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CORNERSTONE ONDEMAND INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are any statements
that look to future events and consist of, among other things, statements
regarding our business strategies; anticipated future operating results and
operating expenses; our ability to attract new clients to enter into
subscriptions for our solution; our ability to service those clients effectively
and induce them to renew and upgrade their deployments of our solution; our
ability to expand our sales organization to address effectively the new
industries, geographies and types of organizations we intend to target; our
ability to accurately forecast revenue and appropriately plan our expenses;
market acceptance of enhanced solutions; alternate ways of addressing learning
and talent management needs or new technologies generally by us and our
competitors; continued acceptance of SaaS as an effective method for delivering
learning and talent management solutions and other business management
applications; the attraction and retention of qualified employees and key
personnel; our ability to protect and defend our intellectual property; costs
associated with defending intellectual property infringement and other claims;
events in the markets for our solution and alternatives to our solution, as well
as in the United States and global markets generally; future regulatory,
judicial and legislative changes in our industry; and changes in the competitive
environment in our industry and the markets in which we operate. In addition,
forward-looking statements also consist of statements involving trend analyses
and statements including such words as "may," "believe," "could," "anticipate,"
"would," "might," "plan," "expect," and similar expressions or the negative of
such terms or other comparable terminology. These forward-looking statements
speak only as of the date of this Form 10-Q and are subject to business and
economic risks. As such, our actual results could differ materially from those
set forth in the forward-looking statements as a result of the factors set forth
below in Part II, Item 1A, "Risk Factors," and in our other reports filed with
the Securities and Exchange Commission. We assume no obligation to update the
forward-looking statements to reflect events that occur or circumstances that
exist after the date on which they were made.
The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading global provider of a comprehensive learning and talent
management solution delivered as software-as-a-service, or SaaS. We enable
organizations to meet the challenges they face in empowering their people and
maximizing the productivity of their human capital. These challenges include
developing employees throughout their careers, engaging all employees
effectively, improving business execution, cultivating future leaders and
enabling an organization's extended enterprise of clients, vendors and
distributors by delivering training, certification programs and other content.
Our Cornerstone product offering, or the Cornerstone solution, consists of four
integrated cloud-based solutions, which we refer to as "clouds," for recruiting,
learning, performance, and extended enterprise. Clients can purchase these
clouds individually and easily add and integrate additional clouds at any time.
We offer a number of cross-cloud tools for analytics and reporting, employee
profile management, employee on-boarding and e-learning content aggregation. We
also provide consulting services for configuration and training for our solution
as well as third-party e-learning content for use with our solution. We target
our sales and marketing efforts for these four integrated clouds to large and
mid-sized clients with 500 or more employees, and our solution can be used in
multiple industry vertical segments. After the initial purchase, we continue to
market and sell to our existing clients, who may renew their subscriptions, add
additional clouds, broaden the deployment of our solution across their
organizations and increase the usage of our solution over time. We currently
have 1,112 clients who use our Cornerstone solution to empower approximately
10.3 million users across 186 countries and 38 languages. Our number of clients
for our Cornerstone solution has grown from 105 at December 31, 2007 to 481 at
December 31, 2010, to 805 at December 31, 2011 and to 1,112 at September 30,
2012.
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In addition to our Cornerstone solution, we also offer a cloud-based talent
management solution that is targeted principally to clients with less than 500
employees, the Cornerstone Small Business solution. On April 5, 2012, we
completed the acquisition of Sonar Limited, a New Zealand cloud-based talent
management solutions provider serving small business globally. Sonar Limited's
talent management solution was rebranded as the Cornerstone Small Business
solution. Cornerstone Small Business solution did not have a significant impact
on our financial results and key metrics for the three months ended
September 30, 2012 and is not expected to have a significant impact for the year
ending December 31, 2012. We currently do not include the number of clients and
users of our Cornerstone Small Business solution in our client and user key
metrics as the inclusion does not provide us with meaningful, consistent and
comparative information in terms of our financial performance.
We founded our business in 1999 to improve access to education through the
distribution of online educational content to individuals, small businesses and
large corporations. Our distribution model was built using Internet technologies
that are now known as software-as-a-service. When the Internet "bubble" burst in
2000, we focused on corporations that needed tools to manage compliance and
on-boarding of employees as well as to link learning to employee performance,
leadership development and knowledge management. As a result of our work with
clients to address their particular challenges, we had as early as 2001
developed the foundation for a comprehensive learning and talent management
cloud-based solution that included functionality for learning management and
performance management. In 2006, we added our extended enterprise functionality,
which helps clients extend learning and talent management to their customers,
vendors and distributors. During the first quarter of 2012, we added our
recruiting cloud. The recruiting cloud supports the modern ways that businesses
source, recruit, hire and onboard new employees.
Global 500 companies were among our first clients. In our early years, we
focused primarily on building our account management and support capabilities to
be able to service these large clients more effectively. Sales were initially
constrained by the resistance of some large corporations to purchase SaaS
solutions. By the mid-2000s, however, our market opportunity increased
significantly with both the adoption of SaaS solutions generally by large
enterprises and the market's recognition of learning and talent management as a
distinct industry.
In response to these positive trends, we raised our first round of institutional
venture capital in May 2007. We used this capital to serve clients across
multiple industries, geographies and enterprise types by increasing the number
of our direct sales personnel, both domestically and internationally, and by
expanding our indirect channels through distribution relationships. Between
December 31, 2007 and September 30, 2012, our number of users increased from
859,000 to approximately 10.3 million. In 2009, after a highly competitive
process involving a number of potential providers, ADP chose to enter into a
distributor agreement with us that allows ADP to sell our solution globally.
We generate most of our revenue from sales of our solutions pursuant to
multi-year client agreements. Our sales typically involve competitive processes,
with sales cycles that generally vary in duration from two to nine months
depending on the size of the potential client. We price our solution based on
the number of clouds the client can access and the permitted number of users
with access to each cloud. Our client agreements typically have terms of three
years. We also generate revenue from consulting services for configuration,
training, and consulting, as well as from the resale or hosting of third-party
e-learning content.
We generate sales of our solutions primarily through our direct sales teams and,
to a lesser extent, indirectly through our distributors. We intend to accelerate
our investment in our direct sales and distribution activities to continue to
address our market opportunity.
We generally recognize revenue from subscriptions ratably over the term of the
client agreement and revenue from consulting services as these services are
performed. In certain instances, our clients request enhancements to underlying
features and functionality of our solution, and in these instances revenue from
subscriptions is recognized once the additional features are delivered to the
client over the remaining term of the agreement. We generally invoice our
clients a portion of the annual subscription fees upfront for multi-year
subscriptions and upfront for consulting services. For amounts not invoiced in
advance for multi-year subscriptions or consulting services, we invoice under
various terms over the subscription and service periods. We record amounts
invoiced for portions of annual subscription periods that have not occurred or
services that have not been performed as deferred revenue on our balance sheet.
