NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
Description of Business and Basis of Presentation
|
LivePerson, Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware in November 1995 and the LivePerson service was introduced in November 1998. In April 2000, the Company completed an initial public offering and is currently traded on the NASDAQ Global Select Market and the Tel Aviv Stock Exchange. LivePerson is headquartered in New York City with U.S. offices in Alpharetta (Georgia), Austin (Texas), Mountain View (California) and Seattle (Washington), and international offices in Amsterdam (Netherlands), Berlin (Germany), London (United Kingdom), Mannheim (Germany), Melbourne (Australia), Milan (Italy), Paris (France), Ra'anana (Israel), Reading (United Kingdom), Sydney (Australia), Tel Aviv (Israel), and Tokyo (Japan).
LivePerson makes life easier by transforming how people communicate with brands. During the past decade, consumers have made the mobile device the center of their digital lives, and they have made mobile messaging the center of communication with friends, family and peers. The Company’s technology enables consumers to connect with businesses through these same preferred conversational interfaces, including Facebook Messenger, WhatsApp, Apple Business Chat, Google Rich Business Messenger and Alexa. These messaging conversations harness human agents, bots and Artificial Intelligence (AI) to power convenient, personalized and content-rich journeys across the entire consumer lifecycle, from discovery and research, to sales, service and support, and even marketing and brick and mortar engagements. For example, consumers can look up product info like ratings, images and pricing, search for stores, see products in the store, schedule appointments, apply for credit, approve repairs, make purchases or payments - all without ever leaving the messaging channel. LivePerson calls these AI and human-assisted conversational experiences over messaging Conversational Commerce.
LiveEngage, the Company’s enterprise-class, cloud-based platform, was designed for Conversational Commerce, enabling businesses to securely deploy messaging, coupled with bots and AI, at scale for brands with tens of millions of customers and many thousands of customer care agents. LiveEngage powers conversations across each of a brand’s primary digital channels, including mobile apps, mobile and desktop web browsers, short message service (SMS), social media and third-party consumer messaging platforms. Brands can also use LiveEngage to message consumers when they dial a 1-800 number instead of having them navigate interactive voice response systems (IVRs) and wait on hold.
The robust, cloud-based suite of rich mobile messaging and real-time chat offerings features intelligent routing and capacity mapping, queue prioritization, customer sentiment, real-time analytics and reporting, content delivery, Payment Card Industry (PCI) compliance, cobrowsing and a sophisticated proactive targeting engine. With LiveEngage, agents can manage all conversations with consumers through a single console interface, regardless of which disparate messaging endpoints the consumers originate from: i.e., WhatsApp, Line, Apple Business Chat, IVR, or Google Home. An extensible application programming interface (API) stack facilitates a lower cost of ownership by facilitating robust integration into back-end systems, as well as enabling developers to build their own programs and services on top of the platform. More than three dozen APIs are available on LiveEngage.
LiveEngage also features Maven, a robust AI engine that was custom designed for Conversational Commerce. Maven, announced in December 2018, puts the power of bot development, training and management into the hands of the contact center and its agents, the teams most familiar with how to structure sales and service conversations to drive successful outcomes. The platform enables what the Company calls “the tango” of humans, AI and bots, whereby human agents act as bot managers, overseeing AI-powered conversations and seamlessly stepping into the flow when a personal touch is needed. Through Maven Assist, agents become ultra-efficient, leveraging the AI engine to serve up relevant content, define next-best actions and take over repetitive transactional work, so that the agent can focus on relationship building. By seamlessly integrating LiveEngage with Maven, as well as third-party bots, the platform provides businesses with a comprehensive view of all AI-based and human-based conversations from a single console.
Complementing LiveEngage are teams of technical, solutions and consulting professionals that have developed deep domain expertise in Conversational Commerce across industries and messaging endpoints. The Company is positioned as an authority in Conversational Commerce, publishing a proprietary Conversational Quotient™ Index that measures each customer across multiple key indicators to ascertain the sophistication and breadth of their conversational commerce capabilities. Each business is then benchmarked against industry peers to determine their relative progression. The Company has developed a Transformation Model that is introduced to existing and prospective customers to help guide them on their journeys from legacy and often times inefficient legacy voice, email and chat solutions to modern conversational ones powered by messaging and AI. LivePerson’s products, coupled with our domain knowledge, industry expertise and professional services, have been proven to maximize the effectiveness of Conversational Commerce and deliver measurable return on investment.
As a “cloud computing” or software-as-a-service (SaaS) provider, LivePerson provides solutions on a hosted basis. This model offers significant benefits over premise-based software, including lower up-front costs, faster implementation, lower total cost of ownership, scalability, cost predictability, and simplified upgrades. Organizations that adopt a fully-hosted, multi-tenant
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
architecture that is maintained by LivePerson eliminate the majority of the time, server infrastructure costs, and IT resources required to implement, maintain, and support traditional on-premise software.
The Company's consumer services offering is an online marketplace that connects independent service providers (Experts) who provide information and knowledge for a fee via mobile and online messaging with individual consumers (Users). Users seek assistance and advice in various categories including personal counseling and coaching, computers and programming, education and tutoring, spirituality and religion, and other topics.
Basis of Presentation
The accompanying condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the consolidated financial position of LivePerson as of September 30, 2019, and the consolidated results of operations, comprehensive loss and cash flows for the interim periods ended September 30, 2019 and 2018. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at December 31, 2018 has been derived from audited consolidated financial statements at that date.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016‑13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” , which changes the impairment model for most financial assets. The new model uses a forward‑looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018‑19, “ Codification Improvements to Topic 326, Financial Instruments- Credit Losses ”, which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments-Credit Losses . Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases . In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarifies treatment of certain credit losses. In May 2019, the FASB issued ASU 2019-05, " Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ", which permits an entity, upon adoption of ASU 2016-13, to irrevocably elect the fair value option (on an instrument-by instrument basis) for eligible financial assets measured at amortized cost basis. These ASUs are effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2018, the FASB issued ASU No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements" (“ASU 2018-15”). This standard aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under Accounting Standards Codification ("ASC") 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently in the process of evaluating the impact of the adoption of ASU 2018-230 on its consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (“ASU 2017-04”). This update addresses concerns over the cost and complexity of the two-step goodwill impairment test. The amendments in this update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2017-04 will have a material effect on its financial position, results of operations or cash flows.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) may apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.
The Company adopted ASU No. 2016-02, "Leases" (Topic 842), as of January 1, 2019 using the modified transition approach. The modified transition approach provides a method for recording existing leases at adoption. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). For its long-term operating lease, the Company recognized a right-of-use asset and a lease liability on its balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise. Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations. Variable lease payments include lease operating expenses. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $14.5 million and $18.3 million, respectively, as of September 30, 2019. The standard did not materially impact the Company's consolidated net earnings and had no impact on cash flows.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation -Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). This new standard expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The standard did not materially impact the Company's consolidated net earnings and had no impact on cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The majority of the Company’s revenue is generated from monthly service revenues and related professional services from the sale of the LivePerson services. Revenues are recognized when control of these services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, the Company satisfies a performance obligation.
