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; Belfast, Northern Ireland; Crawley, United Kingdom; Chennai, India; Madrid, Spain; Montreal, Canada; Paris, France; Seoul, South Korea; Sydney, Australia; Warsaw, Poland; London, England; Tokyo, Japan; Sophia, Bulgaria; Cologne, Germany; 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 has been listed on the NASDAQ Global Select Market since January 3, 2012 and prior thereto was listed on the NASDAQ Global Market, under the symbol “BSFT”. Prior to our IPO on June 16, 2010, there was no public market for our common stock.
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 20, 2014, there were 27 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 June 16, 2010 (the date of our IPO) and December 31, 2013, with the comparative cumulative total return of such amount on (i) the NASDAQ Telecommunications Index and (ii) 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 graph assumes our closing sales price on June 16, 2010 of $8.30 per share as the initial value of our common stock.
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, 2013, 2012 and 2011 and as of December 31, 2013 and 2012 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, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 from audited financial statements that are not included in this Annual Report on Form 10-K. 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 mobile, fixed-line and cable service providers to deliver hosted, or cloud-based, Unified Communications and other voice and multimedia services over their Internet protocol, or IP, based networks. Our core communications platform consists of three offerings: BroadWorks, BroadCloud and BroadTouch.
We began selling BroadWorks in 2001. Over 600 service providers in more than 76 countries have purchased and/or are delivering services utilizing our software, including 19 of the top 25 telecommunications service providers globally, as measured by revenue for the year ended December 31, 2012. We sell our products to service providers both directly and indirectly through distribution partners, such as telecommunications equipment vendors, VARs and other distributors.
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.
In 2013, we saw the continuation of the trend towards cloud-based and hosted communications by service providers and others. In 2014, we believe this trend will continue and possibly accelerate, as service providers further seek speed and flexibility for the delivery of communications services. Our goal 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. As a result, in 2014, we will continue our strategic investments in research and development of existing and new products, including client software and cloud-based services, as well as in sales and marketing headcount to support our product offerings and increase our go-to-market efforts. We increased our hiring in 2013, adding approximately 114 employees, and expect to continue to grow in 2014.
BroadCloud PBX, our cloud-based PBX offering, is a particularly key area of investment focus for us. We believe that 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, reducing cost and increasing speed and ease of use for end-users. Accordingly, in 2013, we increased our investment in BroadCloud PBX, including through the acquisition of Hosted IP Communications (Europe) Limited, located in the United Kingdom, and finocom AG, located in Germany. In 2014, we expect that we will continue to invest in, and expand the availability of, BroadCloud PBX in the UK, Germany and other select European markets. We believe that delivering innovative solutions to our existing customer base to meet their growing cloud-based needs will help service providers get to market more quickly and drive our revenue growth.
We believe converged and mobile operators desire UC solutions to deliver to their enterprise customer base to raise average revenue per user. Our UC-One functionality, which is either delivered via a cloud-based platform managed by us or via server software that resides within the service provider’s network, seeks to address this evolution and allows service providers and operators 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. In addition, we have announced a significant expansion in the video calling and video conferencing capabilities of our offerings.
Recognizing the importance of mobile applications and the growing desire for end-users for seamless communications wherever they are, across a wide range of devices, we have architected mobility into our solutions and products and have made integrating with existing mobile networks simple and a core competency of our platform. We have optimized our client, cloud and software solutions to enable mobility in all of our services, across a wide range of personal and/or business devices.
During 2013, our UC and Trunking solutions experienced strong growth, while our consumer fixed line broadband applications showed a decline in sales. We believe our UC solutions growth was largely driven by increased market acceptance of hosted Unified Communications offerings and our SIP Trunking offerings growth from the move by service provider customers to IP-based trunks. We expect the decrease in consumer fixed line broadband applications will continue in 2014.
We also believe that the migration of wireless networks to VoLTE (voice over LTE) could drive significant growth for us over the next several years, although we think the impact in 2014 will be modest. We believe we are well-positioned to meet carrier demand for VoLTE-based UC and consumer solutions, especially with regard to our UC offerings for VoLTE. We executed our first agreements with service providers for VoLTE consumer and enterprise opportunities in 2013 and expect to execute additional agreements in 2014 to support VoLTE offerings by our service provider customers.
Management also analyzes trends of billings from existing customers relative to billings from new customers as we believe billings are a key indicator of growth and performance of our business and reflect the level of selling activity in any particular time frame. Indeed, we saw considerable growth in billings during the fourth quarter of 2013. In 2013, we saw continued growth in revenue and billings from our existing customer base, driven by both the growth of existing BroadWorks-based
applications, deployment of new BroadWorks applications and the adoption of BroadCloud PBX. Due to our current market penetration among service providers globally, growth from the acquisition of new customers was lower in 2013 and we expect this trend to continue in 2014. We have increasingly focused our selling efforts on our existing customers by, for example, increasing our go-to-market assistance to such service providers to help them accelerate the sale of UC offerings to their end-users.
Key Financial Highlights
Some of our key GAAP financial highlights for the year ended December 31, 2013 include:
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Total revenue increased by 8%, or $13.7 million, to $178.5 million, compared to $164.8 million for 2012;
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Gross profit increased to $137.1 million, or 77% of revenue, compared to $132.4 million, or 80% of revenue for 2012;
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Loss from operations was $7.3 million, compared to income from operations of $25.4 million for 2012;
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Net loss was $8.9 million, compared to net income of $12.1 million for 2012;
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Net loss per diluted share was $0.32 per share compared to net income per diluted share of $0.43 per share for 2012;
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Revenue plus net change in deferred revenue increased by 15% to $195.0 million, compared to $168.9 million for 2012;
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Deferred revenue increased $16.5 million, compared to an increase of $4.0 million for 2012; and
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Cash provided by operating activities was $31.9 million, compared to $30.0 million for 2012.
Some of our key non-GAAP financial highlights for the year ended December 31, 2013 include:
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Non-GAAP gross profit increased to $145.9 million, or 82% of revenue, compared to $136.8 million, or 83% of revenue in 2012;
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Non-GAAP income from operations was $38.2 million, or 21% of total revenue, compared to $43.1 million, or 26% of total revenue, in 2012;
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Non-GAAP net income was $36.0 million, compared to $40.9 million in 2012; and
•
Non-GAAP net income per diluted share was $1.22 per common share, compared to $1.44 per common share in 2012.
