Item 1B.
Unresolved Staff Comments
None.
Our principal offices occupy approximately 35,000 square feet of leased office space in Gaithersburg, Maryland which we lease pursuant to a sublease with a sublessor. We also maintain sales, development or technical assistance offices in Phoenix, Arizona; San Jose, California; Richardson and Houston, Texas; Tulsa, Oklahoma; Cedar Rapids, Iowa; Boca Raton, Florida; McLean, Virginia; Montreal, Canada; Belfast, Northern Ireland; Crawley, United Kingdom; Chennai and Bangalore, India; Madrid, Spain; Paris, France; Seoul, South Korea; Sydney, Australia; Warsaw, Poland; Tokyo, Japan; Sophia, Bulgaria; Cologne and Frankfurt, Germany; Amsterdam, Netherlands; Rome, Italy; and Helsinki, Finland.
Item 3.
Item 3.
Legal Proceedings
We are subject to litigation and claims arising in the ordinary course of business. While we intend to defend ourselves vigorously, we cannot be certain of any particular outcome and an adverse outcome in this lawsuit could have a material adverse effect on our business. We are not aware of any pending or threatened legal proceeding against us that could have a material adverse effect on our business, operating results or financial condition. The software and communications infrastructure industries are characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices and claims for indemnification. As a result, we may be involved in various legal proceedings from time to time.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol “BSFT."
The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported on the NASDAQ Global Select Market.
Dividend Policy
We have never declared or paid dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements.
Stockholders
As of February 23, 2016, there were 20 registered stockholders of record of our common stock.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between December 31, 2010 and December 31, 2015, with the comparative cumulative total return of such amount on (a) the NASDAQ Telecommunications Index and (b) the NASDAQ Composite Index, over the same period. We have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from the NASDAQ Stock Market, Inc., a financial data provider and a source believed to be reliable. The NASDAQ Stock Market, Inc. is not responsible for any errors or omissions in such information.
The information presented above in the stock performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, except to the extent that we subsequently specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, or a filing under the Securities Exchange Act of 1934, as amended.
Recent Sale of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6.
Item 6.
Selected Consolidated Financial Data
You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes included in this Annual Report on Form 10-K.
We derived the consolidated financial data for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data for the years ended December 31, 2012 and 2011 and as of December 31, 2013, 2012 and 2011 from audited financial statements that are not included in this Annual Report on Form 10-K. Consolidated financial data include (a) retrospective application of our change in accounting policy related to the attribution method for stock-based compensation expense and (b) our retrospective application of ASU 2015-03 related to debt issuance costs. See Note 2 Summary of Significant Accounting Policies for additional information on the changes. Historical results are not necessarily indicative of the results to be expected in any future periods.
Statements of Operations Data:
Balance Sheet Data:
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
We are the leading global provider of software and services that enable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, to their enterprise customers.
Traditionally, many enterprises have utilized premise-based private branch exchanges, or PBX’s, to connect their offices and people to public telephony networks. Hosted UC enables the delivery of PBX features without the need for premise-based equipment. Hosted UC can be delivered through service providers using their own IP-based and mobile networks, as well as over the public internet (also known as "over the top" or OTT). In addition to voice telephony, UC offers additional features such as full integration with mobile devices, high definition, or HD, voice and video calling and conferencing, instant messaging and presence, or IM&P, and web collaboration.
We believe we are well positioned to enable service providers to capitalize on increasing demand by enterprises for such UC services by enabling them to efficiently and cost-effectively offer a broad suite of services to their end-users. Over 450 service provider customers in more than 85 countries are delivering services and have deployed over 13 million UC subscriber lines worldwide using our software.
Executive Summary
Our management team monitors and analyzes a number of key industry trends and performance indicators to manage our business and evaluate our financial and operating performance.
We believe the trend towards adoption of cloud-based unified communications by enterprises will continue and even accelerate over the next several years. We also believe that service providers using our products and services are strongly positioned to take advantage of this demand. Our objective is to provide our service provider customers with the service and software offerings they need to effectively address this market opportunity and their end-user customer needs.
We experienced strong revenue from our UC solutions in 2015 and expect continued strong growth during 2016. We believe our UC solutions growth is largely driven by increased market acceptance of hosted UC offerings and our continued market leadership. We believe converged and mobile operators desire to deliver UC solutions to their enterprise customer base to grow revenue, reduce subscriber turnover, or churn, and raise average revenue per user. Our UC-One solutions, which are either delivered through our hosted UC offering, BroadCloud, or through our BroadWorks server software that resides within the service provider’s network, enable service providers to rapidly and efficiently deliver a UC experience regardless of end-user device and whether or not the end-user has fixed-line or wireless access.
BroadCloud continues to be a particularly important area of investment and marketing focus for us. Many of our service provider customers are interested in accessing the capabilities of our BroadWorks features and functions through a service offering hosted and managed by us. We believe that service providers choose BroadCloud to accelerate their time to market and reduce their capital and implementation costs and that delivering innovative solutions to our customers will drive our revenue growth. In November 2015, we expanded our BroadCloud offering platform into the Japanese market through an acquisition. In 2016, we expect to continue to invest in our BroadCloud offerings, including by expanding the geographic availability of these offerings.
We announced Project Tempo at our annual BroadSoft Connections user conference in October 2015. Our goal with Project Tempo is to enable service providers to adopt UC as the centerpiece in what we have entitled "The Future of Work." This is our vision of extending UC to help drive how enterprises and people communicate, interact and collaborate by integrating their communication, collaborative and work productivity tools with contextual intelligence. We expect that in 2016 we will continue our strategic investments in initiatives such as Project Tempo and in research and development of existing and new products, such as client and portal software, mobility and cloud-based services, including products acquired in connection with our acquisitions.
We also continue to invest in our service providers' ability to differentiate their UC offerings, as evidenced by our acquisition in the second quarter of 2015 of mPortal, Inc. a company that designs and develops customer experiences across mobile, web and other connected devices. mPortal became part of our BroadSoft Design group. This acquisition increases our ability to help our service provider customers to highly-customize the UC experience for their end-users and their system administrators across different size market segments. We also expect to continue to invest in our sales and our go-to-market efforts to take advantage of these market opportunities.
During the first quarter of 2016, we acquired Transera Communications, Inc. (now called BroadSoft Contact Center, Inc.), a provider of cloud based contact center software. The Transera products and services will allow our customers to offer a
comprehensive cloud contact center portfolio that is complementary to, and integrates with, our BroadWorks and BroadCloud platform. The contact center offering is an enterprise grade cloud contact center utilizing multiple interaction channels, including voice, email, chat and social media. We also believe that Transera’s contact center data analytics capabilities have the ability to assist our customers in improving their contact center operational performance.
We also believe that many of the largest carriers in the world are embarking on projects to ultimately transform most, if not all, of their legacy fixed and mobile circuit switched networks to IP-based networks, driven in part by the movement to migrate their wireless networks to VoLTE. We believe transformation projects by certain of our largest service provider customers could drive significant growth for us over the next several years. We think that we are well-positioned to meet such carrier demand for these transformation projects, especially with regard to our UC and UC for VoLTE offerings. We have experienced a significant positive revenue impact from these projects in 2015, and expect this to continue in 2016.
Key Financial Highlights
Some of our key U.S. GAAP financial highlights for the year ended December 31, 2015 include:
•
Total revenue increased by 29%, or $62.0 million, to $278.8 million, compared to $216.9 million for 2014;
•
Gross profit increased to $201.1 million, or 72% of revenue, compared to $159.2 million, or 73% of revenue for 2014;
•
Income from operations was $15.2 million, compared to $6.6 million for 2014;
•
Net income was $0.2 million, compared to $0.3 million for 2014;
•
Net income per diluted share was $0.01 per share, compared to $0.01 per share for 2014;
•
Revenue plus net change in deferred revenue increased by 20% to $288.4 million, compared to $240.7 million for 2014;
•
Deferred revenue increased $9.6 million, compared to an increase of $23.8 million for 2014; and
•
Cash provided by operating activities was $44.8 million, compared to $54.8 million for 2014.
Some of our key non-GAAP financial highlights for the year ended December 31, 2015 include:
•
Non-GAAP gross profit increased to $214.4 million, or 77% of revenue, compared to $168.4 million, or 78% of revenue in 2014;
•
Non-GAAP income from operations was $61.8 million, or 22% of total revenue, compared to $42.2 million, or 19% of total revenue, in 2014;
•
Non-GAAP net income was $58.6 million, compared to $40.1 million in 2014; and
•
Non-GAAP net income per diluted share was $1.96 per common share, compared to $1.37 per common share in 2014.
For a discussion of these non-GAAP financial measures and a reconciliation of GAAP and non-GAAP financial results, please refer to “Non-GAAP Financial Measures” included elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Components of Operating Results
Revenue
We derive our revenue primarily from software licenses, subscription and maintenance support and professional services and other. We recognize revenue when all revenue recognition criteria have been met in accordance with revenue recognition guidance. This guidance provides that revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.
Our total revenue consists of the following:
License software. We derive license software revenue primarily from the sale of perpetual software licenses. We generally price our software based on the packages of features and applications provided and on the number of subscriber licenses sold. These factors impact the average selling price of our licenses and the comparability of average selling prices. Our license software revenue may vary significantly from quarter to quarter or from year to year as a result of long sales and deployment cycles, variations in customer ordering practices and the application of management’s judgment in applying complex revenue recognition rules. Our deferred license software revenue balance consists of software orders that do not meet all the criteria for
revenue recognition. We are unable to predict with certainty the proportion of orders that will meet all the criteria for revenue recognition relative to those orders that will not meet all such criteria and, as a result, it is difficult to forecast whether recognized license software revenue and deferred license software revenue will continue to increase or decrease in a given period. As of December 31, 2015, our deferred license software revenue balance was $33.2 million, the current portion of which was $31.9 million.
Subscription and maintenance support. Subscription and maintenance support revenue includes recurring revenue from annual maintenance support contracts for our software licenses and from subscriptions related to our delivery of BroadCloud services.
Rates for maintenance support, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance support revenue is recognized ratably over the maintenance support period, assuming all other revenue recognition criteria have been met. Our annual maintenance support contracts provide for software updates, upgrades and technical support. Our typical warranty on licensed software is 90 days and, during this period, our customers are entitled to receive maintenance and support without the purchase of a maintenance contract. After the expiration of the warranty period, our customers must purchase maintenance support services to continue receiving such support.
Under our BroadCloud subscriptions, we are paid a recurring fee typically calculated based on the number of seats and type of services purchased or a usage fee based on the actual number of transactions. The recurring fee is typically billed monthly or annually in advance based on the terms of the arrangement and the usage fee is billed one month in arrears.
Our deferred subscription and maintenance support revenue balance consists of maintenance support and subscription orders that do not meet all the criteria for revenue recognition. As of December 31, 2015, our deferred subscription and maintenance support revenue balance was $61.4 million, the current portion of which was $58.9 million.
Professional services and other. Professional services and other revenue primarily includes revenue from professional service engagements consisting of implementation, training, consulting and design and customization services. Our professional services and other deferred revenue balance consists of orders that do not meet all the criteria for revenue recognition. As of December 31, 2015, our deferred professional services and other revenue balance was $16.5 million, the current portion of which was $15.7 million.
Cost of Revenue
Our total cost of revenue consists of the following:
•
Cost of license software revenue. A majority of the cost of license software revenue consists of amortization of acquired intangibles, personnel-related expenses and royalties paid to third parties whose technology or products are sold as part of BroadWorks. A significant amount of the royalty fees are for the underlying embedded data base technology within BroadWorks for which we currently incur a fixed expense per quarter. Personnel-related expenses include salaries, benefits, bonuses, reimbursement of expenses and stock-based compensation. Such costs are expensed in the period in which they are incurred.
•
Cost of subscription and maintenance support revenue. Cost of subscription and maintenance support revenue consists primarily of personnel-related expenses and other direct costs associated with support and maintenance obligations to our customers who have licensed our software and BroadCloud services, including maintenance and support expenses due to our use of third party software, amortization of acquired intangibles and operating and depreciation expenses associated with the delivery of BroadCloud services.
