Operations And Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Operations And Significant Accounting Policies [Abstract]

Operations And Significant Accounting Policies

(1) Operations and Significant Accounting Policies

The Company is a software development company focused on bringing innovative and proprietary software products to a wide variety of markets. Our core software products include award-winning fonts and font rendering technologies, mobile browsing and messaging technologies, variable data publishing and web-to-print technologies, and multi-channel communications technologies. The Company operates in one business segment and we conduct our operations through Bitstream Inc. and two foreign subsidiaries: Bitstream India Pvt. Ltd. and Bitstream Israel LTD. On July 18, 2011, in connection with the Separation, Distribution and planned Merger of Bitstream with Monotype Imaging Holdings, Inc. (see note 10), the Company incorporated Marlborough Software Development Holdings ("MSDH"), a wholly-owned subsidiary of Bitstream. As of and through September 30, 2011, there was no activity in MSDH.

The Company is subject to risks common to technology-based companies, including dependence on key personnel, rapid technological change, competition from alternative product offerings and larger companies, and challenges to the development and marketing of commercial products and services. The Company has also experienced net losses in the current year, as well as prior years, and as of September 30, 2011 has an accumulated deficit of approximately $24 million. For a complete discussion of our business risks, see the "Risk Factors" under Part I, Item 1A. beginning on page 18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

(a) Use of Estimates

The accompanying condensed consolidated financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes. The preparation of the accompanying condensed consolidated financial statements requires the use of certain estimates by us in determining our assets, liabilities, revenues and expenses. Significant estimates in these financial statements include revenue recognition, the valuation of acquired intangible assets and goodwill, share-based compensation, income taxes and the valuation of deferred tax assets, and the allowance for doubtful accounts receivable. Actual results may differ from these estimates.

(b) Basis of Presentation

Our unaudited condensed consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (the "SEC") for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles ("GAAP"). The balance sheet information as of December 31, 2010 has been derived from our audited consolidated financial statements but does not include all disclosures required by GAAP. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 included in our Annual Report on Form 10-K, which was filed with the SEC on March 31, 2011. The condensed consolidated balance sheet as of September 30, 2011, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2011 and 2010, and the condensed consolidated statements of cash flows for the three and nine months ended September 30, 2011 and 2010, and the notes to each are unaudited, but in the opinion of management include all adjustments necessary for a fair presentation of the condensed consolidated financial position, results of operations, and cash flows of the Company for these interim periods. The results of operations for the nine months ended September 30, 2011 may not necessarily be indicative of the results to be expected for the year ending December 31, 2011.

Certain prior year amounts have been reclassified to conform with the current year's presentation. The Company evaluated subsequent events through November 14, 2011 to determine whether or not any such events required disclosure in this Form 10-Q, and determined that the subsequent event disclosed in Footnote 10 to these unaudited condensed consolidated financial statements is the only such event.

(c) Property and Equipment, in thousands

Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment consists of the following:

	September 30, 2011		December 31, 2010
Equipment and computer software	$	2,189	$	2,027
Purchased software		449		439
Furniture and fixtures		621		624
Leasehold improvements		166		100
		3,425		3,190
Less – Accumulated depreciation and amortization		2,760		2,584
Property and equipment, net	$	665	$	606

Depreciation expense for the three months ended September 30, 2011 and 2010 was $71 and $80, respectively. Depreciation expense for the nine months ended September 30, 2011 and 2010 was $207 and $213, respectively.

(d) Off-Balance Sheet Risk and Concentration of Credit Risk, dollar amounts in thousands

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities, and trade accounts receivable. The Company places a majority of its cash and cash equivalents in one highly-rated financial institution and holds its marketable securities in a custodial account at another highly-rated financial institution. The Company evaluated its accounts receivable balance at September 30, 2011 and determined that its allowance for bad debts of $39 was adequate. At September 30, 2011, three customers accounted for 20%, 13% and 10% of our accounts receivable. At December 31, 2010, two customers accounted for 23% and 16% of our accounts receivable. We do not have any off-balance sheet risks as of September 30, 2011 or December 31, 2010. For the three and nine months ended September 30, 2011 and for the nine months ended September 30, 2010, no single customer accounted for 10% or more of our revenue. One customer accounted for 10% of our revenue for the three month period ended September 30, 2010.