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 the sale of license software, subscription and maintenance support, and professional services. 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 from the sale of perpetual software licenses. We generally price our software based on the types 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 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, we cannot 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, 2013, our deferred license software revenue balance was $20.1 million, the current portion of which was $19.4 million.
Subscription and maintenance support. Subscription and maintenance support revenue includes recurring revenue from annual maintenance support contracts for our software licenses and, to a much lesser extent, from subscriptions related to our delivery of BroadCloud services.
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 an annual maintenance contract to continue receiving ongoing software maintenance and customer 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 subscription and maintenance support orders that do not meet all the criteria for revenue recognition. As of December 31, 2013, our deferred subscription and maintenance support revenue balance was $47.0 million, the current portion of which was $41.4 million.
Professional services and other. Professional services and other revenue primarily includes revenue from professional service engagements consisting of implementation, training and consulting 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, 2013, our deferred professional services and other revenue balance was $10.5 million, the current portion of which was $10.5 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 technology, 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 and stock-based compensation. Such costs are expensed in the period in which they are incurred.
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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 the support and maintenance of our software licenses and BroadCloud services, including maintenance and support expenses due to our use of third party software, amortization of acquired technology 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.
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:
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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.
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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 the 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.
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Impact of deferred revenue. If any revenue recognition criteria has 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 because we are not able to predict 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.
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Intangible amortization related to mergers and acquisitions. Over the last several years, we acquired a number of businesses which resulted in the recognition of intangible 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 we recognize 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
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 grew our total headcount to 725 employees at December 31, 2013 from 611 employees at December 31, 2012, and we expect to continue to hire new employees to support our anticipated growth.
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. We expect our sales and marketing expenses to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. We expect sales and marketing expenses to increase in the foreseeable future. In 2013, sales and marketing expenses grew as a percentage of revenue compared with 2012; however we expect that in 2014, sales and marketing expenses will decrease as a percentage of total revenue.
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 outside 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. We expect research and development expenses to increase in the foreseeable future. In 2013, research and development grew as a percentage of revenue compared with 2012; however we expect that in 2014, research and development expenses will decrease as a percentage of total revenue.
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 corporate expenses. We expect general and administrative expenses to increase in the foreseeable future. In 2013, general and administrative expenses grew as a percentage of revenue compared with 2012; however we expect that in 2014, general and administrative expenses will decrease as a percentage of total revenue.
Stock-Based Compensation
We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant of stock options and other equity awards to our directors, employees and consultants. Historically, stock-based compensation has been the fastest growing component of our employee-related expenses. 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 is then recognized as stock-based compensation expense over the requisite service period, which is the vesting period, of the award. For the years ended December 31, 2013, 2012 and 2011, we recorded stock-based compensation expense of $41.7 million, $15.0 million and $7.2 million, respectively.
Based on stock options and other equity awards outstanding as of December 31, 2013, we expect to recognize future expense related to the non-vested portions of such options and other equity awards in the amount of $38.3 million over a weighted average period of approximately 1.35 years.
Other Expense (Income), Net
Other expense (income), net consists primarily of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest related to our 1.50% convertible senior notes due in 2018, or Notes, the five installment loans with Tekes that were paid in full in September 2013 and an installment bank loan with Bank of America Leasing and Capital, LLC, or Bank of America, that was paid in full in March 2012.
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 U.S. federal income taxes due to our accumulated net operating losses. For the years ended December 31, 2013 and 2012, we have net operating loss carryforwards to utilize in the U.S. For the year ended December 31, 2011, we paid alternative minimum tax in the U.S. due to the taxable income generated in the period.
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 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 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 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-deliverables that generally include subscription and professional services. To treat deliverables in a multiple-deliverable 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-deliverables 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 a deliverable 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
Revenue from professional services is typically recognized as services are performed. 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:
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a significant adverse change in our business climate;
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unanticipated competition;
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a loss of key personnel;
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a more likely than not expectation that a significant portion of our business will be sold; or
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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 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 the results of our annual goodwill impairment testing, there was no indication of impairment as of December 31, 2013, 2012 or 2011. 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, 2013, 2012 or 2011.
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. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. 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. 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, 2013, 2012 or 2011.
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.
Based upon our cumulative operating results through June 30, 2011 and an assessment of our expected future results of operations, we determined that there was significant positive evidence regarding the realization of our U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing our core products and services both inside and outside the U.S., we believe that it is more likely than not that our U.S. deferred tax assets will be realized. A portion of the U.S. valuation allowance was released in the period ended June 30, 2011 based on the amount of U.S. net deferred tax assets then expected to be remaining as of December 31, 2011. As of December 31, 2011, we reversed all of the remaining valuation allowance on the U.S. deferred tax assets because it was more likely than not that those deferred tax assets would be realized. The release of the U.S. valuation allowance was recorded as a tax benefit on our consolidated statements of operations for 2011. As of December 31, 2013 and 2012, we had a remaining valuation allowance of approximately $3.3 million and $5.6 million, respectively, which primarily relates to certain foreign NOLs and tax credits that more likely than not will not be 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, 2013 and 2012
Revenue
Total revenue for 2013 increased by 8%, or $13.7 million, to $178.5 million, compared to 2012. This growth was driven by a 5% increase in license software revenue and a 19% increase in subscription and maintenance support revenue, partially offset by a 13% decrease in professional services and other revenue. Deferred revenue increased by $16.5 million for 2013, compared to an increase of $4.0 million in 2012.
Total revenue from the Americas for 2013 increased by 5%, or $5.8 million, to $113.3 million compared to 2012. The increase in revenue from the Americas for 2013 was due to growth in subscription revenue associated with our BroadCloud offerings and maintenance support revenue. In Europe, Middle East and Africa, or EMEA, total revenue for 2013 increased by 12%, or $4.9 million, to $44.2 million compared to 2012. The increase in EMEA revenue in 2013 was primarily due to growth in maintenance support revenue due to an increase in software sales and subscription revenue from recent acquisitions, partially offset by a decrease in professional service revenue. In Asia Pacific, or APAC, total revenue for 2013 increased by 17%, or $3.0 million, to $21.0 million compared to 2012. The increase in APAC revenue was primarily due to the growth in software license revenue, partially offset by a decrease in professional services revenue.