•
Cost of professional services and other revenue. Cost of professional services and other revenue consists primarily of personnel-related expenses and other direct costs associated with the delivery of our professional services, which are expensed in the period in which they are incurred.
Gross Profit
Gross profit is the calculation of total revenue minus cost of revenue. Our gross profit as a percentage of revenue, or gross margin, has been and will continue to be affected by a variety of factors, including:
•
Mix of license software, subscription and maintenance support and professional services and other revenue. We generate higher gross margins on license software revenue compared to subscription and maintenance support or professional services and other revenue.
•
Growth or decline of license software revenue. A significant portion of cost of license software revenue is fixed and is expensed in the period in which it is incurred. This cost consists primarily of royalty fees to our
embedded database provider and amortization of acquired technology. If license software revenue increases, these fixed fees will decline as a percentage of revenue. If license software revenue declines, these fixed fees will increase as a percentage of revenue.
•
Impact of deferred revenue. If any revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license software, subscription and maintenance support, and professional services and other revenue, until all elements of revenue recognition criteria have been met. However, the cost of revenue, including the costs of license software, subscription and maintenance support and professional services and other, is typically expensed in the period in which it is incurred. Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period. Because the ability to recognize revenue on orders depends largely on the terms of the sale arrangement and we are not able to predict with certainty the proportion of orders that will not meet all the criteria for revenue recognition, we cannot forecast whether any historical trends in gross margin will continue.
•
Intangible amortization related to mergers and acquisitions. Over the last several years, our business combinations resulted in a number of intangibles assets. These intangible assets are amortized over their useful lives, resulting in additional expense impacting gross profit over the applicable period. We may undertake additional strategic transactions in the future that would result in additional intangible amortization expense.
Revenue Plus Net Change in Deferred Revenue
We believe revenue recognized in a particular period plus the net change in our deferred revenue balance is a key measure of our sales activity for that period.
Revenue plus the net change in deferred revenue is as follows (in thousands):
Operating Expenses
We grew our total headcount to 1,247 employees at December 31, 2015 from 867 employees at December 31, 2014, and we expect to continue to hire new employees to support our anticipated growth.
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and other personnel costs are the most significant component of each of these expense categories. We expect our operating expenses to increase in 2016 primarily due to increases in headcount and stock-based compensation expense.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions, benefits and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead.
Research and development expenses. Research and development expenses consist primarily of salaries and personnel costs for development employees, including stock-based compensation, benefits and bonuses. Additional expenses include costs related to development, quality assurance and testing of new software and enhancement of existing software, consulting, travel and other related overhead. We engage third-party international and domestic consulting firms for various research and development efforts, such as software development, documentation, quality assurance and software support. We intend to continue to invest in our research and development efforts, including by hiring additional development personnel and by using third-party consulting firms for various research and development efforts. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position.
General and administrative expenses. General and administrative expenses consist primarily of salary and personnel costs for administration, finance and accounting, legal, information systems and human resources employees, including stock-based
compensation, benefits and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other administrative expenses.
Stock-Based Compensation
We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant of stock-based awards to our directors, employees and consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The total cost of the grant is measured based on the estimated fair value of the award at the date of grant. The fair value of service-only awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period, which is the vesting period, of the award. Straight-line expense recognition for service-only awards is an accounting policy change in the fourth quarter of 2015, applied retrospectively. See Note 2 Summary of Significant Accounting Policies for additional information on the accounting policy change. The fair value of awards with a performance condition continues to be recognized as stock-based compensation on a graded basis over the requisite vesting period of the award. For the years ended December 31, 2015, 2014 and 2013, we recorded stock-based compensation expense of $40.4 million, $30.3 million and $27.4 million, respectively.
Based on stock-based awards outstanding as of December 31, 2015, we expect to recognize future expense related to the non-vested portions of such stock-based awards in the amount of $56.9 million over a weighted average period of approximately 1.91 years.
Other Expense, Net
Other expense, net, consists primarily of interest income, interest expense, loss on repurchase of convertible senior notes and foreign currency translation gains and losses. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interest related to our 2018 convertible senior notes, or the 2018 Notes, and our 2022 convertible senior notes, or the 2022 Notes. Loss on repurchase of convertible senior notes relates to the fair value in excess of the carrying value of the portion of the 2018 Notes repurchased. Foreign currency translation gains and losses relate to the revaluation of foreign currency denominated trade receivables.
Income Tax Expense
Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. Historically, we have not been required to pay significant U.S. federal income taxes due to our accumulated net operating losses. As of December 31, 2015 and 2014, we had net operating loss carryforwards, or the NOLs, to utilize in the U.S of approximately $32.1 million and $39.2 million, respectively. Additionally, we have $11.3 million and $5.9 million of tax credit carryforwards for tax return purposes as of December 31, 2015 and 2014, respectively. The U.S. NOLs and tax credit carryforwards are scheduled to begin to expire in 2018 and 2019, respectively. As of December 31, 2015 and 2014, we had a remaining valuation allowance of approximately $0.3 million and $0.3 million, respectively, which primarily relate to certain foreign NOLs and tax credits that more likely than not will not be realized.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard allows entities to apply either of two methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Topic 606 ("ASU 2015-14"), which defers the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are evaluating the impact of adopting this new standard on our financial statements and our method of adoption.
In April 2015, the FASB issued Accounting Standards Updated 2015-03, Interest-Imputation of Interest ("ASU 2015-03"), which provides updated guidance for accounting for debt issuance costs. The update is intended to simplify and standardize the
presentation of debt issuance costs. ASU 2015-13 requires that we present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the treatment of debt discounts. We adopted the new guidance effective July 1, 2015 and reclassified our unamortized debt issuance costs from "other current assets" and "other long-term assets" to "convertible senior notes" on the consolidated balance sheets for all periods presented. The balances of unamortized debt issuance costs reclassified as of December 31, 2014 were $0.4 million and $1.0 million from other current assets and other long-term assets, respectively.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations: Topic 805 ("ASU 2015-16"), which provides updated guidance on recognizing adjustments to provisional amounts for items in a business combination. ASU 2015-16 requires that the we recognize adjustments to provisional amounts during the reporting period in which the adjustment amounts are determined. We will adopt ASU 2015-16 upon its effective date, which is for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. The guidance will be applied prospectively.
In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes: Topic 740 ("ASU 2015-17"), which provides updated guidance for the presentation of deferred income taxes. ASU 2015-17 requires that we present deferred income taxes as non-current in the balance sheet. We adopted the new guidance effective December 31, 2015 and reclassified our current deferred tax assets and deferred tax liabilities to non-current on the consolidated balance sheet for all periods presented. The balances of current deferred tax assets and current deferred tax liabilities reclassified to non-current as of December 31, 2014 were $14.3 million and an immaterial amount, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
We derive our revenue from the sale of software licenses and related maintenance for those licenses, subscription and usage fees related to our cloud offerings and the sale of professional services.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability of the related receivable is probable. In making judgments regarding revenue recognition, we analyze various factors, including the nature and terms of the specific transaction, the creditworthiness of our customers, our historical experience, accuracy of prior estimates and overall market and economic conditions. Moreover, in connection with the sale of a number of products and services under a single contractual arrangement (a multiple element arrangement), we make judgments as to whether there is sufficient vendor specific objective evidence (“VSOE”) to enable the allocation of fair value among the various elements in software arrangements that contain multiple elements and as to relative selling prices for multiple element arrangements that do not contain software elements. In determining relative selling prices for products and services, we consider, among other things, our use of discounts from list prices, prices we charge for similar offerings and our historical pricing practices. Changes in judgments related to these items, or deterioration in market or economic conditions, could materially impact the timing and amount of revenue recognized.
License Software Revenue
We sell software licenses to service providers through our direct sales force and indirectly through distribution partners.
For direct sales, we generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute evidence of an arrangement. In the case of sales through distribution partners, we generally consider a purchase order or executed sales quote, when combined with a reseller or similar agreement with the distribution partner, and evidence of the distribution partner’s customer, to constitute evidence of an arrangement. For sales through distribution partners for which we are not able to ascertain proof of the distribution partner’s customer, we defer revenue until we are able to do so.
We consider delivery to have occurred when the customer is given electronic access to the licensed software and a license key for the software has been delivered or made available. Instances where all ordered software features are not delivered are considered to be partial deliveries. Since we cannot determine VSOE of an undelivered software feature in the case of a partial delivery, we defer revenue recognition on all elements of such order until delivery for all ordered software features is complete.
Acceptance of our licensed software generally occurs upon delivery. From time to time, we have agreed with certain customers to a specific set of acceptance criteria. In such cases, we may defer revenue until these acceptance criteria have been met.
Our sales generally consist of multiple elements: software licenses; maintenance support; and professional services. We calculate the amount of revenue allocated to the software license by determining the fair value of the undelivered elements, which often are maintenance support and professional services, and subtracting it from the total order amount. We establish VSOE of the fair value of maintenance support based on the renewal price as stated in the agreement and as charged in the first optional renewal period under the arrangement. Our VSOE for professional services is determined based on an analysis of our historical daily rates when these professional services are sold separately from the software license.
The warranty period for our licensed software is generally 90 days. During this period, the customer receives technical support and has the right to unspecified product upgrades on an if-and-when available basis. For these periods, we defer a portion of the license fee and recognize it ratably over the warranty period. The revenue is reflected under the subscription and maintenance support revenue line item in the consolidated income statement.
Our license software revenue is subject to significant fluctuation as a result of the application of accounting regulations and related interpretations and policies regarding revenue recognition. We do not believe license revenue to be the only meaningful measure of our level of sales activity during the periods reported because of the impact of software license orders for these periods that were not yet recognized as revenue and therefore were recorded as deferred license software revenue. Our deferred license software revenue balance consists of software orders that do not meet all the criteria for revenue recognition. We are unable to predict the proportion of orders that will meet all the criteria for revenue recognition relative to those orders that will not meet all such criteria. As a result, we cannot forecast whether historical trends in recognized license software revenue, and corresponding changes in deferred license revenue, will continue.
Subscription and Maintenance Support Revenue
We typically sell software in combination with maintenance support. Maintenance support is generally renewable annually at the option of the customer. Rates for maintenance support, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance support revenue is recognized ratably over the maintenance support period, assuming all other revenue recognition criteria have been met.
Under our BroadCloud subscriptions, we are paid a recurring fee calculated based on the number of seats and type of services purchased or a usage fee based on actual number of transactions. Typically, the recurring fee is billed monthly or annually based on the terms of the arrangement and the usage fee is billed one month in arrears. Revenue is recognized ratably over the contract term beginning with the date our service is made available to customers.
We enter into arrangements with multiple-elements that generally include subscription and professional services. To treat deliverables in a multiple-element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors; the nature of the professional services; the timing of when the professional services contract was signed in comparison to the subscription service start date; and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work.
Per the accounting guidance, when multiple-elements included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for each element based on its VSOE, if available, or our best estimate of selling price, or BESP, if VSOE is not available. We have determined that third-party evidence is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, our price lists, our go-to-market strategy, historical standalone sales and contract prices. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Professional Services Revenue
Professional services are generally either daily-rate or fixed-fee arrangements. Revenue from daily-rate arrangements is typically recognized as services are performed. Revenue related to fixed-fee arrangements is typically recognized upon completion of all of the deliverables. Services are generally not considered essential to the functionality of the licensed software.
Software Development Costs
Software development costs for software to be sold, leased or marketed that is incurred prior to the establishment of technological feasibility are expensed as incurred as research and development expense. Software development costs incurred subsequent to the establishment of technological feasibility, if any, are capitalized until the software is available for general release to customers. For each software release, judgment is required to evaluate when technological feasibility has occurred. We have determined that technological feasibility has been established at approximately the same time as our general release of such software to customers. Therefore, to date, we have not capitalized any related software development costs.
Internal-Use Software Development Costs
Costs associated with customized internal-use software systems, which include development costs associated with our BroadCloud platforms, that have reached the application development stage are capitalized. Such capitalized costs include costs directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that is maintained for estimated losses that would result from the inability of some customers to make payments. The allowance is based on an analysis of past due amounts and ongoing credit evaluations. Customers are generally evaluated for creditworthiness through a credit review process at the time of each order. Our collection experience has been consistent with our estimates.
