e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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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: 001-34391
LOGMEIN, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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20-1515952 |
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer
Identification No.) |
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| 500 Unicorn Park Drive |
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| Woburn, Massachusetts
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01801 |
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| (Address of principal executive offices)
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(Zip Code) |
781-638-9050
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ 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 o 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.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of April 22, 2011, there were 24,052,007 shares of the registrant’s Common Stock, par value $.01
per share, outstanding.
Part I. Financial Information
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| Item 1. |
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Financial Statements |
LogMeIn, Inc.
Condensed Consolidated Balance Sheets
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December 31, |
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March 31, |
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2010 |
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2011 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
77,279,987 |
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$ |
86,081,727 |
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Marketable securities |
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90,144,484 |
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90,133,823 |
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Accounts receivable (net of allowance for doubtful accounts of $111,000 as of
December 31, 2010 and March 31, 2011) |
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4,744,392 |
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5,873,614 |
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Prepaid expenses and other current assets (including $9,000 and $0
of non-trade receivable due from related party at December 31, 2010 and
March 31, 2011, respectively) |
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2,905,618 |
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2,440,586 |
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Deferred income tax assets |
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1,315,529 |
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1,326,923 |
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Total current assets |
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176,390,010 |
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185,856,673 |
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Property and equipment, net |
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6,198,487 |
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6,448,220 |
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Restricted cash |
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350,481 |
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389,201 |
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Intangibles, net |
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577,815 |
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532,188 |
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Goodwill |
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615,299 |
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615,299 |
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Other assets |
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27,019 |
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62,219 |
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Deferred income tax assets |
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2,518,158 |
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2,519,356 |
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Total assets |
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$ |
186,677,269 |
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$ |
196,423,156 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,176,390 |
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$ |
4,849,366 |
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Accrued liabilities |
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10,829,310 |
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9,812,013 |
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Deferred revenue, current portion |
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41,763,138 |
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46,177,082 |
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Total current liabilities |
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54,768,838 |
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60,838,461 |
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Deferred revenue, net of current portion |
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1,030,017 |
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1,390,037 |
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Other long-term liabilities |
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500,156 |
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459,669 |
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Total liabilities |
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56,299,011 |
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62,688,167 |
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Commitments and contingencies (Note 8) |
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Preferred stock, $0.01 par value — 5,000,000 shares authorized, 0 shares outstanding
as of December 31, 2010 and March 31, 2011 |
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Stockholders’ equity: |
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Common stock, $0.01 par value — 75,000,000 shares authorized as of
December 31, 2010 and March 31, 2011; 23,858,514 and 24,021,282 shares
outstanding as of December 31, 2010 and March 31, 2011, respectively |
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238,585 |
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240,213 |
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Additional paid-in capital |
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133,425,098 |
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136,290,131 |
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Accumulated deficit |
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(3,084,316 |
) |
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(3,149,563 |
) |
Accumulated other comprehensive income (loss) |
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(201,109 |
) |
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354,208 |
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Total stockholders’ equity |
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130,378,258 |
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133,734,989 |
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Total liabilities and stockholders’ equity |
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$ |
186,677,269 |
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$ |
196,423,156 |
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See notes to condensed consolidated financial statements.
2
LogMeIn, Inc.
Condensed Consolidated Statements of Operations
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Three Months Ended March 31, |
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2010 |
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2011 |
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Revenue (including $1,487,000 and $0 from a related party
during the three months ended March 31, 2010 and
2011, respectively) |
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$ |
21,324,800 |
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$ |
27,038,779 |
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Cost of revenue |
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2,220,163 |
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2,536,136 |
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Gross profit |
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19,104,637 |
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24,502,643 |
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Operating expenses |
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Research and development |
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3,553,797 |
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4,317,779 |
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Sales and marketing |
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9,840,481 |
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12,986,109 |
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General and administrative |
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2,803,357 |
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6,058,690 |
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Legal
settlements |
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— |
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1,250,000 |
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Amortization of acquired intangibles |
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81,929 |
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92,034 |
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Total operating expenses |
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16,279,564 |
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24,704,612 |
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Income
(loss) from operations |
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2,825,073 |
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(201,969 |
) |
Interest
income, net |
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114,142 |
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210,712 |
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Other expense |
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(64,037 |
) |
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(108,811 |
) |
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Income (loss) before income taxes |
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2,875,178 |
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(100,068 |
) |
(Provision)
benefit for income taxes |
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(139,159 |
) |
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34,821 |
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Net income (loss) |
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$ |
2,736,019 |
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$ |
(65,247 |
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Net income (loss) per share: |
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Basic |
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$ |
0.12 |
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$ |
0.00 |
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Diluted |
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$ |
0.11 |
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$ |
0.00 |
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Weighted average shares outstanding: |
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Basic |
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22,643,963 |
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23,928,310 |
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Diluted |
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24,350,845 |
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23,928,310 |
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See notes to condensed consolidated financial statements.
3
LogMeIn, Inc.
Condensed Consolidated Statements of Cash Flows
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Three Months Ended March 31, |
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2010 |
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2011 |
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Cash flows from operating activities |
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Net income
(loss) |
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$ |
2,736,019 |
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$ |
(65,247 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating activities |
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Depreciation and amortization |
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941,530 |
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1,004,987 |
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Amortization of premium on investments |
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33,913 |
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59,105 |
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Provision for bad debts |
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30,000 |
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|
14,050 |
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Provision for deferred income taxes |
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4,000 |
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(12,461 |
) |
Stock-based compensation |
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1,026,799 |
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1,745,494 |
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Gain on disposal of equipment |
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(1,238 |
) |
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(178 |
) |
Changes in assets and liabilities: |
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Accounts receivable |
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780,568 |
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(1,143,272 |
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Prepaid expenses and other current assets |
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204,340 |
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|
465,032 |
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Other assets |
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(27,901 |
) |
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(35,200 |
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Accounts payable |
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|
281,745 |
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2,634,892 |
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Accrued liabilities |
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(842,522 |
) |
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(1,006,483 |
) |
Deferred revenue |
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2,265,579 |
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4,773,964 |
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Other long-term liabilities |
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(50,371 |
) |
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(40,487 |
) |
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Net cash provided by operating activities |
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7,382,461 |
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8,394,196 |
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Cash flows from investing activities |
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Purchases of marketable securities |
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(55,331,450 |
) |
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(30,076,850 |
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Proceeds from sale or disposal of marketable securities |
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25,000,000 |
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30,000,000 |
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Purchases of property and equipment |
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(365,001 |
) |
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(1,117,622 |
) |
Intangible asset additions |
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— |
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(61,738 |
) |
Increase in restricted cash and deposits |
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— |
|
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(25,569 |
) |
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Net cash used in investing activities |
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(30,696,451 |
) |
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(1,281,779 |
) |
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Cash flows from financing activities |
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Payments of issuance costs related to secondary offering
of common stock |
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(210,394 |
) |
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— |
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Proceeds from issuance of common stock upon option exercises |
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1,350,413 |
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|
1,117,686 |
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Net cash provided by financing activities |
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1,140,019 |
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|
1,117,686 |
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Effect of exchange rate changes on cash and cash equivalents and restricted cash |
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(133,907 |
) |
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571,637 |
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Net increase (decrease) in cash and cash equivalents |
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(22,307,878 |
) |
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|
8,801,740 |
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Cash and cash equivalents, beginning of period |
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100,290,001 |
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77,279,987 |
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Cash and cash equivalents, end of period |
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$ |
77,982,123 |
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$ |
86,081,727 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
228 |
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$ |
118 |
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Cash paid for income taxes |
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$ |
16,626 |
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$ |
23,736 |
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Noncash investing and financing activities |
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Purchases of property and equipment included in
accounts payable and accrued liabilities |
|
$ |
817,709 |
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$ |
418,055 |
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Deferred stock offering costs included in accounts payable
and accrued liabilities |
|
$ |
18,493 |
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$ |
— |
|
See notes to condensed consolidated financial statements.
4
LogMeIn, Inc.
Notes to Condensed Consolidated Financial Statements
1. Nature of the Business
LogMeIn,
Inc. (the “Company”) develops and markets a suite of remote access, remote support,
and collaboration solutions that provide instant, secure connections between Internet enabled
devices. The Company’s product line includes GravityTM,
LogMeIn Free®,
LogMeIn Pro2®,
LogMeIn®
CentralTM,
LogMeIn Rescue®,
LogMeIn®
Rescue+MobileTM,
LogMeIn Backup®,
LogMeIn®
Ignition SMTM,
LogMeIn Hamachi2®,
join.meTM
and RemotelyAnywhere®. The Company is based in
Woburn, Massachusetts with wholly-owned subsidiaries in Hungary, The Netherlands, Australia,
England and Brazil.
2. Summary of Significant Accounting Policies
Principles of Consolidation — The accompanying condensed consolidated financial statements
include the results of operations of the Company and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation. The Company has
prepared the accompanying consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”).
Unaudited Interim Condensed Consolidated Financial Statements — The accompanying condensed
consolidated financial statements and the related interim information contained within the notes to
the condensed consolidated financial statements are unaudited and have been prepared in accordance
with GAAP and applicable rules and regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include all of the information and notes
required by GAAP for complete financial statements. The accompanying unaudited condensed
consolidated financial statements should be read along with the Company’s audited financial
statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on February 28, 2011. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the audited consolidated financial statements
and in the opinion of management, reflect all adjustments, consisting of normal and recurring
adjustments, necessary for the fair presentation of the Company’s financial position, results of
operations and cash flows for the interim periods presented. The results for the interim periods
presented are not necessarily indicative of future results. The Company considers events or
transactions that occur after the balance sheet date but before the financial statements are issued
to provide additional evidence relative to certain estimates or to identify matters that require
additional disclosure.
Use of Estimates — The preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting
period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results
could differ from those estimates.
Marketable Securities — The Company’s marketable securities are classified as
available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax,
reported as a component of accumulated other comprehensive income in stockholders’ equity. Realized
gains and losses and declines in value judged to be other than temporary are included as a
component of earnings based on the specific identification method. Fair value is determined based
on quoted market prices. At December 31, 2010 and March 31, 2011, marketable securities consisted
of U.S. government agency securities that have remaining maturities within two years and have an
aggregate amortized cost of $90,119,605 and $90,137,350 and an aggregate fair value of $90,144,484
and $90,133,823, including $65,136 and $52,183 of unrealized gains and $40,257 and $55,711 of
unrealized losses, respectively.
Revenue Recognition — The Company derives revenue primarily from subscription fees related
to its LogMeIn premium services and from the licensing of its Ignition for iPhone, iPad and Android
software products and RemotelyAnywhere software and related maintenance.
Revenue from the Company’s LogMeIn premium services is recognized on a daily basis over the
subscription term as the services are delivered, provided that there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured.
Subscription periods range from monthly to four years, but are generally one year in duration. The
Company’s software cannot be run on another entity’s hardware nor do customers have the right to
take possession of the software and use it on their own or another entity’s hardware.
The Company recognizes revenue from the bundled delivery of its RemotelyAnywhere software
product and related maintenance ratably, on a daily basis, over the term of the maintenance
contract, generally one year, when there is persuasive evidence of an arrangement, the product has
been provided to the customer, the collection of the fee is probable, and the amount of fees to be
paid by the customer is fixed or determinable. The Company currently does not have vendor-specific
objective evidence for the fair value of its maintenance arrangements and therefore the license and
maintenance are bundled together. The Company recognizes revenue from the sale of its Ignition for
iPhone, iPad and Android software product which is sold as a perpetual license and is recognized
when there is persuasive evidence of an arrangement, the product has been provided to the customer,
the collection of the fee is probable, and the amount of fees to be paid by the customer is fixed
or determinable.
The Company’s multi-element arrangements typically include multiple deliverables by the
Company such as subscription and professional services, including development services. Agreements
with multiple element deliverables are analyzed to determine if fair value
5
exists for each element
on a stand-alone basis. If the fair value of each deliverable is
determinable using objective evidence or best estimate selling price, then revenue is
recognized separately when or as the services are delivered, or if applicable, when milestones
associated with the deliverable are achieved and accepted by the customer. If
the fair value of any of the undelivered performance obligations cannot be determined, the
arrangement is accounted for as a single element and the Company recognizes revenue on a
straightline basis over the period in which the Company expects to complete its performance
obligations under the agreement.
