of customers, harm to our reputation and costs to us.

 

Many of our customer agreements currently, and may in the future, require that we meet minimum service level commitments regarding items such as platform availability, invoice processing speed and order processing speed. If we are unable to meet the stated service level commitments under these agreements many of our customers will have the right to terminate their agreements with us and we may be contractually obligated to provide our customers with credits or pay other penalties. If our software products are unavailable for significant periods of time we may lose a substantial number of our customers as a result of these contractual rights, we may suffer harm to our reputation and we may be required to provide our customers with significant credits or pay our customers significant contractual penalties, any of which could harm our business, financial condition, results of operations.

 

Risks Related to Ownership of Our Common Stock

 

We have incurred and will incur further increased costs as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

 

As a public company, we have begun to incur, and will in the future incur, significant additional legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements and directors’ and officers’ liability insurance. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NASDAQ stock market. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are unable to currently estimate these costs with any degree of certainty.

 

Insiders have substantial control over us and will be able to influence corporate matters.

 

As of April 30, 2012, our directors and executive officers and their affiliates beneficially owned, in the aggregate, approximately 23.9% of our outstanding common stock.  As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

 

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Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our software products could reduce our ability to compete successfully.

 

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per-share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

·                  develop or enhance our software products;

 

·                  continue to expand our research and development and sales and marketing efforts;

 

·                  acquire complementary technologies, products or businesses;

 

·                  expand our operations, in the United States or internationally;

 

·                  hire, train and retain employees; or

 

·                  respond to competitive pressures or unanticipated working capital requirements.

 

An active trading market for our common stock may not develop, and investors may not be able to resell their shares at or above the price at which such shares were purchased.

 

Although we have listed our common stock on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the prices at which they acquired their shares or at the time that they would like to sell.

 

Our stock price may be volatile, and the market price of our common stock may decrease.

 

The market price of our common stock may be subject to significant fluctuations. Our stock price is volatile, and from July 27, 2011, the first day of trading of our common stock, to April 30, 2012, the trading prices of our stock have ranged from $8.01 to $21.74 per share. As a result of this volatility, investors may not be able to sell their common stock at or above the price they paid for it. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

·                  fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

·                  changes in estimates of our financial results or recommendations by securities analysts;

 

·                  failure of any of our software products to achieve or maintain market acceptance;

 

·                  changes in market valuations of similar companies;

 

·                  success of competitive products or services;

 

·                  changes in our capital structure, such as future issuances of securities or the incurrence of debt;

 

·                  announcements by us or our competitors of significant products, services, contracts, acquisitions or strategic alliances;

 

·                  regulatory developments in the United States, foreign countries or both;

 

·                  litigation involving our company, our general industry or both;

 

·                  additions or departures of key personnel;

 

·                  general perception of the future of the CLM market or our software products;

 

·                  investors’ general perception of us; and

 

·                  changes in general economic, industry and market conditions.

 

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In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of certain lock-up agreements that have been entered into in connection with the public offering of our common stock that we recently completed under a registration statement declared effective on March 28, 2012.  These lock-up agreements have been entered into by our directors, officers and certain stockholders who participated in the public offering. These sales, or the market perception that the holders of large numbers of our shares intend to sell shares, could reduce the market price of our common stock.

 

A total of at least 9,546,646 shares of common stock are subject to these lock-up agreements through at least June 26, 2012.  The lock-up period is subject to extension of up to a further 34 days under certain circumstances. The shares subject to these lock-up agreements can be sold, subject to any applicable volume limitations under federal securities laws, after the earlier of the expiration of, or release from, the lock-up period. The balance of our outstanding shares of common stock may be freely sold in the public market at any time to the extent permitted by Rules 144 and 701 under the Securities Act of 1933, as amended, which we refer to as the Securities Act, or to the extent such shares have already been registered under the Securities Act and are held by non-affiliates of ours.

 

In addition, as of April 30, 2012, there were 7,070,457 shares subject to outstanding options and 130,500 shares subject to issuance on vesting of outstanding restricted stock units, all of which we have registered under the Securities Act, on a registration statement on Form S-8. These shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the lock-up agreements, to the extent applicable. Furthermore, as of April 30, 2012 there were 67,434 shares subject to outstanding warrants. These shares will become eligible for sale in the public market to the extent such warrants are exercised as permitted by any applicable vesting requirements, and to the extent permitted by the lock-up agreements and Rules 144 and 701 under the Securities Act. Moreover, holders of a substantial portion of our outstanding common stock and warrants to purchase common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendations regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Our management will have broad discretion over the use of our cash reserves and might not use such funds in ways that increase the value of your investment.