Business Combinations
In a business combination, we allocate the purchase price to the acquired business’ identifiable assets and liabilities at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. The excess, if any, of the fair value of the identifiable assets acquired and liabilities assumed over the consideration transferred is recognized as a gain within other income in the consolidated statements of operations as of the acquisition date.
To date, the assets acquired and liabilities assumed in our business combinations have primarily consisted of acquired working capital and definite-lived intangible assets. The carrying value of acquired working capital approximates its fair value, given the short-term nature of these assets and liabilities. We estimate the fair value of definite-lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by such assets and the risk associated with achieving such cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the discretely forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible assets, which include revenue, operating expenses and taxes. Our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Goodwill
Goodwill represents the excess of (a) the aggregate of the fair value of consideration transferred in a business combination over (b) the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to annual impairment tests as described below.
We test goodwill for impairment annually on December 31, or more frequently if events or changes in business circumstances indicate the asset might be impaired. Examples of such events or circumstances include the following:
•
a significant adverse change in our business climate;
•
unanticipated competition;
•
a loss of key personnel;
•
a more likely than not expectation that a significant portion of our business will be sold; or
•
the testing for recoverability of a significant asset group within the reporting unit.
We first may assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test included in U.S. GAAP. To the extent our assessment identifies adverse conditions, or if we elect to bypass the qualitative assessment, goodwill is tested for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is required to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the purchase price were being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the consolidated statements of operations in the period the determination is made.
We have determined that we have one reporting unit, BroadSoft, Inc., which is the consolidated entity. Based on our qualitative assessment, there was no indication of impairment as of December 31, 2015, 2014 or 2013. However, there can be no assurance that goodwill will not be impaired at any time in the future.
Intangible Assets
We acquired intangible assets in connection with certain of our business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Estimated useful lives are determined based on our historical use of similar assets and the expectation of future realization of cash flows attributable to the intangible assets. Changes in circumstances, such as technological advances or changes to our business model, could result in the actual useful lives differing from our current estimates. In those cases where we determine that the useful life of an intangible asset should be shortened, we amortize the net book value in excess of the estimated salvage value over its revised remaining useful life. We did not revise our previously assigned useful life estimates attributed to any of our intangible assets during the years ended December 31, 2015, 2014 or 2013.
The estimated useful lives used in computing amortization of intangible assets are as follows:
Impairment of Long-Lived Assets
We review our long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable. Typical indicators that an asset may be impaired include, but are not limited to:
•
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
•
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; or
•
a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Recoverability measurement and estimating of undiscounted cash flows for assets to be held and used is done at the lowest possible levels for which there are identifiable cash flows. If such assets are considered impaired, generally the amount of impairment recognized would be equal to the amount by which the carrying amount of the assets exceeds the fair value of the assets, which we would compute using a discounted cash flow approach. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. Estimating future cash flows attributable to our long-lived assets requires significant judgment and projections may vary from cash flows eventually
realized. There were no triggering events to cause us to record an impairment charge during the years ended December 31, 2015, 2014 or 2013.
Income Taxes
We use the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred amounts are expected to be settled or realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. Changes in facts and circumstances could have a material impact on our effective tax rate and results of operations.
Results of Operations
Comparison of the Years Ended December 31, 2015 and 2014
Revenue
Total revenue for 2015 increased by 29%, or $62.0 million, to $278.8 million, compared to 2014. This growth was driven by a 16% increase in license software revenue, a 22% increase in subscription and maintenance support revenue and a 119% increase in professional services and other revenue. Deferred revenue increased by $9.6 million for 2015, compared to an increase of $23.8 million in 2014.
Americas revenue for 2015 increased by 59%, or $70.9 million, to $191.6 million compared to 2014. The increase in Americas revenue for 2015 was due to increases in license software revenue, subscription and maintenance support revenue and professional services and other revenues.
Europe, Middle East and Africa, or EMEA, revenue for 2015 increased by 11%, or $6.2 million, to $61.1 million compared to 2014. The increase in EMEA revenue in 2015 was primarily due to an increase in license software revenue and subscription and maintenance support revenue, partially offset by a decrease in professional services and other revenue.
Asia Pacific, or APAC, total revenue for 2015 decreased by 36%, or $15.0 million, to $26.2 million compared to 2014. The decrease in APAC revenue was primarily due to the recognition of revenue in the prior year related to a multi-year project for an APAC service provider customer.
License Software
License software revenue for 2015 increased by 16%, or $16.5 million, to $119.8 million. The increase in revenue for 2015 reflects an increase in license software revenue in the Americas and EMEA, partially offset by a decrease in license software revenue in APAC. Deferred license software revenue increased by $6.7 million in 2015, compared to an increase of $6.3 million in 2014.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2015 increased by 22%, or $20.3 million, to $112.8 million, compared to 2014. The increase in subscription and maintenance support revenue was the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions, and growth in our maintenance support revenue. Our BroadCloud subscription revenue for 2015 increased by $8.8 million to $34.5 million, compared to 2014. Our maintenance support revenue grew as a result of growth in the installed base of our customers who purchase maintenance support. Deferred subscription and maintenance support revenue increased by $8.6 million in 2015, compared to an increase of $5.8 million in 2014.
Professional Services and Other
Professional services and other revenue for 2015 increased by 119%, or $25.1 million, to $46.2 million, compared to 2014. The increase in professional services and other revenue for 2015 was primarily due to revenue recognized from several large projects as we've reached milestones for those projects, and also due to increased professional services activity, including contributions from recent acquisitions. Deferred professional services and other revenue decreased by $5.7 million in 2015, compared to an increase of $11.7 million in 2014.
Cost of Revenue and Gross Profit
For 2015, our gross margin decreased to 72% as compared to 73% in 2014 and our gross profit increased by 26%, or $41.9 million, to $201.1 million. We experienced an increase in gross profit across all of our revenue streams for 2015. The total gross profit growth is primarily due to higher revenue growth relative to the growth in cost of revenue.
For 2015, license software gross margin remained approximately unchanged at 91% as compared to 2014 and license software gross profit increased by 17% to $109.6 million. License software cost of revenue increased by 5%, or $0.5 million, to $10.2 million in 2015. This increase was primarily due to a $0.8 million increase in intangible amortization related to our acquisitions. The increase in license software gross profit was driven by higher revenue growth relative to the growth in license software cost of revenue.
For 2015, subscription and maintenance support gross margin increased to 66% as compared to 64% in 2014 and subscription and maintenance support gross profit increased by 25% to $74.2 million. Subscription and maintenance support cost of revenue increased by 17%, or $5.6 million, to $38.6 million in 2015. The increase in subscription and maintenance support cost of
revenue was related to our continued investment in our product offerings, primarily investment in our BroadCloud offering, including a $3.0 million increase in personnel-related costs and a $2.5 million increase in operating costs associated with hosting our BroadCloud services. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance services cost of revenue.
For 2015, professional services and other gross margin increased to 37% as compared to 29% in 2014 and professional services and other gross profit increased by 183% to $17.3 million. Professional services and other cost of revenue increased 93%, or $14.0 million, to $28.9 million in 2015. The increase in professional services and other cost of revenue was primarily due to a $9.7 million increase in personnel-related costs, which includes the impact of acquisitions we made during 2015. The increase was also due to a $1.2 million increase in hardware expense and a $1.1 million increase in travel expenses. The increase in professional services and other gross profit was driven by higher revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased by 21%, or $14.3 million, to $83.8 million for 2015. The increase was primarily due to a $9.3 million increase in personnel-related costs, a $2.1 million increase in outside consulting expenses, a $0.7 million increase in equipment and software expenses and a $0.6 million increase in travel expenses.
Research and Development. Research and development expense increased by 21%, or $10.6 million, to $60.7 million for 2015. The increase was primarily due to an $8.9 million increase in personnel-related costs, a $0.8 million increase in depreciation expenses and a $0.7 million increase in equipment and software expenses.
General and Administrative. General and administrative expense increased by 25%, or $8.3 million, to $41.3 million for 2015. The increase was primarily related to a $3.6 million increase in personnel-related costs and a $4.1 million increase in third party legal and consulting expenses.
Income from Operations
We had income from operations of $15.2 million for 2015, compared to $6.6 million in 2014.
Other Expense
Other expense, net increased by $6.6 million for 2015 compared to 2014. The increase in total other expenses was related to the loss of $4.2 million related to the repurchase of a portion of the 2018 Notes, interest expense of $3.2 million related to the 2022 Notes and a $0.7 million increase in foreign currency translation losses related to the revaluation of foreign denominated trade
receivables compared to 2014, partially offset by an increase in interest income of $0.7 million related to our investments and a decrease in interest expense of $0.7 million related to the 2018 Notes.
Benefit from Income Taxes
Benefit from income taxes was an immaterial amount for the year ended December 31, 2015, compared to $2.2 million for the year ended December 31, 2014. For the year ended December 31, 2015, the tax provision was primarily impacted by research tax credits generated in 2015 and prior years, partially offset by non-deductible share base compensation. The decrease in the income tax benefit in 2015 compared to 2014 was primarily related to the release of a valuation allowance in 2014 due to expected realization of our deferred tax assets in certain foreign jurisdictions.
Comparison of the Years Ended December 31, 2014 and 2013
Revenue
Total revenue for 2014 increased by 21%, or $38.4 million, to $216.9 million, compared to 2013. This growth was driven by a 9% increase in license software revenue, a 33% increase in subscription and maintenance support revenue and a 43% increase in professional services and other revenue. Deferred revenue increased by $23.8 million for 2014, compared to an increase of $16.5 million in 2013.
Americas revenue for 2014 increased by 7%, or $7.5 million, to $120.7 million, compared to 2013. The increase in the Americas revenue for 2014 was primarily due to growth in subscription revenue associated with our BroadCloud offering and growth in maintenance support revenue.
EMEA revenue for 2014 increased by 24%, or $10.7 million, to $55.0 million, compared to 2013. The increase in EMEA revenue in 2014 was primarily due to growth in subscription revenue from acquisitions and maintenance support revenue due to an increase in software sales. The increase was partially offset by a decrease in license software revenue due to the deferral of a large order that did not meet the criteria for revenue recognition, with revenue recognition from such order anticipated in 2016.
APAC revenue for 2014 increased by 96%, or $20.2 million, to $41.2 million, compared to 2013. The increase in APAC revenue was primarily due to the recognition of $18.3 million of revenue related to a multi-year project for an APAC service provider customer, including revenue from license software, subscription and maintenance support and professional services and other.
License Software
License software revenue for 2014 increased by 9%, or $8.9 million, to $103.3 million, compared to 2013. The increase in revenue for 2014 reflects an increase in license software revenue in APAC partially offset by a decrease in software license revenue in EMEA. Deferred license software revenue increased by $6.3 million in 2014, compared to a decrease of $1.8 million in 2013.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2014 increased by 33%, or $23.1 million, to $92.5 million, compared to 2013. The increase in subscription and maintenance support revenue was the result of growth in our subscription revenue associated with our BroadCloud offering, which included contributions from acquisitions. Our BroadCloud subscription revenue for 2014 increased by $13.2 million to $25.7 million, compared to 2013. Our maintenance support revenue grew as a result of growth in the installed base of our customers who purchase maintenance support. Deferred subscription and maintenance support revenue increased by $5.8 million in 2014, compared to an increase of $11.3 million in 2013.
Professional Services and Other
Professional services and other revenue for 2014 increased by 43%, or $6.3 million, to $21.1 million, compared to 2013. The increase in professional services and other revenue for 2014 was primarily due to the timing of revenue recognition, including revenue related to a multi-year project for an APAC service provider customer that had been deferred in prior periods. Deferred professional services and other revenue increased by $11.7 million in 2014, compared to remaining approximately unchanged in 2013.
Cost of Revenue and Gross Profit
For 2014, gross margin decreased to 73% as compared to 78% in 2013 and our gross profit increased by 15%, or $20.3 million, to $159.2 million. We experienced an increase in gross profit across all of our revenue streams for 2014. The total gross profit growth was primarily due to higher revenue growth relative to the growth in cost of revenue.