Concentrations of Credit Risk and Significant Customers — The Company’s principal credit
risk relates to its cash, cash equivalents, marketable securities, restricted cash, and accounts
receivable. Cash, cash equivalents, and restricted cash are deposited primarily with financial
institutions that management believes to be of high-credit quality and custody of its marketable
securities is with an accredited financial institution. To manage accounts receivable credit risk,
the Company regularly evaluates the creditworthiness of its customers and maintains allowances for
potential credit losses. To date, losses resulting from uncollected receivables have not exceeded
management’s expectations.
As of March 31, 2011, one customer accounted for 17% of accounts receivable, and no customers
accounted for more than 10% of revenue for the three months ended
March 31, 2010 or 2011. At
December 30, 2010, there was one customer that accounted for 14% of accounts receivable.
Foreign Currency Translation —The functional currency of operations outside the United States
of America is deemed to be the currency of the local country. Accordingly, the assets and
liabilities of the Company’s foreign subsidiaries are translated into United States dollars using
the period-end exchange rate, and income and expense items are translated using the average
exchange rate during the period. Cumulative translation adjustments are reflected as a separate
component of stockholders’ equity. Foreign currency transaction gains and losses are charged to
operations. The Company had foreign currency losses of approximately $64,000 and $109,000 for the
three months ended March 31, 2010 and 2011, respectively.
Stock-Based Compensation — Stock-based compensation is measured based upon the grant
date fair value and recognized as an expense on a straight-line basis in the financial statements
over the vesting period of the award for those awards expected to vest. The Company uses the
Black-Scholes option pricing model to estimate the grant date fair value of stock awards. The
Company uses the with-or-without method to determine when it will realize excess tax benefits from
stock based compensation. Under this method, the Company will realize these excess tax benefits
only after it realizes the tax benefits of net operating losses from operations.
Income Taxes — Deferred income taxes are provided for the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, and operating loss carry-forwards and credits using
enacted tax rates expected to be in effect in the years in which the differences are expected to
reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets
will be realized, and recognizes a valuation allowance if it is more likely than not that some
portion of the deferred tax assets will not be realized. This assessment requires judgment as to
the likelihood and amounts of future taxable income by tax jurisdiction. As of December 31, 2010
and March 31, 2011, the Company maintained a full valuation allowance related to the deferred tax
assets of its Hungarian subsidiary due to its historical net losses.
The Company evaluates its uncertain tax positions based on a determination of whether and how
much of a tax benefit taken by the Company in its tax filings or positions is more likely than not
to be realized. Potential interest and penalties associated with any uncertain tax positions are
recorded as a component of income tax expense. Through March 31, 2011, the Company has not
identified any material uncertain tax positions for which liabilities would be required.
Comprehensive Income — Comprehensive income is the change in stockholders’ equity during a
period relating to transactions and other events and circumstances from non-owner sources and
currently consists of net income (loss), foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities.
Comprehensive income was calculated as follows:
| |
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| |
|
Three Months Ended March 31, |
|
| |
|
2010 |
|
|
2011 |
|
Net income
(loss) |
|
$ |
2,736,019 |
|
|
$ |
(65,247 |
) |
Cumulative translation adjustments |
|
|
(143,593 |
) |
|
|
572,460 |
|
Unrealized gain on available-for-sale securities |
|
|
(14,420 |
) |
|
|
(17,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,578,006 |
|
|
$ |
490,070 |
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share — Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for the period. Diluted
net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares outstanding during the period and the options to purchase common
shares from the assumed exercise of stock options. For the three months ended March 31, 2011, the
Company incurred a net loss and therefore, the effect of the Company’s outstanding common stock
equivalents were not included in the calculation of diluted loss per
share as they were anti-dilutive. Accordingly, basic and
diluted net loss per share for the period were identical.
The Company excluded 809,575 and 2,939,422 of options to purchase common shares from the
computation of diluted net income (loss) per share for the three months ended March 31, 2010 and
2011, respectively, either because they had an anti-dilutive impact or because the Company had a
net loss in the period.
6
Basic and
diluted net income (loss) per share was calculated as follows:
| |
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, 2010 |
|
Basic: |
|
|
|
|
Net income |
|
$ |
2,736,019 |
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
22,643,963 |
|
|
|
|
|
Net income, basic |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
Net income |
|
$ |
2,736,019 |
|
|
|
|
|
Weighted average common shares outstanding |
|
|
22,643,963 |
|
Add: Options to purchase common shares |
|
|
1,706,882 |
|
|
|
|
|
Weighted average common shares outstanding, diluted |
|
|
24,350,845 |
|
|
|
|
|
Net income, diluted |
|
$ |
0.11 |
|
|
|
|
|
| |
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, 2011 |
|
|
|
|
|
|
Basic and
diluted net loss per share: |
|
|
|
|
Net loss |
|
$ |
(65,247 |
) |
|
|
|
|
Weighted average common shares outstanding |
|
|
23,928,310 |
|
|
|
|
|
Basic and
diluted net loss per share |
|
$ |
0.00 |
|
|
|
|
|
Recently Issued Accounting Pronouncements — In October 2009, an update was made to “Revenue
Recognition — Multiple Deliverable Revenue Arrangements.” This update removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to
determine whether an arrangement involving multiple deliverables contains more than one unit of
accounting, replaces references to “fair value” with “selling price” to distinguish from the fair
value measurements required under the “Fair Value Measurements and Disclosures” guidance, provides
a hierarchy that entities must use to estimate the selling price, eliminates the use of the
residual method for allocation, and expands the ongoing disclosure requirements.
The effect of adoption of this standard has only impacted our financial statement disclosure
to comply with the additional disclosure requirements as described in Note 2 to the condensed
consolidated financial statements. The implementation of this guidance did not have a material impact
on our consolidated financial position, results of operations or cash flows.
3. Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash equivalents,
restricted cash, accounts receivable, and accounts payable, approximate their fair values due to
their short maturities. The Company’s financial assets and liabilities are measured using
7
inputs
from the three levels of the fair value hierarchy. A financial asset or liability’s classification
within the hierarchy is determined based on the lowest level input that is significant to the fair
value measurement. The three levels are as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets
accessible by the Company at the measurement date.
Level 2: Inputs include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability, and inputs
that are derived principally from or corroborated by observable market data by correlation or other
means.
Level 3: Unobservable inputs that reflect the Company’s assumptions about the assumptions
that market participants would use in pricing the asset or liability.
The following table summarizes the basis used to measure certain of the Company’s
financial assets that are carried at fair value:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basis of Fair Value Measurements |
| |
|
|
|
|
|
Quoted Prices |
|
|
|
|
| |
|
|
|
|
|
in Active |
|
Significant |
|
|
| |
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
| |
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
| |
|
|
|
|
|
Items |
|
Inputs |
|
Inputs |
| |
|
Balance |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Balance at December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents — money market funds |
|
$ |
48,074,441 |
|
|
$ |
48,074,441 |
|
|
$ |
— |
|
|
$ |
— |
|
Cash equivalents — bank deposits |
|
|
5,022,089 |
|
|
|
— |
|
|
|
5,022,089 |
|
|
|
— |
|
Short-term marketable securities —
U.S. government agency securities |
|
|
90,144,484 |
|
|
|
90,144,484 |
|
|
|
— |
|
|
|
— |
|
Balance at March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents — money market funds |
|
$ |
48,293,829 |
|
|
$ |
48,293,829 |
|
|
$ |
— |
|
|
$ |
— |
|
Cash equivalents — bank deposits |
|
|
5,025,591 |
|
|
|
— |
|
|
|
5,025,591 |
|
|
|
— |
|
Short-term marketable securities —
U.S. government agency securities |
|
|
90,133,823 |
|
|
|
90,133,823 |
|
|
|
— |
|
|
|
— |
|
Bank deposits are classified within the second level of the fair value hierarchy and the fair
value of those assets are determined based upon quoted prices for similar assets in active markets.
4. Intangible Assets
Acquired intangible assets consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 31, 2010 |
|
|
March 31, 2011 |
|
| |
|
Estimated |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
| |
|
Useful |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
| |
|
Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark |
|
5 years |
|
$ |
635,506 |
|
|
$ |
563,105 |
|
|
$ |
72,401 |
|
|
$ |
635,506 |
|
|
$ |
594,880 |
|
|
$ |
40,626 |
|
Customer base |
|
5 years |
|
|
1,003,068 |
|
|
|
888,791 |
|
|
|
114,277 |
|
|
|
1,003,068 |
|
|
|
938,944 |
|
|
|
64,124 |
|
Domain names |
|
5 years |
|
|
202,120 |
|
|
|
10,038 |
|
|
|
192,082 |
|
|
|
202,107 |
|
|
|
20,143 |
|
|
|
181,964 |
|
Software |
|
4 years |
|
|
298,977 |
|
|
|
298,977 |
|
|
|
— |
|
|
|
298,977 |
|
|
|
298,977 |
|
|
|
— |
|
Technology |
|
4 years |
|
|
1,361,900 |
|
|
|
1,361,900 |
|
|
|
— |
|
|
|
1,361,900 |
|
|
|
1,361,900 |
|
|
|
— |
|
Internally
developed
software |
|
3 years |
|
|
213,942 |
|
|
|
14,887 |
|
|
|
199,055 |
|
|
|
275,693 |
|
|
|
30,219 |
|
|
|
245,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,715,513 |
|
|
$ |
3,137,698 |
|
|
$ |
577,815 |
|
|
$ |
3,777,251 |
|
|
$ |
3,245,063 |
|
|
$ |
532,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The Company
capitalized $61,751 of costs related to internally developed computer software to be
sold as a service incurred during the application development stage during the three
months ended March 31, 2011 and is amortizing these costs over the expected lives of the related
services. No amounts were capitalized during the three months ended March 31, 2010 as the costs
incurred during the period were immaterial.
The Company is amortizing the intangible assets on a straight-line basis over the
estimated useful lives noted above. Amortization expense for intangible assets was $185,733 and
$107,365 for the three months ended March 31, 2010 and 2011, respectively. Amortization relating
to software, technology and internally developed software is recorded within cost of revenues and
the amortization of trademark, customer base, and domain names is recorded within operating
expenses. Future estimated amortization expense for intangible assets is as follows at March 31,
2011:
| |
|
|
|
|
| Amortization Expense (Years Ending December 31) |
|
Amount |
|
| |
|
|
|
|
2011 |
|
$ |
203,999 |
|
2012 |
|
|
132,331 |
|
2013 |
|
|
117,444 |
|
2014 |
|
|
48,085 |
|
2015 |
|
|
30,329 |
|
5. Accrued Expenses
Accrued expenses consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
March 31, |
|
| |
|
2010 |
|
|
2011 |
|
Marketing programs |
|
$ |
3,265,692 |
|
|
$ |
2,069,731 |
|
Payroll and payroll related |
|
|
4,535,322 |
|
|
|
2,940,553 |
|
Professional fees |
|
|
745,834 |
|
|
|
1,228,635 |
|
Legal
settlements (see Note 8) |
|
|
— |
|
|
|
1,250,000 |
|
Other accrued liabilities |
|
|
2,282,462 |
|
|
|
2,323,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
10,829,310 |
|
|
$ |
9,812,013 |
|
|
|
|
|
|
|
|
6. Income Taxes
The
Company recorded a benefit for federal, state and foreign income
taxes of approximately $35,000 for the three months ended
March 31, 2011. The Company’s tax provision for
the three months ended March 31, 2010 primarily consists of alternative minimum taxes and foreign
income taxes, as well as a deferred provision related to the book and tax basis differences of
goodwill. During the three months ended March 31, 2010, the
Company maintained a full valuation allowance
against all of its net deferred tax assets. However, the Company reversed the valuation allowance against
primarily all of its net deferred tax assets at June 30, 2010
and therefore its tax provision and
effective tax rate has increased year-over-year.