(e) Comprehensive Loss, in thousands

Comprehensive loss consists of net loss and adjustments to stockholders' equity for historical foreign currency translation adjustments and unrealized gains from investments in marketable securities classified as available-for-sale. For the purposes of comprehensive loss disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as it intends to permanently reinvest undistributed earnings in its foreign subsidiaries in accordance with the applicable accounting guidance. For purposes of comprehensive loss disclosures, the Company also does not record tax provisions or benefits for unrealized gains or losses on investments in marketable securities as it has recorded a full valuation allowance against its deferred tax assets and is not currently recording a tax liability.

The components of comprehensive loss are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net loss	$	(1,950	)	$	(1,174	)	$	(4,235	)	$	(2,257	)
Unrealized gain on investments in marketable securities, net		64			192			120			385
Total comprehensive loss	$	(1,886	)	$	(982	)	$	(4,115	)	$	(1,872	)

Accumulated other comprehensive income consisted of the following:

	September 30, 2011		December 31, 2010
Unrealized gain on investments in marketable securities, net	$	314	$	194

(f) Recently Issued Accounting Standards

Recent Accounting Pronouncements Not Yet Adopted

In June 2011, the Financial Accounting Standards Board issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company on January 1, 2012. Early adoption is permitted. As the new guidance relates only to how comprehensive income is disclosed and does not change the items that must be reported as comprehensive income, adoption will not have an effect on the Company's consolidated financial statements.

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for the Company beginning January 1, 2012. Other than requiring additional disclosures, we do not anticipate material impacts on the Company's consolidated financial statements upon adoption.

(g) Fair Value Hierarchy, in thousands

The accounting standards codification for fair value measurements specifies a hierarchy for disclosure of fair value measurements. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. This hierarchy requires the use of observable market data when available. The three levels are defined as follows:

Level 1	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities for the instrument or security to be valued.
Level 2	Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, through corroboration with observable market data for substantially the full term of the asset or liability.
Level 3	Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable and are significant to the fair value of the assets or liabilities.

Assets and liabilities of the Company measured at fair value on a recurring basis are summarized as follows as of September 30, 2011 and December 31, 2010:

	Fair Value Measurements at Reporting Date Using
Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets – September 30, 2011
Money market funds	$	178	$	178	$	—	$	—
Certificates of deposit		250		250		—		—
Government bonds		875		875		—		—
Corporate bonds		5,603		5,603		—		—
Total assets – September 30, 2011	$	6,906	$	6,906	$	—	$	—
Assets – December 31, 2010
Money market funds	$	169	$	169	$	—	$	—
Certificates of deposit		250		250		—		—
Government bonds		1,201		1,201		—		—
Corporate bonds		6,896		6,896		—		—
Total assets – December 31, 2010	$	8,516	$	8,516	$	—	$	—

See Note 2 for further disclosure regarding our cash, cash equivalents, and marketable securities.

(h) Foreign Currency Remeasurement and Transactions, in thousands

The functional currency for the Company's foreign subsidiaries is the U.S. Dollar. For financial reporting purposes, assets and liabilities of subsidiaries outside the United States of America denominated in other currencies are remeasured into U.S. dollars using period-end and historical exchange rates. Revenue and expense accounts are remeasured at the monthly average rates in effect during the period. The effects of the remeasurement of the balances of our Israel and India subsidiaries are included as gains (losses) and reported as Interest and other income, net in the condensed and consolidated statements of operations.

Transaction losses for the three months ended September 30, 2011 and 2010 were $53 and $25, respectively, and for the nine months ended September 30, 2011 and 2010 were $74 and $29, respectively.