With the growth in the number of clients, our net revenue has grown to $30.8
million and $81.5 million for the three and nine months ended September 30,
2012, respectively, from $20.0 million and $50.6 million for the three and nine
months ended September 30, 2011, respectively. Our gross revenue was $53.1
million for the nine months ended September 30, 2011 before a $2.5 million
reduction of revenue. This reduction of revenue related to a non-cash charge for
a common stock warrant issued to ADP during the three months ended June 30,
2011.
We have historically experienced seasonality in terms of when we enter into
client agreements. We sign a significantly higher percentage of agreements with
new clients, as well as renewal agreements with existing clients, in the fourth
quarter of each year and usually sign a significant portion of these agreements
during the last month, and with respect to each quarter,
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often the last two weeks, of the quarter. We believe this seasonality is driven
by several factors, most notably the tendency of procurement departments at our
enterprise clients to purchase technology at the end of a quarter or calendar
year, possibly in order to use up their available quarterly or annual funding
allocations, or to be able to deploy new talent management capabilities prior to
the beginning of a new financial or performance period. As the terms of most of
our client agreements are measured in full year increments, agreements initially
entered into the fourth quarter or last month of any quarter will generally come
up for renewal at that same time in subsequent years. This seasonality is
reflected to a much lesser extent, and sometimes is not immediately apparent, in
our revenue, due to the fact that we recognize subscription revenue over the
term of the client agreement, which is generally three years. In addition, this
seasonality is reflected in changes in our deferred revenue balance, which
generally is impacted by the timing in which we enter into agreements with new
clients, the timing of when we invoice new clients, the timing in which we
invoice existing clients for annual subscription periods, and the timing in
which we recognize revenue. We expect this seasonality to continue in the
future, which may cause fluctuations in certain of our operating results and
financial metrics, and thus limit our ability to predict future results. In
addition, the recognition of our consulting service revenues is impacted by the
timing of our clients' implementations, which varies from client to client and
may differ from the aforementioned seasonality trends. As a result, the timing
of our clients' implementations may also cause fluctuations in certain of our
operating results and financial metrics, and limit our ability to predict future
results.
We believe the market for learning and talent management remains large and
underpenetrated, providing us with significant growth opportunities. We expect
businesses and other organizations to continue to increase their spending on
learning and talent management solutions in order to maximize productivity of
their employees, manage changing workforce demographics and ensure compliance
with global regulatory requirements. Historically, many of these software
solutions have been human resource applications running on hardware located on
organizations' premises. However, we believe that just as organizations have
increasingly chosen SaaS solutions for business applications such as sales force
management, they are also increasingly adopting SaaS learning and talent
management solutions.
We have focused on growing our business to pursue what we believe is a
significant market opportunity, and we plan to continue to invest in building
for growth. As a result, we expect our cost of revenue and operating expenses to
increase in future periods. Sales and marketing expenses are expected to
increase, as we continue to expand our direct sales teams, increase our
marketing activities, and grow our international operations. Research and
development expenses are expected to increase as we improve the existing
functionality for our solution. We also believe that we must invest in
maintaining a high degree of client service and support that is critical for our
continued success. We plan to continue our policy of implementing best practices
across our organization, expanding our technical operations and investing in our
network infrastructure and services capabilities in order to support continued
future growth. We also expect to incur additional general and administrative
expenses as a result of both our growth and our continued transition to
operating as a public company. In addition, to the extent that we make
additional strategic acquisitions in the future, like our recent acquisition of
Sonar Limited, our investments in operations may increase.
Our quarterly operating results have fluctuated in the past and may continue to
fluctuate in the future based on a number of factors, many of which are beyond
our control. In addition to those in the "Risk Factors" section of this Form
10-Q, such factors include:
• our ability to attract new clients;
• the timing and rate at which we enter into agreements for our
solutions with new clients;
• the timing and duration of our client implementations, which is
often outside of our direct control, and our ability to provide
resources for client implementations and consulting projects;
• the extent to which our existing clients renew theirsubscriptions
for our solutions and the timing of those renewals;
• the extent to which our existing clients purchase additional clouds
or add incremental users;
• the extent to which our clients request enhancements tounderlying
features and functionality of our solutions and the timing for us to
deliver the enhancements to our clients;
• changes in the mix of our sales between new and existing clients;
• changes to the proportion of our client base that is comprised of
enterprise or mid-sized organizations;
• seasonal factors affecting the demand for our solution;
• the timing of our client implementations;
• our ability to manage growth, including in terms of new clients,
additional users and new geographies;
• the timing and success of competitive solutions offered by our competitors;
• changes in our pricing policies and those of our competitors; and
• general economic and market conditions.
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One or more of these factors may cause our operating results to vary widely. As
such, we believe that our quarterly results of operations may vary significantly
in the future and that period-to-period comparisons of our operating results may
not be meaningful and should not be relied upon as an indication of future
performance.
Initial Public Offering
In March 2011, we completed our initial public offering whereby we sold
7,500,000 shares of common stock at a price of $13.00 per share. Our shares are
traded on the NASDAQ Global Market. We received proceeds from our initial public
offering of $90.5 million, net of underwriting discounts and commissions, but
before offering expenses of $3.7 million.
As part of the offering, an additional 4,575,000 shares of common stock were
sold by certain existing stockholders at a price of $13.00 per share, including
1,575,000 shares sold by such stockholders upon the exercise of the
underwriters' option to purchase additional shares. We did not receive any of
the proceeds from the sale of such shares by the selling stockholders.
Metrics
We regularly review a number of metrics, including the following key metrics, to
evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections and make strategic decisions.
• Bookings. Under our revenue recognition policy, we generally
recognize subscription revenue from our client agreements ratably
over the terms of those agreements. For this reason, the major
portion of our revenue for a period will be from client agreements
signed in prior periods rather than from new business activity
during the current period. In order to assess our business
performance with a metric that more fully reflects current period
business activity, we track bookings, which is a non-GAAP financial
measure we define as the sum of revenue and the change in the
deferred revenue balance for the period. We include changes in the
deferred revenue balance in bookings to reflect new business
activity in the period as evidenced by prepayments or billings under
our billing policies arising from acquisition of new clients, sales
of additional clouds to existing clients, the addition of
incremental users by existing clients and client renewals. We
exclude the non-cash reduction of revenue related to the issuance of
common stock warrants in the second quarter 2011 because that charge
did not relate to sales activity in that period, and we do not
consider the issuance of such warrants to have been indicative of
our core operating performance. Bookings are affected by our billing
terms, and any changes in those billing terms may shift bookings
between periods. Due to the seasonality of our sales, bookings
growth is inconsistent from quarter to quarter throughout a calendar
year. For a reconciliation of bookings to revenue, please see
"Results of Operations - Revenue and Metrics."