For 2014, license software gross margin remained approximately unchanged at 91% as compared to 2013 and license software gross profit increased by 9% to $93.6 million. License software cost of revenue increased by 10%, or $0.9 million, to $9.8 million in 2014. This increase was primarily due to a $0.7 million increase in personnel-related costs and a $0.6 million increase in equipment and software expense, partially offset by a $0.5 million decrease in royalty expense. The increase in license software gross profit was driven by higher revenue growth relative to the growth in license software cost of revenue.
For 2014, subscription and maintenance support gross margin decreased to 64% as compared to 71% in 2013, and subscription and maintenance support gross profit increased by 21% to $59.5 million. Subscription and maintenance support cost of revenue increased by 62%, or $12.6 million, to $33.0 million in 2014. The increase in subscription and maintenance support cost of revenue was related to our continued investment in our product offerings, primarily investment in our BroadCloud offering. The increase was primarily due to a $5.2 million increase in personnel-related costs, a $5.4 million increase in operations costs associated with hosting our BroadCloud services and a $1.5 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance support cost of revenue.
For 2014, professional services and other gross margin remained approximately unchanged at 29% as compared to 2013, and professional services and other gross profit increased by 41% to $6.1 million. Professional services and other cost of revenue
increased 44%, or $4.5 million, to $15.0 million in 2014. The increase in professional services and other cost of revenue was primarily due to a $1.9 million increase in hardware costs delivered under an order related to a multi-year project for an APAC service provider customer, a $1.0 million increase in outside consulting expenses and a $1.2 million increase in personnel-related costs. The increase in professional services and other gross profit was driven by higher revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased by 22%, or $12.6 million, to $69.5 million for 2014, compared to 2013. This increase was primarily due to a $9.2 million increase in personnel-related costs, a $1.1 million increase in travel expenses, a $0.8 million increase in outside consulting expenses and a $0.6 million in training and marketing expenses.
Research and Development. Research and development expense increased by 11%, or $4.9 million, to $50.1 million for 2014, compared to 2013. This increase was primarily due to a $3.2 million increase in personnel-related costs and a $0.5 million increase in equipment and software expenses. The increase in personnel-related costs was reflective of our continued investment in our product offerings, which includes the impact of the acquisitions we made during 2013 and 2014.
General and Administrative. General and administrative expense increased by 10%, or $3.0 million, to $33.0 million for 2014, compared to 2013. This increase was primarily due to a $1.3 million increase in personnel-related costs and a $0.9 million increase in third-party legal and consulting expenses.
Income from Operations
We had income from operations of $6.6 million for 2014, compared to $6.8 million in 2013.
Other Expense
*
Less than 1%
Other expense, net increased by $1.7 million for 2014 primarily related to the increase of $1.4 million in foreign currency transaction losses related to the revaluation of foreign currency denominated trade receivables.
Benefit from Income Taxes
Benefit from income taxes was $2.2 million for 2014, compared to $0.4 million for 2013. For 2014, in addition to the tax impact of the pre-tax loss for the year, the tax provision was primarily impacted by the release of the valuation allowance on certain deferred tax assets in foreign jurisdictions and the increase in research credits claimed in 2014. The decrease in the
valuation allowance by approximately $3.0 million was related to the expected realization of our deferred tax assets in certain foreign jurisdiction.
Liquidity and Capital Resources
Resources
We fund our operations principally with cash provided by operating activities. Cash flow from operations was $44.8 million, $54.8 million and $31.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. In September 2015, we completed an offering of our 2022 Notes with net proceeds from the offering of approximately $194.8 million.
Cash and Cash Equivalents, Accounts Receivable and Working Capital
The following table presents a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows as of the dates and for the periods indicated (in thousands).
Our cash and cash equivalents at December 31, 2015 were held for working capital and other general corporate purposes and were invested primarily in demand deposit accounts or money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which was immaterial at December 31, 2015, is not included in cash and cash equivalents.
Operating Activities
For the year ended December 31, 2015, net cash provided by operating activities was $44.8 million, compared to $54.8 million for 2014. The decrease was primarily due to a $26.2 million decrease from the net change in other current and long-term assets and liabilities and a decrease in net income of $0.1 million, partially offset by a $16.3 million increase from the aggregate changes in non-cash items. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.
For the year ended December 31, 2014, net cash provided by operating activities was $54.8 million, compared to $31.9 million for 2013. The increase was primarily due to a $11.4 million increase from the aggregate changes in non-cash items and a $11.5 million increase from the net change in other current and long-term asset and liabilities. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.
For the year ended December 31, 2013, net cash provided by operating activities was $31.9 million, compared to $30.0 million in 2012. The increase was primarily due to a $13.3 million increase from the net change in other current and long-term asset and liabilities and a $3.1 million increase from the aggregate changes in non-cash items, partially offset by a decrease in net income of $14.5 million. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.
Investing Activities
Our investing activities have consisted primarily of purchases of marketable securities and property and equipment and the acquisitions of businesses.
For the year ended December 31, 2015, net cash used in investing activities was $88.0 million, compared to $17.6 million for 2014. This increase was primarily attributable to a $50.0 million increase in net purchases of marketable securities, $17.5 million increase in cash used for acquisitions and a $2.4 million increase in purchases of property and equipment.
For the year ended December 31, 2014, net cash used in investing activities was $17.6 million, compared to $57.4 million for 2013. This decrease was primarily attributable to a $34.1 million decrease in cash used for acquisitions and a $9.9 million decrease in net purchases of marketable securities, partially offset by a $4.7 million increase in purchases of property and equipment.
For the year ended December 31, 2013, net cash used in investing activities was $57.4 million, compared to $34.2 million for 2012. This increase was primarily attributable to a $12.6 million increase in cash used for acquisitions, an $8.4 million increase in net purchases of marketable securities and a $1.9 million increase in purchases of property and equipment.
Financing Activities
For the year ended December 31, 2015, net cash provided by financing activities was $118.9 million, compared to net cash used in financing activities of $4.1 million for 2014. Net cash provided by financing activities in 2015 consisted of proceeds from 2022 Notes of $194.8 million and proceeds from the exercise of stock options of $6.2 million, partially offset by our repurchase of a portion of the 2018 Notes for $48.6 million, our repurchase of 790,880 shares of our common stock for $25.0 million, and taxes paid on the vesting of restricted stock units of $10.3 million.
For the year ended December 31, 2014, net cash used in financing activities was $4.1 million, compared to net cash provided by financing activities of $4.8 million for 2013. Net cash used in financing activities in 2014 consisted of taxes paid on the vesting of restricted stock units of $7.8 million, partially offset by our tax windfall benefits from stock option exercises of $3.0 million and proceeds from the exercise of stock options of $0.7 million.
For the year ended December 31, 2013, net cash provided by financing activities was $4.8 million, compared to $0.5 million in 2012. Net cash provided by financing activities in 2013 consisted of our tax windfall benefits from stock option exercises of $7.5 million and proceeds from the exercise of stock options of $1.3 million, partially offset by taxes paid on the vesting of restricted stock units of $3.0 million and payments of notes payable of $1.0 million.
Borrowings and Credit Facilities
2022 Convertible Senior Notes
In September 2015, we issued $201.3 million aggregate principal amount of the 2022 Notes, with net proceeds of approximately $194.8 million. The 2022 Notes are general unsecured obligations, with interest payable semi-annually in cash at a rate of 1.0% per annum, and will mature on September 1, 2022, unless earlier repurchased, redeemed or converted.
The initial conversion rate for the 2022 Notes is approximately $38.72 per share. The conversion price is subject to adjustment in some events, but will not be adjusted for accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption on or after September 1, 2019, we will increase the conversion rate for a holder who elects to convert its 2022 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle conversions through combination settlement with a specified dollar amount per $1,000 principal amount of 2022 Notes of $1,000. See Note 9, Borrowings, contained elsewhere in this Annual Report on Form 10-K for additional details about the 2022 Notes.
2018 Convertible Senior Notes
In June 2011, we issued $120.0 million aggregate principal amount of our 2018 Notes, with net proceeds of approximately $116 million. The 2018 Notes are our senior unsecured obligations, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.
Concurrently with the closing of the 2022 Notes offering, we repurchased $50.9 million principal amount of the 2018 Notes in privately negotiated transactions for an aggregate purchase price of $53.4 million.
The initial conversion rate for the 2018 Notes is approximately $41.99 per share. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make-whole fundamental change, as defined in the indenture governing the 2018 Notes (the “2018 Indenture”), occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder that elects to convert its 2018 Notes in connection with such make-whole fundamental change. Upon conversion, we will pay cash up to the aggregate principal amount of the 2018 Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the 2018 Notes being converted. See Note 9, Borrowings, contained elsewhere in this Annual Report on Form 10-K for additional details about the 2018 Notes.
Tekes Loan
In connection with our acquisition of Movial Applications Oy in October 2011, we assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, which we repaid in full in September 2013.
Operating and Capital Expenditure Requirements
We believe that the cash generated from operations, our current cash, cash equivalents and short-term and long-term investment balances and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to grow, through organic growth and acquisitions, as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology system. As sales grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which would likely result in greater working capital requirements.
If our available cash resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities or enter into a credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.
Contractual Obligations
We have contractual obligations for non-cancelable office space, notes payable and other short-term and long-term liabilities. The following table discloses aggregate information about our contractual obligations as of December 31, 2015 and periods in which payments are due (in thousands):
*
Contractual interest obligations related to our Notes totaled $16.6 million at December 31, 2015, including $3.0 million, $5.6 million, $4.0 million and $4.0 million due in years 2016, 2017-2018, 2019-2020 and 2020 and thereafter, respectively.
^
Principal payment obligations for the 2018 Notes are $69.1 million, due in July 2018, and principal payment obligations for the 2022 Notes are $201.3 million, due in September 2022.
As of December 31, 2015, we had unrecognized tax benefits of $4.9 million. We do not expect to recognize any of these benefits in 2016. Furthermore, we are not able to provide a reliable estimate of the timing of future payments relating to these unrecognized benefits.
Off-Balance Sheet Arrangements
As of December 31, 2015, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Non-GAAP Financial Measures
In addition to our U.S. GAAP operating results, we use certain non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of certain non-cash expenses, such as stock-based compensation expense, amortization of acquired intangibles expense, non-cash interest expense on our convertible senior notes and non-cash tax benefit or expense included in our tax provision, so management and investors can compare our core business operating results over multiple periods. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for operating results in accordance with U.S. GAAP. In addition, other companies, including companies in our industry, may calculate such measures differently, which reduces its usefulness as a comparative measure. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses.
The presentation of non-GAAP net income, non-GAAP net income per basic and diluted share, non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP income from operations and other non-GAAP financial measures in this Annual Report on Form 10-K is not meant to be a substitute for “net income,” “net income per share,” “cost of revenue,” “gross profit,” “income from operations” or other financial measures presented in accordance with GAAP, but rather should be evaluated in conjunction with such data. Our definition of “non-GAAP net income,” “non-GAAP net income per share,” "non-GAAP cost of revenue," “non-GAAP gross profit,” “non-GAAP income from operations” and other non-GAAP financial measures may differ from similarly titled non-GAAP measures used by other companies and may differ from period to period. In reporting non-GAAP measures in the future, we may make other adjustments for expenses and gains we do not consider reflective of core operating performance in a particular period and may modify “non-GAAP net income,” “non-GAAP net income per share,” "non-GAAP cost of revenue," “non-GAAP gross profit,” “non-GAAP income from operations” and such other non-GAAP measures by excluding these expenses and gains.
Non-GAAP cost of revenue, license software cost of revenue, subscription and maintenance cost of revenue and professional services and other cost of revenue. We define non-GAAP cost of revenue as a cost of revenue less stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP cost of revenue to be a useful metric for management and our investors because it excludes the effect of certain non-cash expenses so management and investors can compare our cost of revenue over multiple periods.
Non-GAAP gross profit, license software gross profit, subscription and maintenance support gross profit and professional services and other gross profit. We define non-GAAP gross profit as gross profit plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP gross profit to be a useful metric for management and our investors because it excludes the effect of certain non-cash expenses so management and investors can compare our sales margins over multiple periods.