Total revenue of $75.2 million and $64.2 million recognized during the three months ended September 30, 2019 and 2018 and $212.5 million and $184.1 million recognized during the nine months ended September 30, 2019 and 2018, respectively.
Hosted Services- Business Revenue
Hosted Services Business revenue is reported at the amount that reflects the ultimate consideration expected to be received and primarily consist of fees that provide customers access to LiveEngage, the Company’s enterprise-class, cloud-based platform. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company recognizes this revenue over time on a ratable basis over the contract term, beginning on the date that access to the LiveEngage platform is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one year or longer in length, billed, monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements. Additionally, for certain of the Company's larger customers, the Company may provide call center labor through an arrangement with one or more of several qualified vendors. For most of these customers, the Company passes the fee it incurs with the labor provider and its fee for the hosted services through to its customers in the form of a fixed fee for each order placed via the Company's online engagement solutions. For these Gainshare (formerly Pay for Performance) arrangements in accordance with ASC-606, "Principal Agent Considerations", the Company acts as a principal in a transaction if it controls the specified goods or services before they are transferred to the customer.
Professional Services Revenues
Professional services revenue primarily consists of fees for deployment and optimization services, as well as training delivered on an on-demand basis which is deemed to represent a distinct stand-ready performance obligation. Professional Services Revenues are reported at the amount that reflects the ultimate consideration the Company expects to receive in exchange for such services. Control for the majority of the Company's Professional Services contracts passes over time to the customer and is recognized ratably over the contracted period, as the passage of time is deemed to be the most faithful depiction of the transfer of control. For certain deployment services, which are not deemed to represent a distinct performance obligation, revenue will be recognized in the same manner as the fee for access to the LiveEngage platform, and as such will be recognized on a straight-line basis over the contract term. For services billed on a fixed price basis, revenue is recognized over time based on the proportion performed using inputs as the measure of progress toward complete satisfaction of the performance obligation. Professional service contracts are generally one year or longer in length, billed, monthly, quarterly or annually in advance. There is no significant variable consideration related to these arrangements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contracts with Multiple Performance Obligations
Some of the Company's contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the cloud applications sold, and the number and types of users within its contracts.
Hosted Services- Consumer Revenue
For revenue from the Company's Consumer segment generated from online transactions between Experts and Users, revenue is recognized at an amount net of Expert fees in accordance with ASC 606, “Principal Agent Considerations,” due primarily to the fact that the Expert is the primary obligor. Additionally, the Company performs as an agent without any risk of loss for collection, and is not involved in selecting the Expert or establishing the Expert’s fee. The Company collects a fee from the consumer and retains a portion of the fee, and then remits the balance to the Expert. Revenue from these transactions is recognized at the point in time when the transaction is complete and no significant performance obligations remain.
Deferred Revenues
The Company records deferred revenues when cash payments are received or due in advance of its performance. The increase in the deferred revenue balance as of September 30, 2019 is primarily driven by cash payments received or due in advance of satisfying its performance obligations, partially offset by $37.8 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2018.
The following table presents deferred revenue by revenue source (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
As of September 30, 2019
|
|
As of December 31, 2018
|
Hosted services – Business
|
|
$
|
67,010
|
|
|
$
|
52,232
|
|
Professional services – Business
|
|
5,105
|
|
|
2,783
|
|
Total deferred revenue - short term
|
|
$
|
72,115
|
|
|
$
|
55,015
|
|
|
|
|
|
|
Hosted services – Business
|
|
$
|
818
|
|
|
$
|
19
|
|
Professional services – Business
|
|
246
|
|
|
203
|
|
Total deferred revenue - long term
|
|
$
|
1,064
|
|
|
$
|
222
|
|
Disaggregated Revenue
The following table presents the Company's revenues disaggregated by revenue source (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
|
Hosted services – Business
|
$
|
57,824
|
|
|
$
|
50,046
|
|
|
$
|
163,033
|
|
|
$
|
145,805
|
|
Hosted services – Consumer
|
6,704
|
|
|
4,876
|
|
|
18,235
|
|
|
14,508
|
|
Professional services
|
10,647
|
|
|
9,291
|
|
|
31,268
|
|
|
23,801
|
|
Total revenue
|
$
|
75,175
|
|
|
$
|
64,213
|
|
|
$
|
212,536
|
|
|
$
|
184,114
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue by Geographic Location
The following table presents the Company’s revenues attributable to domestic and foreign operations for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States
|
$
|
44,130
|
|
|
$
|
37,033
|
|
|
$
|
124,034
|
|
|
$
|
106,676
|
|
Other Americas (1)
|
3,814
|
|
|
2,402
|
|
|
8,466
|
|
|
6,208
|
|
Total Americas
|
47,944
|
|
|
39,435
|
|
|
132,500
|
|
|
112,884
|
|
EMEA (2) (4)
|
19,308
|
|
|
18,536
|
|
|
57,332
|
|
|
52,974
|
|
APAC (3)
|
7,923
|
|
|
6,242
|
|
|
22,704
|
|
|
18,256
|
|
Total revenue
|
$
|
75,175
|
|
|
$
|
64,213
|
|
|
$
|
212,536
|
|
|
$
|
184,114
|
|
(1) Canada, Latin America and South America
(2) Europe, the Middle East and Africa (“EMEA”)
(3) Asia-Pacific (“APAC”)
(4) Includes revenues from the United Kingdom of $12.3 million and $11.1 million for the three months ended September 30, 2019 and 2018, respectively, and $36.9 million and $34.7 million for the nine months ended September 30, 2019 and 2018, respectively, and from the Netherlands of $2.4 million and $2.2 million for the three months ended September 30, 2019 and 2018, respectively, and $7.5 million and $6.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Information about Contract Balances
Amounts collected in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company's deferred revenue balance is related to Hosted Services- Business Revenue.
In some arrangements, the Company allows customers to pay for access to LiveEngage over the term of the software license. The Company refers to these as subscription transactions. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables, anticipated to be invoiced in the next twelve months, are included in accounts receivable on the consolidated balance sheet. The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Unbilled Receivable
|
|
Prepaid Commissions
|
|
Deferred Revenue (current)
|
|
Deferred Revenue (long term)
|
Opening Balance as of December 31, 2018
|
$
|
34,211
|
|
|
$
|
11,812
|
|
|
$
|
13,361
|
|
|
$
|
55,015
|
|
|
$
|
222
|
|
Increase, net
|
5,876
|
|
|
1,888
|
|
|
11,033
|
|
|
17,100
|
|
|
842
|
|
Ending Balance as of September 30, 2019
|
$
|
40,087
|
|
|
$
|
13,700
|
|
|
$
|
24,394
|
|
|
$
|
72,115
|
|
|
$
|
1,064
|
|
As of September 30, 2019, the Company expects to recognize the long term performance obligations in 2020.