Deferred income taxes are provided for the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, and operating loss carry-forwards and credits using enacted tax rates
expected to be in effect in the years in which the differences are expected to reverse. At each
balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized,
and recognizes a valuation allowance if it is more likely than not that some portion of the
deferred tax assets will not be realized. This assessment requires judgment as to the likelihood
and amounts of future taxable income by tax jurisdiction. As of December 31, 2010 and March 31,
2011, the Company maintained a full valuation allowance related to the deferred tax assets of its
Hungarian subsidiary.
The Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company’s income tax returns since inception are open to examination by
federal, state, and foreign tax authorities. The Company has no amount recorded for any
unrecognized tax benefits as of December 31, 2010 or March 31, 2011. The Company’s policy is to
record estimated interest and penalty related to the underpayment of income taxes or unrecognized
tax benefits as a component of its income tax provision. During the three months ended March 31,
2010 and 2011, the Company did not recognize any interest or penalties in its statements
of operations, and there are no accruals for interest or penalties at December 31, 2010 or March
31, 2011.
The Company has performed an analysis of its ownership changes as defined by Section 382 of
the Internal Revenue Code and has determined that an ownership change as defined by Section 382
occurred in October 2004 and March 2010 resulting in approximately $219,000 and $12,800,000,
respectively, of net operating losses (“NOLs”) being subject to limitation. As of December 31, 2010
and March 31, 2011, the Company believes all NOLs generated by the Company, including those subject
to limitation, are available for utilization given the Company’s large annual limitation amount.
Subsequent ownership changes as defined by Section 382 could potentially limit the amount of net
operating loss carry-forwards that can be utilized annually to offset future taxable income.
7. Stock Option Plans
On June 9, 2009, the Company’s Board of Directors approved the 2009 Stock Incentive Plan (the
“2009 Plan”) which became effective upon the closing of the Company’s initial public offering, or IPO. A total of 800,000 shares of
common stock, subject to increase on an annual basis, were reserved for future issuance under the
2009 Plan. Shares of common stock reserved for issuance under the 2007 Stock Incentive Plan that
remained available for issuance at the time of effectiveness of the 2009 Plan and any shares of
common stock subject to awards under the 2007 Plan that expire, terminate, or are otherwise
forfeited, canceled, or repurchased by the Company were added to the number of shares available
under the 2009 Plan. The 2009 Plan is administered by the Board of Directors and Compensation
Committee, which have the authority to designate participants and determine the number and type of
awards to be granted, the time at which awards are exercisable, the method of payment and any other
terms or conditions of the awards. Options generally vest over a four-year period and expire ten
years from the date of grant. Certain
9
options provide for accelerated vesting if there is a change
in control. On January 1, 2010, subject to the provisions of the 2009 Plan, 448,996 shares were
added to the shares available for grant under the 2009 Plan. On May 27, 2010, the Company’s
stockholders approved a 2,000,000 share increase to the shares available for grant under the 2009
Plan and removed the annual automatic share increase provision from the 2009 Plan. There were
1,760,803 shares available for grant under the 2009 Plan as of March 31, 2011.
The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value
of stock option grants. The Company estimates the expected volatility of its common stock at the
date of grant based on the historical volatility of comparable public companies over the option’s
expected term as well as its own stock price volatility since the Company’s IPO. The Company
estimates expected term based on historical exercise activity and giving consideration to the
contractual term of the options, vesting schedules, employee turnover, and expectation of employee
exercise behavior. The assumed dividend yield is based upon the Company’s expectation of not paying
dividends in the foreseeable future. The risk-free rate for periods within the estimated life of
the option is based on the U.S. Treasury yield curve in effect at the time of grant. Historical
employee turnover data is used to estimate pre-vesting option forfeiture rates. The compensation
expense is amortized on a straight-line basis over the requisite service period of the options,
which is generally four years.
The Company used the following assumptions to apply the Black-Scholes option-pricing model:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2010 |
|
|
2011 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Risk-free interest rate |
|
|
2.46 |
% |
|
|
2.28 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
5.56-6.25 |
|
Volatility |
|
|
75 |
% |
|
|
60 |
% |
The following table summarizes stock option activity, including performance-based options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
| |
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
| |
|
Number |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
| |
|
of Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding, January 1, 2011 |
|
|
2,564,315 |
|
|
$ |
12.76 |
|
|
|
7.3 |
|
|
$ |
80,983,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
649,550 |
|
|
|
40.07 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(162,768 |
) |
|
|
7.17 |
|
|
|
|
|
|
$ |
5,068,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(111,675 |
) |
|
|
28.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2011 |
|
|
2,939,422 |
|
|
$ |
18.51 |
|
|
|
7.6 |
|
|
$ |
69,503,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
1,246,838 |
|
|
$ |
5.36 |
|
|
|
5.7 |
|
|
$ |
48,600,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2011 |
|
|
1,331,187 |
|
|
$ |
7.18 |
|
|
|
5.7 |
|
|
$ |
46,570,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was calculated based on the positive differences
between the estimated fair value of the Company’s common stock on December 31, 2010, of $44.34, and
$42.16 per share on March 31, 2011, or at time of exercise, and the exercise price of the options.
The weighted average grant date fair value of stock options issued or modified was $14.63 per
share for the year ended December 31, 2010, and $23.09 for the three months ended March 31, 2011.
The Company recognized stock based compensation expense within the accompanying condensed
consolidated statements of operations as summarized in the following table:
10
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended, |
|
| |
|
March 31, |
|
| |
|
2010 |
|
|
2011 |
|
Cost of revenue |
|
$ |
32,170 |
|
|
$ |
89,052 |
|
Research and development |
|
|
135,963 |
|
|
|
280,116 |
|
Sales and marketing |
|
|
235,520 |
|
|
|
562,535 |
|
General and administrative |
|
|
623,146 |
|
|
|
813,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,026,799 |
|
|
$ |
1,745,494 |
|
|
|
|
|
|
|
|
As of March 31, 2011, there was approximately $23,415,000 of total unrecognized
share-based compensation cost, net of estimated forfeitures, related to unvested stock option
grants which are expected to be recognized over a weighted average period of 3.2 years. The total
unrecognized share-based compensation cost will be adjusted for future changes in estimated
forfeitures.
Of the total stock options issued subject to the plans, certain stock options have
performance-based vesting. These performance-based options granted during 2004 and 2007 were
granted at-the-money, contingently vest over a period of two to four years depending upon the
nature of the performance goal, and have a contractual life of ten years.
The performance-based stock option activity is summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
| |
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
| |
|
Number |
|
|
Exercise |
|
|
Term |
|
|
Intrinsic |
|
| |
|
of Shares |
|
|
Price |
|
|
(Years) |
|
|
Value |
|
Outstanding, January 1, 2011 |
|
|
532,932 |
|
|
$ |
1.25 |
|
|
|
4.6 |
|
|
$ |
22,964,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(30,000 |
) |
|
|
1.25 |
|
|
|
|
|
|
|
1,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2011 |
|
|
502,932 |
|
|
|
1.25 |
|
|
|
4.3 |
|
|
|
20,574,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
532,932 |
|
|
|
1.25 |
|
|
|
4.6 |
|
|
|
22,964,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2011 |
|
|
502,932 |
|
|
|
1.25 |
|
|
|
4.3 |
|
|
|
20,574,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was calculated based on the positive differences
between the estimated fair value of the Company’s common stock on December 31, 2010, of $44.34 per
share, and $42.16 per share on March 31, 2011, or at the time of exercise, and the exercise price
of the options.
8. Commitments and Contingencies
Operating Leases — The Company has operating lease agreements for offices in Massachusetts,
Hungary, The Netherlands, Australia and England that expire in 2012 through 2016. The lease
agreement for the Massachusetts office requires a security deposit of $125,000 in the form of a
letter of credit which is collateralized by a certificate of deposit in the same amount. The lease
agreement for one of the Company’s Hungarian offices requires a security deposit, which totaled
approximately $239,068 (170,295 Euro) at March 31, 2011.
The lease for the Company’s Australian office requires a bank
guarantee which totaled $25,133 (24,375 AUD) at March 31, 2011, whereby the bank agrees to pay the
lessor this amount should the Company default under the terms of the lease.
The certificate of deposit, the
security deposit and bank guarantee are classified as restricted cash. The Netherlands and Budapest, Hungary leases
contain termination options which allow the Company to terminate the leases pursuant to certain
lease provisions.
In February 2011, the Company entered into a lease for new office space for its Australian office.
The term of the new office space began in February 2011 and extends through January 2014.
The approximate annual lease payments for the new office space are $91,000.
In April 2011, the Company entered into a lease for new office space for
its England office. The term of the new office space began in April 2011 and extends through
April 4, 2016. The approximate annual lease payments for the new
office space are $231,000. The lease contains a termination option
which allows the Company to terminate the lease pursuant to certain
lease provisions.
11
Rent
expense under all leases was approximately $518,000 and $660,000 for the three months
ended March 31, 2010 and 2011, respectively. The Company records rent expense on a straight-line
basis for leases with scheduled escalation clauses or free rent periods.
The Company also enters into hosting services agreements with third-party data centers and
internet service providers that are subject to annual renewal. Hosting fees incurred under these
arrangements aggregated approximately $359,000 and $496,000 for the three months ended March 31,
2010 and 2011, respectively.
Future minimum lease payments under non-cancelable operating leases including one year
commitments associated with the Company’s hosting services arrangements are approximately as
follows at March 31, 2011:
| |
|
|
|
|
| Years Ending December 31 |
|
|
|
|
2011 (nine months ending December 31) |
|
$ |
3,040,000 |
|
2012 |
|
|
2,912,000 |
|
2013 |
|
|
1,432,000 |
|
2014 |
|
|
375,000 |
|
2015 |
|
|
231,000 |
|
Thereafter |
|
|
58,000 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
8,048,000 |
|
|
|
|
|
Litigation — On September 8,
2010, 01 Communique Laboratory, Inc., or 01,
filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court
for the Eastern District of Virginia (Civil Action No. 1:10cv1007). The Company received service
of the complaint on September 10, 2010. The complaint alleged that the Company infringed U.S.
Patent No. 6,928,479, which allegedly is owned by 01 and has claims directed to a particular application
or system for providing a private communication portal from one computer to a second computer. The complaint sought
damages in an unspecified amount and injunctive relief. On April 1, 2011, the U.S. District Court for the Eastern
District of Virginia granted the Company's motion for summary judgment of non-infringement and the trial tentatively
scheduled for the second quarter of 2011 was removed from the court’s calendar. The Company expects the court
will issue a written order regarding this decision. 01 has indicated that it intends to appeal the court's ruling granting summary judgment.
On November 3,
2010, Gemini IP LLC, or Gemini, filed a complaint that named the Company as a defendant in a lawsuit in
the U.S. District Court for the Eastern District of Texas (Civil Action No. 4:07-cv-521). The Company received
service of the complaint on November 10, 2010. The complaint alleged that the Company infringed U.S. Patent No.
6,117,932, which allegedly is owned by Gemini and has claims related to a system for operating an IT helpdesk. The
complaint sought damages in an unspecified amount and injunctive
relief. On April 25, 2011, the Company and Gemini entered into a
License Agreement which granted the Company a fully-paid license
that covers the patent at issue in the action and mutually released each
party from all claims. The Company paid Gemini a one-time licensing
fee of $1,250,000 in connection with the License Agreement. As a result, the Company expects the action to be
dismissed by the court in May 2011.
The Company is from time to time subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While the outcome of these
other claims cannot be predicted with certainty, management does not believe that the outcome of
any of these other legal matters will have a material adverse effect on the Company’s consolidated
financial statements.
Other
Contingencies — The Company was contacted by a representative from a state tax
assessor’s office requesting remittance of uncollected sales
taxes. The Company does not believe it was responsible for collecting sales taxes in this state and
is investigating this request and intends to vigorously defend this position. If the Company does not prevail in its position,
uncollected sales taxes due for the period from 2005 to the present could amount to approximately
$1.1 million excluding interest or penalties.