• Number of clients. We believe that our ability to expand our client
base is an indicator of our market penetration and the growth of our
business as we continue to invest in our direct sales teams and
distributors. Our client count includes contracted clients for any
combination of the four integrated clouds for our Cornerstone
solution as of the end of the period and excludes clients of our
Cornerstone Small Business solution.
• Number of users. Since our clients generally pay fees based on the
number of users of our solution within their organizations, we
believe the total number of users is an indicator of the growth of
our business. Our user count includes active users for any
combination of the four integrated clouds for our Cornerstone
solution and excludes users of our Cornerstone Small Business
solution.
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our solutions are designed to enable organizations to meet the challenges they
face in maximizing the productivity of their human capital. We generate revenue
from the following sources:
• Subscriptions to Our Solutions. Clients pay subscription fees for
access to our solutions for a specified period of time, typically
three years for our Cornerstone solution or monthly orannually for
our Cornerstone Small Business solution. Fees are based on a number
of factors including the number of clouds the client can access or
the number of users having access to the solution. We generally
recognize revenue from subscriptions ratably over the term of the
agreement.
• Consulting Services. We offer our clients assistance inimplementing
our solutions and optimizing their use. Consulting services include
application configuration, system integration, business process
re-engineering, change management and training services. Services
are billed either on a time-and-material or a fixed-fee basis. These
services are generally purchased as part of a subscription
arrangement and are typically performed within the first several
months of the arrangement. Clients may also purchase consulting
services
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at any other time. Our consulting services are performed by us directly or by
third-party service providers we hire. Clients may also choose to perform these
services themselves or hire their own third-party service providers. We
generally recognize revenue from consulting services using the proportional
performance method over the period the services are performed.
• E-learning Content. We resell third-party on-line training content,
which we refer to as e-learning content, to our clients. We also
host other e-learning content provided to us by our clients. We
generally recognize revenue from the resale of e-learningcontent as
it is delivered and recognize revenue from hosting as the hosting
services are provided.
Our client agreements generally include both a subscription to access our
solutions and related consulting services, and may also include e-learning
content. Our agreements generally do not contain any cancellation or refund
provisions other than in the event of our default.
Cost of Revenue
Cost of revenue consists primarily of costs related to hosting our solutions;
personnel and related expenses, including stock-based compensation, for network
infrastructure, IT support, consulting services and on-going client support;
payments to external service providers; amortization of capitalized software
costs, amortization of developed technology and software license rights;
licensing fees; and referral fees. In addition, we allocate a portion of
overhead, such as rent, IT costs, depreciation and amortization and employee
benefits costs, to cost of revenue based on headcount. The costs associated with
providing consulting services are significantly higher as a percentage of
revenue than the costs associated with providing access to our solution due to
the labor costs to provide the consulting services.
Operating Expenses
Our operating expenses are as follows:
• Sales and Marketing. Sales and marketing expenses consist primarily
of personnel and related expenses for our sales and marketing staff,
including salaries, benefits, bonuses, stock-basedcompensation and
commissions; costs of marketing and promotional events, corporate
communications, online marketing, product marketing and other
brand-building activities; and allocated overhead.
We intend to continue to invest in sales and marketing and expect spending in
these areas to increase as we continue to expand our business both domestically
and internationally. We expect sales and marketing expenses to continue to be
among the most significant components of our operating expenses.
• Research and Development. Research and development expenses consist
primarily of personnel and related expenses for our research and
development staff, including salaries, benefits, bonuses and
stock-based compensation; the cost of certain third-party service
providers; and allocated overhead. Research and development costs,
other than software development expenses qualifying for
capitalization, are expensed as incurred.
We have focused our research and development efforts on continuously improving
our solution. We believe that our research and development activities are
efficient because we benefit from maintaining a single software code base for
our solution. We expect research and development expenses to increase in
absolute dollars in the future, as we scale our research and development
department and expand our network infrastructure.
• General and Administrative. General and administrative expenses
consist primarily of personnel and related expenses for
administrative, legal, finance and human resource staffs, including
salaries, benefits, bonuses and stock-based compensation;
professional fees; insurance premiums; other corporateexpenses; and
allocated overhead.
We expect our general and administrative expenses to increase as we continue to
expand our operations, hire additional personnel and incur costs as a public
company. We expect to incur increased expenses related to outside legal counsel
assistance, accounting and auditing activities, compliance with the SEC
requirements and enhancing our internal control environment through the adoption
and administration of new corporate policies.
• Amortization of Certain Acquired Intangible Assets. Amortization of
certain acquired intangibles consist of amortization of Sonar
Limited acquisition-related intangibles including customer
relationships, non-compete agreements, patents, trade names and
trademarks.
Other Income (Expense)
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• Interest Expense. Interest expense consists primarily of interest
expense from borrowings under our credit facility and our promissory
notes; capital lease payments; amortization of debt issuance costs
and debt discounts.
• Change in Fair Value of Preferred Stock Warrant Liabilities.
Preferred stock warrant liabilities are the result of warrants
issued prior to our initial public offering in connection with
long-term debt and preferred stock financings. Changes in the fair
value of our preferred stock occurred in connection withchanges in
the overall value of our company. Immediately prior to the
completion of our initial public offering, all of our warrants to
purchase preferred stock were exercised, and as a result, we no
longer record any changes in the fair value of theseliabilities in
our statements of operations.
• Withdrawn Secondary Offering Expense. On July 20, 2011, we filed a
Registration Statement on Form S-1 in connection with a proposed
secondary offering of shares of our common stock. On August 8, 2011,
pursuant to Rule 477 under the Securities Act of 1933, as amended,
we requested that the Securities and Exchange Commissionconsent to
the withdrawal of the Registration Statement. During the three
months ended September 30, 2011, we incurred expenses of
approximately $0.6 million in connection with the proposed secondary
offering.
• Other, Net. Other, net consists of income and expense associated
with fluctuations in foreign currency exchange rates and other
non-operating expenses. We expect interest income (expense) and
other income (expense) to vary depending on the movement in foreign
currency exchange rates and the related impact on our foreign
exchange gain (loss).