3. Net Loss Per Share
The Company calculates earnings per share (“EPS”) in accordance with the provisions of ASC 260-10. Under the guidance, basic EPS excludes dilution for common stock equivalents and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. All options, warrants or other potentially dilutive instruments issued for nominal consideration are required to be included in the calculation of basic and diluted net income attributable to common stockholders. Diluted EPS is calculated using the treasury stock method and reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock.
Diluted net loss per common share for the three and nine months ended September 30, 2019 does not include the effect of 8,905,707 outstanding common stock awards, as the effect of their inclusion is anti-dilutive. Diluted net loss per common share for the three and nine months ended September 30, 2018 does not include the effect of 9,168,450 outstanding common stock awards, as the effect of their inclusion is anti-dilutive.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of shares used in calculating basic and diluted net loss per share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic
|
63,014,802
|
|
|
60,014,246
|
|
|
62,268,439
|
|
|
58,667,289
|
|
Effect of assumed exercised options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
63,014,802
|
|
|
60,014,246
|
|
|
62,268,439
|
|
|
58,667,289
|
|
The Company expects to settle the principal amount of its outstanding Notes (as defined below) in cash and any excess in shares of the Company’s common stock. The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the initial conversion price of $38.58 per share for the Notes. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a full description of the Notes.
The Company accounts for its segment information in accordance with the provisions of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company is organized into two operating segments for purposes of making operating decisions and assessing performance. The Business segment enables brands to leverage LiveEngage’s sophisticated intelligence engine to connect with consumers through an integrated suite of mobile and online business messaging technologies. The Consumer segment facilitates online transactions between independent service providers (“Experts”) and individual consumers (“Users”) seeking information and knowledge for a fee via mobile and online messaging. Both segments currently generate their revenue primarily in the United States. The chief operating decision maker, who is the chief executive officer, evaluates performance, makes operating decisions, and allocates resources based on the operating income of each segment. The reporting segments follow the same accounting polices used in the preparation of the Company’s condensed consolidated financial statements which are described in the summary of significant accounting policies. The Company allocates cost of revenue, sales and marketing and amortization of purchased intangibles to the segments, but it does not allocate product development expenses, general and administrative expenses, restructuring costs and income tax expense because management does not use this information to measure performance of the operating segments. There are currently no inter-segment sales.
Summarized financial information by segment for the three months ended September 30, 2019, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Corporate
|
|
Consolidated
|
Revenue:
|
|
|
|
|
|
|
|
Hosted services – Business
|
$
|
57,824
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,824
|
|
Hosted services – Consumer
|
—
|
|
|
6,704
|
|
|
—
|
|
|
6,704
|
|
Professional services
|
10,647
|
|
|
—
|
|
|
—
|
|
|
10,647
|
|
Total revenue
|
68,471
|
|
|
6,704
|
|
|
—
|
|
|
75,175
|
|
Cost of revenue
|
18,950
|
|
|
1,170
|
|
|
—
|
|
|
20,120
|
|
Sales and marketing
|
37,512
|
|
|
4,262
|
|
|
—
|
|
|
41,774
|
|
Amortization of purchased intangibles
|
447
|
|
|
—
|
|
|
—
|
|
|
447
|
|
Unallocated corporate expenses
|
—
|
|
|
—
|
|
|
35,960
|
|
|
35,960
|
|
Operating income (loss)
|
$
|
11,562
|
|
|
$
|
1,272
|
|
|
$
|
(35,960
|
)
|
|
$
|
(23,126
|
)
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized financial information by segment for the three months ended September 30, 2018, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Corporate
|
|
Consolidated
|
Revenue:
|
|
|
|
|
|
|
|
Hosted services – Business
|
$
|
50,046
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,046
|
|
Hosted services – Consumer
|
—
|
|
|
4,876
|
|
|
—
|
|
|
4,876
|
|
Professional services
|
9,291
|
|
|
—
|
|
|
—
|
|
|
9,291
|
|
Total revenue
|
59,337
|
|
|
4,876
|
|
|
—
|
|
|
64,213
|
|
Cost of revenue
|
14,695
|
|
|
994
|
|
|
—
|
|
|
15,689
|
|
Sales and marketing
|
24,391
|
|
|
2,357
|
|
|
—
|
|
|
26,748
|
|
Amortization of purchased intangibles
|
424
|
|
|
—
|
|
|
—
|
|
|
424
|
|
Unallocated corporate expenses
|
—
|
|
|
—
|
|
|
26,178
|
|
|
26,178
|
|
Operating income (loss)
|
$
|
19,827
|
|
|
$
|
1,525
|
|
|
$
|
(26,178
|
)
|
|
$
|
(4,826
|
)
|
Summarized financial information by segment for the nine months ended September 30, 2019, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Corporate
|
|
Consolidated
|
Revenue:
|
|
|
|
|
|
|
|
Hosted services – Business
|
$
|
163,033
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
163,033
|
|
Hosted services – Consumer
|
—
|
|
|
18,235
|
|
|
—
|
|
|
18,235
|
|
Professional services
|
31,268
|
|
|
—
|
|
|
—
|
|
|
31,268
|
|
Total revenue
|
194,301
|
|
|
18,235
|
|
|
—
|
|
|
212,536
|
|
Cost of revenue
|
53,572
|
|
|
3,246
|
|
|
—
|
|
|
56,818
|
|
Sales and marketing
|
103,171
|
|
|
10,982
|
|
|
—
|
|
|
114,153
|
|
Amortization of purchased intangibles
|
1,346
|
|
|
—
|
|
|
—
|
|
|
1,346
|
|
Unallocated corporate expenses
|
—
|
|
|
—
|
|
|
102,730
|
|
|
102,730
|
|
Operating income (loss)
|
$
|
36,212
|
|
|
$
|
4,007
|
|
|
$
|
(102,730
|
)
|
|
$
|
(62,511
|
)
|
Summarized financial information by segment for the nine months ended September 30, 2018, based on the Company’s internal financial reporting system utilized by the Company’s chief operating decision maker, follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Corporate
|
|
Consolidated
|
Revenue:
|
|
|
|
|
|
|
|
Hosted services – Business
|
$
|
145,805
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145,805
|
|
Hosted services – Consumer
|
—
|
|
|
14,508
|
|
|
—
|
|
|
14,508
|
|
Professional services
|
23,801
|
|
|
—
|
|
|
—
|
|
|
23,801
|
|
Total revenue
|
169,606
|
|
|
14,508
|
|
|
—
|
|
|
184,114
|
|
Cost of revenue
|
42,699
|
|
|
2,980
|
|
|
—
|
|
|
45,679
|
|
Sales and marketing
|
69,453
|
|
|
6,818
|
|
|
—
|
|
|
76,271
|
|
Amortization of purchased intangibles
|
1,272
|
|
|
—
|
|
|
—
|
|
|
1,272
|
|
Unallocated corporate expenses
|
—
|
|
|
—
|
|
|
77,355
|
|
|
77,355
|
|
Operating income (loss)
|
$
|
56,182
|
|
|
$
|
4,710
|
|
|
$
|
(77,355
|
)
|
|
$
|
(16,463
|
)
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Geographic Information
The Company is domiciled in the United States and has international operations in Israel, the United Kingdom, Asia-Pacific and Australia, Latin America and Western Europe, particularly France, Germany and the Netherlands. The following table presents the Company’s long-lived assets by geographic region as of the dates presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
United States
|
$
|
148,284
|
|
|
$
|
122,019
|
|
Israel
|
16,276
|
|
|
13,598
|
|
Australia
|
9,992
|
|
|
8,970
|
|
Netherlands
|
7,657
|
|
|
7,426
|
|
Other (1)
|
8,975
|
|
|
3,130
|
|
Total long-lived assets
|
$
|
191,182
|
|
|
$
|
155,143
|
|
(1) United Kingdom, Germany, Japan, France and Italy
|
|
5.