9. Related Party Transactions
In December 2007, the Company entered into a strategic connectivity service and marketing
agreement with Intel Corporation to jointly develop a service that delivers connectivity to
computers built with Intel components. Under the terms of the multi-year agreement, the Company
adapted its service delivery platform, Gravity, to work with specific technology delivered with
Intel hardware and software products. The agreement provided that
Intel would market and sell the
service to its customers. Intel paid the Company a minimum license and service fee on a quarterly
basis during the multi-year term of the agreement. The Company began recognizing revenue associated
with the Intel service and marketing agreement upon receipt of acceptance in the quarter ended
September 30, 2008. In addition, the Company and Intel shared revenue generated by the use of the
service by third parties to the extent it exceeded the minimum payments. In conjunction with this
agreement, Intel Capital purchased 2,222,223 shares of the Company’s Series B-1 redeemable
convertible preferred stock for $10,000,004, which were converted into 888,889 shares of common
stock in connection with the closing of the IPO on July 7, 2009.
In September 2010,
Intel notified the Company that it intended to terminate the connectivity service
and marketing agreement effective on December 26, 2010. In accordance with the termination provisions of
the agreement, Intel paid the Company a one-time termination fee of $2.5 million in lieu of the $5 million in annual fees
associated with 2011. Intel paid the Company the $2.5 million termination fee in December 2010.
At December 31,
2010 and March 31, 2011, Intel owed the Company approximately $9,000 and
$0, respectively, recorded as a non-trade receivable relating to this agreement. The Company
recognized approximately $1,487,000 and $0 of net revenue relating
to these agreements for the three months ended March 31, 2010 and 2011, respectively.
As of December 31, 2010 and March 31, 2011, the Company had recorded
$0 related to this
agreement as deferred revenue.
12
|
|
|
| Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated financial statements and
the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto and management’s discussion and analysis of
financial condition and results of operations for the year ended December 31, 2010 included in our
Annual Report on Form 10-K , filed with the Securities and Exchange Commission, or SEC, on February
28, 2011. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
These statements are often identified by the use of words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or
variations. Such forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results and the timing of certain events to differ materially from future
results expressed or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed in the section
titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and
elsewhere in this Report. The forward-looking statements in this Quarterly Report on Form 10-Q
represent our views as of the date of this Quarterly Report on Form 10-Q . We anticipate that
subsequent events and developments will cause
our views to change. However, while we may elect to update these forward-looking statements at some
point in the future, we have no current intention of doing so except to the extent required by
applicable law. You should, therefore, not rely on these forward-looking statements as representing
our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
LogMeIn provides SaaS-based, on-demand, remote-connectivity, collaboration and support
solutions to SMBs, IT service providers, mobile carriers, and consumers. Businesses and IT service
providers use our solutions to deliver remote, end-user support and to access and manage computers
and other Internet-enabled devices more effectively and efficiently from a remote location, or
remotely. Consumers and mobile workers use our remote connectivity solutions to access computer
resources remotely and to collaborate with other users, thereby facilitating their mobility and
increasing their productivity. SMBs and mobile professionals use our solutions to meet online and
quickly collaborate on projects. Our solutions, which are deployed and accessed from anywhere
through a web browser, or on-demand, are secure, scalable and easy for our customers to try,
purchase and use.
We offer three free services and nine premium services. Sales of our premium services are
generated through word-of-mouth referrals, web-based advertising, expiring free trials that we
convert to paid subscriptions and direct marketing to new and existing customers.
We derive our revenue principally from
subscription fees from SMBs, IT service providers, mobile carriers and
consumers. The majority of our customers subscribe to our services on an annual basis. Our revenue
is driven primarily by the number and type of our premium services for which our paying customers
subscribe. For the three months ended March 31, 2011, we generated revenues of $27.0 million,
compared to $21.3 million for the three months ended March 31, 2010, an increase of approximately
27%. In fiscal 2010, we generated revenues of $101.1 million.
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. The summary, however, should be considered along with the factors
identified in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly
Report on Form 10-Q and elsewhere in this report.
| • |
|
We continue to closely monitor current adverse economic conditions,
particularly as they impact SMBs, IT service providers and
consumers. We are unable to predict the likely duration and
severity of the current adverse economic conditions in the United
States and other countries, but the longer the duration the greater
risks we face in operating our business. |
| |
| • |
|
We believe that competition will continue to increase. Increased
competition could result from existing competitors or new
competitors
|
13
| |
|
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 believe that as we continue to grow revenue at expected rates,
our cost of revenue and operating expenses, including sales and
marketing, research and development and general and administrative
expenses will increase in absolute dollar amounts. For a
description of the general trends we anticipate in various expense
categories, see “Cost of Revenue and Operating Expenses” below. |
Sources of Revenue
We derive our revenue principally from subscription fees from SMBs, IT service providers,
mobile carriers and consumers. Our revenue is driven primarily by the number and type of our
premium services for which our paying customers subscribe and is not concentrated within one
customer or group of customers. The majority of our customers subscribe to our services on an
annual basis and pay in advance, typically with a credit card, for their subscription. A smaller
percentage of our customers subscribe to our services on a monthly basis through either
month-to-month commitments or annual commitments that are then paid monthly with a credit card. We
initially record a subscription fee as deferred revenue and then recognize it ratably, on a daily
basis, over the life of the subscription period. Typically, a subscription automatically renews at
the end of a subscription period unless the customer specifically terminates it prior to the end of
the period.
In addition to our subscription fees, to a lesser extent, we also generate revenue from
license and annual maintenance fees from the licensing of our RemotelyAnywhere product. We license
RemotelyAnywhere to our customers on a perpetual basis. Because we do not have vendor specific
objective evidence of fair value, or VSOE, for our maintenance arrangements, we record the initial
license and maintenance fee as deferred revenue and recognize the fees as revenue ratably, on a
daily basis, over the initial maintenance period. We also initially record maintenance fees for
subsequent maintenance periods as deferred revenue and recognize revenue ratably, on a daily basis,
over the maintenance period. We also generate revenue from the license of our Ignition for iPhone,
iPad and Android product which is sold as a perpetual license and is recognized as delivered.
Revenue from RemotelyAnywhere, Ignition for iPhone, iPad and Android represented approximately 7%
of our revenue for the three months ended March 31, 2011.
Employees
We have increased our number of full-time employees to 417 at March 31, 2011 as compared to
415 at December 31, 2010 and 353 at March 31, 2010.
Cost of Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent and utilities, to expense categories based
on the headcount in or office space occupied by personnel in that expense category as a percentage
of our total headcount or office space. As a result, an overhead allocation associated with these
costs is reflected in the cost of revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists primarily of costs associated with our data center
operations and customer support centers, including wages and benefits for personnel,
telecommunication and hosting fees for our services, equipment maintenance, maintenance and license
fees for software licenses and depreciation. Additionally, amortization expense associated with the
acquired software and technology as well as internally developed software is included in cost of
revenue. The expenses related to hosting our services and supporting our free and premium customers
is related to the number of customers who subscribe to our services and the complexity and
redundancy of our services and hosting infrastructure. We expect these expenses to increase in
absolute dollars as we continue to increase our number of customers over time but, in total, to
remain relatively constant as a percentage of revenue.
Research and Development. Research and development expenses consist primarily of wages and
benefits for development personnel, professional fees associated with outsourced development
projects and depreciation associated with assets used in development. We have
focused our research and development efforts on both improving ease of use and functionality of our
existing services, as well as developing new offerings. The majority of our research and
development employees are located in our development centers in Hungary. Therefore, a majority of
research and development expense is subject to fluctuations in foreign exchange rates. During the
three months ended March 31, 2011, we capitalized approximately
$0.1 million of costs related to
internally developed computer software to be sold as a service, which was incurred during the
application development stage. No amounts were capitalized for the three months ended March 31,
2010 as the costs incurred during such stage were immaterial. As a result, the majority of research
and development costs have been expensed as incurred. We expect that research and development
expenses will increase in both absolute dollars and as a percentage of revenue as we continue to
enhance and expand our services.
Sales and Marketing. Sales and marketing expenses consist primarily of online search and
advertising costs, wages, commissions and benefits for sales and marketing personnel, offline
marketing costs such as media advertising and trade shows, professional fees and credit card
processing fees. Online search and advertising costs consist primarily of pay-per-click payments to
search engines and other online advertising media such as banner ads. Offline marketing costs
include radio and print advertisements as well as the costs to create and produce these
advertisements, and tradeshows, including the costs of space at tradeshows and costs to design and
construct tradeshow booths. Advertising costs are expensed as incurred. In order to continue to
grow our business and awareness of our services, we expect that we will continue to
14
commit resources to our sales and marketing efforts. We expect that sales and marketing
expenses will increase in absolute dollars but decrease as a percentage of revenue over time as our
revenue increases.
General and Administrative. General and administrative expenses consist primarily of wages
and benefits for management, human resources, internal IT support, finance and accounting
personnel, professional fees, insurance and other corporate expenses. We expect that general and
administrative expenses will decrease significantly primarily due to
a reduction in the legal costs associated with
our defense against the patent infringement claims made by 01 Communique. Additionally, general and
administrative expenses will increase as we continue to add personnel, enhance our internal
information systems to align with the growth of our business and expenses related to audit,
accounting and insurance costs. We expect that our general and administrative expenses will
significantly decrease in both absolute dollars and as a percentage
of revenue when compared to the quarter ended March 31, 2011 and
in increase in absolute dollars but remain constant as a percentage
of revenue as compared to prior historical quarters.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. 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 listed below:
| • |
|
Revenue recognition; |
| |
| • |
|
Income taxes; |
| |
| • |
|
Stock-based compensation; and |
| |
| • |
|
Loss contingencies. |
During the three months ended March 31, 2011, there were no significant changes in our
critical accounting policies or estimates. See Notes 2, 6, 7 and 8 to our condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q and included in our
Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February
28, 2011, for additional information about these critical accounting policies, as well as a
description of our other significant accounting policies.
Results of Consolidated Operations
The following table sets forth selected consolidated statements of operations data for each of
the periods indicated as a percentage of total revenue.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March |
| |
|
31, |
| |
|
2010 |
|
2011 |
Revenue |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
90 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
17 |
|
|
|
16 |
|
Sales and marketing |
|
|
46 |
|
|
|
48 |
|
General and administrative |
|
|
13 |
|
|
|
22 |
|
Legal
settlements |
|
|
— |
|
|
|
5 |
|
Amortization of acquired intangibles |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
76 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations |
|
|
13 |
|
|
|
— |
|
Interest and other (income) expense, net |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes |
|
|
13 |
|
|
|
— |
|
(Provision)
benefit for income taxes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
|
13 |
% |
|
|
— |
% |
Three Months Ended March 31, 2011 and 2010
15
Revenue. Revenue for the three months ended March 31, 2011 was $27.0 million, an increase of
$5.7 million, or 27%, over revenue of $21.3 million for the three months ended March 31, 2010. Of
the 27% increase in revenue, the majority of the increase was due to an increase in revenue from
new customers, as our total number of premium accounts increased to approximately 685,000 at March
31, 2011 from approximately 340,000 premium accounts at March 31, 2010, and incremental add-on
revenues from our existing customer base.
Included in the revenue for the three months ended March 31, 2010 was $1.5 million related to the service
and marketing agreement with Intel compared to $0 for the three months ended March 31, 2011.
Cost of Revenue. Cost of revenue for the three months ended March 31, 2011 was $2.5 million,
an increase of $0.3 million, or 14%, over cost of revenue of $2.2 million for the three months
ended March 31, 2010. As a percentage of revenue, cost of revenue was 9% and 10% for the three
months ended March 31, 2011 and 2010, respectively. The increase in absolute dollars resulted
primarily from an increase in both the number of customers using our premium services and the total
number of devices that connected to our services, including devices owned by free users, which
resulted in increased hosting and customer support costs. Of the increase in cost of revenue, $0.2
million resulted from increased data center costs associated with managing our data centers and the
hosting of our services. The increase in data center costs was due to the expansion of our data
center facilities as we added capacity to our hosting infrastructure. Additionally, $0.2 million of
the increase in cost of revenue was due to the increased costs in our customer support
organization, primarily as a result of hiring new employees to support our customer growth.