License Software
License software revenue for 2013 increased by 5%, or $4.7 million, to $94.4 million. The increase in revenue for 2013 was primarily related to growth in hosted UC software license revenue, as well as growth in SIP Trunking software license revenue, partially offset by a decrease in consumer applications software license revenue. Deferred license software revenue increased by $1.8 million in 2013, compared to a decrease of $2.2 million in 2012.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2013 increased by 19%, or $11.1 million, to $69.4 million, compared to 2012. The increase in subscription and maintenance support revenue was the result of growth in our subscription revenue associated with our BroadCloud platform, which included contributions from recent acquisitions and growth in the installed base of customers who purchase maintenance support. Deferred subscription and maintenance support revenue increased by $11.3 million in 2013, compared to an increase of $6.4 million in 2012.
Professional Services and Other
Professional services and other revenue for 2013 decreased by 13%, or $2.1 million, to $14.7 million, compared to 2012. The decrease in professional services and other revenue for 2013 was primarily due to the timing of revenue recognition on orders. Deferred professional services and other revenue increased by $3.5 million in 2013, compared to remaining approximately unchanged in 2012.
Cost of Revenue and Gross Profit
For 2013, our gross margin decreased to 77% as compared to 80% in 2012 and our gross profit increased by 4%, or $4.8 million, to $137.1 million. We experienced an increase in both license software revenue gross profit and subscription and maintenance support gross profit, offset by a decrease in professional services and other gross profit for 2013. The total gross profit growth is primarily due to growth in license software and subscription and maintenance support revenue relative to the respective cost of revenue.
For 2013, license software gross margin remained approximately unchanged at 90% compared to 2012 and license software gross profit increased by 5% to $85.2 million. License software cost of revenue increased by 7%, or $0.6 million, to $9.2 million for 2013. This increase was primarily due to a $0.8 million increase in personnel-related costs driven by an increase in headcount and compensation increases, of which $0.5 million related to stock-based compensation expense. The increase in license software gross profit was driven by revenue growth relative to lower growth in license software cost of revenue.
For 2013, subscription and maintenance services gross margin decreased to 69% as compared to 75% in 2012 and subscription and maintenance services gross profit increased by 11% to $48.0 million. Subscription and maintenance services cost of revenue increased by 44%, or $6.5 million, to $21.4 million in 2013 as compared to 2012. The increase in subscription and maintenance services cost of revenue was primarily due to an increase of $4.0 million in personnel-related costs driven by an increase in headcount and compensation increases, of which $1.8 million related to stock-based compensation expense. The increase in headcount was reflective of our continued investment in our product offerings, primarily investment in our BroadCloud offering, which includes the impact of the acquisitions we made during 2012 and 2013. The increase was also due to a $1.3 million increase in amortization of acquired intangibles and a $0.8 million increase in direct third-party telephony expenses. The increase in subscription and maintenance services gross profit was driven by revenue growth relative to lower growth in subscription and maintenance services cost of revenue.
For 2013, professional services and other gross margin decreased to 27% as compared to 46% in 2012 and professional services and other gross profit decreased by 49% to $4.0 million. Professional services and other cost of revenue increased 20%, or $1.8 million, to $10.8 million for 2013. The increase in professional services cost of revenue was primarily due to an increase of $1.5 million in personnel-related costs driven by an increase in headcount and compensation increases, of which $0.7 million related to stock-based compensation expense. The decrease in professional services and other gross profit was driven by an increase in professional services and other cost of revenue and a decrease in professional services and other revenue. The decrease in professional services and other revenue was primarily due to the timing of revenue recognition on orders.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased by 30%, or $14.3 million, to $62.2 million for 2013. The increase was primarily due to a $12.5 million increase in personnel-related costs driven by an increase in headcount and compensation costs, of which $8.7 million related to stock-based compensation expense. The increase was also due to a $1.1 million increase in travel expenses.
Research and Development. Research and development expense increased by 37%, or $13.5 million, to $49.7 million for 2013. This increase was primarily due to a $12.5 million increase in personnel-related costs driven by an increase in headcount and compensation costs, of which $8.7 million related to stock-based compensation expense. The increase in headcount was reflective of our continued investment in our product offerings, which includes the impact of the acquisitions we made during 2012 and 2013.
General and Administrative. General and administrative expense increased by 43%, or $9.7 million, to $32.6 million for 2013. This increase was primarily due to a $7.9 million increase in personnel-related costs driven by an increase in headcount and compensation costs, of which $6.2 million related to stock-based compensation expense. The increase was also due to a $1.1 million increase in third-party costs related to acquisitions in 2013.
(Loss) Income from Operations
We had losses from operations of $7.3 million for 2013, compared to income of $25.4 million in 2012.
Other (Income) Expense
*
Less than 1%
Interest income remained approximately unchanged for 2013. Interest expense increased by $0.5 million compared to 2012.
(Benefit from) Provision for Income Taxes
Benefit from income taxes was $5.4 million for the year ended December 31, 2013, compared to provision for income taxes of $6.9 million for the year ended December 31, 2012. For the year ended December 31, 2013, in addition to the tax impact of the net loss for the year, the tax provision was primarily impacted by the release of the valuation allowance on a foreign jurisdiction.
Comparison of the Years Ended December 31, 2012 and 2011
Revenue
Total revenue for 2012 increased by 19%, or $26.8 million, to $164.8 million, compared to 2011. This growth was driven by a 16% increase in license software revenue and a 37% increase in subscription and maintenance support revenue, partially offset by an 8% decrease in professional services and other revenue. Deferred revenue increased by $4.0 million for 2012, compared to a decrease of $2.1 million in 2011.