Income Tax Benefit (Provision)
The income tax benefit (provision) is related to certain foreign income taxes
and the expected reversal of deferred tax liabilities assumed as part of the
Sonar Limited acquisition available to offset foreign net operating losses. As
we have incurred operating losses in the U.S. and certain foreign jurisdictions
in all periods to date and recorded a full valuation allowance against our U.S.
federal and state net deferred tax assets, we have not historically recorded a
provision for U.S. federal and state income taxes.
Critical Accounting Policies and Estimates
Information with respect to our critical accounting policies which we believe
have the most significant effect on our reported results and require subjective
or complex judgments of management are contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Form 10-K
filed with the Securities and Exchange Commission on March 6, 2012.
As of September 30, 2012, there have been no material changes to our critical
accounting policies since December 31, 2011. On April 5, 2012, we completed the
acquisition of Sonar Limited. As part of this acquisition, we acquired
finite-lived intangible assets totaling $7.1 million. The excess of the
acquisition consideration over the fair value of the assets acquired and
liabilities assumed was allocated to goodwill. Our accounting policy with
respect to finite-lived intangible assets and goodwill is described below.
Goodwill
Goodwill is not amortized, but instead is required to be tested for impairment
annually and under certain circumstances. We perform such testing of goodwill in
the fourth quarter of each year, or as events occur or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. Events or changes in circumstances which could trigger an
impairment review include a significant adverse change in legal factors or in
the business climate, an adverse action or assessment by a regulator,
unanticipated competition, a loss of key personnel, significant changes in the
manner we use the acquired assets or the strategy we have for our overall
business, significant negative industry or economic trends, or significant
underperformance relative to expected historical or projected future results of
operations.
As part of the annual impairment test, we conduct an assessment of qualitative
factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If we determine that it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount, we then conduct the first step of a two-step impairment test.
The first step of the test for goodwill impairment compares the fair value of
the applicable reporting unit with its carrying value. Fair value is determined
using a discounted cash flow method and/or prevailing earnings multiples for the
reporting unit. The use of discounted cash flows requires the use of various
economic, market and business assumptions in developing our internal forecasts,
the useful life over which cash flows will occur, and determination our weighted
average cost of capital that reflect our best estimates when performing the
annual impairment test. Judgment is required in selecting relevant earnings
multiples.
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If the fair value of a reporting unit is less than the reporting unit's carrying
value, we perform the second step of the test for impairment of goodwill. During
the second step, we compare the implied fair value of the reporting unit's
goodwill with the carrying value of that goodwill. The estimate of implied fair
value of goodwill may require valuations of certain internally generated and
unrecognized intangible assets and other assets and liabilities. If the carrying
value of the goodwill exceeds the calculated implied fair value, the excess
amount will be recognized as an impairment loss.
Intangible Assets
Identified intangible assets primarily consist of trade names and intellectual
property and acquisition-related intangibles, including developed technology,
customer relationships, non-compete agreements, patents, trade names and
trademarks. We determine the appropriate useful life of our intangible assets by
performing an analysis of expected cash flows of the acquired assets. Intangible
assets are amortized over their estimated useful lives ranging from two to ten
years, generally using the straight line method, which approximates the pattern
in which the economic benefits are consumed.
We evaluate the recoverability of our long-lived assets with finite useful
lives, including intangible assets for impairment, whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. Such
trigger events or changes in circumstances may include: a significant decrease
in the market price of a long-lived asset, a significant adverse change in the
extent or manner in which a long-lived asset is being used, a significant
adverse change in legal factors or in the business climate, the impact of
competition or other factors that could affect the value of a long-lived asset,
a significant adverse deterioration in the amount of revenue or cash flows
expected to be generated from an asset group, an accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
development of a long-lived asset, current or future operating or cash flow
losses that demonstrate 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. We perform impairment testing at
the asset group level that represents the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and
liabilities. If events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable and the expected undiscounted
future cash flows attributable to the asset group are less than the carrying
amount of the asset group, an impairment loss equal to the excess of the asset's
carrying value over its fair value is recorded. Fair value is determined based
upon estimated discounted future cash flows. There were no impairment charges
related to the identified intangible assets in the nine months ended
September 30, 2012 and in the year ended December 31, 2011.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1 of
notes to condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q.
Results of Operations
The following table sets forth our results of operations for each of the periods
indicated (in thousands). The period-to-period comparison of financial results
is not necessarily indicative of future results.
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Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Gross revenue(1) $ 30,768 $ 20,019 $ 81,488 $ 53,136
Common stock warrant charge(1) - - - (2,500 )
Net revenue 30,768 20,019 81,488 50,636
Cost of revenue 9,135 5,371 23,869 14,903
Gross profit 21,633 14,648 57,619 35,733
Operating expenses:
Sales and marketing 18,624 11,531 52,283 32,244
Research and development 4,101 2,670 10,625 7,608
General and administrative 6,600 3,439 18,346 10,577
Amortization of acquired intangibles 251 - 488 -
Total operating expenses 29,576 17,640 81,742 50,429
Loss from operations (7,943 ) (2,992 ) (24,123 ) (14,696 )
Other income (expense):
Interest income (expense) (121 ) (35 ) (358 ) (782 )
Change in fair value of preferred
stock warrant liabilities - - - (42,559 )
Withdrawn secondary offering expense - (555 ) - (555 )
Other, net 139 (643 ) (42 ) (220 )
Loss before income tax benefit
(provision) (7,925 ) (4,225 ) (24,523 ) (58,812 )
Income tax benefit (provision) 298 (52 ) 550 (132 )
Net loss $ (7,627 ) $ (4,277 ) $ (23,973 ) $ (58,944 )
(1) During the second quarter of 2011, we recorded a $2.5 million reduction of
revenue associated with a common stock warrant. There were no reductions
of revenue in any other period presented. We have presented gross revenue
excluding this non-cash common stock warrant charge, because this charge
does not relate to sales activity in the period, and we do not consider
the issuance of warrants to be indicative of our core operating
performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Critical Accounting Policies and
Estimates-Fair Value of Warrants" contained in the Form 10-K filed with
the Securities and Exchange Commission ("SEC") on March 6, 2012 for additional information about common stock warrants that are accounted for
as reductions of revenue.