Research and Development Expenses. Research and development expenses for the three months
ended March 31, 2011 were $4.3 million, an increase of $0.8 million, or 22%, over research and
development expenses of $3.6 million for the three months ended March 31, 2010. As a percentage of
revenue, research and development expenses were 16% and 17% for the three months ended March 31,
2011 and 2010, respectively. The increase in absolute dollars was primarily due to a $0.6 million
increase in personnel-related costs as we hired additional employees to improve the ease of use and
functionality of our existing services as well as develop new service offerings. The increase in
personnel-related costs was offset by the capitalization of
approximately $0.1 million of costs incurred
during the application development stage related to new product development and development of
significant new functionality to existing products during the three months ended March 31, 2011. No
amounts were capitalized during the three months ended March 31, 2010 as the costs incurred in the
period were immaterial.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March
31, 2011 were $13.0 million, an increase of $3.1 million, or 32%, over sales and marketing expenses
of $9.8 million for the three months ended March 31, 2010. As a percentage of revenue, sales and
marketing expenses were 48% and 46% for the three months ended March 31, 2011 and 2010,
respectively. The increase in absolute dollars was primarily due to a $1.6 million increase in
marketing program costs and a $1.2 million increase in personnel-related and recruiting costs from
additional employees hired to support our growth in sales and expand our marketing efforts.
The increase was also due to a $0.1 million increase in credit card processing fees, a $0.1
million increase in travel-related costs and a $0.1 million increase in rent costs primarily related to the
expansion of our corporate headquarters.
General and Administrative Expenses. General and administrative expenses for the three
months ended March 31, 2011 were $6.1 million, an increase of $3.3 million, or 116%, over general
and administrative expenses of $2.8 million for the three months ended March 31, 2010. As a
percentage of revenue, general and administrative expenses were 22% and 13% for the three months
ended March 31, 2010 and 2010, respectively. The increase in absolute dollars was primarily due to
a $2.9 million increase in legal costs associated with our defense against the patent infringement
claims made by 01 Communique. The increase was also due to
$0.4 million increase in personnel-related
costs as we increased the number of general and administrative employees to support our overall
growth.
Legal
Settlement Expenses. Legal settlement expenses were
$1.3 million for the three months ended March 31, 2011,
compared to $0 for the three months ended March 31, 2010. The
legal settlement expenses for the three months ended March 31,
2011 are related to the License Agreement entered into by the Company
and Gemini IP LLC on April 25, 2011 (see Note 8).
Amortization of Acquired Intangibles. Amortization of acquired intangibles for the three
months ended March 31, 2011 and 2010 was $0.1 million and related primarily to the value of
intangible assets acquired in our July 2006 acquisition of Applied Networking, Inc.
Interest Income, Net. Interest
income, net for the
three months ended March 31, 2011 was income of approximately
$0.2 million, compared to income of
approximately $0.1 million for the three months ended March 31, 2010. The change was mainly due to an
increase in interest income resulting from an increase in the balance of funds invested in higher
yielding marketable securities.
Other
Expense. Other expense for the three months ended March 31, 2011
and 2010 was $0.1 million and related to foreign currency
losses.
Income Taxes. During
the three months ended March 31, 2011, we recorded a benefit for
federal, state and foreign income taxes of approximately $35,000. For the three months ended
March 31, 2010, we recorded a provision primarily for alternative minimum taxes and foreign income
taxes, as well as a deferred provision related to the book and tax basis differences of goodwill of
approximately $0.1 million. During the three months ended March 31, 2010, we maintained a full valuation allowance
against all of our net deferred tax assets. However, we reversed the valuation allowance against
primarily all of our net deferred tax assets at June 30, 2010 and therefore our tax provision and
effective tax rate has increased year-over-year. At each balance sheet date, we assesses the likelihood that deferred tax assets will be
realized, and recognize a valuation allowance if it is more likely than not that some portion of
the deferred tax assets will not be realized. This assessment requires judgment as to the
likelihood and amounts of future taxable income by tax jurisdiction. As of December 31, 2010 and
March 31, 2011, we maintained a full valuation allowance related to the deferred tax assets of our
Hungarian subsidiary due to its historical net losses.
16
Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for each of the periods set
forth below:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2010 |
|
|
2011 |
|
| |
|
(In thousands) |
|
Net cash provided by operations |
|
$ |
7,382 |
|
|
$ |
8,394 |
|
Net cash used in investing activities |
|
|
(30,696 |
) |
|
|
(1,282 |
) |
Net cash provided by financing activities |
|
|
1,140 |
|
|
|
1,118 |
|
Effect of exchange rate changes |
|
|
(134 |
) |
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
$ |
(22,308 |
) |
|
$ |
8,802 |
|
|
|
|
|
|
|
|
At March 31, 2011, our principal source of liquidity was cash and cash equivalents and
short-term marketable securities totaling $176.2 million.
Cash Flows From Operating Activities
Net cash inflows from
operating activities during the three months ended March 31, 2011 were
mainly due to a $4.8 million increase in
deferred revenue associated with the increase in subscription sales orders and customer growth. Net cash inflows from operating
activities were also due to non-cash operating expenses, including $1.0 million for depreciation
and amortization and $1.8 million for stock compensation. The net cash inflows from operating activities were also
due to
a $1.6 million increase in current liabilities and a $0.5 million decrease in prepaid expenses and
other current assets. These were offset by a $1.1 million increase in accounts receivable. We
expect that our future cash flows from operating activities will be impacted by the legal costs associated with our
defense against the patent infringement claim made by 01
Communique.
Net cash inflows
from operating activities during the three months ended March 31, 2010 were mainly due to $2.7
million of net income for the period, non-cash operating expenses, including $0.9 million for
depreciation and amortization and $1.0 million for stock compensation, as well as a $0.8 million
decrease in accounts receivable, a $0.2 million decrease in prepaid expenses and other current
assets, a $2.3 million increase in deferred revenue associated with the increase in subscription
sales orders and a $0.3 million increase in accounts payable, offset by a $0.9 million decrease in
accrued liabilities.
Cash Flows From Investing Activities
Net cash used in investing
for the three months ended March 31, 2011 was primarily
related to
the addition of $1.1 million in property and equipment mainly related to the expansion and upgrade of our data
center capacity and also related to the expansion and upgrade of our
internal IT infrastructure. Net cash used in investing
activities was also related to the purchase of $30.1 million of marketable securities offset by proceeds
of $30.0 million from
sale or disposal of marketable securities.
Net cash used in
investing activities during the three months ended March 31, 2010 was mainly due to the purchase of
$55.3 million of marketable securities offset by proceeds of $25.0 million from maturity of
marketable securities. Net cash used in investing activities was also due to $0.4 million from
purchases of property and equipment mainly for use in our existing data centers.
Our future capital requirements may vary materially from those currently planned and will
depend on many factors, including, but not limited to, development of new services, market
acceptance of our services, the expansion of our sales, support, development and marketing
organizations, the establishment of additional offices in the United States and worldwide and the
expansion of our data center infrastructure necessary to support our growth. Since our inception,
we have experienced increases in our expenditures consistent with the growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase in the future. We also
intend to make investments in computer equipment and systems and infrastructure related to existing
and new offices as we move and expand our facilities, add additional personnel and continue to grow
our business. We are not currently party to any purchase contracts related to future capital
expenditures.
Cash Flows From Financing Activities
Net cash flows provided
by financing activities were $1.1 million for the three months ended
March 31, 2011 and were related to proceeds received from the issuance of common
stock upon exercise of stock options.
17
Net cash provided
by financing activities for the three months ended March 31, 2010 was due to $1.3 million in
proceeds received from the issuance of common stock upon exercise of stock options offset by $0.2
million in payments made in connection with our secondary public offering.
While we believe that our
current cash and cash equivalents will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months, we may elect to raise additional
capital through the sale of additional equity or debt securities or obtain a credit facility to
develop or enhance our services, to fund expansion, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. If we elect, additional financing may
not be available in amounts or on terms that are favorable to us, if at all. If we raise additional
funds through the issuance of equity or convertible debt securities, our existing stockholders
could suffer significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our common stock.
During the last three years, inflation and changing prices have not had a material effect on
our business and we do not expect that inflation or changing prices will materially affect our
business in the foreseeable future.
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.
18
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2011 and the effect
such obligations are expected to have on our liquidity and cash flow in future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
| |
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
Than |
|
| |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Operating lease obligations |
|
$ |
7,119,000 |
|
|
$ |
2,905,000 |
|
|
$ |
3,752,000 |
|
|
$ |
462,000 |
|
|
$ |
— |
|
Hosting service agreements |
|
|
929,000 |
|
|
|
929,000 |
|
|
|
—
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,048,000 |
|
|
$ |
3,834,000 |
|
|
$ |
3,752,000 |
|
|
$ |
462,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commitments under our operating leases shown above consist primarily of lease
payments for our Woburn, Massachusetts corporate headquarters, our international sales and
marketing offices located in The Netherlands, Australia and England and our research and
development offices in Hungary and contractual obligations related to our data centers.
The table above
includes the leases for our new spaces for our Australia and England
offices. In February 2011, we
entered into a lease for new office space for our Australian office. The term of the new office space began in February
2011 and extends through January 2014. The approximate annual lease payments for
the new office space are $91,000. In April 2011, we entered into a
lease for new office space for our England
office. The term of the new office space began in April 2011 and extends through April 4, 2016. The approximate annual
lease payments for the new office space are $231,000.
Recent Accounting Pronouncements
In October 2009, an update was made to “Revenue Recognition — Multiple Deliverable Revenue
Arrangements.” This update removes the objective-and-reliable-evidence-of-fair-value criterion from
the separation criteria used to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting, replaces references to “fair value” with “selling price”
to distinguish from the fair value measurements required under the “ Fair Value Measurements and
Disclosures” guidance, provides a hierarchy that entities must use to estimate the selling price,
eliminates the use of the residual method for allocation, and expands the ongoing disclosure
requirements. The effect of adoption of this standard has only impacted our financial statement disclosure to comply with the additional disclosure requirements as described in Note 2 to the condensed consolidated financial statements. The implementation of this guidance
did not have a material impact on our consolidated financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates as a result of the majority of our
research and development expenditures being made from our Hungarian research and development
facilities, and in our international sales and marketing offices in The Netherlands, England,
Australia and Brazil. In the three months ended March 31, 2011,
approximately 13%, 4%, 3%, 2% and less
than 1% of our operating expenses occurred in our operations in Hungary, The Netherlands, England,
Australia and Brazil, respectively. In the three months ended March 31, 2010, approximately 16%,
12%, 1% and 3% of our operating expenses occurred in our operations in Hungary, The Netherlands,
England and Australia, respectively.
Additionally, an increasing percentage of our sales outside the United States are denominated
in local currencies and, thus, are also subject to fluctuations due to changes in foreign currency
exchange rates. To date, changes in foreign currency exchange rates have not had a material impact
on our operations, and a future change of 20% or less in foreign currency exchange rates would not
materially affect our operations. At this time, we do not, but may
in the future, enter into any foreign currency hedging programs or instruments that would hedge or
help offset such foreign currency exchange rate risk.
Interest Rate Sensitivity. Interest income is sensitive to changes in the general level of
U.S. interest rates. However, based on the nature and current level of our cash and cash
equivalents, which are primarily invested in deposits and money market funds, we believe there is
no material risk of exposure to changes in the fair value of our cash and cash equivalents as a
result of changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of
our chief executive officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2011. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and
other procedures of a company 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, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and
19
procedures. Based on the evaluation of our disclosure controls and procedures
as of March 31, 2011, our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Controls. No changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended
March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 8, 2010, 01 Communique Laboratory, Inc., or 01, filed a complaint that named us
as a defendant in a lawsuit in the U.S. District Court for the Eastern District of Virginia (Civil
Action No. 1:10cv1007). We received service of the complaint on September 10, 2010. The complaint
alleged that we infringed U.S. Patent No. 6,928,479, which allegedly is owned by 01 and has
claims directed to a particular application or system for providing a private communication portal
from one computer to a second computer. The complaint sought damages in an unspecified amount and
injunctive relief. On April 1, 2011, the U.S. District Court for the Eastern District of Virginia
granted our motion for summary judgment of non-infringement and the trial tentatively scheduled for
the second quarter of 2011 was removed from the court’s calendar. We expect the court will issue
a written order regarding this decision. 01 has indicated that it intends to appeal the court’s
ruling granting summary judgment.