Non-GAAP income from operations. We define non-GAAP income from operations as income from operations plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP income from operations to be a useful metric for management and investors because it excludes the effect of certain non-cash expenses so management and investors can compare our core business operating results over multiple periods.
Non-GAAP operating expenses, sales and marketing expense, research and development expense and general and administrative expense. We define non-GAAP operating expenses as operating expense less stock-based compensation expense allocated to sales and marketing, research and development and general and administrative expenses. Similarly, we define non-GAAP sales and marketing, research and development and general and administrative expenses as the relevant GAAP measure less stock-based compensation expense allocated to the particular expense item.
Non-GAAP net income and net income per share. We define non-GAAP net income as net income plus stock-based compensation expense, amortization expense for acquired intangible assets, non-cash interest expense on our convertible senior notes, foreign currency transaction gains and losses, loss on repurchase of our convertible senior notes and non-cash tax expense included in the GAAP tax provision. We define non-GAAP income per share as non-GAAP net income divided by the weighted average shares outstanding.
*
Less than 1%
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into interest rate or exchange rate hedging arrangements to manage the risks described below.
Interest Rate Risk
The interest rate is fixed on all our outstanding loan balances; consequently, we do not have exposure to risks due to increases in the variable rates tied to indexes. We maintain a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which we consider to be cash equivalents. Our restricted cash consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space. These securities and investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. At December 31, 2015, we had long-term debt of $270.4 million associated with our convertible senior notes, which are fixed rate instruments. We would not expect a 10% change in interest rates to have a material impact on our results of operations.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro and British Pound, the currencies of countries where we currently have our most significant international operations. On a historical basis, invoicing has largely been denominated in U.S. dollars; however, we expect an increasing proportion of our future business to be conducted in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies of the countries in which our operations are located, with our most significant operations at present located in the United States, the United Kingdom, Germany, India and Canada. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreign currencies. However, we believe this exposure is not material at this time. As we continue to grow our international operations, our exposure to foreign currency risk will likely become more significant. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.
Fluctuations in foreign currencies impact the amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. Dollars. In particular, the amount of cash and cash equivalents that we report in U.S. Dollars would be impacted by a significant fluctuation in foreign currency exchange rates. Based on our cash and cash equivalent balances held in foreign currencies at December 31, 2015, if overall foreign currency exchange rates in comparison to the U.S. Dollar uniformly weakened by 10%, the amount of cash and cash equivalents we would report in U.S. Dollars would decrease by approximately $1.4 million, assuming constant foreign currency cash and cash equivalents balances, although the actual effects may differ materially from this hypothetical analysis.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BroadSoft, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of BroadSoft, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(b) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it presents deferred income taxes and debt financing costs in 2015.
Additionally, as discussed in Note 2 to the financial statements, the Company has elected to change its method of accounting for stock-based compensation expense in 2015.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
February 29, 2016
BroadSoft, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
BroadSoft, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
BroadSoft, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BroadSoft, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BroadSoft, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
BroadSoft, Inc. (“BroadSoft” or the “Company”), a Delaware corporation, was formed in 1998. The Company is the leading global provider of software and services that enable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, to their enterprise customers.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are held in money market accounts. Restricted cash consists primarily of certificates of deposit that are securing letters of credit related to operating leases for office space. The Company had an immaterial amount of long-term restricted cash at December 31, 2015 and December 31, 2014.
Investments in Marketable Securities
Marketable debt securities that the Company does not intend to hold to maturity are classified as available-for-sale, are carried at fair value and are included on the Company’s consolidated balance sheet as either short-term or long-term investments depending on their maturity. Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments. Available-for-sale investments are marked-to-market at the end of each reporting period, with unrealized holding gains or losses, which represent temporary changes in the fair value of the investment, reflected in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company’s primary objective when investing excess cash is preservation of principal. The following table summarizes the Company's investments:
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the Company's investments at December 31, 2015 (in thousands):
The following table summarizes the Company's investments at December 31, 2014 (in thousands):
Fair Value Measurements
The following table summarizes the carrying and fair value of the Company’s financial assets (in thousands):
*
Excludes $52.7 million and $21.6 million of operating cash balances as of December 31, 2015 and 2014, respectively.
The carrying amounts of the Company’s other financial instruments, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short term nature. (See Note 9 Borrowings for additional information on fair value of debt.)
The Company uses a three-tier fair value measurement hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The three tiers are defined as follows:
•
Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical instruments and include the Company’s investments in money market funds and certificates of deposit;
•
Level 2. Inputs valued using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data and include the Company’s investments and marketable securities in U.S. agency notes, commercial paper and corporate bonds; and
•
Level 3. Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.
Assets Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. This determination requires significant judgments to be made. There were no transfers between classification levels during the periods. The following table summarizes the values (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
*
Excludes $52.7 million and $21.6 million of operating cash balances as of December 31, 2015 and 2014, respectively.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be impaired. During the years ended December 31, 2015, 2014 and 2013, there were no assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. All of the Company’s cash and cash equivalents and marketable securities are held at financial institutions that management believes to be of high credit quality. The Company’s cash and cash equivalent accounts may exceed federally insured limits at times. The Company has not experienced any losses on cash and cash equivalents to date. To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts.
The following customer represented 10% or more of revenue for the periods presented:
*
Represented less than 10%
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are derived from sales to customers. Each customer is evaluated for creditworthiness through a credit review process at the time of each order. Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that is maintained for estimated losses that would result from the inability of some customers to make payments as they become due. The allowance is based on an analysis of past due amounts and ongoing credit evaluations. Collection experience has been consistent with the Company’s estimates.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Replacements and major improvements are capitalized; maintenance and repairs are charged to expense as incurred.
Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets per the table below:
Leasehold improvements are amortized over the shorter of the term of the lease and the estimated useful life of the assets.
Business Combinations
In a business combination, the Company allocates the purchase price to the acquired business’ identifiable assets and liabilities at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. The excess, if any, of the fair value of the identifiable assets acquired and liabilities assumed over the consideration transferred is recognized as a gain within other income in the consolidated statement of operations as of the acquisition date.
To date, the assets acquired and liabilities assumed in the Company’s business combinations have primarily consisted of acquired working capital, definite-lived intangible assets and goodwill. The carrying value of acquired working capital approximates its fair value, given the short-term nature of these assets and liabilities. The Company estimates the fair value of definite-lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by such assets and the risk associated with achieving such cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the discretely forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible, which include revenue, operating expenses and taxes. The Company's estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Goodwill
Goodwill represents the excess of (a) the aggregate of the fair value of consideration transferred in a business combination, over (b) the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to annual impairment tests as described below.
The Company tests goodwill for impairment annually on December 31, or more frequently if events or changes in business circumstances indicate the asset might be impaired. The Company may first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test included in U.S. GAAP. To the extent the assessment identifies adverse conditions, or if the Company elects to bypass the qualitative assessment, goodwill is tested for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is performed to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the purchase price were being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the consolidated statement of operations in the period the determination is made.
The Company has determined that it has one reporting unit, BroadSoft, Inc., which is the consolidated entity. Based on the Company’s completion of the first step of the two-step goodwill impairment test, there was no indication of impairment as of December 31, 2015, 2014 or 2013. (See Note 4 Goodwill and Intangibles.)
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Identifiable Intangible Assets
The Company acquired intangible assets in connection with certain of its business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Estimated useful lives are determined based on the Company’s historical use of similar assets and the expectation of future realization of revenue attributable to the intangible assets. In those cases where the Company determines that the useful life of an intangible asset should be shortened, the Company amortizes the net book value in excess of the estimated salvage value over its revised remaining useful life. The Company did not revise the useful life estimates attributed to any of the Company’s intangible assets during the years ended December 31, 2015, 2014 or 2013. (See Note 4 Goodwill and Intangibles.)
The estimated useful lives used in computing amortization are as follows:
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Recoverability measurement and estimating of undiscounted cash flows for assets to be held and used is done at the lowest possible levels for which there are identifiable cash flows. If such assets are considered impaired, the amount of impairment recognized would be equal to the amount by which the carrying amount of the assets exceeds the fair value of the assets, which the Company would compute using a discounted cash flow approach. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. There was no impairment of long-lived assets during the years ended December 31, 2015, 2014 or 2013.
Deferred Financing Costs
The Company amortizes deferred financing costs using the effective-interest method and records such amortization as interest expense.
Revenue Recognition
The Company’s revenue is generated from the sales of software licenses and related maintenance for those licenses, subscription and usage fees related to the cloud offering and professional services. The Company’s software licenses, subscription and maintenance contracts and professional services are sold directly through its own sales force and indirectly through distribution partners.
License Software
Revenue from software licenses is recognized when the following four basic criteria are met as follows:
•
Persuasive evidence of an arrangement. For direct sales, an agreement signed by the Company and by the customer, in conjunction with a non-cancelable purchase order or executed sales quote from the customer, is deemed to represent persuasive evidence of an arrangement. For sales through distribution partners, a purchase order or executed sales quote, in conjunction with a reseller agreement with the distribution partner and evidence of the distribution partner's customer, is deemed to represent persuasive evidence of an arrangement. Revenue is deferred for sales through a distribution partner without proof of the distribution partner's customer.
•
Delivery has occurred. Delivery is deemed to have occurred when the customer is given electronic access to the licensed software and a license key for the software has been delivered or made available. If an arrangement contains a requirement to deliver additional elements essential to the functionality of the delivered element, revenue associated with the arrangement is recognized when delivery of the final element has occurred.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
•
Fees are fixed or determinable. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, revenue is recognized when the refund or adjustment right lapses. If payment terms exceed the Company’s normal terms, revenue is recognized as the amounts become due and payable or upon the receipt of cash if collection is not probable.
•
Collection is probable. Each customer is evaluated for creditworthiness through a credit review process at the inception of an arrangement. Collection is deemed probable if, based upon the Company’s evaluation, the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not probable, revenue is deferred and recognized upon cash collection.
The warranty period for the Company’s licensed software is generally 90 days.
The Company delivers its licensed software primarily by utilizing electronic media. Revenue includes amounts billed for shipping and handling and such amounts represent an immaterial amount of revenue. Cost of license software revenue includes shipping and handling costs.
Subscription and Maintenance Support
The Company typically sells annual maintenance support contracts in combination with license software sales. Maintenance support enables the customer to continue receiving software maintenance and support after the warranty period has expired. Maintenance support is renewable at the option of the customer. When customers prepay for annual maintenance support, the related revenue is deferred and recognized ratably over the term of the maintenance period. Generally, rates for maintenance support, including subsequent renewal rates, are established based upon a specific percentage of net license fees as set forth in the arrangement. Maintenance support typically includes the right to unspecified product upgrades on an if-and-when available basis.
The Company’s subscription revenue is generated from a recurring fee and/or a usage based fee from customers purchasing the Company's cloud offering. Under these arrangements, the Company is generally paid a recurring fee calculated based on the number of seats and type of service purchased or a usage fee based on the actual number of transactions. Revenue related to the recurring fee is recognized ratably over the contract term beginning with the date our service is made available to the customer. The usage fee is recognized as revenue in the period in which the transactions occur. Subscription agreements do not provide customers with the right to take possession of the underlying software at any time.
Professional Services and Other
Revenue from professional services includes implementation, training and consulting fees. Professional services are generally either daily-rate or fixed-fee arrangements. Revenue from daily-rate arrangements is typically recognized as services are performed. Revenue related to fixed-fee arrangements are typically recognized upon completion of all of the deliverables. Services are generally not considered essential to the functionality of the licensed software.
Costs related to shipping and handling and billable travel expenses are included in cost of revenue.
Multiple Element Arrangements
The Company accounts for multiple element arrangements that consist of software and software-related services, collectively referred to as “software elements,” in accordance with industry specific accounting guidance for software and software-related transactions. For such transactions, the Company generally allocates revenue to the software license by determining the fair value of the undelivered elements, which is usually maintenance support and professional services. The Company establishes vendor-specific objective evidence ("VSOE") of the fair value of the maintenance support based on the renewal price as stated in the agreement and as charged in the first optional renewal period under the arrangement. VSOE for professional services is determined based on an analysis of our historical daily rates when these professional services are sold separately from the software license.