The following table sets forth our revenue and key metrics that we use to
evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections and make strategic decisions:
Revenue and Metrics
At or For Three Months Ended At or For Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Net revenue (in thousands) $ 30,768 $ 20,019 $ 81,488 $ 50,636
Gross revenue (in thousands) $ 30,768 $ 20,019 $ 81,488 $ 53,136
Bookings (in thousands) $ 42,737 $ 23,990 $ 98,230 $ 59,193
Number of clients 1,112 710 1,112 710
Number of users (in thousands) 10,326 7,160 10,326 7,160
We generally recognize subscription revenue over the contract period, and as a
result of our revenue recognition policy and the seasonality of when we enter
into new client agreements, revenue from client agreements signed in the current
period may not be fully reflected in the current period. As a result, revenue
increases period over period are primarily from contracts that existed prior to
the beginning of that period, or as referenced below "existing clients". Gross
revenue in the first nine months of 2011 excludes the impact of a non-cash
reduction of revenue related to a common stock warrant issued to ADP of $2.5
million during the three months ended June 30, 2011. Net revenue for the first
nine months of 2011 was impacted by this
23
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non-cash reduction of revenue. There were no such reductions of revenue in the
three and nine months ended September 30, 2012, and as such, net revenue was
equal to gross revenue for these periods.
Revenue increased $10.7 million, or 54%, for the three months ended
September 30, 2012 as compared to the same period in 2011. The increase was
primarily the result of a $9.5 million increase in revenue from existing
clients, that is, revenue from clients in the three months ended September 30,
2012 from client agreements that were entered into prior to that period compared
to revenue from clients in the three months ended September 30, 2011 from client
agreements that were entered into prior to that same period. In addition,
revenue increased by $1.2 million from the acquisition of new clients during the
three months ended September 30, 2012 as compared to revenue during the three
months ended September 30, 2011 for the acquisition of clients during that
period.
Revenue generated in the United States was $22.0 million, or 71%, of total
revenue for the three months ended September 30, 2012 as compared to $14.5
million, or 72%, for the same period in 2011, resulting in a 52% increase.
Revenue generated outside of the United States was $8.8 million, or 29%, of
total revenue for the three months ended September 30, 2012 as compared to $5.6
million, or 28%, for the same period in 2011, resulting in a 58% increase.
Revenue generated outside of the United States increased primarily due to an
increase in our sales efforts internationally, particularly in Europe.
Net revenue increased $30.9 million, or 61%, for the nine months ended
September 30, 2012 as compared to the same period in 2011. The increase in net
revenue was primarily the result of a $17.8 million increase in revenue from
existing clients and a $13.0 million increase in revenue resulting from the
acquisition of new clients during the nine months ended September 30, 2012, as
compared to revenue in the nine months ended September 30, 2011 from existing
clients at that period and new client acquisitions during that period,
respectively.
Gross revenue increased $28.4 million, or 53%, for the nine months ended
September 30, 2012 as compared to the same period in 2011. The increase in gross
revenue was primarily the result of $15.3 million increase in revenue from
existing clients and a $13.0 million increase in revenue resulting from the
acquisition of new clients during the nine months ended September 30, 2012, as
compared to revenue in the nine months ended September 30, 2011 from existing
clients at that period and new client acquisitions during that period,
respectively.
Gross revenue generated in the United States was $57.3 million, or 70%, of total
revenue for the nine months ended September 30, 2012 as compared to $37.9
million, or 71%, for the same period in 2011, resulting in a 51% increase. Gross
revenue generated outside of the United States was $24.2 million, or 30%, of
total revenue for the nine months ended September 30, 2012 as compared to $15.2
million, or 29%, for the same period in 2011, resulting in a 59% increase.
Revenue generated outside of the United States increased primarily due to an
increase in our sales efforts internationally, particularly in Europe.
Bookings increased 78% and 66%, respectively, for the three and nine months
ended September 30, 2012 as compared to the same periods in 2011, reflecting the
increase in gross revenue for those periods, and an increase in deferred revenue
at September 30, 2012 from June 30, 2012 compared to the increase at
September 30, 2011 from June 30, 2011 and an increase in deferred revenue at
September 30, 2012 from December 31, 2011 as compared to the increase at
September 30, 2011 from December 31, 2010. The growth rates for revenue and
bookings are not correlated with each other in a given period due to the
seasonality of when we enter into client agreements, the varied timing of
billings, the recognition in most cases of subscription revenue on a
straight-line basis over the term of each client agreement, and the recognition
of consulting revenue generally are based on proportional performance over the
period the services are performed. Our number of clients grew 57% at
September 30, 2012 compared to September 30, 2011. Our number of users increased
44% at September 30, 2012 compared to September 30, 2011, due primarily to the
acquisition of new clients, although we also increased the number of users
within existing clients.
As discussed above under the heading "Metrics," bookings is a non-GAAP financial
measure defined as the sum of revenue and the change in the deferred revenue
balance for the period. Our management uses bookings in analyzing its financial
results and believes it is useful to investors, as a supplement to the
corresponding GAAP measure, in evaluating our ongoing operational performance
and trends and in comparing our financial measures with other companies in the
same industry. However, it is important to note that other companies, including
companies in our industry, may calculate bookings differently or not at all,
which may reduce its usefulness as a comparative measure.
The following table presents a reconciliation of revenue to bookings for each of
the periods presented (in thousands):
24
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Deferred
Revenue Three Months Ended
Balance September 30, 2012
Gross revenue $ 30,768
Deferred revenue at June 30, 2012 $ 60,653
Deferred revenue at September 30, 2012 72,622
Change in deferred revenue 11,969
Bookings $ 42,737
Deferred
Revenue Three Months Ended
Balance September 30, 2011
Gross revenue $ 20,019
Deferred revenue at June 30, 2011 $ 35,904
Deferred revenue at September 30, 2011 39,875
Change in deferred revenue 3,971
Bookings $ 23,990
Deferred
Revenue Nine Months Ended
Balance September 30, 2012
Gross revenue $ 81,488
Deferred revenue at December 31, 2011 $ 55,880
Deferred revenue at September 30, 2012 72,622
Change in deferred revenue 16,742
Bookings $ 98,230
Deferred
Revenue Nine Months Ended
Balance September 30, 2011
Gross revenue $ 53,136Deferred revenue at December 31, 2010 $ 33,818
Deferred revenue at September 30, 2011 39,875
Change in deferred revenue
6,057
Bookings $ 59,193
We believe our revenue growth is a result of our continued investment in and
development of our direct sales and sales support teams. We believe this
investment has enabled us to achieve greater sales coverage and better sales
execution, as well as increased marketing activities, which we believe have
increased brand awareness and created higher demand for our solution. We have
also continued to enhance our comprehensive solution, which we believe has
encouraged existing clients to add additional clouds and users.