Revenue from the Americas for 2012 increased by 22%, or $19.6 million, to $107.5 million, compared to 2011. The increase in the Americas revenue for 2012 was due to growth in software license sales for our hosted UC and consumer offerings and associated maintenance support revenue. EMEA revenue for 2012 increased by 58%, or $14.5 million, to $39.3 million, compared to 2011. The increase in EMEA revenue in 2012 was primarily due to growth in software license sales and related maintenance support, particularly our hosted UC applications, and the recognition of consumer applications revenue related to an arrangement that had been deferred in prior periods. APAC revenue for 2012 decreased by 29%, or $7.3 million, to $18.0 million, compared to 2011. The decrease in APAC revenue was primarily due to the recognition of revenue in 2011 on a sizeable order for our call center application from a large incumbent provider that had been deferred in prior periods.
License Software
License software revenue for 2012 increased by 16%, or $12.5 million, to $89.8 million, compared to 2011. The increase in revenue for 2012 was primarily due to growth in sales of software licenses. This growth was most significant in license sales for our hosted UC and consumer applications. Deferred license software revenue decreased by $2.2 million in 2012, compared to a decrease of $5.0 million in 2011.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2012 increased by 37%, or $15.8 million, to $58.2 million, compared to 2011. The increase in subscription and maintenance support revenue for 2012 was primarily due to growth in our installed base of customers and licenses and subscription revenue contributions from certain of our recent acquisitions. Deferred subscription and maintenance support revenue increased by $6.4 million in 2012, compared to an increase of $5.9 million in 2011.
Professional Services and Other
Professional services and other revenue for 2012 decreased by 8%, or $1.5 million, to $16.8 million, compared to 2011. The decrease in professional services and other revenue for 2012 was primarily due to the recognition of revenue in 2011 for a new call center application that had been deferred in prior periods, partially offset by growth in demand for our professional services. Deferred professional services and other revenue remained approximately unchanged in 2012, compared to a decrease of $3.0 million in 2011.
Cost of Revenue and Gross Profit
For 2012, gross margin decreased to 80%, compared to 82% in 2011, and our gross profit increased by 17%, or $19.3 million, to $132.4 million. We experienced an increase in both license software revenue gross profit and subscription and maintenance support gross profit and a decrease in professional services and other gross profit for 2012. The total gross profit growth is primarily due to growth in license software and subscription and maintenance support revenue relative to the respective cost of revenue.
For 2012, license software gross margin decreased to 90%, compared to 92% in 2011, and license software gross profit increased by 14% to $81.1 million. License software cost of revenue increased by 42%, or $2.6 million, to $8.6 million for 2012. This increase of license software cost of revenue was primarily due to a $1.0 million increase in equipment and resold third party software costs and a $0.8 million increase in personnel-related costs driven by an increase in headcount and compensation increases. The increase in license software gross profit was driven by revenue growth relative to lower growth in license software cost of revenue.
For 2012, subscription and maintenance services gross margin remained approximately unchanged at 75%, compared to 2011, and subscription and maintenance services gross profit increased by 35% to $43.4 million. Subscription and maintenance services cost of revenue increased by 42%, or $4.4 million, to $14.8 million in 2012, compared to 2011. The increase in subscription and maintenance services cost of revenue was primarily due to an increase of $1.3 million in personnel-related costs driven by an increase in headcount and compensation increases, a $1.1 million increase in amortization of acquired intangibles, a $0.4 million increase in consulting fees and a $0.4 million increase in line costs. The increase in subscription and maintenance services gross profit was driven by revenue growth relative to lower growth in subscription and maintenance services cost of revenue.
For 2012, professional services and other gross margin decreased to 46%, compared to 54% in 2011, and professional services and other gross profit decreased by 20% to $7.8 million. Professional services and other cost of revenue increased 6%, or $0.5 million, to $9.0 million for 2012. The increase in professional services cost of revenue was primarily due to an increase in personnel-related costs and consulting fees. The decrease in professional services and other gross profit was driven by the recognition of revenue in 2011 for a new call center application from a large APAC incumbent provider that had been deferred in prior periods.
Operating Expenses
Sales and Marketing. Sales and marketing expense increased by 25%, or $9.5 million, to $47.9 million for 2012, compared to 2011. This increase was primarily due to a $7.2 million increase in personnel-related costs driven by an increase in headcount and higher sales commissions, a $0.7 million increase in outside consulting fees and a $0.7 million increase in travel expenses.
Research and Development. Research and development expense increased by 30%, or $8.4 million, to $36.2 million for 2012, compared to 2011. This increase was primarily due to an $8.0 million increase in personnel-related costs driven by an increase in headcount and compensation increases. The increase in headcount was reflective of our continued investment in our product offerings, as well as the impact of the acquisitions we made during 2011 and 2012.
General and Administrative. General and administrative expense increased by 17%, or $3.3 million, to $22.9 million for 2012, compared to 2011. This increase was primarily due to a $2.0 million increase in personnel-related costs driven by an increase in headcount and compensation increases, a $0.7 million increase in equipment and software costs, a $0.6 million increase in bad debt expense and an increase of $0.3 million in outside consulting fees.
Income from Operations
We had income from operations of $25.4 million for 2012, compared to $27.4 million in 2011.
Other (Income) Expense
*
Less than 1%
Interest income increased by $0.2 million for 2012. Interest expense increased by $3.3 million compared to 2011. This increase in interest expense was primarily due to a full year's recognition of interest expense in 2012 on our Notes issued in June 2011.
Provision for (Benefit from) Income Taxes
Provision for income taxes was $6.9 million for 2012, compared to benefit from income taxes of $8.2 million for 2011. The provision for income taxes for 2012 was positively impacted by $1.9 million due to the recognition of research and development tax credits relating to prior years. These credits were not recorded until an acceptance for the credits was established. The benefit from income taxes for 2011 related primarily to an $8.9 million benefit due to the discrete release of the U.S. tax valuation allowance, partially offset by foreign taxes.
Liquidity and Capital Resources
Resources
Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities, which has resulted primarily from growth in net income and deferred revenue. Cash flow from operations was $31.9 million, $30.0 million and $28.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. In June 2011, we completed an offering of our Notes with net proceeds from the offering of approximately $115.7 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, 2013 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 totaled $0.6 million at December 31, 2013 and is not included in cash and cash equivalents, consisted primarily of certificates of deposit that secure letters of credit related to operating leases for office space.