|
Goodwill and Intangible Assets
|
Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2019 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Consolidated
|
Balance as of December 31, 2018
|
$
|
87,007
|
|
|
$
|
8,024
|
|
|
$
|
95,031
|
|
Adjustments to goodwill:
|
|
|
|
|
|
Foreign exchange adjustment
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
Balance as of September 30, 2019
|
$
|
86,904
|
|
|
$
|
8,024
|
|
|
$
|
94,928
|
|
Intangible Assets
Intangible assets are summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
Weighted
Average
Amortization
Period
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
Technology
|
$
|
30,389
|
|
|
$
|
(24,780
|
)
|
|
$
|
5,609
|
|
|
5.3 years
|
Customer relationships
|
16,959
|
|
|
(12,659
|
)
|
|
4,300
|
|
|
8.4 years
|
Patents
|
3,036
|
|
|
(669
|
)
|
|
2,367
|
|
|
12.7 years
|
Other
|
262
|
|
|
(235
|
)
|
|
27
|
|
|
2.7 years
|
Total
|
$
|
50,646
|
|
|
$
|
(38,343
|
)
|
|
$
|
12,303
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
Weighted
Average
Amortization
Period
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
Technology
|
$
|
30,447
|
|
|
$
|
(23,615
|
)
|
|
$
|
6,832
|
|
|
5.3 years
|
Customer relationships
|
17,219
|
|
|
(11,786
|
)
|
|
5,433
|
|
|
8.4 years
|
Patents
|
2,074
|
|
|
(534
|
)
|
|
1,540
|
|
|
12.4 years
|
Other
|
262
|
|
|
(235
|
)
|
|
27
|
|
|
2.7 years
|
Total
|
$
|
50,002
|
|
|
$
|
(36,170
|
)
|
|
$
|
13,832
|
|
|
|
Amortization expense is calculated over the estimated useful life of the asset. Aggregate amortization expense for intangible assets was $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $2.2 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively. For the three and nine months ended September 30, 2019 and 2018, respectively, a portion of this amortization is included in cost of revenue. Estimated amortization expense for the next five years is as follows (amounts in thousands):
|
|
|
|
|
|
Estimated Amortization Expense
|
Remaining 2019
|
$
|
1,211
|
|
2020
|
2,716
|
|
2021
|
2,504
|
|
2022
|
2,145
|
|
2023
|
898
|
|
2024
|
701
|
|
Thereafter
|
2,128
|
|
Total
|
$
|
12,303
|
|
|
|
6.
|
Property and Equipment
|
The following table presents the detail of property and equipment for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Computer equipment and software
|
$
|
86,676
|
|
|
$
|
79,161
|
|
Internal-use software development costs
|
43,933
|
|
|
19,240
|
|
Furniture, equipment and building improvements
|
16,246
|
|
|
14,132
|
|
|
146,855
|
|
|
112,533
|
|
Less: accumulated depreciation
|
(79,996
|
)
|
|
(68,798
|
)
|
Total
|
$
|
66,859
|
|
|
$
|
43,735
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
7.
|
Accrued Expenses and Other Current Liabilities
|
The following table presents the detail of accrued expenses and other current liabilities for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Payroll and other employee related costs
|
$
|
19,838
|
|
|
$
|
19,014
|
|
Professional services and consulting and other vendor fees
|
15,201
|
|
|
17,461
|
|
Unrecognized tax benefits
|
1,472
|
|
|
1,913
|
|
Sales commissions
|
7,035
|
|
|
6,239
|
|
Contingent earn-out (see Note 9 and 10)
|
1,557
|
|
|
2,372
|
|
Restructuring (see Note 13)
|
727
|
|
|
977
|
|
Other
|
4,460
|
|
|
2,686
|
|
Total
|
$
|
50,290
|
|
|
$
|
50,662
|
|
|
|
8.
|
Convertible Senior Notes and Capped Call Transactions
|
In March 2019, the Company issued $230.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2024 in a private placement, which amount includes $30.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019.
The Notes will mature on March 1, 2024, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting debt issuance costs, paid or payable by us, was approximately $221.0 million.
Each $1,000 principal amount of the Notes is initially convertible into 25.9182 shares of the Company’s common stock par value $0.001, which is equivalent to an initial conversion price of approximately $38.58 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event. The Notes are not redeemable prior to the maturity date of the Notes and no sinking fund is provided for the Notes. If we undergo a fundamental change (as defined in the indenture governing the Notes) prior to the maturity date, holders may require us to repurchase for cash all or any portion of their Notes in principal amounts of $1,000 or a multiple thereof at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding November 1, 2023, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day as determined by the Company; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the Notes on each such trading day; or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
It is the Company’s current intent to settle the principal amount of its outstanding Notes in cash and any excess in shares of the Company’s common stock.
During the nine months ended September 30, 2019, the conditions allowing holders of the Notes to convert were not met.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $52.9 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an effective interest rate over the contractual terms of the Notes.