Cost of Revenue and Gross Margin
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
Cost of revenue $ 9,135 $ 5,371 $ 23,869 $ 14,903
Gross profit $ 21,633 $ 14,648 $ 57,619 $ 35,733
Gross margin 70 % 73 % 71 % 71 %
Cost of revenue increased $3.8 million, or 70%, for the three months ended
September 30, 2012 as compared to the same period in 2011, attributable to $1.7
million in increased employee-related costs due to higher headcount and $0.7
million in increased costs related to outsourced consulting services, in each
case to service our existing clients and support our continued growth. We also
incurred $0.3 million in increased allocated overhead such as rent, IT costs,
depreciation and amortization and employee benefits costs, $0.3 million in
increased amortization of developed technology related to acquired intangibles
with our acquisition of Sonar Limited, and $0.3 million in increased
amortization of capitalized software.
Cost of revenue increased $9.0 million, or 60%, for the nine months ended
September 30, 2012 as compared to the same
25
--------------------------------------------------------------------------------
period in 2011, attributable to $4.5 million in increased employee-related costs
due to higher headcount and $1.2 million in increased costs related to
outsourced consulting services, in each case to service our existing clients and
support our continued growth. We also incurred $0.9 million in increased
allocated overhead such as rent, IT costs, depreciation and amortization and
employee benefits costs, $0.7 million in increased amortization of capitalized
software, $0.6 million in increased referral fees, $0.6 million in increased
amortization of acquired intangibles, and $0.4 million in increased third-party
e-learning costs.
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)Sales and marketing $ 18,624 $ 11,531 $ 52,283 $ 32,244
Percent of net revenue 61 % 58 % 64 % 64 %
Sales and marketing expenses increased $7.1 million, or 62%, for the three
months ended September 30, 2012 as compared to the same period in 2011. The
increase was attributable to the expansion of our sales force and increases in
marketing programs to address additional opportunities in new and existing
markets. Total headcount in sales and marketing at September 30, 2012 increased
compared to September 30, 2011, contributing to an increase in employee-related
costs of $5.2 million, consisting of increased employee compensation and
benefits of $3.3 million, increased commissions of $1.1 million, and increased
stock-based compensation of $0.8 million. In addition, we incurred increased
allocated overhead costs, such as rent, IT costs, and depreciation and
amortization, of $0.7 million, increased costs associated with outsourced
marketing programs and events of $0.6 million, and increased travel costs
associated with our direct sales teams of $0.4 million.
Sales and marketing expenses increased $20.0 million, or 62%, for the nine
months ended September 30, 2012 as compared to the same period in 2011. The
increase was attributable to the expansion of our sales force and increases in
marketing programs to address additional opportunities in new and existing
markets. Employee-related costs increased by $14.2 million, consisting of
increased employee compensation and benefits of $9.8 million, increased
commissions of $3.0 million, and increased stock-based compensation of
$1.4 million, primarily driven by increased headcount and increased sales. In
addition, we incurred increased allocated overhead costs, such as rent, IT
costs, and depreciation and amortization, of $2.1 million, increased costs
associated with outsourced marketing programs and events of $1.5 million, and
increased travel costs associated with our direct sales teams of $1.1 million.
Research and Development
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
Research and development $ 4,101 $ 2,670 $ 10,625 $ 7,608
Percent of net revenue 13 % 13 % 13 % 15 %
Research and development expenses increased by $1.4 million, or 54%, for the
three months ended September 30, 2012 as compared to the same period in 2011.
The increase was principally due to an increase in research and development
headcount at September 30, 2012 compared to September 30, 2011 to maintain and
improve the functionality of our solution. As a result, we incurred increased
employee-related costs of $1.0 million arising primarily from increased
headcount, consisting of increased employee compensation and benefits of $0.9
million and increased stock-based compensation of $0.1 million. In addition, in
the three months ended September 30, 2012 we incurred increased expenses of
allocated overhead costs, such as rent, IT costs, and depreciation and
amortization, of $0.3 million relating to overall increased expenses to support
our continued growth.
Research and development expenses increased by $3.0 million, or 40%, for the
nine months ended September 30, 2012 as compared to the same period in 2011. We
incurred increased employee-related costs of $1.8 million, consisting of
increased compensation and benefits, arising primarily from increased headcount.
In addition, in the nine months ended September 30, 2012, we incurred increased
expenses of allocated overhead costs, such as rent, IT costs, and depreciation
and amortization, of $0.8 million relating to overall increased expenses to
support our continued growth and increased expenses related to third-party
consultants of $0.3 million.
26
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We capitalize a portion of our software development costs related to the
development and enhancements of our solution, which is then amortized to cost of
revenue. The timing of our capitalizable development and enhancement projects
may affect the amount of development costs expensed in any given period. We
capitalized $1.5 million and $0.9 million of software development costs and
amortized $0.7 million and $0.5 million in the three months ended September 30,
2012 and September 30, 2011, respectively, and capitalized $4.1 million and $2.4
million and amortized $1.9 million and $1.3 million in the nine months ended
September 30, 2012 and September 30, 2011, respectively.
General and Administrative
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
General and administrative $ 6,600 $ 3,439 $ 18,346 $ 10,577
Percent of net revenue 21 % 17 % 23 % 21 %
General and administrative expenses increased by $3.2 million, or 92%, for the
three months ended September 30, 2012 as compared to the same period in 2011.
The increase was driven by increased employee-related costs and professional
fees to support our growing business and operations as a public company. We
incurred increased employee-related costs of $1.9 million, consisting of
increased stock-based compensation expense of $1.2 million and increased
employee compensation and benefits of $0.7 million, as a result of increased
headcount and corresponding stock-based compensation awards between
September 30, 2011 and September 30, 2012. In addition, we incurred increased
professional fees of $0.5 million for accounting, audit, legal and tax services,
increased expenses related to third-party consultants of $0.2 million, and
increased taxes and licenses of $0.2 million.
General and administrative expenses increased by $7.8 million, or 73%, for the
nine months ended September 30, 2012 as compared to the same period in 2011. The
increase was driven by increased employee-related costs due to our increased
headcount and professional fees to support our growing business and operations
as a public company. We incurred increased employee-related costs of $4.4
million, consisting of increased stock-based compensation expense of $2.8
million and increased employee compensation and benefits of $1.6 million, as a
result of increased headcount and corresponding stock-based compensation awards
between September 30, 2011 and September 30, 2012. In addition, we incurred
increased professional fees of $2.0 million for accounting, audit, legal and tax
services, including $0.8 million of costs associated with our acquisition of
Sonar Limited, increased subscription fees of $0.3 million, increased taxes and
licenses expenses of $0.6 million, increased expenses of allocated overhead
costs such as rent, IT costs, and depreciation and amortization of $0.2 million,
and increased expenses related to third-party consultants of $0.2 million.