Operating Activities
For the year ended December 31, 2013, net cash provided by operating activities was $31.9 million, compared to $30.0 million for 2012. The increase was primarily due to a $9.6 million increase from the aggregate changes in non-cash items and a $13.3 million increase from the net change in other current and long-term assets and liabilities, partially offset by a decrease in net income of $21.0 million. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, non-cash interest on convertible debt, amortization of software licenses, tax windfall benefits from stock option exercises and change in deferred income taxes.
For the year ended December 31, 2012, net cash provided by operating activities was $30.0 million, compared to $28.5 million for 2011. The increase was primarily due to a $28.3 million increase from the aggregate changes in non-cash items, partially offset by a decrease in net income of $20.2 million and a $6.6 million decrease 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, non-cash interest on convertible debt, amortization of software licenses and change in deferred income taxes.
For the year ended December 31, 2011, operating activities provided $28.5 million in net cash compared to $19.4 million in 2010. The increase was primarily due to an increase in net income of $24.3 million, partially offset by a $13.9 million decrease from the net change in other current and long-term asset and liabilities and a $1.5 million decrease from the aggregate changes in non-cash items. Non-cash items primarily consist of stock-based compensation expense, release of tax valuation allowances, depreciation and amortization, non-cash interest on convertible debt, amortization of software licenses and change in deferred income taxes.
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, 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.
For the year ended December 31, 2012, net cash used in investing activities was $34.2 million, compared to $99.1 million for 2011. This decrease was primarily attributable to a $73.6 million decrease in net purchases of marketable securities, offset by an $8.4 million increase in cash used for acquisitions.
For the year ended December 31, 2011, net cash used in investing activities was $99.1 million, compared to $24.3 million for 2010. This increase was attributed to an increase of $118.6 million in marketable securities purchased with excess cash, and a $14.6 million increase in cash used for acquisitions, partially offset by proceeds from the sale and maturity of marketable securities of $58.2 million.
Financing Activities
For the year ended December 31, 2013, net cash provided by financing activities was $4.8 million, compared to net cash used in financing activities of $0.5 million for 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.
For the year ended December 31, 2012, net cash used in financing activities was $0.5 million, compared to net cash provided by financing activities of $117.5 million for 2011. Net cash used in financing activities in 2012 consisted of taxes paid on the vesting of restricted stock units of $2.2 million and payments of notes payable of $0.4 million, offset by proceeds from the exercise of stock options of $2.5 million.
For the year ended December 31, 2011, net cash provided by financing activities was $117.5 million, compared to $29.2 million in 2010. The principal source of cash generated from financing activities was related to the issuance of the Notes, which generated $115.7 million, net of issuance costs. Additionally, net cash provided by financing activities included proceeds from common stock issued upon the exercise of stock options of $3.9 million, partially offset by payments of notes payable and bank loans of $1.6 million.
Borrowings and Credit Facilities
Convertible Senior Notes
In June 2011, we issued $120.0 million aggregate principal amount of our Notes, with net proceeds of approximately $116 million. The 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.
The initial conversion rate for the 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. Upon conversion, we will pay cash up to the aggregate principal amount of the 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 Notes being converted.
Conversion Prior to April 1, 2018:
Note holders may convert their Notes at their option prior to April 1, 2018 only if any of the following occur:
•
if, for ten consecutive trading days, the trading price per Note is less than 98% of the product of the last reported sale price of the common stock and the applicable conversion rate of the Notes on such day, then the Notes may be converted at any time during the five business days following such ten day period;
•
if the closing price of our common stock exceeds 130% of the conversion price of the Notes for at least 20 of the final 30 trading days of a calendar quarter, then the Notes may be converted at any time during the following calendar quarter;
•
upon the occurrence of certain corporate events specified in the indenture governing the Notes, or the Indenture; or
•
if we call the Notes for redemption.
Conversion on or After April 1, 2018:
The Notes will be convertible, regardless of the foregoing circumstances, at any time on or after April 1, 2018 through the second scheduled trading day immediately preceding the maturity date.
Redemption by Holders:
Holders of the Notes may require us to repurchase some or all of the Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the Indenture, at a repurchase price equal to the principal amount of the Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date. In addition, if a make-whole fundamental change, as defined in the Indenture, occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Redemption by BroadSoft:
We may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, we may redeem for cash all or part of the Notes (except for the Notes that we are required to repurchase as described above) if the last reported sale price of our common stock exceeds 140% of the applicable conversion price of the Notes for at least 20 of the final 30 trading days ending on the trading day immediately prior to the date of the redemption notice. The redemption price of any Notes we call for redemption prior to the maturity date will equal the sum of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, plus a “make-whole premium” payment.
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. The terms of the loans were governed by the Finnish Act on State Lending and State Guarantees, Government Decree on Research, Development and Innovation Funding and the proceeds 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.
Operating and Capital Expenditure Requirements
We believe 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 as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology and enterprise resource planning 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, 2013 and periods in which payments are due (in thousands):
*
Contractual interest obligations related to our Notes totaled $8.1 million at December 31, 2013, including $1.8 million, $3.6 million, and $2.7 million due in years 2014, 2015-2016, 2017-2018, respectively.
As of December 31, 2013, we had unrecognized tax benefits of $4.9 million. We do not expect to recognize any of these benefits in 2014. 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, 2013, 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 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 Notes and non-cash 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 other GAAP metrics. 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 share, non-GAAP gross profit, non-GAAP operating income 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,” “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 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 gross profit,” “non-GAAP income from operations” and such other non-GAAP measures by excluding these expenses and gains.
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 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.
Non-GAAP gross profit, license gross profit, maintenance and services 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 operating income. We define non-GAAP operating income as income from operations plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP operating income 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 plus 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 plus stock-based compensation expense allocated to the particular expense item.
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 of 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. We do not enter into investments for trading or speculative purposes. At December 31, 2013, we had long-term debt of $120.0 million associated with our 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
Most of our sales contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue. With international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and if our exposure increases, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Historically, our primary exposures have been related to non-U.S. dollar denominated operating expenses in Canada, Europe and the APAC region. 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 could 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, 2013, 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 $1.1 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, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 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, 2013, based on criteria established in Internal Control - Integrated Framework (1992) 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.
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
McLean, Virginia
February 28, 2014
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 mobile, fixed-line and cable service providers to deliver hosted, or cloud-based, Unified Communications and other voice and multimedia services over their Internet protocol, or IP, based networks. The Company’s core communications platform consists of three offerings: BroadWorks, BroadCloud and BroadTouch.