On November 3, 2010, Gemini IP LLC, or Gemini, filed a complaint that named us as a
defendant in a lawsuit in the U.S. District Court for the Eastern District of Texas (Civil Action
No. 4:07-cv-521). We received service of the complaint on
November 10, 2010. The complaint alleged
that we infringed U.S. Patent No. 6,117,932, which allegedly is owned by Gemini and has claims
related to a system for operating an IT helpdesk. The complaint sought damages in an unspecified
amount and injunctive relief. On April 25, 2011, we entered into
a License Agreement with Gemini which granted us a fully-paid license
that covers the patent at issue in the action and mutually released
each party from all claims. We paid Gemini a one-time licensing fee
of $1,250,000 in connection with the License Agreement. As a result, we expect the action to be dismissed by
the court in May of 2011.
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 other claims
cannot be predicted with certainty, management does not believe that the outcome of any of these
other legal matters will have a material adverse effect on our consolidated financial statements.
Item 1A. Risk Factors
Our business is subject to numerous risks. We caution you that the following important factors,
among others, could cause our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in filings with the SEC, press releases,
communications with investors and oral statements. Any or all of our forward-looking statements in
this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results
may differ materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
RISKS RELATED TO OUR BUSINESS
We
may be unable to achieve or maintain profitability.
We experienced net losses of $9.1 million for 2007, and $5.4 million for 2008. In the
quarter ended September 30, 2008, we achieved profitability and reported net income for the first
time. We reported net income of $8.8 million for 2009 and
$21.1 million for 2010. For the three months ended March 31,
2011, we experienced a net loss of $0.1 million due primarily to
patent litigation defense costs and costs related to a one-time legal
settlement. We cannot predict if we will again achieve profitability
or sustain profitability
if achieved. 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. These increased expenditures make it
harder for us to maintain future profitability. Our recent growth in revenue and customer base may
not be sustainable, and we may not achieve sufficient revenue to achieve or maintain profitability.
We may incur significant losses in the future for a number of reasons, including due to the other
risks described in this report and we may encounter unforeseen expenses, difficulties,
complications and delays and other unknown events. Accordingly, we
may not be able to again achieve or maintain
profitability, and we may incur significant losses for the foreseeable future.
Growth of our business may be adversely affected if businesses, IT support providers or
consumers do not adopt remote access or remote support solutions more widely.
Our services employ new and emerging technologies for remote access and remote support.
Our target customers may hesitate to accept the risks inherent in applying and relying on new
technologies or methodologies to supplant traditional methods of remote connectivity. Our business
will not be successful if our target customers do not accept the use of our remote access and
remote support technologies.
20
Assertions by a third party that our services infringe 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 software and technology industries based on
allegations of infringement or other violations of intellectual property rights. We have been, and
may in the future be, subject to third party patent infringement lawsuits as we face increasing
competition and become increasingly visible. Regardless of the merit of these claims, they can be
time-consuming, result in costly litigation and diversion of technical and management personnel or
require us to develop a non-infringing technology or enter into license agreements. There can be no
assurance that such licenses will be available on acceptable terms and conditions, if at all and
although we have previously licensed proprietary technology, we cannot be certain that the owners’
rights in such technology will not be challenged, invalidated or circumvented. For these reasons
and because of the potential for high court awards that are difficult predict, it is not unusual to
find even arguably unmeritorious claims settled for significant amounts. In addition, many of our
service agreements require us to indemnify our customers from 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, deter future customers from
subscribing to our services or expose us to further litigation. Any adverse determination related
to intellectual property claims or litigation could prevent us from offering all or a portion of
our services to customers due to an injunction or require us to pay damages or license fees, which
could adversely affect our business, financial condition and operating results.
For information concerning pending patent infringement cases in which we are involved,
please refer to Part II, Item 1 entitled “Legal
Proceedings” and Note 8 of the Notes to Condensed
Consolidated Financial Statements.
We depend on search engines to attract a significant percentage of our customers, and if those
search engines change their listings or increase their pricing, it would limit our ability to
attract new customers.
Many of our customers locate our website through search engines, such as Google. Search
engines typically provide two types of search results, algorithmic and purchased listings, and we
rely on both types.
Algorithmic listings cannot be purchased and are determined and displayed solely by a set
of formulas designed by the search engine. Search engines revise their algorithms from time to time
in an attempt to optimize search result listings. If the search engines on which we rely for
algorithmic listings modify their algorithms in a manner that reduces the prominence of our
listing, fewer potential customers may click through to our website, requiring us to resort to
other costly resources to replace this traffic. Any failure to replace this traffic could reduce
our revenue and increase our costs. In addition, costs for purchased listings have increased in the
past and may increase in the future, and further increases could have negative effects on our
financial condition.
If we are unable to attract new customers to our services on a cost-effective basis, our
revenue and results of operations will be adversely affected.
We must continue to attract a large number of customers on a cost-effective basis, many
of whom have not previously used on-demand, remote-connectivity solutions. We rely on a variety of
marketing methods to attract new customers to our services, such as paying providers of online
services and search engines for advertising space and priority placement of our website in response
to Internet searches. Our ability to attract new customers also depends on the competitiveness of
the pricing of our services. If our current marketing initiatives are not successful or become
unavailable, if the cost of such initiatives were to significantly increase, or if our competitors
offer similar services at lower prices, we may not be able to attract new customers on a
cost-effective basis and, as a result, our revenue and results of operations would be adversely
affected.
If we are unable to retain our existing customers, our revenue and results of operations would be
adversely affected.
We sell our services pursuant to agreements that are generally one year in duration. Our
customers have no obligation to renew their subscriptions after their subscription period expires,
and these subscriptions may not be renewed on the same or on more profitable terms. As a result,
our ability to grow depends in part on subscription 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
services, the prices of our services, the prices of services offered by our competitors or
reductions in our customers’ spending levels. If our customers do not renew their subscriptions for
our services, renew on less favorable terms, or do not purchase additional functionality or
subscriptions, our revenue may grow more slowly than expected or decline, and our profitability and
gross margins may be harmed.
If we fail to convert our free users to paying customers, our revenue and financial results
will be harmed.
A significant portion of our user base utilizes our services free of charge through our
free services or free trials of our premium services. We seek to convert these free and trial users
to paying customers of our premium services. If our rate of conversion suffers for any reason, our
revenue may decline and our business may suffer.
21
We may expand by acquiring or investing in other companies, which may divert our management’s
attention, result in additional dilution to our stockholders and consume resources that are
necessary to sustain our business.
Our business strategy may include acquiring complementary services, technologies or
businesses. We also may enter into relationships with other businesses to expand our portfolio of
services or our ability to provide our services in foreign jurisdictions, which could involve
preferred or exclusive licenses, additional channels of
distribution, discount pricing or investments in other companies. Negotiating these
transactions can be time-consuming, difficult and expensive, and our ability to close these
transactions may often be subject to conditions or approvals that are beyond our control.
Consequently, these transactions, even if undertaken and announced, may not close.
An acquisition, investment or new business relationship may result in unforeseen
operating difficulties and expenditures. In particular, we may encounter difficulties assimilating
or integrating the businesses, technologies, products, personnel or operations of the acquired
companies, particularly if the key personnel of the acquired company choose not to work for us, the
company’s software is not easily adapted to work with ours or we have difficulty retaining the
customers of any acquired business due to changes in management or otherwise. 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. For one or more of those transactions, we may:
| |
• |
|
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; |
| |
| |
• |
|
encounter difficulties retaining key employees of the acquired
company or integrating diverse software codes or business cultures;
and |
| |
| |
• |
|
become subject to adverse tax consequences, substantial depreciation
or deferred compensation charges. |
Any of these risks could harm our business and operating results.
We use a limited number of data centers to deliver our services. Any disruption of service at
these facilities could harm our business.
We host our services and serve all of our customers from four third-party data center
facilities, of which three are located in the United States and one is located in Europe. We do not
control the operation of these facilities. The owners of our data center facilities have no
obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are
unable to renew these agreements on commercially reasonable terms, we may be required to transfer
to new data center facilities, and we may incur significant costs and possible service interruption
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 services could harm our reputation and may
damage our customers’ businesses. Interruptions in our services 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.
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, telecommunications failures and similar events. At least one
of our data facilities is located in an area known for seismic activity, increasing our
susceptibility to the risk that an earthquake could significantly harm the operations of these
facilities. 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 our services.
If the security of our customers’ confidential information stored in our systems is breached
or otherwise subjected to unauthorized access, our reputation may be harmed, and we may be exposed
to liability and a loss of customers.
Our system stores our customers’ confidential information, including credit card
information and other critical data. Any accidental or willful security breaches or other
unauthorized access could expose us to liability for the loss of such information, time-consuming
and expensive litigation and other possible liabilities as well as negative publicity. Techniques
used to obtain unauthorized access or to sabotage systems change frequently and generally are
difficult to recognize and react to. We and our third-party data center facilities may be unable to
anticipate these techniques or to implement adequate preventative or reactionary measures.
22
In addition, many states have enacted laws requiring companies to notify individuals of
data security breaches involving their personal data. These mandatory disclosures regarding a
security breach often lead to widespread negative publicity, which may cause our customers to lose
confidence in the effectiveness of our data security measures. Any security breach, whether
successful or not, would harm our reputation, and it could cause the loss of customers.
Failure to comply with data protection standards may cause us to lose the ability to offer our
customers a credit card payment option which would increase our costs of processing customer orders
and make our services less attractive to our customers, the majority of which purchase our services
with a credit card.
Major credit card issuers have adopted data protection standards and have incorporated
these standards into their contracts with us. If we fail to maintain our compliance with the data
protection and documentation standards adopted by the major credit card issuers and applicable to
us, these issuers could terminate their agreements with us, and we could lose our ability to offer
our customers a credit card payment option. Most of our individual and SMB customers purchase our
services online with a credit card, and our business depends substantially upon our ability to
offer the credit card payment option. Any loss of our ability to offer our customers a credit card
payment option would make our services less attractive to them and hurt our business. Our
administrative costs related to customer payment processing would also increase significantly if we
were not able to accept credit card payments for our services.
Failure to effectively and efficiently service SMBs would adversely affect our ability to
increase our revenue.
We market and sell a significant amount of our services to SMBs. SMBs are challenging to
reach, acquire and retain in a cost-effective manner. To grow our revenue quickly, we must add new
customers, sell additional services to existing customers and encourage existing customers to renew
their subscriptions. Selling to and retaining SMBs is more difficult than selling to and retaining
large enterprise customers because SMB customers generally:
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have high failure rates; |
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are price sensitive; |
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are difficult to reach with targeted sales campaigns; |
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have high churn rates in part because of the scale of their
businesses and the ease of switching services; and |
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generate less revenues per customer and per transaction. |
In addition, SMBs frequently have limited budgets and may choose to spend funds on items
other than our services. Moreover, SMBs are more likely to be significantly affected by economic
downturns than larger, more established companies, and if these organizations experience economic
hardship, they may be unwilling or unable to expend resources on IT.
If we are unable to market and sell our services to SMBs with competitive pricing and in
a cost-effective manner, our ability to grow our revenue quickly and become profitable will be
harmed.
We may not be able to respond to rapid technological changes with new services, which could
have a material adverse effect on our sales and profitability.
The on-demand, remote-connectivity solutions market is characterized by rapid
technological change, frequent new service introductions and evolving industry standards. Our
ability to attract new customers and increase revenue from existing customers will depend in large
part on our ability to enhance and improve our existing services, introduce new services and sell
into new markets. To achieve market acceptance for our services, we must effectively anticipate and
offer services that meet changing customer demands in a timely manner. Customers may require
features and capabilities that our current services do not have. If we fail to develop services
that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our
services with existing customers and our ability to create or increase demand for our services will
be harmed.