In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred of approximately $8.6 million to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $6.6 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were approximately $2.0 million and recorded as a reduction of additional paid in capital in stockholders’ equity.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
|
|
|
|
|
|
As of September 30, 2019
|
Principal
|
$
|
230,000
|
|
Unamortized discount
|
(47,622
|
)
|
Unamortized issuance costs
|
(5,986
|
)
|
Net carrying amount
|
$
|
176,392
|
|
The net carrying amount of the equity component of the Notes was as follows (in thousands):
|
|
|
|
|
|
As of September 30, 2019
|
Proceeds allocated to the conversion options (debt discount)
|
$
|
52,900
|
|
Issuance costs
|
(1,986
|
)
|
Net carrying amount
|
$
|
50,914
|
|
The following table sets forth the interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Contractual interest expense
|
$
|
417
|
|
|
$
|
992
|
|
Amortization of issuance costs
|
287
|
|
|
663
|
|
Amortization of debt discount
|
2,288
|
|
|
5,278
|
|
Total interest expense
|
$
|
2,992
|
|
|
$
|
6,933
|
|
The remaining term over which the debt discount and debt issuance costs will be amortized is 4.4 years. The effective interest rate on the debt was 6.18% for the period ended September 30, 2019. Interest expense of $3.0 million and $6.9 million is reflected as a component of Other expense, net in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.
In connection with the offering of the Notes, the Company entered into privately-negotiated capped call option transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $38.58 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $57.16 per share, subject to certain adjustment events. The capped calls cover, subject to anti-dilution adjustments, approximately 5.96 million shares of common stock. The capped calls are generally intended to reduce or offset the potential dilution to the common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
based on the cap price. The capped calls expire on March 1, 2024, subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, failure to deliver, and hedging disruptions. The capped calls are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $23.2 million incurred to purchase the capped calls was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
AdvantageTec Inc.
In October 2018, the Company entered into a stock purchase agreement to acquire the outstanding equity interest of AdvantageTec Inc. (“AdvantageTec”), a leading provider of texting solutions for service departments of automotive dealerships that helps enable Conversational Commerce across the entire dealership, including both front end/variable operations (new and used vehicle sales) and back end/fixed operations (parts and services). The purchase agreement was for total consideration of approximately $11.2 million, which includes approximately $6.0 million in cash, approximately $4.3 million in shares of common stock, and approximately $0.9 million of potential earn-out consideration in cash and shares of common stock. The earn-out is contingent upon achieving certain targeted financial, strategic and integration objectives and milestones and is included as part of the purchase price. During the nine months ended September 30, 2019, the company assessed this earn-out and recorded a $0.2 million fair value re-measurement adjustment, which was recorded in loss from operations as an increase in general and administrative expenses. During the nine months ended September 30, 2019, the Company made $0.5 million of payments in earn-out consideration, with potential future earn-out payments of $0.4 million at September 30, 2019.
The purchase price allocation resulted in approximately $9.1 million of goodwill and approximately $2.2 million of intangible assets. The goodwill will not be deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. A deferred tax liability for the identified intangibles has been recorded.
AdvantageTec Inc. enhances the Company’s messaging platform available for the automotive industry and is included in the Company's business segment.
Conversable, Inc.
In September 2018, the Company acquired the employees and technology assets of Conversable, Inc. a SaaS based Artificial Intelligence powered conversational platform, headquartered in Austin, Texas, for an aggregate estimated purchase price of $5.7 million. The estimated purchase price consisted of $1.3 million in cash, approximately $2.9 million in shares of common stock of the Company, and a potential earn-out consideration of $1.5 million in cash, which is based on achieving certain targeted financial, strategic, and integration objectives and milestones and is included as part of the purchase price. During the nine months ended September 30, 2019, the company assessed this earn-out and recorded a $0.5 million fair value re-measurement adjustment, which was recorded in loss from operations as a decrease in general and administrative expenses. The ending balance as of September 30, 2019 is $1.0 million. This transaction was accounted for under the purchase method of accounting and was based upon the estimated fair value of Conversable, Inc.'s net tangible and identifiable intangible assets as of the date of acquisition.
The purchase price allocation resulted in approximately $5.5 million of goodwill and approximately $0.5 million of intangible assets. The goodwill will be deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit. The allocation of the purchase price to net book value of acquired assets and liabilities resulted in a net liability of $0.3 million, which includes accounts receivable, property and equipment, accrued expenses, and deferred revenue. Transaction costs of $0.3 million were expensed during the nine months ended September 30, 2019.
Conversable Inc.’s capabilities will accelerate the ongoing expansion of the Company's Conversational Commerce solutions and enhance the Company’s ability to deliver proactive and personalized content and services when and where the customer needs it, helping consumers find immediate service through messaging. Conversable, Inc. is included in the Company's business segment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BotCentral, Inc.
In January 2018, the Company acquired the employees and technology assets of BotCentral, Inc., a Silicon Valley based startup, for a purchase price of approximately $1.0 million in common stock of the Company. The Company incurred an additional $0.2 million related to acquisition costs. This transaction was accounted for as an asset purchase. The aggregate amount of approximately $1.2 million is included in intangibles on the Company's consolidated balance sheet. With the BotCentral team's expertise and knowledge of the LiveEngage platform, the team is bringing valuable insight for the Company's customers and partners, and enabling the company to more rapidly optimize its bot deployment capabilities, and grow the ecosystem. BotCentral, Inc. is included in the Company's business segment.
|
|
10.
|
Fair Value Measurements
|
The Company measures its cash equivalents at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
|
|
•
|
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
•
|
Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
Financial Assets and Liabilities
The carrying amount of cash, accounts receivable, and accounts payable approximate their fair value due to their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 30, 2019 and December 31, 2018, are summarized as follows (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
2,877
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,877
|
|
|
$
|
2,828
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,828
|
|
Total assets
|
$
|
2,877
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,877
|
|
|
$
|
2,828
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,557
|
|
|
$
|
1,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,372
|
|
|
$
|
2,372
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,557
|
|
|
$
|
1,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,372
|
|
|
$
|
2,372
|
|
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available.
The Company's money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. The Company's contingent earn-out liability is measured at fair value on a recurring basis and is classified as level 3 within the fair value hierarchy. On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute level 3. During the third quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses qualitative factors in accordance with ASU No. 2011-08 to determine whether 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. This measurement is classified based on level 3 input.
As of September 30, 2019, the fair value of the Notes, as further described in Note 8 above, was approximately $190.6 million. Management determines the fair value by utilizing an independent valuation specialist using the antithetic variable technique and is considered a Level 2 fair value measurement.
The Company recorded a contingent earn-out of $2.4 million in December 2018 in connection with the acquisitions of Conversable, Inc. and AdvantageTec Inc. The contingent earn-out is based on achieving certain targeted financial, strategic, and integration objectives. The unobservable inputs considered are probability factors and the time value of money. During the nine months ended September 30, 2019, the contingent earn-out decreased by $0.8 million due to a decrease in re-measurement to fair value of Conversable, Inc. of $0.5 million and cash payments of $0.5 million, offset in part by an increase of re-measurement to fair value of Advantage, Inc. of $0.2 million.