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.
Revision of Prior Period Amounts
The Company revised the presentation of excess tax benefit related to share based compensation in the statement of cash flows for the years ended December 31, 2012 and 2011. This item was previously reflected as a cash inflow from operating activities rather than financing activities. The revision decreased cash flows from operating activities and increased cash flows from financing activities by $0.6 million and $0.1 million for the years ended December 31, 2012 and 2011, respectively. There was no impact on cash and cash equivalents. The Company concluded that the correction was immaterial to all prior annual and quarterly periods.
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 long-term restricted cash of $0.6 million at December 31, 2013 and 2012.
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, 2013 (in thousands):
The following table summarizes the Company's investments at December 31, 2012 (in thousands):
Fair Value Measurements
The following table summarizes the carrying and fair value of the Company’s financial assets (in thousands):
*
Includes $0.6 million of restricted cash as of December 31, 2013 and 2012 and excludes $21.6 million and $27.4 million of operating cash balances as of December 31, 2013 and 2012, 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.)
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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):
*
Includes $0.6 million of restricted cash as of December 31, 2013 and 2012 and excludes $21.6 million and $27.4 million of operating cash balances as of December 31, 2013 and 2012, 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 other-than-temporarily impaired. During the years ended December 31, 2013, 2012 and 2011, there were no fair value measurements of 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
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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 customers represented 10% or more of revenue or accounts receivable:
*
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.
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.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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 results of the Company’s annual goodwill impairment testing, there was no indication of impairment as of December 31, 2013, 2012 or 2011. (See Note 4 Goodwill and Intangibles.)
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, 2013, 2012 or 2011. (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. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. 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. There was no impairment of long-lived assets during the years ended December 31, 2013, 2012 or 2011.
Deferred Financing Costs
The Company amortizes deferred financing costs using the effective-interest method and records such amortization as interest expense.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Revenue Recognition
The Company’s revenue is generated from the sales of software licenses and related maintenance for those licenses, professional services and subscription and usage fees related to the cloud offering. 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.
•
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 less than 1% 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 the 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 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.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Professional Services and Other
Revenue from professional services includes implementation, training and consulting fees and is generally recognized as services are performed. 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, 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-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 in which 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 $1.1 million and $0.3 million in internal-use software during the years ended December 31, 2013 and 2012, respectively. Capitalized internal-use software is included in property and equipment.
The Company recorded amortization expense related to these assets of approximately $0.2 million during the year ended December 31, 2013. The Company did not record any amortization expense related to these assets during the years ended December 31, 2012 or 2011.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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 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) intangible asset amortization expense related to acquired technology.
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 and stock-based compensation expense. The Company has a valuation allowance of approximately $3.3 million against its net deferred tax assets in certain foreign jurisdictions. 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 the grant is measured based on the estimated fair value of the stock award at the date of the grant, using a binomial options pricing model, or binomial lattice model. 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 graded basis over the requisite service period of the grant.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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 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 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 (Loss) Income Per Common Share
Basic net (loss) 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, restricted stock units ("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 (loss) 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, we only include the impact of the premium feature in our 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, 2013, 2012 or 2011.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2013, the weighted average number of shares outstanding used in the computation of diluted loss per share does not include the effect of stock-based awards convertible to 944,499 shares of common stock as the effect would have been anti-dilutive given the Company's loss for the year. For the years ended December 31, 2013, 2012 and 2011, certain stock options were not included in the computation of diluted earnings per share as their effect was anti-dilutive because the exercise prices exceeded the average market price of the Company’s common stock during these periods. The weighted average effect of potentially dilutive securities that have been excluded from the calculation of diluted net income per common share because the effect was anti-dilutive was 1,927,664, 575,327 and 96,932 for the years ended December 31, 2013, 2012 and 2011, respectively.
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.
3. Acquisitions
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 enables 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 preliminarily allocated to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date. The Company has not finalized the purchase price allocation for this acquisition.
The following table summarizes the estimated 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 initial purchase price allocation is preliminary as of December 31, 2013. Changes to amounts recorded as assets or liabilities as additional information is received may result in a corresponding adjustment to 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
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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 enables 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 preliminarily allocated to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date. The Company has not finalized the purchase price allocation for this acquisition.
The following table summarizes the estimated 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 initial purchase price allocation is preliminary as of December 31, 2013. Changes to amounts recorded as assets or liabilities as additional information is received may result in a corresponding adjustment to 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.
Adaption Technologies Ventures, Ltd.
On August 6, 2012, the Company completed its acquisition of substantially all the assets of Adaption Technologies Ventures, Ltd. (“Adaption”), a provider of hosted business VoIP solutions. The acquisition enabled the Company to enhance its BroadCloud Software-as-a-Service delivery platform.
The total cash consideration paid for Adaption was $22.0 million and the Company funded the acquisition with cash on hand. The Company incurred $0.4 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, 2012.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The consolidated financial statements include the results of Adaption 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 Company finalized the purchase price allocation for this acquisition in 2013.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of August 6, 2012 (in thousands):
Developed technology represents purchased technology that reached technological feasibility and for which Adaption had substantially completed development as of the date of acquisition. Fair value was determined using estimated future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Key assumptions included a discount factor of 13% and estimates of revenue growth, cost of revenue, operating expenses and taxes.
The customer relationships, trade name and developed technology are being amortized on a straight-line basis over a period of three years, two years, and five years, respectively, which reflects the cash flows generated from such assets. The weighted-average amortization period for depreciable intangible assets acquired is approximately four years.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $16.7 million was recorded as goodwill. The goodwill balance is attributable to 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.
Movial
On October 21, 2011, the Company completed its acquisition of all of the outstanding shares of Movial Applications Oy (“Movial”), a client developer for IP communications services. The acquisition enabled the Company to enhance its BroadTouch platform.
The total cash consideration paid for Movial was approximately $6.0 million and the Company funded the acquisition with cash on hand. 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, 2011.
The consolidated financial statements include the results of Movial 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 Company finalized the purchase price allocation for this acquisition in 2012.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of October 21, 2011 (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Developed technology represents purchased technology that reached technological feasibility and for which Movial had substantially completed development as of the date of acquisition. Fair value was determined using estimated future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Key assumptions included a discount factor of 15% and estimates of revenue growth, cost of revenue, operating expenses and taxes.