 

Our management will have broad discretion to use our cash reserves, if any, and you will be relying on the judgment of our management regarding the application of these funds. Our management might not apply these funds in ways that increase the value of your investment. Our management might not be able to yield a significant return, if any, on any investment of these cash reserves. You will not have the opportunity to influence our decisions on how to use our cash reserves.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

 

Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

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·                  authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

·                  limiting the liability of, and providing indemnification to, our directors and officers;

 

·                  limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

·                  requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

·                  controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

·                  limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

 

·                  providing that directors may be removed by stockholders only for cause.

 

These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.

 

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Set forth below is information regarding shares issued by us upon the exercise of warrants during the three months ended March 31, 2012 to the extent such transactions were not registered under the Securities Act of 1933, as amended, which we refer to as the Securities Act, including the consideration, if any, received by us in connection with such exercises.  The shares issued upon these warrant exercises were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act.  No underwriters were involved in any such issuances.

 

(1)         On January 25, 2012, we issued 6,844 shares of common stock to Comerica Ventures, Inc., pursuant to the cashless exercise feature of a warrant we had granted to it on March 28, 2005.

 

(2)         On January 26, 2012, we issued 36,725 shares of common stock to ORIX Venture Finance LLC pursuant to the cashless exercise feature of a warrant we had granted to it on March 9, 2007 and a further 117,295 shares of common stock pursuant to the cashless exercise feature of a warrant we had granted to it on January 21, 2011.

 

(3)         On January 26, 2012, we issued 159,521 shares of common stock to ORIX Finance Equity Investors, LP pursuant to the cashless exercise feature of a warrant we had granted to it on July 28, 2008.

 

(4)         On February 15, 2012, we issued an aggregate of 72,662 shares of common stock to Venture Lending & Leasing IV, LLC pursuant to the cashless exercise features of two warrants we had granted to it on March 9, 2007.

 

(5)         On March 27, 2012, we issued 5,013 shares of common stock to The Bank of Southern Connecticut pursuant to the cashless exercise feature of a warrant we had granted to it on November 17, 2005.

 

On January 10, 2012, we issued an aggregate of 298,392 shares of common stock, of which 132,617 shares were subject to further vesting, to certain of the former shareholders of Anomalous Networks Inc., which we refer to as Anomalous, in connection with our purchase of all of the outstanding equity of Anomalous.  These shares were issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act, and, in certain cases, in reliance on Regulation S promulgated under the Securities Act.  No underwriters were involved in any such issuances.

 

Use of Proceeds

 

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-166123), which we refer to as the Registration Statement, that was declared effective by the Securities and Exchange Commission on July 26, 2011. The net offering proceeds to us, after deducting underwriting discounts and offering expenses, were approximately $66.0 million. Of these net proceeds, we have used $25.5 million to repay all of the outstanding amounts under our term loan and revolving credit facilities, $24.9 million as consideration for our acquisitions of ProfitLine, Inc., Anomalous and ttMobiles Limited and $1.3 million to pay deferred consideration due related to our acquisition of substantially all of the assets of the telecommunications expense management division of Telwares, Inc. and its subsidiary Vercuity Solutions, Inc. We have invested the remaining net proceeds in cash and cash equivalents, primarily money-market mutual funds.

 

Repurchases

 

We did not purchase any of our equity securities during the period covered by this Quarterly Report on Form 10-Q.

 

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Item 6.   Exhibits

 

Exhibit
No.

 

Description of Exhibit

 

 

 

2.1*

 

Share Purchase Agreement, dated as of January 10, 2012, by and among Tangoe, Inc., Anomalous Networks Inc. and the shareholders of Anomalous Networks Inc. named therein (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-35247) filed by the registrant on January 10, 2012)

 

 

 

10.1

 

Summary of Compensation Arrangements for Named Executive Officers and Directors (incorporated by reference to Exhibit 10.44 to the Annual Report on Form 10-K (File No. 001-35247) filed by the registrant on March 29, 2012)

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted 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 Extension Calculation Linkbase Document

 

 

 

101.DEF†

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB†

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE†

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*                 Certain exhibits and schedules to the Share Purchase Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish copies of any of the exhibits and schedules to the U.S. Securities and Exchange Commission upon request.

 

†       XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not otherwise subject to liability under these sections.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Tangoe, Inc.

 

 

 

 

Date: May 15, 2012

/s/ Gary R. Martino

 

Gary R. Martino

 

Chief Financial Officer

 

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