As a result, the contingent earn-out balance was $1.6 million as of September 30, 2019. See Note 9 of the Notes to Condensed Consolidated Financial Statements for a full description of the acquisition.
The changes in fair value of the Level 3 liabilities are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Contingent Earn-Out
|
|
September 30, 2019
|
|
December 31, 2018
|
Balance, Beginning of period
|
$
|
2,372
|
|
|
$
|
—
|
|
Conversable, Inc. fair value adjustment (see Note 9)
|
(496
|
)
|
|
1,496
|
|
AdvantageTec Inc. fair value adjustment (see Note 9)
|
168
|
|
|
876
|
|
Cash payment
|
(487
|
)
|
|
—
|
|
Balance, End of period
|
$
|
1,557
|
|
|
$
|
2,372
|
|
Derivative Financial Instruments
The Company is exposed to foreign exchange risks that in part are managed by using derivative financial instruments. The Company entered into foreign currency forward contracts related to risks associated with foreign operations. The Company does not use derivatives for trading purposes. Derivatives are recorded at their estimated fair values based upon Level 2 inputs. Derivatives designated and effective as cash flow hedges are reported as a component of other comprehensive income and reclassified to earnings in the same periods in which the hedged transactions impact earnings. Gains and losses related to derivatives not meeting the requirements of hedge accounting and the portion of derivatives related to hedge ineffectiveness are recognized in current earnings. As of September 30, 2019, the Company is not party to any foreign currency forward contracts and does not have any restricted cash balance.
The following summarizes certain information regarding the Company’s derivatives that are not designated or are not effective as hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (losses) on Derivative Instruments Recognized in Statements of Operations
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
Location
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency derivatives contracts
|
|
Other income, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
|
11.
|
Commitments and Contingencies
|
Contractual Obligations
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company leases facilities and certain car leases (the "leases") under agreements accounted for as operating leases. The leases have initial lease terms ranging from 1 years to 10 years. Payments due under the lease contracts include primarily fixed payments. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Currently, there are no operating leases where we believe it is reasonably certain that the Company will exercise any option to extend the initial term.
The Company has evaluated its facility leases and determined which leases met the definition of the new standard in accordance with Topic 842. The Company also performed an evaluation of their other contracts with suppliers in accordance with Topic 842 and have determined that, except for the facilities and car leases described above, none of its supply contracts contain a lease. Further, the Company has made an accounting policy election to keep leases with a term of twelve months or less off the balance sheet. This policy applies to all classes of the underlying assets. The Company will recognize those lease payments and associated interest expense in the consolidated statement of operations evenly over the lease term.
In connection with the leases, the Company recognized operating lease right-of-use assets of $14.5 million and an aggregate lease liability of $18.3 million in its condensed consolidated balance sheet as of September 30, 2019.
The determination of the discount rate used to calculate the present value of the right-of-use assets and lease liabilities depends on whether an interest rate is specified in the lease or not. If the lease specifies a rate, that rate is used when calculating the present value of lease payments. If the rate is not readily determinable, which is generally the case for the Company, the Company’s incremental borrowing rate (“IBR”) as of the date of inception of the lease is used (for initial measurement, the IBR was determined as of the adoption date of the standard). The IBR is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The Company used a ratings benchmark report against its peers in the technology sector.
|
|
|
|
|
|
|
|
As of September 30, 2019
|
Operating Leases
|
|
(in thousands, except lease term and discount rate)
|
Right-of-use asset
|
|
$
|
14,521
|
|
|
|
|
Current operating lease liability
|
|
6,015
|
|
Long term operating lease liability
|
|
12,323
|
|
Total operating lease liability
|
|
$
|
18,338
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
3.8 years
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
7
|
%
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three months and nine months ended September 30, 2019, there were $1.9 million and $5.0 million of cash payments for operating leases, respectively. The undiscounted future lease payments under the lease liability as of September 30, 2019 were as follows (amounts in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
As of September 30, 2019
|
2019 (remaining three months)
|
|
$
|
1,899
|
|
2020
|
|
6,429
|
|
2021
|
|
4,962
|
|
2022
|
|
3,674
|
|
2023
|
|
1,885
|
|
2024
|
|
1,114
|
|
Thereafter
|
|
807
|
|
Total undiscounted lease payments
|
|
20,770
|
|
Less: present value adjustment
|
|
(2,432
|
)
|
Total operating lease liability
|
|
$
|
18,338
|
|
Rental expense for operating leases and other service agreements was approximately $3.3 million and $2.9 million for the three months ended, September 30, 2019 and 2018, respectively, and $9.3 million and $7.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Employee Benefit Plans
The Company has a 401(k) defined contribution plan covering all eligible employees. In 2018, the Company provided for employer matching contributions equal to 50% of employee contributions, up to the lesser of 5% of eligible compensation or $6,000. Matching contributions are deposited into the employee’s 401(k) account and are subject to 5 year graded vesting. Beginning in 2019, the Company's 401(k) policy was changed to a Safe Harbor Plan, whereby the Company matches 100% of the first 3% of eligible compensation and 50% of the next 2% of eligible compensation. Furthermore, the match is immediately vested. Salaries and related expenses include $0.8 million and $0.4 million of employer matching contributions for the three months ended September 30, 2019 and 2018, respectively and $2.5 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Letters of Credit
As of September 30, 2019, the Company has a $1.8 million letter of credit outstanding substantially in favor of a certain landlord for office space. In addition, the Company has a letter of credit totaling $0.1 million as a security deposit for the due performance by the Company of the terms and conditions of a supply contract. There were no draws against these letters of credit during the nine months ended September 30, 2019.
Common Stock
As of September 30, 2019, there were 100,000,000 shares of common stock authorized, and 66,035,099 shares issued and outstanding. As of December 31, 2018, there were 100,000,000 shares of common stock authorized, and 63,676,229 shares issued and outstanding. The par value for common shares is $0.001 per share.
On June 6, 2019, our stockholders approved an amendment to our charter to increase the number of shares of our common stock that we are authorized to issue from 100,000,000 to 200,000,000 shares. We expect to file a charter amendment in the near future with the State of Delaware to effectuate this increase in the number of shares of our common stock that we are authorized to issue.
Preferred Stock
As of September 30, 2019 and December 31, 2018, there were 5,000,000 shares of preferred stock authorized, and zero shares issued and outstanding. The par value for preferred shares is $0.001 per share.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Repurchase Program
From 2012 through 2018, the Company had a stock repurchase program in place pursuant to which the Company was authorized to repurchase shares of its common stock, in the open market or privately negotiated transactions, at times and prices considered appropriate by the Board of Directors depending upon prevailing market conditions and other corporate considerations. The timing and actual number of shares repurchased depended on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. The program was discontinued at the end of 2018. The Company may or may not enter into a new stock repurchase program in the future.