The customer relationships and developed technology are being amortized on a straight-line basis over a period of three 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 five years.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $5.3 million was recorded as goodwill. The goodwill balance is attributable to 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.
iLinc
On September 30, 2011, the Company completed its acquisition of all outstanding shares of iLinc Communications, Inc. (“iLinc”). iLinc is a provider of web collaboration services for global businesses, governments and educational institutions. The acquisition of iLinc and its web collaboration SaaS offering complements BroadSoft’s BroadCloud services capabilities.
The total cash consideration paid for iLinc was $11.1 million and the Company funded the acquisition with cash on hand. The Company incurred $0.4 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, 2011.
The consolidated financial statements include the results of iLinc 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 Company finalized the purchase price allocation for this acquisition in 2011.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of September 30, 2011 (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Developed technology represents purchased technology that reached technological feasibility and for which iLinc had substantially completed development as of the date of acquisition. Fair value was determined using estimated future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Key assumptions included a discount factor of 11.5% and estimates of revenue growth, cost of revenue, operating expenses and taxes.
The customer relationships, trade name and developed technology are being amortized on a straight-line basis over a period of four years, three years, and five years, respectively, which in general reflects the cash flows generated from such assets. The weighted-average amortization period for amortizable intangible assets acquired is approximately four years.
The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $4.9 million was recorded as goodwill. The goodwill balance is attributable to 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 finocom, HIPCOM and Adaption (unaudited)
The businesses acquired in 2013 contributed aggregate revenue of $2.8 million and net losses of $0.3 million for the period from the relevant acquisition date to December 31, 2013. The businesses acquired in 2012 contributed aggregate revenue of $1.5 million and net losses of $0.2 million for the period from the acquisition date to December 31, 2012.
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 impairment test of the Company’s goodwill and determined that no impairment of goodwill existed at December 31, 2013, 2012 or 2011.
The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2013, the increase in "goodwill related to acquisitions" consists of $18.3 million of goodwill related to the acquisition of HIPCOM, $5.7 million of goodwill related to the acquisition of finocom and $2.1 million of goodwill related to the acquisition of a development services company in September 2013. For the year ended December 31, 2012, the increase in “goodwill related to acquisitions” consists of $3.2 million of goodwill related to the acquisition in April 2012 of a research and development workforce and $16.7 million of goodwill related to the acquisition of Adaption in August 2012. Any changes in the goodwill amounts resulting from foreign currency translations are presented as “Other” in the above table.
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 $3.9 million, $2.7 million and $1.3 million in 2013, 2012 and 2011, respectively. In addition, in 2013, the Company retired $1.1 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. As of December 31, 2013, future amortization expense on intangible assets is expected to be as follows (in thousands):
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, 2013, 2012 and 2011 was approximately $3.9 million, $2.6 million and $1.8 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 was previously party to an agreement that provided the Company the right to distribute certain third-party software on a per-user basis up to 35,000,000 licenses over a four-year period, for $6.4 million. The arrangement required the Company to pay a per-user license fee for licenses distributed in excess of 35,000,000. The cost was amortized to cost of revenue over the 3.5 year period ended May 2012, based on the greater of actual usage or the straight line method. In 2011, the Company entered into a new agreement that provides the Company the right to distribute this third-party software on an unlimited basis through May 2016 at a total cost of $10.2 million. To the extent annual billed license software revenue over the four-year period exceeds $460 million, the Company would be required to pay additional fees. The additional cost of $10.2 million is being amortized to cost of revenue over the four-year period beginning June 2012 (the expiration date of the previous agreement), based on the straight line method.
Amortization expense related to these agreements was approximately $2.6 million, $2.8 million and $1.8 million for each of the years ended December 31, 2013, 2012 and 2011, 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):
At December 31, 2013, the Company had U.S. net operating loss carryforwards of approximately $63.6 million and research and experimentation tax credit carryforwards of $2.3 million, which are scheduled to begin to expire in 2019. 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 $3.9 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.
Based upon the Company’s cumulative operating results through June 30, 2011 and an assessment of its expected future results of operations, the Company determined that there was significant positive evidence regarding the realization of its U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing its core products and services both inside and outside the U.S., the Company believes that it is more likely than not that its U.S. deferred tax assets will be realized. A portion of the U.S. valuation allowance was released in the period ended June 30, 2011 based on the amount of U.S. net deferred tax assets then expected to be remaining as of December 31, 2011. As of December 31, 2011, the Company reversed all of the remaining valuation allowance on the U.S. deferred tax assets because it was more likely than not that those deferred tax assets would be realized. As of December 31, 2013, the Company has a remaining valuation allowance of approximately $3.3 million, which primarily relates to certain foreign NOLs and tax credits 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 2014, which may have an impact on the results of operations.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table presents the provisions for income taxes compared with income taxes based on the federal statutory tax rate of 35% (in thousands):
For the year ended December 31, 2012 the tax provision was positively impacted by $1.9 million due to the recognition of business tax credits relating to prior years. These credits were not recorded until the Company obtained a sufficient history of acceptance for the credits by the tax authorities.
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, 2012 and 2011, there was no material adjustment in the liability for unrecognized income tax benefits and no new 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, 2013. The Company recorded no interest and penalties during the years ended December 31, 2012 or 2011. 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 2009, with the exception that operating loss or tax credit carryforwards generated prior to 2008 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 2007.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
9. Borrowings
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 “Notes”). The 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 Notes may be converted by the holders of Notes 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 Notes for redemption. The 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 Notes is 23.8126 shares of the Company’s common stock per $1,000 principal amount of 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 Notes (the “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 Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 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 Notes being converted.
Holders of the Notes may require the Company to repurchase some or all of the Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the Indenture, at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date.
The Company may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, the Company may redeem for cash all or part of the Notes (except for the 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 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 Notes called for redemption prior to the maturity date, including 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 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 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 interest method, through July 2018, the maturity date of the 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 in other assets.