Amortization of certain acquired intangible assets
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
Amortization of certain acquired
intangible assets $ 251 $ - $ 488 $ -
Amortization of acquired intangibles increased by $0.3 million and $0.5 million
for the three and nine months ended September 30, 2012, respectively, as
compared to the same period in 2011 due to the amortization of intangible assets
acquired through the acquisition of Sonar Limited.
The following table presents our estimate of amortization expense for each of
the five succeeding fiscal years for finite-lived intangible assets that existed
at September 30, 2012 (in thousands):
27
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2012 $ 562
2013 2,192
2014 $ 2,007
2015 1,755
2016 $ 607
Thereafter 320
Total $ 7,443
Estimated amortization expense of $0.3 million, $1.2 million, $1.2 million, $1.2
million, $0.4 million and $0.3 million will be recorded in cost of revenue for
2012, 2013, 2014, 2015, 2016 and thereafter, respectively. The remaining
estimated amortization expense will be recorded in amortization of certain
acquired intangible assets within operating expenses.
Other Income (Expense)
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
Interest income $ - $ 8 $ - $ 15
Interest expense (121 ) (43 ) (358 ) (797 )
Change in fair value of preferred stock
warrant liabilities - - - (42,559 )
Withdrawn secondary offering expense - (555 ) - (555 )
Other, net 139 (643 ) (42 ) (220 )
Total $ 18 $ (1,233 ) $ (400 ) $ (44,116 )
Interest expense for the nine months ended September 30, 2012 decreased by $0.4
million as compared to the same period in 2011 due to decreased borrowings and
the write-off of the remaining unamortized debt discount of $0.3 million in the
three months ended March 31, 2011 associated with debt that was repaid with
proceeds from our initial public offering.
During the nine months ended September 30, 2011, we recorded a non-cash charge
of $42.6 million related to the change in fair value of our preferred stock
warrant liabilities from December 31, 2010 to the respective exercise dates of
the warrants in March 2011. We valued our preferred stock warrants at the end of
each fiscal period using the Black-Scholes option pricing model. During March
2011, all of our warrants to purchase preferred stock were exercised, and all
outstanding shares of preferred stock, including all shares of preferred stock
issued upon the exercise of the preferred stock warrants, were converted into
common stock on a one-for-one basis. As a result, subsequent to the three months
ended March 31, 2011, we no longer record any changes in the fair value of such
liabilities in our statement of operations.
During the three months ended September 30, 2011, we incurred legal, accounting
and printing related costs of approximately $0.6 million associated with our
intended secondary offering. As a result of our withdrawal from the offering, we
expensed such costs.
Other, net is comprised of foreign exchange gains and losses. Foreign exchange
gains and losses for the three months and nine months ended September 30, 2012
and 2011, respectively, were related to fluctuations in the British Pound and
Euro in relation to the U.S. Dollar. The foreign exchange gains and losses are
mainly attributable to unrealized foreign exchange gains and losses on
intercompany loans and other monetary accounts. During the three months ended
September 30, 2012, we had unrealized gains of $0.2 million compared to
unrealized losses of $0.5 million in the same period in 2011. During the nine
months ended September 30, 2012, we had unrealized gains of $37,000 compared to
unrealized losses of $0.3 million in the same period in 2011.
Income Tax Benefit (Provision)
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(dollars in thousands)
Income tax benefit (provision) $ 298 $ (52 ) $ 550 $ (132 )
28--------------------------------------------------------------------------------
We have incurred operating losses in the U.S. and certain foreign jurisdictions
in all periods to date and have recorded a full valuation allowance against our
net deferred tax assets and, therefore, have not recorded a provision for income
taxes for any of the periods presented, other than provisions for certain
foreign income taxes. During the three and nine months ended September 30, 2012,
we recorded an income tax benefit due to the expected reversal of deferred tax
liabilities assumed as part of the Sonar Limited acquisition available to offset
foreign net operating losses. Realization of any of our deferred tax assets
depends upon future earnings, the timing and amount of which are uncertain.
Liquidity and Capital Resources
To date, our operations and growth have been financed primarily through the sale
of equity securities, including net cash proceeds from our initial public
offering of common stock in March 2011, in which we raised approximately $90.5
million, net of underwriting discounts and commissions but before offering
expenses of $3.7 million.
At September 30, 2012, our principal sources of liquidity were $64.5 million of
cash and cash equivalents.
Our cash flows from operating activities have historically been significantly
impacted by the contractual payment terms and patterns of client agreements, as
well as our investments in sales and marketing and research and development to
drive our business growth.
Based on our current level of operations and anticipated growth, we believe our
future cash flows from operating activities and existing cash and cash
equivalents, will provide adequate funds for our ongoing operations for at least
the next twelve months. Our future capital requirements will depend on many
factors, including our rate of revenue, billings growth and collections, the
level of our sales and marketing efforts, the timing and extent of spending to
support product development efforts and expansion into new territories, the
timing of introductions of new services and enhancements to existing services,
the timing of general and administrative expenses as we grow our administrative
infrastructure, the continuing market acceptance of our solution, and to the
extent to which we incur costs associated with integrating Sonar Limited, our
recently acquired New Zealand subsidiary, which we acquired in April 2012. To
the extent that existing cash and cash from operations are not sufficient to
fund our future activities, we may need to raise additional funds or utilize our
cash resources. We funded the cash portion of the purchase price of Sonar
Limited with $12.5 million of our own cash resources. Although we are not
currently a party to any agreement or letter of intent with respect to potential
investments in, or acquisitions of, complementary businesses, services or
technologies, we may enter into these types of arrangements in the future, which
could also require us to seek additional equity financing or utilize our cash
resources.
Depending on certain growth opportunities, we may choose to accelerate
investments in sales and marketing, research and development, technology and
services, which may require the use of proceeds from our initial public offering
for such additional expansion and expenditures, although we have no present
understandings, commitments or agreements to enter into any such acquisitions.
The following table sets forth a summary of our cash flows for the periods
indicated (in thousands):
Nine Months Ended September 30,
2012 2011
Net cash used in operating activities $ (3,793 ) $ (3,040 )
Net cash used in investing activities (16,437 ) (20,144 )
Net cash (used in) provided by financing activities (663 ) 80,637
Net Cash Used In Operating Activities
Our net loss and cash flows from operating activities are significantly
influenced by our investments in headcount and infrastructure to support
anticipated growth. In addition, our net loss in prior periods has been
significantly greater than our use of cash for operating activities due to the
inclusion of substantial non-cash charges. Our cash flows from operating
activities are affected by the seasonality of our business, which results in
variations in the timing of our invoicing of, and our receipt of payments from,
our clients. We have generally experienced increased invoicing in the third and
fourth quarters of each year due to higher acquisitions of new clients, the
timing of annual billings for existing clients and increased client renewals
during these quarters. As a result, we have also experienced increased levels of
client payments during the fourth and first quarters of each year, related to
client receipts from third and fourth quarter invoices. Conversely, we have
experienced relatively lower levels of billings in the first and second quarters
of each year, and thus client receipts in the second and third quarters have
been lower relative to the other quarters. We expect this seasonality and
resulting trends in cash flows from operating activities to continue.