We may experience difficulties with software development, industry standards, design or
marketing that could delay or prevent our development, introduction or implementation of new
services and enhancements. The introduction of new services by competitors, the emergence of new
industry standards or the development of entirely new technologies to replace existing service
offerings could render our existing or future services obsolete. If our services become obsolete
due to wide-spread adoption of alternative connectivity technologies such as other Web-based
computing solutions, our ability to generate revenue may be impaired. In addition, any new markets
into which we attempt to sell our services, including new countries or regions, may not be
receptive.
23
If we are unable to successfully develop or acquire new services, enhance our existing
services to anticipate and meet customer preferences or sell our services into new markets, our
revenue and results of operations would be adversely affected.
The market in which we participate is competitive, with low barriers to entry, and if we do not
compete effectively, our operating results may be harmed.
The markets for remote-connectivity solutions are competitive and rapidly changing, with
relatively low barriers to entry. With the introduction of new technologies and market entrants, we
expect competition to intensify in the future. In addition, pricing pressures and increased
competition generally could result in reduced sales, reduced margins or the failure of our services
to achieve or maintain widespread market acceptance. Often we compete against existing services
that our potential customers have already made significant expenditures to acquire and implement.
Certain of our competitors offer, or may in the future offer, lower priced, or free,
products or services that compete with our solutions. This competition may result in reduced prices
and a substantial loss of customers for our solutions or a reduction in our revenue.
We compete with Citrix Systems, WebEx (a division of Cisco Systems) and others. Certain
of our solutions, including our free remote access service, also compete with current or potential
services offered by Microsoft and Apple. Many of our actual and potential competitors 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. In addition, many of our competitors have established marketing relationships and access
to larger customer bases, and have major distribution agreements with consultants, system
integrators and resellers. If we are not able to compete effectively, our operating results will be
harmed.
Industry consolidation may result in increased competition.
Some of our competitors have made or may make acquisitions or may enter into partnerships
or other strategic relationships to offer a more comprehensive service 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. We expect these trends to continue
as companies attempt to strengthen or maintain their market positions. Many of the companies
driving this trend have significantly greater financial, technical and other resources than we do
and may be better positioned to acquire and offer complementary services and technologies. 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. These pressures could result in a substantial loss
of customers or a reduction in our revenues.
Original equipment manufacturers may adopt solutions provided by our competitors.
Original equipment manufacturers may in the future seek to build the capability for
on-demand, remote-connectivity solutions into their products. We may compete with our competitors
to sell our services to, or partner with, these manufacturers. Our ability to attract and partner
with these manufacturers will, in large part, depend on the competitiveness of our services. If we
fail to attract or partner with, or our competitors are successful in attracting or partnering
with, these manufacturers, our revenue and results of operations would be affected adversely.
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, those listed below:
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our ability to renew existing customers, increase sales to existing
customers and attract new customers; |
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the amount and timing of operating costs and capital expenditures
related to the operation, maintenance and expansion of our business; |
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service outages or security breaches; |
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whether we meet the service level commitments in our agreements with
our customers; |
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changes in our pricing policies or those of our competitors; |
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the timing and success of new application and service introductions and
upgrades by us or our competitors; |
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changes in sales compensation plans or organizational structure; |
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the timing of costs related to the development or acquisition of
technologies, services or businesses; |
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seasonal variations or other cyclicality in the demand for our services; |
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general economic, industry and market conditions and those conditions
specific to Internet usage and online businesses; |
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the purchasing and budgeting cycles of our customers; |
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the financial condition of our customers; and |
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geopolitical events such as war, threat of war or terrorist acts. |
We believe that our quarterly revenue and operating results may vary significantly in the
future and that period-to-period comparisons of our operating results may not be meaningful. You
should not rely on past results as an indication of future performance.
If our services are used to commit fraud or other similar intentional or illegal acts, we may
incur significant liabilities, our services may be perceived as not secure and customers may
curtail or stop using our services.
Our services enable direct remote access to third-party computer systems. We do not
control the use or content of information accessed by our customers through our services. If our
services are used to commit fraud or other bad
or illegal acts, such as posting, distributing or transmitting any software or other computer
files that contain a virus or other harmful component, interfering or disrupting third-party
networks, infringing any third party’s copyright, patent, trademark, trade secret or other
proprietary rights or rights of publicity or privacy, transmitting any unlawful, harassing,
libelous, abusive, threatening, vulgar or otherwise objectionable material, or accessing
unauthorized third-party data, we may become subject to claims for defamation, negligence,
intellectual property infringement or other matters. As a result, defending such claims could be
expensive and time-consuming, and we could incur significant liability to our customers and to
individuals or businesses who were the targets of such acts. As a result, our business may suffer
and our reputation will be damaged.
We provide minimum service level commitments to some of our customers, the failure of which to
meet could cause us to issue credits for future services or pay penalties, which could
significantly harm our revenue.
Some of our customer agreements now, and may in the future, provide minimum service level
commitments regarding items such as uptime, functionality or performance. If we are unable to meet
the stated service level commitments for these customers or suffer extended periods of
unavailability for our service, we are or may be contractually obligated to provide these customers
with credits for future services or pay other penalties. Our revenue could be significantly
impacted if we are unable to meet our service level commitments and are required to provide a
significant amount of our services at no cost or pay other penalties. We do not currently have any
reserves on our balance sheet for these commitments.
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 revenue from $51.7 million in 2008 to $74.4 million in 2009 to $101.1
million in 2010 and to $27.0 million in the three months ended March 31, 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. Creating a global
organization and managing 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. As such, we may be unable to manage our expenses effectively
in the future, which may negatively impact our gross profit or operating expenses in any particular
quarter.
If we do not effectively expand and train our work force, our future operating results will
suffer.
We plan to continue to expand our work force both domestically and internationally to
increase our customer base and revenue. We believe that there is significant competition for
qualified personnel with the skills and technical knowledge that we require. Our ability to achieve
significant revenue growth will depend, in large part, on our success in recruiting, training and
retaining sufficient numbers of
25
personnel to support our growth. New hires require significant
training and, in most cases, 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
sales cycles for enterprise customers, which currently
account for approximately 10 to 15% of our overall sales,
can be long, unpredictable and require considerable time and expense, which may cause our operating
results to fluctuate.
The timing of our revenue from sales to enterprise customers is difficult to predict.
These efforts require us to educate our customers about the use and benefit of our services,
including the technical capabilities and potential cost savings to an organization. Enterprise
customers typically undertake a significant evaluation process that has in the past resulted in a
lengthy sales cycle, typically several months. We spend substantial time, effort and money on our
enterprise sales efforts without any assurance that our efforts will produce any sales. In
addition, service subscriptions are frequently subject to budget constraints and unplanned
administrative, processing and other delays. If sales expected from a specific customer for a
particular quarter are not realized in that quarter or at all, our results
could fall short of public expectations and our business, operating results and financial
condition could be adversely affected.
Our long-term success depends, in part, on our ability to expand the sales of our services to
customers located outside of the United States, and thus our business is susceptible to risks
associated with international sales and operations.
We currently maintain offices and have sales personnel or independent consultants outside
of the United States and are expanding our international operations. Our international expansion
efforts may not be successful. In addition, conducting international operations subjects us to new
risks that we have not generally faced in the United States.
These risks include:
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localization of our services, including translation into foreign languages and
adaptation for local practices and regulatory requirements; |
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lack of familiarity with and unexpected changes in foreign regulatory requirements; |
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longer accounts receivable payment cycles and difficulties in collecting accounts
receivable; |
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difficulties in managing and staffing international operations; |
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fluctuations in currency exchange rates; |
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potentially adverse tax consequences, including the complexities of foreign value
added or other tax systems and restrictions on the repatriation of earnings; |
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dependence on certain third parties, including channel partners with whom we do
not have extensive experience; |
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the burdens of complying with a wide variety of foreign laws and legal standards; |
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increased financial accounting and reporting burdens and complexities; |
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political, social and economic instability abroad, terrorist attacks and security
concerns in general; and |
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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.
Our success depends on our customers’ continued high-speed access to the Internet and the
continued reliability of the Internet infrastructure.
Because our services are designed to work over the Internet, our revenue growth depends
on our customers’ high-speed access to the Internet, as well as the continued maintenance and
development of the Internet infrastructure. The future delivery of our services will depend on
third-party Internet service providers to expand high-speed Internet access, to maintain a reliable
network with the necessary speed, data capacity and security, and to develop complementary products
and services, including high-speed modems, for providing reliable and timely
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Internet access and
services. The success of our business depends directly on the continued accessibility, maintenance
and improvement of the Internet as a convenient means of customer interaction, as well as an
efficient medium for the delivery and distribution of information by businesses to their employees.
All of these factors are out of our control.
To the extent that the Internet continues to experience increased numbers of users,
frequency of use or bandwidth requirements, the Internet may become congested and be unable to
support the demands placed on it, and its performance or reliability may decline. Any future
Internet outages or delays could adversely affect our ability to provide services to our customers.
Our success depends in large part on our ability to protect and enforce our intellectual
property rights.
We rely on a combination of copyright, service mark, trademark and trade secret laws, as
well as confidentiality procedures and contractual restrictions, to establish and protect our
proprietary rights, all of which provide only limited protection. In addition, we have one issued
patent and three patents pending, and we are in the process of filing additional patents. We cannot
assure you that any patents will issue from our currently pending patent applications in a manner
that gives us the protection that we seek, if at all, or that any future patents issued to us will
not be challenged, invalidated or circumvented. Any patents that may issue in the future from
pending or future patent applications may not provide sufficiently broad protection or they may not
prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any
future service mark or trademark registrations will be issued for pending or future applications or
that any registered service marks or trademarks will be enforceable or provide adequate protection
of our proprietary rights.
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 to 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, trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are available. In addition,
the legal standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related industries are uncertain and still evolving.
Our use of “open source” software could negatively affect our ability to sell our services and
subject us to possible litigation.
A portion of the technologies licensed by us incorporate so-called “open source”
software, and we may incorporate open source software 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 services that incorporate the open source software for no cost, that we make available
source code for modifications or derivative works we create based upon, incorporating or using the
open source software and/or 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 services
that contained the open source software and required to comply with the foregoing conditions, which
could disrupt the distribution and sale of some of our services.
We rely on third-party software, including server software and licenses from third parties to
use patented intellectual property that is required for the development of our services, which may
be difficult to obtain or which could cause errors or failures of our services.
We rely on software licensed from third parties to offer our services, including server
software from Microsoft and patented third-party technology. In addition, we may need to obtain
future licenses from third parties to use intellectual property associated with the development of
our services, which might not be available to us on acceptable terms, or at all. Any loss of the
right to use any software required for the development and maintenance of our services could result
in delays in the provision of our services until equivalent technology is either developed by us,
or, if available, is identified, obtained and integrated, which could harm our business. Any errors
or defects in third-party software could result in errors or a failure of our services which could
harm our business.
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. Our internal
controls over financial reporting is 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. In
addition, Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires an
annual management assessment of the effectiveness of our internal controls over financial reporting
and a report from our independent registered public accounting firm addressing the effectiveness of
our internal controls over financial reporting. We have documented, tested and improved, to the
extent necessary, our internal controls over financial reporting for the year ended December 31,
27
2010. If in the future we are not able to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act in a timely manner, or if as part of our process of documenting and testing our
internal controls over financial reporting, we or our independent registered public accounting firm
identify deficiencies or areas for further attention and improvement, implementing appropriate
changes to our internal controls may distract our officers and employees, entail substantial costs
to modify our existing processes and take significant time to complete. These changes may not,
however, be effective in maintaining the adequacy of our internal controls, and any failure to
maintain that adequacy, or consequent inability to produce accurate financial statements on a
timely basis, could increase our operating costs and harm our business. In addition, investors’
perceptions that our internal controls are inadequate or that we are unable to produce accurate
financial statements on a timely basis may harm our stock price and make it more difficult for us
to effectively market and sell our services to new and existing customers.