The fair value of the Notes as of December 31, 2013 and 2012 was $123.2 million and $135.8 million, respectively. The carrying amount of the equity component of the Notes was $28.5 million at December 31, 2013. The unamortized offering costs at December 31, 2013 were $1.8 million which is being amortized as interest expense through the July 2018 maturity date of the Notes. The remaining $1.4 million of offering costs were allocated to the equity component.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
The following table shows the amounts recorded within the Company’s financial statements with respect to the Notes (in thousands):
The following table presents the interest expense recognized related to the Notes (in thousands):
The net proceeds from the Note offering were approximately $115.7 million, after deducting discounts to the initial purchasers and offering expenses payable by the Company.
Installment Bank Loans
In May 2008, the Company amended a software license and maintenance agreement that provided the Company the right to distribute third party software for a one-time fee of approximately $6.4 million. The agreement was financed with an installment bank loan with an effective interest rate of 4.0%. The loan provided for a payment of $0.4 million at loan inception and scheduled principal repayments of $0.4 million each quarter commencing July 1, 2008, with the final payment due on April 1, 2012. At March 31, 2012, the loan was paid in full.
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 is variable, with the interest rate equal to three percent at the time of repayment. As of December 31, 2012, the aggregate balance of the loans was approximately $1.0 million.
Fair Value of Borrowings
Fair value for the Company’s borrowings is estimated using quoted market price of the Notes at December 31, 2013, 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, 2013 were as follows (in thousands):
10. Stockholders’ Equity (Deficit)
Preferred Stock
Pursuant to the Company’s amended and restated certificate of incorporation filed on June 21, 2010 in connection with the closing of the initial public offering of the Company's common stock (the "IPO"), 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.
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, restricted stock units (“RSUs”) and stock appreciation rights. In June 2010, in connection with the IPO, 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 10 years, except that certain stock-based grants made after 2005 have a term of five years. The requisite vesting period for grants made under the 2009 Plan is typically four years. On January 1, 2012 and 2013, 1,219,787 and 1,250,000 shares, respectively, were added to the 2009 Plan. At December 31, 2013, the Company had 118,663 shares of common stock available for issuance under the 2009 Plan.
Stock-based compensation expense recognized by the Company is as follows (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Stock Options
The following table presents a summary related to stock options for the following periods:
In 2013, 2012 and 2011, the Company granted stock options with a weighted-average grant date fair value of $18.09, $20.14 and $21.86, respectively. The intrinsic value of stock options exercised in 2013, 2012 and 2011 was $5.0 million, $22.3 million and $59.3 million, respectively, and cash received from stock options exercised was $1.3 million, $2.5 million and $3.9 million, respectively.
At December 31, 2013, unrecognized stock-based compensation expense, net of estimated forfeitures, relating to unvested stock options was $9.5 million which amount is scheduled to be recognized as stock-based compensation expense over a weighted average period of 1.4 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at December 31, 2013, stock-based compensation expense will be different from expectations.
Restricted Stock Units
The following table presents a summary of activity for RSUs (excluding RSUs that are subject to performance-based vesting conditions (“PSUs”):
During 2013, the Company granted 1,510,176 RSUs to certain officers and employees, which vest over three or four years following the vesting commencement date, and granted 7,847 RSUs to certain directors that vest quarterly through December 31, 2013. At December 31, 2013, unrecognized stock-based compensation expense related to unvested RSUs was $24.5 million, which is scheduled to be recognized over a weighted average period of 1.32 years.
During 2012, the Company granted 352,600 RSUs to certain officers and employees, which vest over four years following the date of grant, 128,309 RSUs to certain employees that vest over three years following the date of grant and 4,925 RSUs to certain employees that vest over two years following the date of grant. During 2011, the Company granted 211,450 RSUs to certain officers and employees that vest over four years following the date of grant.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
Performance Stock Units
The following table presents a summary of activity for PSUs:
During 2013, the Company granted 382,500 PSUs to certain officers, which vest over 4 years, subject to the satisfaction of performance conditions based upon the trading price of the Company's common stock. To date, the trading price of our common stock has not met any of the thresholds necessary to satisfy any of the performance conditions of these awards. During 2012, the Company granted 55,000 PSUs to certain officers subject to the recipients’ satisfying the performance criteria of the awards, of which 10,000 PSUs met the criteria and vested on December 31, 2013. At December 31, 2013, unrecognized stock-based compensation expense related to unvested PSUs was $4.3 million, which is scheduled to be recognized over a weighted average period of 1.34 years .
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, 2013, the Company’s APIC pool balance was $7.3 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. For 2011, there was a reduction to the deferred tax asset related to tax benefits of employee stock option grants of $0.1 million related to forfeitures and exercises that resulted in a tax deduction less than previously recorded benefits based on the option value at the time of grant (shortfalls). Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets for the years ended December 31, 2013 and 2012 are $63.6 million and $77.6 million, respectively.
12. Commitments and Contingencies
Leases
The Company leases office space under non-cancelable operating leases with various expiration dates through 2022. Rent expense was approximately $3.2 million, $2.7 million and $2.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The following table presents future minimum lease payments under the non-cancelable operating leases (in thousands):
BroadSoft, Inc.
Notes to Consolidated Financial Statements
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):
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, 2013 and 2012 were $1.8 million and $1.2 million, respectively.
BroadSoft, Inc.
Notes to Consolidated Financial Statements
15. Quarterly Financial Data (Unaudited) (in thousands, except per share data):
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
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, 2013. The term “disclosure controls and procedures,” as set forth 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 provide reasonable assurance 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, 2013, 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, 2013, using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based upon this assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2013 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, 2013 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 2014 Annual Meeting of Stockholders (the “2014 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 2014 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 2014 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 2014 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 2014 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 2014 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 66.
(b) Financial Statement Schedules
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 NOL’s 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 99.1 to the Registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on October 29, 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 June 25, 2010 and incorporated herein by reference.
(3)
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.
(4)
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.
(5)
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.
(6)
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.
(7)
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.
(8)
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.
(9)
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.
(10)
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.
(11)
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.
(12)
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.
(13)
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.
(14)
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.
(15)
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.
(16)
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.
(17)
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.
(18)
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.
(19)
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.
(20)
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.
(21)
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.
(22)
Filed as exhibit 10.20 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.
(23)
Filed herewith. 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 6, 2013.
*
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.