29
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Cash used in operating activities of $3.8 million in the nine months ended
September 30, 2012 was a result of our continued significant investments in
headcount, increased expenses incurred as a result of becoming a public company,
including costs associated with public company reporting and corporate
governance requirements, and other expenses incurred to grow our business. In
the nine months ended September 30, 2012, $12.7 million, or 53%, of our net loss
of $24.0 million consisted of non-cash items, including $8.3 million of
stock-based compensation, $4.9 million of depreciation and amortization, and
$0.7 million of deferred income taxes.
Cash used in operating activities in the nine months ended September 30, 2012
also included a $10.1 million increase in accounts receivable attributable to
higher billings in the third quarter of 2012 due to increased number of clients,
a $3.4 million increase in prepaid and other assets due to an increase in
business activity associated with the growth of our business and the timing of
payments to vendors, and a $0.6 million increase in deferred commissions due to
increased sales during the period. Cash used in operating activities was
partially offset by a $15.7 million increase in deferred revenue due to
increased billings during the nine months ended September 30, 2012, an increase
in other liabilities of $3.0 million, an increase in accounts payable of $1.7
million attributable to increased expenses associated with our growth, and a
$1.1 million increase in accrued liabilities primarily due to the timing of
payments.
Cash used in operating activities of $3.0 million in the nine months ended
September 30, 2011 was a result of our continued significant investments in
headcount, increased expenses incurred as we became a public company, including
costs associated with public company reporting and corporate governance
requirements, and other expenses incurred to grow our business. In the nine
months ended September 30, 2011, $51.7 million, or 88%, of our net loss of $58.9
million consisted of non-cash items, including a $42.6 million increase in
preferred stock warrant liabilities, a $2.5 million reduction of revenue for the
issuance of a common stock warrant in connection with our distributor agreement
with ADP, $3.0 million of stock-based compensation, $2.7 million of depreciation
and amortization, $0.5 million of non-cash interest expense, approximately $0.3
million in foreign exchange losses, and a $0.2 million non-cash expense related
to a charitable contribution of 20,000 shares of our common stock to a
non-profit organization in February 2011. In addition, we incurred $0.6 million
in expenses associated with our secondary offering, which we withdrew from in
August 2011.
Cash used in operating activities in the nine months ended September 30, 2011
also included a $2.2 million increase in accounts receivable attributable to
higher billings in the third quarter of 2011 due to the seasonality of our
business, as discussed above, a $1.5 million increase in prepaid and other
assets due to an increase in business activity associated with the growth of our
business and the timing of payments to vendors, a $0.5 million increase in
deferred commissions due to increased sales during the period, and a $0.3
million decrease in other liabilities. Cash used in operating activities was
partially offset by a $6.1 million increase in deferred revenue due to increased
billings during the nine months ended September 30, 2011, a $1.8 million
increase in accrued expenses due to increased expenses associated with the
growth of the company, and a $0.3 million increase in accounts payable, also
attributable to increased expenses resulting from the growth of the company.
Net Cash Used in Investing Activities
Our primary investing activities have consisted of capital expenditures to
develop our capitalized software as well as to purchase computer equipment and
furniture and fixtures in support of expanding our infrastructure and workforce.
As our business grows, we expect our capital expenditures and our investment
activity to continue to increase.
We used $16.4 million of cash in investing activities in the nine months ended
September 30, 2012, primarily due to our acquisition of Sonar Limited of $12.4
million, $3.7 million of investments in our capitalized software, and $0.3
million in purchases of additional equipment during the period.
We used $20.1 million of cash in investing activities in the nine months ended
September 30, 2011, primarily due to our purchase of available-for-sale
securities of $34.1 million during the second quarter of 2011, partially offset
by the maturity of $17.0 million of these securities in the third quarter of
2011, $2.2 million of investments in our capitalized software and approximately
$0.8 million of net investments in other fixed assets.
Net Cash (Used in) Provided by Financing Activities
Cash used in financing activities of $0.7 million in the nine months ended
September 30, 2012 was primarily due to payments of $1.4 million on our capital
lease and financing obligations, and debt repayment of $1.3 million, partially
offset by $2.0 million in proceeds from stock option exercises and common stock
warrant exercises.
Cash provided by financing activities of $80.6 million in the nine months ended
September 30, 2011 was primarily due to $90.5 million of proceeds from our
initial public offering, net of underwriting discounts and commissions but
before offering expenses. In addition, cash provided by financing activities was
also due to the receipt of $3.8 million in proceeds from the exercise of
warrants to purchase preferred stock and common stock and stock options and
borrowing of $0.7 million under our
30--------------------------------------------------------------------------------
SVB Credit Facility to finance the purchase of additional equipment and
software. These proceeds were partially offset by payments of $9.2 million to
repay outstanding debt, payments of costs of $3.4 million related to our initial
public offering, payments of $1.2 million on our capital lease obligations, and
payments of costs of $0.6 million related to our withdrawn secondary offering.
Contractual Obligations
There have been no significant changes in contractual obligations from those
disclosed in our Form 10-K filed with the Securities and Exchange Commission on
March 6, 2012 except for the following: during the nine months ended
September 30, 2012, we (i) financed the purchase of equipment through capital
lease agreements that increased our capital lease commitments by approximately
$1.6 million through 2015; (ii) entered into operating leases in Australia,
Denmark, France, Germany, Hong Kong, Italy, Netherlands, New Zealand, Spain and
the United Kingdom, with aggregate operating lease commitments of approximately
$0.2 million through 2012 and $0.5 million through 2013; (iii) entered into an
e-learning content reseller agreement with a third party content provider
whereby we are obligated to pay license fees of $0.8 million in 2012, 2013 and
2014; (iv) entered into an agreement to purchase intellectual property rights
related to a software application for $0.8 million which was financed through a
third-party debt agreement with payments of approximately $0.2 million due in
2012, 2013, 2014 and 2015; and (v) entered into a cloud subscription agreement
with a provider of enterprise cloud computing and social enterprise solutions
whereby we are obligated to pay fees under this agreement of $0.6 million in
2013, $0.8 million in 2014, and $1.0 million in 2015.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not have any relationships with other
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, that have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. We are therefore not exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in those types of relationships.
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