Stock-Based Compensation
The Company follows FASB ASC 718-10, “Stock Compensation,” which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
The per share weighted average fair value of stock options granted was $13.07 and $10.13 during the three months ended September 30, 2019 and 2018, respectively and $11.58 and $6.62 during the nine months ended September 30, 2019 and 2018, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Dividend yield
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Risk-free interest rate
|
1.83%
|
|
2.8% - 2.9%
|
|
1.83% - 2.57%
|
|
2.5% - 2.9%
|
Expected life (in years)
|
5
|
|
5
|
|
5
|
|
5
|
Historical volatility
|
43.71%
|
|
43.5% - 43.7%
|
|
43.42%
|
|
43.5% - 48.4%
|
A description of the methods used in the significant assumptions used to estimate the fair value of stock-based compensation awards follows:
Dividend yield – The Company uses 0% as it has never issued dividends and does not anticipate issuing dividends in the near term.
Risk-free interest rate – The Company uses the market yield on U.S. Treasury securities at five years with constant maturity, representing the current expected life of stock options in years.
Expected life – The Company uses historical data to estimate the expected life of a stock option.
Historical volatility – The Company uses a trailing five year from grant date to determine volatility.
Stock Option Plans
During 1998, the Company established the Stock Option and Restricted Stock Purchase Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue incentive stock options or nonqualified stock options or other equity-based awards in respect of up to 5,850,000 shares of common stock. The 2000 Stock Incentive Plan (the “2000 Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing the number of shares available for issuance under the 2000 Plan by approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of common stock in the aggregate.
The Company established the 2009 Stock Incentive Plan (the “2009 Plan”) as a successor to the 2000 Plan. Under the 2009 Plan, the options which had been outstanding under the 2000 Plan were incorporated into the 2009 Plan and the Company increased the number of shares available for issuance under the plan by 6,000,000. The Company amended the 2009 Plan (the “Amended 2009 Plan”) effective June 7, 2012. The Amended 2009 Plan increased the number of shares authorized for issuance under the plan by an additional 4,250,000. On June 2, 2017, the Company's Board of Directors amended and restated the Amended 2009 Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 4,000,000.
On April 11, 2019, the Company's Board of Directors adopted, and on June 6, 2019, the Company's stockholders approved, the 2019 Stock Incentive Plan ("2019 Stock Incentive Plan") to replace the Amended 2009 Plan, which was set to expire under its terms on June 9, 2019. Under the 2019 Stock Incentive Plan, the number of shares underlying options and other equity awards
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
which remain outstanding, as well as the number of shares that remained available for grant, under the Amended 2009 Plan and under the Amended 2000 Plan were incorporated, as of June 6, 2019, into the 2019 Stock Incentive Plan. In addition, under the 2019 Stock Incentive Plan, 4,250,000 new shares were authorized for issuance. The number of shares authorized for issuance under the 2019 Stock Incentive Plan, the Amended 2009 Plan, and the 2000 Plan is 32,067,744 shares in the aggregate. Options to acquire common stock granted thereunder have 10-year terms. As of September 30, 2019, approximately 4.7 million shares of common stock remained available for issuance under the 2019 Stock Incentive Plan (taking into account all option exercises and other equity award settlements through September 30, 2019).
Employee Stock Purchase Plan
In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan with 1,000,000 shares of common stock initially reserved for issuance. Subject to stockholder approval, which was obtained on June 2, 2017, the Company's Board of Directors amended and restated the 2010 Employee Stock Purchase Plan effective April 30, 2017. The amended and restated plan increased the number of shares authorized for issuance under the plan by an additional 1,000,000, thereby reserving for issuance 2,000,000 shares of common stock in the aggregate.
On April 11, 2019, the Company's Board of Directors adopted, and on June 6, 2019, the Company's stockholders approved, the 2019 Employee Stock Purchase Plan (the "2019 Employee Stock Purchase Plan") to replace the Amended and Restated 2010 Employee Stock Purchase Plan which was set to expire under its terms in June 2020. There are 1,000,000 shares authorized and reserved for issuance under the 2019 Employee Stock Purchase Plan. As of September 30, 2019, approximately 1.0 million shares of common stock remain available for issuance under the 2019 Employee Stock Purchase Plan (taking into account all share purchases through September 30, 2019).
Inducement Plan
During January 2018, the Company established the Inducement Plan (the “2018 Plan”). Under the 2018 Plan, the Board of Directors can issue nonqualified stock options or other equity-based awards in respect of up to 1,500,000 shares of common stock. On April 25, 2018, the Company's Board of Directors amended and restated the 2018 Plan (the "Amended 2018 Plan"). The Amended 2018 Plan increased the number of shares authorized for issuance under the plan by an additional 500,000 shares, and subsequently the Board of Directors has approved and ratified, effective as of July 31, 2018, October 29, 2018 and February 13, 2019, increases of the number of shares authorized for issuance under the Amended 2018 Plan by 500,000, 250,000 and 618,048 shares, respectively, constituting 3,368,048 shares of common stock in the aggregate being reserved for issuance pursuant to grants under the Amended 2018 Plan. As of September 30, 2019, approximately 0.3 million shares of common stock remained available for issuance under the Amended 2018 Plan (taking into account all option exercises and other equity award settlements through September 30, 2019).