Material defects or errors in the software we use to deliver our services could harm our
reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain
material defects or errors, particularly when first introduced or when new versions or enhancements
are released. We have from time to time found defects in our services, and new errors in our
existing services may be detected in the future. Any defects that cause interruptions to the
availability of our services could result in:
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a reduction in sales or delay in market acceptance of our services; |
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sales credits or refunds to our customers; |
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loss of existing customers and difficulty in attracting new customers; |
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diversion of development resources; |
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harm to our reputation; and |
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increased insurance costs. |
After the release of our services, defects or errors may also be identified from time to
time by our internal team and by our customers. The costs incurred in correcting any material
defects or errors in our services may be substantial and could harm our operating results.
Government regulation of the Internet and e-commerce and of the international exchange of
certain technologies is subject to possible unfavorable changes, and our failure to comply with
applicable regulations could harm our business and operating results.
As Internet commerce continues to evolve, increasing regulation by federal, state or
foreign governments becomes more likely. For example, we believe increased regulation is likely in
the area of data privacy, and laws and regulations applying to the solicitation, collection,
processing or use of personal or consumer information could affect our customers’ ability to use
and share data, potentially reducing demand for our products and services. In addition, taxation of
products and services provided over the Internet or other charges imposed by government agencies or
by private organizations for accessing the Internet may also be imposed. Any regulation imposing
greater fees for Internet use or restricting the exchange of information over the Internet could
result in reduced growth or a decline in the use of the Internet and could diminish the viability
of our Internet-based services, which could harm our business and operating results.
Our software products contain encryption technologies, certain types of which are subject
to U.S. and foreign export control regulations and, in some foreign countries, restrictions on
importation and/or use. We have submitted our encryption products for technical review under U.S.
export regulations and have received the necessary
approvals. Any failure on our part to comply with encryption or other applicable export
control requirements could result in financial penalties or other sanctions under the U.S. export
regulations, which could harm our business and operating results. Foreign regulatory restrictions
could impair our access to technologies that we seek for improving our products and services and
may also limit or reduce the demand for our products and services outside of the United States.
Our operating results may be harmed if we are required to collect sales or other related taxes for
our subscription services in jurisdictions where we have not historically done so.
Primarily due to the nature of our services in certain states and countries, we do not
believe we are required to collect sales or other related taxes from our customers in certain
states or countries. However, one or more other states or countries may seek to impose sales or
other tax collection obligations on us, including for past sales by us or our resellers and other
partners. A successful assertion that we should be collecting sales or other related taxes on our
services could result in substantial tax liabilities for past sales, discourage customers from
purchasing our services or otherwise harm our business and operating results.
The loss of key personnel or an inability to attract and retain additional personnel may
impair our ability to grow our business.
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We are highly dependent upon the continued service and performance of our senior
management team and key technical and sales personnel, including our President and Chief Executive
Officer, Chief Financial Officer and Chief Technical Officer. These officers are not party to an
employment agreement with us, and they may terminate employment with us at any time with no advance
notice. The replacement of these officers likely would involve significant time and costs, and the
loss of these officers may significantly delay or prevent the achievement of our business
objectives.
We face intense competition for qualified individuals from numerous technology, software
and manufacturing companies. For example, our competitors may be able attract and retain a more
qualified engineering team by offering more competitive compensation packages. If we are unable to
attract new engineers and retain our current engineers, we may not be able to develop and maintain
our services at the same levels as our competitors and we may, therefore, lose potential customers
and sales penetration in certain markets. Our failure to attract and retain suitably qualified
individuals could have an adverse effect on our ability to implement our business plan and, as a
result, our ability to compete would decrease, our operating results would suffer and our revenues
would decrease.
Adverse economic conditions or reduced IT spending may adversely impact our revenues and
profitability.
Our business depends on the overall demand for IT and on the economic health of our
current and prospective customers. The use of our service is often discretionary and may involve a
commitment of capital and other resources. Weak economic conditions, or a reduction in IT spending
even if economic conditions improve, would likely adversely impact our business, operating results
and financial condition in a number of ways, including by lengthening sales cycles, lowering prices
for our services and reducing sales.
Our limited operating history makes it difficult to evaluate our current business and future
prospects.
Our company has been in existence since 2003, and much of our growth has occurred in
recent periods. Our limited operating history may make it difficult for you to evaluate our current
business and our future prospects. We have encountered and will continue to encounter risks and
difficulties frequently experienced by growing companies in rapidly changing industries, including
increasing expenses as we continue to grow our business. If we do not manage these risks
successfully, our business will be harmed.
Our business is substantially dependent on market demand for, and acceptance of, the on-demand
model for the use of software.
We derive, and expect to continue to derive, substantially all of our revenue from the
sale of on-demand solutions. As a result, widespread acceptance and use of the on-demand business
model is critical to our future growth and success. Under the perpetual or periodic license model
for software procurement, users of the software typically run applications on their hardware.
Because companies are generally predisposed to maintaining control of their IT systems and
infrastructure, there may be resistance to the concept of accessing the functionality that software
provides as a service through a third party. If the market for on-demand, software solutions fails
to grow or grows more slowly than we currently anticipate, demand for our services could be
negatively affected.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our failure to raise additional capital or generate the cash flows necessary to expand our
operations and invest in our services 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:
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develop or enhance our services; |
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continue to expand our development, sales and marketing organizations; |
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acquire complementary technologies, products or businesses; |
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expand our operations, in the United States or internationally; |
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hire, train and retain employees; or |
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respond to competitive pressures or unanticipated working capital requirements. |
Our stock price may be volatile, and the market price of our common stock may drop in the
future.
Prior to the completion of our initial public offering, or IPO, in July 2009, there was
no public market for shares of our common stock. During the period from our IPO until April 22,
2011, our common stock has traded as high as $49.50 and as low as $15.15. An active, liquid and
orderly market for our common stock may not be sustained, which could depress the
trading price of our common stock. Some of the factors that may cause the market price of our
common stock to fluctuate include:
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fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; |
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fluctuations in our recorded revenue, even during periods of significant sales order activity; |
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changes in estimates of our financial results or recommendations by securities analysts; |
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failure of any of our services to achieve or maintain market acceptance; |
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changes in market valuations of similar companies; |
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success of competitive products or services; |
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changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
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announcements by us or our competitors of significant services, contracts, acquisitions or strategic alliances; |
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regulatory developments in the United States, foreign countries or both; |
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the initiation of, or material developments regarding, litigation involving our company; |
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litigation involving our industry; |
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additions or departures of key personnel; |
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general perception of the future of the remote-connectivity market or our services; |
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investors’ general perception of us; and |
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changes in general economic, industry and market conditions. |
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.
If our existing stockholders sell a large number of shares of our common stock or the
public market perceives that such existing stockholders might sell shares of common stock, the
trading price of our common stock could decline significantly.
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 is influenced by the research and reports that
industry or securities analysts publish about us, our business, our market or our competitors. If
any of the analysts who cover us or may cover us in the future change their recommendation
regarding our stock adversely, or provide more favorable relative recommendations about our
competitors, our stock price would likely decline. If any analyst who covers us or may cover us in
the future 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 has broad discretion over the use of our existing cash resources and might not
use such funds in ways that increase the value of our common stock.
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Our management will continue to have broad discretion to use our cash resources. Our
management might not apply these cash resources in ways that increase the value of our common
stock.
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, stockholders 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 the value of
their shares of our common stock.
As a public company, we incur significant additional costs which could harm our operating
results.
As a public company, we incur significant legal, accounting and other expenses that we
did not incur as a private company, including costs associated with public company reporting
requirements.
We also have incurred and will continue to 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 Securities and Exchange Commission, or SEC,
and The NASDAQ Global Select Market. The expenses incurred by public companies for reporting and
corporate governance purposes have increased dramatically. 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 also expect these new rules and regulations may make it more
difficult and more expensive for us to maintain director and officer liability insurance, and we
may be required to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage previously available. As a result, it may be more difficult for
us to attract and retain qualified individuals to serve on our board of directors or as our
executive officers.
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; |
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limiting the liability of, and providing indemnification to, our directors and officers; |
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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; |
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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; |
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controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; |
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providing the board of directors with the express power to postpone previously scheduled annual meetings
and to cancel previously scheduled special meetings; |
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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 |
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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
(a) Sales of Unregistered Securities
We did not sell any unregistered securities in the three months ended March 31, 2011.
(b) Use
of Proceeds from Public Offerings of Common Stock
On July 7, 2009, we closed our IPO, in which 7,666,667 shares of common stock were sold at a
price to the public of $16.00 per share. We sold 5,750,000 shares of our common stock in the
offering and selling stockholders sold 1,916,667 of the shares of common stock in the offering. The
aggregate offering price for all shares sold in the offering, including shares sold by us and the
selling stockholders, was $122.7 million. The offer and sale of all of the shares in the IPO were
registered under the Securities Act pursuant to a registration statement on Form S-1
(File No. 333-148620), which was declared effective by the SEC on June 30, 2009. We raised
approximately $83.0 million in net proceeds after deducting underwriting discounts and commissions
of $6.4 million and other estimated offering costs of $2.7 million. No payments were made by us to
directors, officers or persons owning ten percent or more of our common stock or to their
associates, or to our affiliates, other than payments in the ordinary course of business to
officers for salaries and to non-employee directors as compensation for board or board committee
service, or as a result of sales of shares of common stock by selling stockholders in the offering.
From the effective date of the registration statement through March 31, 2011, we have not used any
of the net proceeds of the IPO. We intend to use the net proceeds for general corporate purposes,
including financing our growth, developing new products, acquiring new customers, funding capital
expenditures and, potentially, the acquisition of, or investment in, businesses, technologies,
products or assets that complement our business. Pending these uses, we have invested the funds in
a registered money market. There has been no material change in the planned use of proceeds from
our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).
On November 19, 2009, we closed a secondary public offering of our common stock. On December
16, 2009, we closed the sale of additional shares of common stock issued in the offering upon the
exercise of the underwriters’ over-allotment option. In aggregate, a total of 3,326,609 shares of
common stock were sold at a price to the public of $18.50 per share. We sold 99,778 shares of our
common stock in the offering and selling stockholders sold an additional 3,226,831 shares of common
stock in the offering. The aggregate offering price for all shares sold in the offering, including
shares sold by us and the selling stockholders, was $61.5 million. The offer and sale of all of the
shares in the secondary offering were registered under the Securities Act pursuant to a
registration statement on Form S-1 (File No. 333-162936), which was declared effective by the SEC
on November 19, 2009. We raised approximately $1.2 million in net proceeds after deducting
underwriting discounts and commissions of $0.1 million and other estimated offering costs of $0.5
million. No payments were made by us to directors, officers or persons owning ten percent or more
of our common stock or to their associates, or to our affiliates, other than payments in the
ordinary course of business to officers for salaries and to non-employee directors as compensation
for board or board committee service, or as a result of sales of shares of common stock by selling
stockholders in the offering. From the effective date of the registration statement through March
31, 2011, we have not used any of the net proceeds received from our secondary public offering. We
intend to use the net proceeds for general corporate purposes, including financing our growth,
developing new products, acquiring new customers, funding capital expenditures and, potentially,
the acquisition of, or investment in, businesses, technologies, products or assets that complement
our business. There has been no material change in the planned use of proceeds from our secondary
public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).
Item 6. Exhibits
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed (other than
exhibits 32.1 and 32.2) as part of this Quarterly Report on Form 10-Q and such Exhibit Index is
incorporated herein by reference.
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.
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LOGMEIN, INC.
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| Date: April 28, 2011 |
By: |
/s/ Michael K. Simon
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Michael K Simon |
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President and Chief Executive Officer
(Principal Executive Officer) |
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| Date: April 28, 2011 |
By: |
/s/ James F. Kelliher
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James F. Kelliher |
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Chief Financial Officer (Principal
Financial Officer) |
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EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
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| Exhibit No. |
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Description |
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31.1
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Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer. |
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31.2
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Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer. |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Executive Officer. |
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32.2
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Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Financial Officer. |
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