For the Company's cloud offering with multiple element arrangements that include subscription and professional services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses the following hierarchy to determine the selling price to be used for allocating revenue to deliverables (a) vendor-specific objective evidence of fair value, (b) third-party evidence of selling price and (c) best estimate of the selling price. Best estimate of selling price reflects the Company’s estimates of what the selling prices of elements would be if they were sold on a stand-
BroadSoft, Inc.
Notes to Consolidated Financial Statements
alone basis. Factors considered by the Company in developing relative selling prices for products and services include the discounting practices, price lists, go-to-market strategy, historical standalone sales and contract prices.
Research and Development
Research and development expenses consist primarily of personnel and related expenses for the Company's research and development staff, including salaries, benefits, bonuses and stock-based compensation and the cost of certain third-party contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred.
Software Development Costs
Software development costs for software to be sold, leased or marketed that is incurred prior to the establishment of technological feasibility are expensed as incurred as research and development expense. Software development costs incurred subsequent to the establishment of technological feasibility, if any, are capitalized until the software is available for general release to customers. The Company has determined that technological feasibility has been established at approximately the same time as the general release of such software to customers. Therefore, to date, the Company has not capitalized any related software development costs.
Internal-Use Software Development Costs
The Company capitalizes costs associated with customized internal-use software systems that have reached the application development stage. Such capitalized costs include costs directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point the project is substantially complete and is ready for its intended purpose. Internal-use software is amortized on a straight-line basis over the estimated useful life. Costs incurred during the preliminary development stage, as well as maintenance and training costs, are expensed as incurred.
The Company capitalized $2.2 million and $1.9 million in internal-use software during the years ended December 31, 2015 and 2014, respectively. Capitalized internal-use software is included in property and equipment.
The Company recorded amortization expense related to these assets of approximately $1.5 million, $0.7 million and $0.2 million during the years ended December 31, 2015, 2014 and 2013, respectively.
Deferred Revenue
Deferred revenue represents amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue is expected to be recognized as revenue within 12 months from the balance sheet date.
Deferred revenue consists of the following (in thousands):
Cost of Revenue
Cost of revenue includes (a) royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, (b) direct costs to manufacture and distribute product, (c) direct costs to provide product support and professional support services, (d) direct costs associated with delivery of the Company's cloud offering and (e) amortization expense related to acquired intangible assets.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred amounts are expected to be settled or realized.
The Company currently has significant deferred tax assets, primarily resulting from net operating loss carryforwards, deferred revenue and stock-based compensation expense. The Company has a valuation allowance of approximately $0.3 million against its net deferred tax assets. Management weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure tax benefits when the realization of the benefits is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized. Income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed. If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.
Stock-Based Compensation
The Company applies the fair value method for determining the cost of stock-based compensation for employees, directors and consultants. Under this method, the total cost of a stock option grant is measured based on the estimated fair value of the stock option award at the date of the grant, using a binomial options pricing model, or binomial lattice model. The fair value of a restricted stock unit ("RSU") is based on the market value of the Company’s common stock on the date of grant. The fair value of a performance stock unit ("PSU") is based on the market price of the Company’s stock on the date of grant and assumes that the performance criteria will be met and the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the outcome of performance-related conditions until the award vests. The fair value of a performance stock unit with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock in relation to the target index of companies over each performance period. Compensation cost on performance shares with a market condition is not adjusted for subsequent changes regardless of the level of ultimate vesting. For service only awards, the total cost related to the portion of awards granted that is ultimately expected to vest is recognized as stock-based compensation expense on a straight-line basis over the requisite service period of the grant. For performance based awards, the total cost related to the portion of the awards granted that is ultimately expected to vest is recognized as stock-based compensation expense on a graded basis over the requisite service period of the grant.
Estimated Fair Value of Share-Based Payments
The binomial lattice model considers certain characteristics of fair value option pricing that are not considered under the Black-Scholes model. Stock-based awards are combined into one grouping for purposes of valuation assumptions. Fair value of the stock options was estimated at the grant date, using the following weighted average assumptions:
The Company has assumed no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities appropriate for the term of the Company’s employee stock options. The expected life of an option is derived from the binomial lattice model, and is based on several factors, including the contract
BroadSoft, Inc.
Notes to Consolidated Financial Statements
life, exercise factor, post-vesting termination rate and volatility. The expected exercise factor, which is the ratio of the fair value of common stock on the expected exercise date to the exercise price, and expected post-vesting termination rate, which is the expected rate at which employees are likely to terminate after vesting occurs, are based on an analysis of actual historical and expected behavior by option holders and analysis of comparable public companies. Expected volatility is based on the historical volatility of the Company and comparable public companies.
The Company’s estimate of pre-vesting forfeitures, or forfeiture rate, is based on an analysis of historical behavior by option holders. The estimated forfeiture rate is applied to the total estimated fair value of the awards, as derived from the binomial lattice model, to compute the stock-based compensation expense, net of pre-vesting forfeitures, to be recognized in the consolidated statements of operations.
Net Income Per Common Share
Basic net income per common share is computed based on the weighted average number of outstanding shares of common stock. Diluted income per common share adjusts the basic weighted average common shares outstanding for the potential dilution that could occur if stock options, RSUs and convertible securities were exercised or converted into common stock.
The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation. In the table below, net income represents the numerator and weighted average common shares outstanding represents the denominator:
Due to the cash settlement feature of the principal amount of the convertible senior notes, the Company only includes the impact of the premium feature in the diluted earnings per common share calculation when the average stock price exceeds the conversion price of the Notes, which did not occur during the years ended December 31, 2015, 2014 or 2013.
The weighted average number of shares outstanding used in the computation of diluted loss per share also does not include the effect of stock-based awards convertible into 1,203,399, 1,369,462 and 1,047,339 shares for the years ended December 31, 2015, 2014 and 2013, respectively, as their effect would have been anti-dilutive because their exercise prices exceeded the average market price of the Company's common stock during these years.
Foreign Currency
The functional currency of operations located outside the United States is the respective local currency. The financial statements of each operation are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenue and expenses. Translation effects are included in accumulated other comprehensive income.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASU 2014-09"), which supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard allows entities to apply either of two adoption methods: (a) retrospective application to
BroadSoft, Inc.
Notes to Consolidated Financial Statements
each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Topic 606 ("ASU 2015-14"), which defers the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of adopting this new standard on its financial statements and the method of adoption.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest-Imputation of Interest ("ASU 2015-03"), which provides updated guidance for accounting for debt issuance costs. The update is intended to simplify and standardize the presentation of debt issuance costs. ASU 2015-03 requires that the Company present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the treatment of debt discounts. The Company adopted the new guidance effective July 1, 2015 and reclassified its unamortized debt issuance costs from "other current assets" and "other long-term assets" to "convertible senior notes" on the consolidated balance sheets for all periods presented. The balances of unamortized debt issuance costs reclassified as of December 31, 2014 were $0.4 million and $1.0 million from other current assets and other long-term assets, respectively.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations: Topic 805 ("ASU 2015-16"), which provides updated guidance on recognizing adjustments to provisional amounts for items in a business combination. ASU 2015-16 requires that the Company recognize adjustments to provisional amounts during the reporting period in which the adjustment amounts are determined. The Company will adopt ASU 2015-16 upon its effective date, which is for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. The guidance will be applied prospectively.
In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes: Topic 740 ("ASU 2015-17"), which provides updated guidance for the presentation of deferred income taxes. ASU 2015-17 requires that the Company present deferred income taxes as non-current in the balance sheet. The Company adopted the new guidance effective December 31, 2015 and reclassified its current deferred tax assets and deferred tax liabilities to non-current on the consolidated balance sheet for all periods presented. The balances of current deferred tax assets and current deferred tax liabilities reclassified to non-current as of December 31, 2014 were $14.3 million and an immaterial amount, respectively.
Change in Accounting Principle - Stock-based Compensation
In the fourth quarter of 2015, the Company changed its policy for recognizing stock-based compensation expense for awards with service conditions only from the graded attribution method to the straight-line attribution method. Based on research and analysis, the Company believes the straight-line attribution method for stock-based compensation expense for service condition-only awards is the predominant method used in its industry. In order for the Company’s results of operations to be more comparable to its peers, it has concluded that the straight-line attribution method for stock-based compensation is a preferable accounting policy in accordance with ASC 250, Accounting Changes and Error Corrections. We have applied this change retrospectively adjusting all periods presented.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following tables present the effect of the change in accounting policy and its impact on key components of the Company’s consolidated financial statements (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
BroadSoft, Inc.
Notes to Consolidated Financial Statements
BroadSoft, Inc.
Notes to Consolidated Financial Statements
As a result of the change in accounting policy, additional paid-in capital and accumulated deficit as of January 1, 2013 decreased from $208.1 million and $44.1 million, respectively, as originally reported using the graded attribution method, to $199.8 million and $38.1 million, respectively, using the straight-line method.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
BroadSoft, Inc.
Notes to Consolidated Financial Statements
3. Acquisitions
mPortal Inc.
On June 3, 2015, the Company completed its acquisition of all of the stock of mPortal Inc. ("mPortal"), a professional services company, renamed BroadSoft Design, Inc. The acquisition enabled the Company to offer its customers the ability to deliver customizable UC experiences to a wide range of business end users. The total consideration paid for mPortal was $14.8 million. The Company funded the acquisition with $14.3 million of cash on hand and $0.5 million of restricted stock units. The Company incurred $0.7 million of transaction costs for financial advisory and legal services related to the acquisition that are included in general and administrative expenses as incurred, in the Company’s consolidated statements of operations for the year ended December 31, 2015.
The consolidated financial statements include the results of mPortal from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of June 3, 2015 (in thousands):
Customer relationships represent the fair value of the underlying relationships and agreements with mPortal customers. The customer relationships intangible asset is being amortized on a straight-line basis over a period of eight years, which in general reflects the cash flows generated.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $2.5 million was recorded as goodwill. The goodwill balance is attributable to the assembled workforce and the synergies expected
BroadSoft, Inc.
Notes to Consolidated Financial Statements
as a result of the acquisition. In accordance with U.S. GAAP, goodwill associated with this acquisition will not be amortized but will be tested for impairment on an annual basis. Goodwill associated with this acquisition is not deductible for tax purposes.
finocom AG
On December 16, 2013, the Company completed its acquisition of all outstanding shares of finocom AG ("finocom"), a provider of cloud-delivered IP-based communication services. The acquisition enabled the Company to extend its BroadCloud delivery platform to customers in Germany, and other select European markets. The total cash consideration paid for finocom was $9.7 million. The Company funded the acquisition with cash on hand. The Company incurred $0.5 million of transaction costs for financial advisory and legal services related to the acquisition that are included in general and administrative expenses as incurred, in the Company’s consolidated statements of operations for the year ended December 31, 2013.
The consolidated financial statements include the results of finocom from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of December 16, 2013 (in thousands):
The trade name represents the fair value of the finocom trade name that the Company intends to use for a fixed period of time. Customer relationships represent the fair value of the underlying relationships and agreements with finocom customers. Developed technology represents the fair value of finocom's intellectual property. The trade name, customer relationships and developed technology are being amortized on a straight-line basis over a period of seven years, eight years and five years, respectively, which in general reflects the cash flows generated from such assets. The weighted-average amortization period for depreciable intangible assets acquired is approximately seven years.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $5.7 million was recorded as goodwill. The goodwill balance is attributable to the assembled workforce and the expected synergies, including complementary products that enhance the Company's overall product portfolio. In accordance with U.S. GAAP, goodwill associated with this acquisition will not be amortized but will be tested for impairment on an annual basis. Goodwill associated with this acquisition is not deductible for tax purposes.
HIPCOM
On August 12, 2013, the Company completed its acquisition of all outstanding shares of Hosted IP Communications (Europe) Limited ("HIPCOM"), a provider of hosted business VoIP services. The acquisition enabled the Company to extend its BroadCloud delivery platform to customers in the United Kingdom, and other select European markets. The total cash consideration paid for HIPCOM was $26.3 million. The Company funded the acquisition with cash on hand. The Company incurred $0.5 million of transaction costs for financial advisory and legal services related to the acquisition that are included in general and administrative expenses as incurred, in the Company’s consolidated statements of operations for the year ended December 31, 2013.