Stock Option Activity
A summary of the Company’s stock option activity and weighted average exercise prices follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Options (in thousands)
|
|
Weighted
Average
Exercise Price
|
|
|
Balance outstanding at December 31, 2018
|
6,266
|
|
|
$
|
12.13
|
|
|
|
|
|
Granted
|
1,264
|
|
|
28.38
|
|
|
|
|
|
Exercised
|
(1,351
|
)
|
|
10.91
|
|
|
|
|
|
Cancelled or expired
|
(264
|
)
|
|
14.25
|
|
|
|
|
|
Balance outstanding at September 30, 2019
|
5,915
|
|
|
$
|
15.78
|
|
|
6.99
|
|
$
|
117,808
|
|
Options vested and expected to vest
|
5,150
|
|
|
$
|
14.70
|
|
|
6.67
|
|
$
|
108,146
|
|
Options exercisable at September 30, 2019
|
2,883
|
|
|
$
|
12.01
|
|
|
5.11
|
|
$
|
68,279
|
|
The total fair value of stock options exercised during the nine months ended September 30, 2019 was approximately $7.0 million. As of September 30, 2019, there was approximately $22.1 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 2.6 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes information about outstanding and vested stock options as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number of Shares Outstanding (in thousands)
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
Weighted-Average Exercise Price
|
|
Number of Shares (in thousands)
|
|
Weighted-Average Exercise Price
|
$5.15 - $7.60
|
|
684
|
|
|
6.77
|
|
$
|
7.43
|
|
|
385
|
|
|
$
|
7.38
|
|
$7.95 - $10.05
|
|
664
|
|
|
5.07
|
|
9.48
|
|
|
599
|
|
|
9.51
|
|
$10.13 - $11.95
|
|
645
|
|
|
6.08
|
|
10.85
|
|
|
499
|
|
|
10.54
|
|
$11.96 - $12.32
|
|
65
|
|
|
1.75
|
|
12.07
|
|
|
65
|
|
|
12.07
|
|
$12.45 - $12.45
|
|
830
|
|
|
8.38
|
|
12.45
|
|
|
249
|
|
|
12.45
|
|
$12.46 - $14.3
|
|
829
|
|
|
4.14
|
|
13.61
|
|
|
611
|
|
|
13.36
|
|
$14.5 - $17.88
|
|
619
|
|
|
6.62
|
|
16.15
|
|
|
299
|
|
|
16.64
|
|
$18.09 - $28.18
|
|
815
|
|
|
9.15
|
|
24.19
|
|
|
176
|
|
|
21.58
|
|
$28.23 - $29.55
|
|
564
|
|
|
9.57
|
|
29.10
|
|
|
—
|
|
|
—
|
|
$29.55 - $29.55
|
|
200
|
|
|
9.81
|
|
32.37
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,915
|
|
|
6.99
|
|
$
|
15.78
|
|
|
2,883
|
|
|
$
|
12.01
|
|
Restricted Stock Unit Activity
A summary of the Company’s restricted stock units (“RSUs”) activity and weighted average exercise prices follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Unit Activity
|
|
|
|
Number of Shares (in thousands)
|
|
Weighted Average
Grant Date Fair Value (Per Share)
|
|
Aggregate Fair Value (in thousands)
|
Balance outstanding at December 31, 2018
|
2,690
|
|
|
$
|
15.89
|
|
|
$
|
—
|
|
Awarded
|
1,575
|
|
|
28.24
|
|
|
—
|
|
Released
|
(896
|
)
|
|
13.81
|
|
|
—
|
|
Forfeited
|
(379
|
)
|
|
18.27
|
|
|
—
|
|
Non-vested and outstanding at September 30, 2019
|
2,990
|
|
|
$
|
21.98
|
|
|
$
|
106,754
|
|
Expected to vest
|
2,029
|
|
|
$
|
20.52
|
|
|
$
|
72,421
|
|
RSUs granted to employees generally vest over a three to four-year period or upon achievement of certain performance conditions. In accordance with ASU 2017-09, as of September 30, 2019, total unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested RSUs was approximately $59.1 million and the weighted-average remaining vesting period was 2.9 years.
As of September 30, 2019, the Company accrued approximately $2.6 million and $7.4 million in cash awards to be settled in shares of the Company's stock and recorded a corresponding expense, which is included as a component of stock-based compensation expense in the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2019, respectively.
Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and cash flows was $9.1 million and $4.1 million for the three months ended September 30, 2019 and 2018, respectively, and $25.5 million and $10.3 million for the nine months ended September 30, 2019 and 2018, respectively.
The Company’s restructuring costs relate to the wind-down of its legacy platform and severance costs associated with re-prioritizing and reallocating resources to focus on areas showing high growth potential within the Company's Business Segment. The expense associated with this restructuring was approximately $1.4 million and $0.7 million during the three months ended September 30, 2019 and 2018, respectively, and $1.9 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively. The Company expects to incur additional restructuring costs through December 31, 2019. The restructuring liability was approximately $0.7 million and $1.0 million as of September 30, 2019 and December 31, 2018, respectively. It is classified as accrued expenses and other current liabilities on the condensed consolidated balance sheets.
The following table presents the detail of the liability for the Company's restructuring charges for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
December 31, 2018
|
Balance, Beginning of the year
|
$
|
977
|
|
|
$
|
2,338
|
|
Severance and other associated costs
|
1,909
|
|
|
4,468
|
|
Cash payments
|
(2,159
|
)
|
|
(5,829
|
)
|
Balance, End of period
|
$
|
727
|
|
|
$
|
977
|
|
The following table presents the detail of expenses for the Company's restructuring charges for the three months ended September 30, 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2019
|
|
2018
|
Severance and other associated costs
|
$
|
1,425
|
|
|
$
|
722
|
|
Total restructuring costs
|
$
|
1,425
|
|
|
$
|
722
|
|
The following table presents the detail of expenses for the Company's restructuring charges for the nine months ended September 30, 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
Severance and other associated costs
|
$
|
1,909
|
|
|
$
|
2,806
|
|
Total restructuring costs
|
$
|
1,909
|
|
|
$
|
2,806
|
|
14. Legal Matters
The Company previously filed an intellectual property suit against [24]7 Customer, Inc. in the Southern District of New York on March 6, 2014 seeking damages on the grounds that [24]7 reverse engineered and misappropriated the Company's technology to develop competing products and misused the Company's business information. On June 22, 2015, [24]7 Customer, Inc. filed suit against the Company in the Northern District of California alleging patent infringement. On December 7, 2015, [24]7 Customer Inc. filed a second patent infringement suit against the Company, also in the Northern District of California. On March 16, 2017, the New York case was voluntarily transferred and consolidated with the two California cases in the Northern District of California for all pre-trial purposes. Rulings by both the Court and the United States Patent Office in the Company's favor have invalidated the majority of [24]7 patents that were asserted in the patent cases. Trial for the Company's intellectual property and other claims asserted against [24]7 in the original litigation is currently set for January 21, 2020. The Company believes the claims filed by [24]7 are entirely without merit and intends to defend them vigorously.
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
From time to time, the Company is involved in or subject to legal, administrative and regulatory proceedings, claims, demands and investigations arising in the ordinary course of business, including direct claims brought by or against the Company with respect to intellectual property, contracts, employment and other matters, as well as claims brought against the Company’s customers for whom the Company has a contractual indemnification obligation. The Company accrues for a liability when it is
both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matter as appropriate and in compliance with ASC 450. The accruals or estimates, if any, resulting from the foregoing analysis, are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
From time to time, third parties assert claims against the Company regarding intellectual property rights, privacy issues and other matters arising in the ordinary course of business. Although the Company cannot be certain of the outcome of any litigation or the disposition of any claims, nor the amount of damages and exposure, if any, that the Company could incur, the Company currently believes that the final disposition of all existing matters will not have a material adverse effect on our business, results of operations, financial condition or cash flows. In addition, in the ordinary course of business, the Company is also subject to periodic threats of lawsuits, investigations and claims. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.