The consolidated financial statements include the results of HIPCOM from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of August 12, 2013 (in thousands):
The trade name represents the fair value of the HIPCOM trade name that the Company intends to use for a fixed period of time. Customer relationships represent the fair value of the underlying relationships and agreements with HIPCOM customers. Developed technology represents the fair value of HIPCOM's intellectual property. The trade name, customer relationships and developed technology are being amortized on a straight-line basis over a period of one year, seven years and two years, respectively, which in general reflects the estimated cash flows to be generated from such assets. The weighted-average amortization period for depreciable intangible assets acquired is approximately six years.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $18.3 million was recorded as goodwill. The goodwill balance is attributable to the assembled workforce and the expected synergies, including complementary products that enhance the Company's overall product portfolio. In accordance with U.S. GAAP, goodwill associated with this acquisition will not be amortized but will be tested for impairment on an annual basis. Goodwill associated with this acquisition is not deductible for tax purposes.
Pro Forma Financial Information for Acquisitions of mPortal, finocom and HIPCOM (unaudited)
The businesses acquired in 2015 contributed aggregate revenue of $7.6 million and net losses of $0.8 million for the period from the relevant acquisition date to December 31, 2015. The businesses acquired in 2013 contributed aggregate revenue of $2.8 million and net losses of $0.3 million for the period from the acquisition date to December 31, 2013. The acquisitions the Company completed in 2014 were not considered to be material, individually or in the aggregate.
The unaudited pro forma statements of operations data below gives effect to the acquisitions as if they had occurred as of the beginning of the comparable prior annual reporting period. The following data includes adjustments for amortization of intangibles and acquisition costs. The pro forma information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had been in effect for the periods presented.
4. Goodwill and Intangibles
The Company has concluded it has a single reporting unit. Accordingly, on an annual basis management performs the impairment assessment required under FASB guidelines at the consolidated enterprise level. The Company performed an
BroadSoft, Inc.
Notes to Consolidated Financial Statements
impairment test of the Company’s goodwill and determined that no impairment of goodwill existed at December 31, 2015, 2014 or 2013.
The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):
For the year ended December 31, 2015, the increase in "goodwill related to acquisitions" consists of $3.3 million of goodwill related to the immaterial acquisition of a hosted voice over IP (VoIP) OSS provider in January 2015, $2.5 million of goodwill related to the acquisition of mPortal in June 2015 and $3.3 million of goodwill related to the immaterial acquisition of a cloud-based communications provider in Japan in November 2015. For the year ended December 31, 2014, the increase in "goodwill related to acquisitions" consists of $3.0 million of goodwill related to the immaterial acquisition of a software and services provider to the hospitality industry in August 2014.
The Company’s acquired intangible assets are subject to amortization. The following is a summary of intangible assets (in thousands):
Amortization expense on intangible assets was approximately $5.8 million, $5.4 million and $3.9 million in 2015, 2014 and 2013, respectively. In addition, in 2015, 2014 and 2013, the Company retired $5.9 million, $1.3 million and $1.1 million of fully amortized intangible assets, respectively, impacting both the gross carrying amount and accumulated amortization by this amount. As of December 31, 2015, future amortization expense on intangible assets is expected to be as follows (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
5. Property and Equipment
Property and equipment consists of the following (in thousands):
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2015, 2014 and 2013 was approximately $9.8 million, $7.0 million and $3.9 million, respectively.
6. Accounts payable and other current liabilities
Accounts payable and other current liabilities consist of the following (in thousands):
7. Software Licenses
The Company has entered into an agreement with a third-party that provides the Company the right to distribute its software on an unlimited basis through May 2016. In May 2015, the Company amended this agreement to extend the term of the agreement from May 2016 to December 2020.
For the period from June 2012 to May 2016, the Company has a fixed cost associated with these distribution rights of $10.2 million, which is being amortized to cost of revenue over the four-year period beginning in June 2012, based on the straight line method.
For the period from June 2016 to December 2020, the Company will have a fixed cost associated with these distribution rights of $17.3 million, and to the extent annual billed license software revenue over the extended term exceeds $850 million, the Company would be required to pay additional fees. The cost of $17.3 million will be amortized to cost of revenue over the extended term beginning June 2016 (the expiration date of the previous agreement), based on the straight line method.
Amortization expense related to these agreements was approximately $2.6 million, $2.6 million and $2.6 million for each of the years ended December 31, 2015, 2014 and 2013, respectively.
8. Income Taxes
The following table presents the components of the income before income taxes and the provision for (benefit from) income taxes (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table presents the components of net deferred tax assets (liabilities) and the related valuation allowance (in thousands):
The Company has $35.9 million and $39.2 million of U.S. net operating loss carryforwards as of December 31, 2015 and 2014, respectively. Additionally, the Company has $11.1 million and $6.0 million of tax credit carryforwards for tax return purposes as of December 31, 2015 and 2014, respectively. The U.S. net operating loss and tax credit carryforwards are scheduled to begin to expire in 2018 and 2019, respectively.
The Company has excluded certain U.S. net operating loss carryforwards from the calculation of deferred tax assets presented above, as they represent excess stock option deductions that do not reduce the Company’s income taxes payable. The excess tax benefits associated with stock option exercises and restricted stock vesting are recorded directly to stock holders equity when
BroadSoft, Inc.
Notes to Consolidated Financial Statements
realized. The Company uses a “with-and-without” method to determine the tax benefit realized from excess stock option deductions under the FASB's updated authoritative guidance on share-based payments. Accordingly, the Company recognizes the benefits of carryforwards in the following order: (a) net operating losses from items other than excess stock option deductions; (b) other tax credit carryforwards from items other than excess stock option deductions; and (c) net operating losses from excess stock option deductions. The amount of excess tax benefits not included in the deferred tax assets were $17.9 million and $16.7 million as of December 31, 2015 and 2014, respectively. As of December 31, 2015, the excess tax benefits not recognized are related to net operating losses of $35.9 million (tax effect of $13.9 million), foreign tax credits of $2.5 million and research and development tax credits of $1.5 million. The tax effect of these unrealized excess tax benefits, when realized in the future, will result in an increase to additional paid-in capital rather than a reduction to the results of operations.
Utilization of net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations as provided by the Internal Revenue Code of 1986, as amended. The Company has not recorded a deferred tax liability for undistributed earnings of $8.8 million of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company would be subject to federal income and foreign withholding taxes. Determination of an unrecognized deferred income tax liability with respect to such earnings is not practicable.
A deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The accounting guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies.
As of December 31, 2015, the Company has a remaining valuation allowance of approximately $0.3 million, which primarily relates to certain foreign NOLs and capital losses that are not more likely than not to be realized. The Company will continue to evaluate the need for a valuation allowance in foreign jurisdictions and may remove the valuation allowance in subsequent periods, which may have an impact on the results of operations.
The following table presents the provisions for income taxes compared with income taxes based on the federal statutory tax rate of 35% (in thousands):
The Company has separately disclosed the tax effect of items in excess of $0.2 million.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Accounting for Uncertainty in Income Taxes
The Company applies guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits the Company to recognize a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is more likely than not to be realized upon settlement.
During the year ended December 31, 2013, the Company's unrecognized income tax benefits increased primarily due to tax exposures in certain foreign jurisdictions. Such exposures, if realized, would be offset by foreign tax credits in the U.S. During the years ended December 31, 2014 and 2012, there was no material adjustment in the liability for unrecognized income tax benefits and no new material tax positions for which the tax benefit was not recognized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
The Company records interest and penalties as a component of its income tax provision. The Company recorded interest and penalties of $0.1 million for the year ended December 31, 2015 and 2013. The Company had not accrued interest with respect to uncertain tax positions in the prior years because unfavorable resolution of those positions would not result in cash tax due for those prior years.
The Company files income tax returns in the United States and in various foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations for years prior to 2010, with the exception that operating loss or tax credit carryforwards generated prior to 2009 may be subject to tax audit adjustment. The Company is no longer subject to state and local or foreign income tax examinations by tax authorities for years prior to 2008.
9. Borrowings
2022 Convertible Senior Notes
In September 2015, the Company issued $201.3 million aggregate principal amount of 1.00% convertible senior notes due in 2022 (the “2022 Notes”). The 2022 Notes are general unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.00% per annum, and will mature on September 1, 2022, unless earlier converted, redeemed or repurchased.
The 2022 Notes may be converted by the holders at their option on any day prior to the close of business on the business day immediately preceding June 1, 2022 only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on December 31, 2015 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (b) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price, as defined in the indenture governing the 2022 Notes (the "2022 Indenture"), per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (c) if the Company calls any or all of the 2022 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the relevant redemption date; or (d) upon the occurrence of specified corporate events. The 2022 Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, June 1, 2022 through the second scheduled trading day immediately preceding the maturity date.
The initial conversion rate for the 2022 Notes is 25.8249 shares of the Company’s common stock per $1,000 principal amount of 2022 Notes, equivalent to a conversion price of approximately $38.72 per share of common stock. The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption on or after September 1, 2019 as described below, the Company will increase the conversion rate for a holder who elects to convert its 2022 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Upon
BroadSoft, Inc.
Notes to Consolidated Financial Statements
conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. It is the Company's current intent to settle conversions through combination settlement with a specified dollar amount per $1,000 principal amount of 2022 Notes of $1,000. While the 2022 Notes were not convertible as of December 31, 2015, if the 2022 Notes were convertible, no shares would have been distributed upon conversion because the conversion price was above the stock price as of such date.
Holders of the 2022 Notes may require the Company to repurchase some or all of the 2022 Notes for cash upon a fundamental change, as defined in the 2022 Indenture, at a repurchase price equal to 100% of the principal amount of the 2022 Notes being repurchased, plus any accrued and unpaid interest up to, but excluding, the relevant repurchase date.
The Company may not redeem the 2022 Notes prior to September 1, 2019. Beginning September 1, 2019, the Company may redeem for cash all or a portion of the 2022 Notes, at the Company's option, if the last reported sale price of the common stock is equal to or greater than 140% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2022 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2022 Notes.
The Company has separately accounted for the liability and equity components of the convertible debt instrument by allocating the gross proceeds from the issuance of the 2022 Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate, estimated at 7.4%, was used to compute the initial fair value of the liability component of $131.3 million. The excess of the gross proceeds received from the issuance of the 2022 Notes over the initial amount allocated to the liability component of $70.0 million was allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and will be subsequently amortized as interest expense, using the interest method, through September 2022, the maturity date of the 2022 Notes. Offering costs, consisting of the initial purchasers’ discount and offering expenses payable by the Company, were $6.4 million. These offering costs were allocated to the liability component and the equity component based on the relative valuations of such components. As a result, $4.2 million of the offering costs were classified as debt issuance costs and recorded on the balance sheet as a deduction from the carrying amount of the 2022 Notes liability. The remaining $2.2 million of offering costs were allocated to the equity component.
The fair value of the 2022 Notes as of December 31, 2015 was $221.1 million. The carrying amount of the equity component of the 2022 Notes was $67.6 million at December 31, 2015. The unamortized offering costs classified as debt issuance costs and recorded as a direct deduction to the carrying amount of the debt liability at December 31, 2015 were $4.0 million, which are being amortized as interest expense through the September 2022 maturity date of the 2022 Notes.
2018 Convertible Senior Notes
In June 2011, the Company issued $120.0 million aggregate principal amount of 1.50% convertible senior notes due in 2018 (the “2018 Notes”). The 2018 Notes are senior unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.
The 2018 Notes may be converted by the holders at their option on any day prior to the close of business on the scheduled trading day immediately preceding April 1, 2018 only under the following circumstances: (a) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of the common stock and the applicable conversion rate on each such day; (b) during any calendar quarter (and only during such quarter) after the calendar quarter ended September 30, 2011, if the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (c) upon the occurrence of specified corporate events; or (d) if the Company calls the 2018 Notes for redemption. The 2018 Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, April 1, 2018 through the second scheduled trading day immediately preceding the maturity date.
The initial conversion rate for the 2018 Notes is 23.8126 shares of the Company’s common stock per $1,000 principal amount of 2018 Notes, equivalent to a conversion price of approximately $41.99 per share of the common stock. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make-whole fundamental change, as defined in the indenture governing the 2018 Notes (the “2018 Indenture”), occurs prior to the maturity date, the Company will in some cases increase the conversion rate for a holder that elects to convert its 2018 Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2018 Notes to be converted and deliver shares of the common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the 2018 Notes being converted. While the 2018
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Notes were not convertible as of December 31, 2015, if the 2018 Notes were convertible, no shares would have been distributed upon conversion because the conversion price was above the stock price as of such date.
Holders of the 2018 Notes may require the Company to repurchase some or all of the 2018 Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the 2018 Indenture, at a repurchase price equal to 100% of the principal amount of the 2018 Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date.
The Company may not redeem the 2018 Notes prior to July 1, 2015. Beginning July 1, 2015, the Company may redeem for cash all or part of the 2018 Notes (except for the 2018 Notes that the Company is required to repurchase as described above) if the last reported sale price of the common stock exceeds 140% of the applicable conversion price for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice. The redemption price will equal the sum of 100% of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all 2018 Notes called for redemption prior to the maturity date, including 2018 Notes converted after the date the Company delivered the notice of redemption.
The Company has separately accounted for the liability and equity components of the convertible debt instrument by allocating the gross proceeds from the issuance of the 2018 Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate, estimated at 8%, was used to compute the initial fair value of the liability component of $79.4 million. The excess of the gross proceeds received from the issuance of the 2018 Notes over the initial amount allocated to the liability component of $40.6 million, was allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and subsequently amortized as interest expense, using the effective interest method, through July 2018, the maturity date of the 2018 Notes. Offering costs, consisting of the initial purchasers’ discount and offering expenses payable by the Company, were $4.3 million. These offering costs were allocated to the liability component and the equity component based on the relative valuations of such components. As a result, $2.9 million of the offering costs were classified as debt issuance costs and recorded on the balance sheet as a deduction from the carrying amount of the 2018 Notes liability. The remaining $1.4 million of offering costs were allocated to the equity component.
Concurrently with the closing of the 2022 Notes offering, the Company repurchased $50.9 million principal amount of the 2018 Notes in privately negotiated transactions for an aggregate purchase price of $53.4 million. The Company recorded an extinguishment loss of $4.2 million on the repurchase, including $0.5 million associated with unamortized issuance costs. This loss was recorded in other expense within the consolidated statement of operations. The remaining purchase price was allocated between the liability component and the equity component based upon the fair value of the debt immediately prior to the repurchase at $42.4 million and $6.8 million, respectively.
The fair value of the 2018 Notes as of December 31, 2015 and 2014 was $75.3 million and $125.1 million, respectively. The carrying amount of the equity component of the Notes was $9.5 million at December 31, 2015. The unamortized offering costs at December 31, 2015 were $0.6 million which are being amortized as interest expense through the July 2018 maturity date of the Notes.
The following table shows the amounts recorded within the Company’s financial statements with respect to the combined 2022 Notes and 2018 Notes (collectively, the "Notes") (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table presents the interest expense recognized related to the Notes (in thousands):
The net proceeds from the 2018 Note and 2022 Note offerings were approximately $115.7 million and $194.8 million, respectively, after deducting discounts to the initial purchasers and offering expenses payable by the Company.
Fair Value of Borrowings
Fair value for the Company’s borrowings is estimated using quoted market price of the Notes at December 31, 2015 and 2014, quoted market prices for similar instruments and by observable market data. The Company believes its creditworthiness and the financial market in which it operates has not materially changed since entering into the arrangements. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
The aggregate maturities of borrowings as of December 31, 2015 were as follows (in thousands):
Installment Bank Loans
In connection with the acquisition of Movial Applications Oy in October 2011, the Company assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, which loans were repaid in full by the Company during 2013. The loans were governed by the Finnish Act on State Lending and State Guarantees, Government Decree on Research, Development and Innovation Funding and were used to fund approved research and development projects. The repayment terms were determined on a per project basis and the interest rate on each loan was variable, with the interest rate equal to three percent at the time of repayment.
10. Stockholders’ Equity
Preferred Stock
Pursuant to the Company’s amended and restated certificate of incorporation filed on June 21, 2010, the Company is authorized to issue 5,000,000 shares of preferred stock. The board of directors has the authority, without action by its stockholders, to designate and issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, preventing or deterring a change in control. To date, the board of directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock have been issued.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
11. Stock-based Compensation
Equity Incentive Plans
In 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Plan”). The 1999 Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights. The 1999 Plan terminated in June 2009 whereby no new options or awards are permitted to be granted. In April 2009, the Company adopted the 2009 Equity Incentive Plan. This plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, RSUs and stock appreciation rights. In June 2010, the 2009 Equity Incentive Plan was amended and restated to provide for, among other things, annual increases in the share reserve (as amended and restated, the “2009 Plan”).
The term of stock-based grants is up to ten years, except that certain stock-based grants made after 2005 have a term of five years. For grants made under the 2009 Plan prior to January 1, 2015, the requisite vesting period is typically four years and for grants made subsequent to January 1, 2015, the requisite vesting period is typically three years. On each of January 1, 2014 and 2015, 1,250,000 shares were added to the 2009 Plan. At December 31, 2015, the Company had 917,388 shares of common stock available for issuance under the 2009 Plan.
Stock-based compensation expense recognized by the Company is as follows (in thousands):
Stock Options
The following table presents a summary related to stock options for the following periods:
In 2015, 2014 and 2013, the Company granted stock options with a weighted-average grant date fair value of $15.75, $12.91 and $18.09, respectively. The intrinsic value of stock options exercised in 2015, 2014 and 2013 was $5.2 million, $1.6 million and $5.0 million, respectively, and cash received from stock options exercised was $6.2 million, $0.7 million and $1.3 million, respectively.
At December 31, 2015, unrecognized stock-based compensation expense, net of estimated forfeitures, relating to unvested stock options was $14.0 million which amount is scheduled to be recognized as stock-based compensation expense over a weighted average period of 2.2 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at December 31, 2015, stock-based compensation expense will be different from expectations.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Restricted Stock Units
The following table presents a summary of activity for RSUs (excluding RSUs that are subject to performance-based vesting conditions (“PSUs”)):
The RSUs generally vest over three or four years from the vesting commencement date and on vesting the holder receives one share of common stock for each RSU.
At December 31, 2015, unrecognized stock-based compensation expense related to unvested RSUs was $42.1 million, which is scheduled to be recognized over a weighted average period of 1.83 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at December 31, 2015, stock-based compensation expense will be different from expectations.
Performance Stock Units
The following table presents a summary of activity for PSUs:
The PSUs generally vest over three or four years from the vesting commencement date, subject to the satisfaction of certain performance conditions, and on vesting the holder receives one share of common stock for each PSU.
During 2014, the Company granted an aggregate of 205,088 PSUs to certain employees hired in connection with an acquisition. These PSUs vest over a period of three years, subject to the satisfaction of certain financial performance conditions related to the business acquired by the Company.
At December 31, 2015, unrecognized stock-based compensation expense related to unvested PSUs was $0.8 million, which is scheduled to be recognized over a weighted average period of 0.93 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at December 31, 2015, stock-based compensation expense will be different from expectations.
Tax Benefits
Upon adoption of the FASB’s guidance on stock-based compensation, the Company elected the alternative transition method (short cut method) provided for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows related to the tax effect of employee stock-based compensation awards that are outstanding upon adoption. As of December 31, 2015, the Company’s APIC pool balance was $10.7 million.
The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls)
BroadSoft, Inc.
Notes to Consolidated Financial Statements
included in net operating loss carryforwards but not reflected in deferred tax assets for the years ended December 31, 2015 and 2014 are $50.4 million and $49.9 million, respectively.
12. Commitments and Contingencies
Leases
The Company leases office space under non-cancelable operating leases with various expiration dates through 2024. Rent expense was approximately $4.7 million, $3.6 million and $3.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The following table presents future minimum lease payments under the non-cancelable operating leases (in thousands):
Indemnifications and Contingencies
In the normal course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any claims related to indemnification obligations to date.
In accordance with its bylaws and certain agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date under these indemnification obligations.
In addition, the Company is involved in litigation incidental to the conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible to have a material adverse effect on its financial position, results of operations or cash flows.
13. Segment and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis, along with information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Discrete information on a geographic basis, except for revenue, is not provided below the consolidated level to the CEO. The Company has concluded that it operates in one segment and has provided the required enterprise-wide disclosures.
Revenue by geographic area is based on the location of the end-user carrier. The following table presents revenue and long-lived assets, net, by geographic area (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
14. 401(k) Defined Contribution Plan
The Company maintains a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. The Company has a 401(k) plan covering all eligible employees. Beginning January 1, 2012, the Company matches a portion of the employees’ eligible contributions according to the 401(k) plan document. Matching contributions to the plan during the years ended December 31, 2015, 2014 and 2013 were $3.0 million, $2.0 million and $1.8 million, respectively.
15. Quarterly Financial Data (Unaudited) (in thousands, except per share data):
16. Subsequent Event
BroadSoft, Inc.
Notes to Consolidated Financial Statements
In February 2016, the Company completed its acquisition of all of the stock of Transera Communications, Inc. ("Transera"), a provider of cloud-based contact center software. The acquisition enables the Company to enhance its call center capabilities. The total consideration paid for Transera was $19.8 million. The Company is in the process of gathering information to prepare the purchase price allocation and accordingly has not presented here.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or 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 procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). We assessed the effectiveness of our internal control over financial reporting as of December 31, 2015, using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based upon this assessment, our management concluded that, as of December 31, 2015, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, which appears on page 59 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
Not applicable.
PART III
We will file a definitive Proxy Statement for our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2016 Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from our 2016 Proxy Statement under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
The information required by Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from our 2016 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from our 2016 Proxy Statement under the captions “Transactions with Related Persons” and “Independence of the Board of Directors.”
Item 14.
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from our 2016 Proxy Statement under the caption “Independent Registered Public Accounting Firm Fees.”
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a) Financial Statements
The financial statements filed as part of this report are listed on the index to financial statements on page 59.
(b) Financial Statement Schedule
The following financial statement schedule is filed as a part of this Annual Report on Form 10-K.
SCHEDULE II-CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
_______________________
(1)
Amount represents charges to bad debt and increase to or (release of) our valuation allowance.
(2)
Amount represents recoveries of accounts receivable previously charged to the allowance and utilization of net operating losses against the valuation allowance.
(c) Exhibits
The following exhibits are incorporated by reference or filed herewith.
See Exhibit Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Exhibit Index
(1)
Filed as exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 25, 2010 and incorporated herein by reference.
(2)
Filed as exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on November 20, 2013 and incorporated herein by reference.
(3)
Filed as exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on June 1, 2010 and incorporated herein by reference.
(4)
Filed as exhibit 4.5 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(5)
Filed as exhibit 4.6 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(6)
Filed as exhibit 4.7 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(7)
Filed as exhibit 4.8 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(8)
Filed as exhibit 4.9 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on April 16, 2010 and incorporated herein by reference.
(9)
Filed as exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 21, 2011 and incorporated by reference herein.
(10)
Filed as exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 21, 2011 and incorporated by reference herein.
(11)
Filed as exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on September 15, 2015 and incorporated by reference herein.
(12)
Filed as exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on September 15, 2015 and incorporated by reference herein.
(13)
Filed as exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(14)
Filed as exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(15)
Filed as exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(16)
Filed as exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2011 and incorporated by reference herein.
(17)
Filed as exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on June 1, 2010 and incorporated herein by reference.
(18)
Filed as exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on June 1, 2010 and incorporated herein by reference.
(19)
Filed as exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(20)
Filed as exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(21)
Filed as exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(22)
Filed as exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on April 16, 2010 and incorporated herein by reference.
(23)
Previously filed, with certain portions redacted pursuant to a confidential treatment request, as exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2015.
(24)
Previously filed, with certain portions redacted pursuant to a confidential treatment request, as exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 4, 2015.
(25)
Filed as exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2015 and incorporated by reference herein.
*
Denotes management compensation plan or arrangement.
^
Confidential treatment has been granted with respect to certain portions of this exhibit. A complete copy of the document, including the redacted portions, has been filed separately with the SEC.