NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share amounts)
All references to MSDH, we, us, our, or Company refer to Marlborough Software Development Holdings Inc., a Delaware corporation. All references
to Bitstream or Parent refer to Bitstream Inc., our former parent. Except as otherwise noted, all reported dollar and share amounts are in thousands.
(1) Background and Nature of Operations
MSDH was formed on July 18, 2011 in conjunction with our former Parents planned merger (the Bitstream
Merger) with and acquisition by Monotype Imaging Holdings Inc., a Delaware corporation (Monotype), pursuant to an agreement and plan of merger (the Bitstream Merger Agreement) entered into by and between Bitstream and
Monotype on November 10, 2011. On January 1, 2012, Bitstream transferred and assigned to MSDH all of the assets and liabilities relating to, arising from, or in connection with Bitstreams Pageflex and BOLT product lines (the
Separation) pursuant to the terms and conditions of a Contribution Agreement dated November 10, 2011 by and between Bitstream and MSDH (the Contribution Agreement). On March 14, 2012, Bitstream distributed all of
the shares of MSDH common stock to the stockholders of Bitstream on a pro rata basis (the Distribution) pursuant to the terms and conditions of the Distribution Agreement dated November 10, 2011 between Bitstream and MSDH (the
Distribution Agreement). On March 19, 2012, Bitstream completed the Bitstream Merger with Monotype. MSDH and Bitstream have entered into certain ancillary agreements in connection with the Separation and Distribution that provide
for indemnification of Bitstream with respect to certain liabilities of the Pageflex and BOLT products contributed to MSDH.
Pursuant to the Contribution Agreement on November 10, 2011, Bitstream transferred its 100% ownership in Bitstream Israel Ltd. to
MSDH and on July 24, 2012 MSDH changed the name of this wholly-owned subsidiary to Pageflex Israel Ltd.
MSDH is a
software development company focused on bringing innovative and proprietary software products to a wide variety of markets. Our core software products include mobile browsing technologies and variable data publishing, Web-to-print, and multi-channel
communications technologies.
MSDH is subject to risks common to technology-based companies, including dependence on key
personnel, rapid technological change, competition from alternative product offerings and larger companies, and challenges to the development and marketing of commercial products and services. MSDH has also experienced net losses and negative
operating cash flows in the past and in the current year, and as of March 31, 2013 has an accumulated deficit of approximately $9,992.
The unaudited condensed consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course
of business. MSDH has suffered recurring losses from operations both before and after the Separation. For its liquidity, prior to Separation, the Company relied on contributions from Bitstream. As of March 19, 2012, MSDH had accumulated
contributions of approximately $60,977 from its former Parent. During the quarter ended March 31, 2013, the Company had a net loss of $1,037 and negative cash flows from operations of $344. Additionally, as of March 31, 2013, the Company
had an accumulated deficit of $9,992. The ability of the Company to satisfy its obligations and recover its costs will be primarily dependent upon the future financial and operating performance of the Company. Additionally, managements
operating plans are designed to help control operating costs, to increase revenues and to raise additional capital until such time as the Company generates sufficient cash flows from operations. If there was a decrease in the demand for the
Companys products due to either economic or competitive conditions, or management was unable to meet its plan, there could be a significant reduction in liquidity due to the possible inability of the Company to cut costs sufficiently.
MSDH had a cash balance of $1,673 as of March 31, 2013. Management has recently revised its operating plan to call for
reduced expenses going forward, principally as a result of further reductions in force in May 2013. Management believes that with its current operating plan, cash, together with cash generated from future operations is, and will be, sufficient to
meet the Companys working capital and capital expenditure requirements through at least the next twelve months.
(2) Basis of Presentation and Allocation Methodologies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of MSDH and its wholly-owned Israeli subsidiary. All material intercompany transactions and balances have been
eliminated in consolidation. Our unaudited condensed consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (the SEC) for quarterly reports on Form 10-Q and
do not include all of the information and footnote disclosures required by generally accepted accounting principles in the United States of America (GAAP). These statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2012 included in our Annual Report on Form 10-K, which was filed with the SEC on March 29, 2013. The condensed consolidated balance sheet as of March 31, 2013, the condensed
consolidated statements of operations for the three months ended March 31, 2013 and 2012, and the condensed
5
consolidated statements of cash flows for the three months ended March 31, 2013 and 2012, and the notes to each are unaudited, but in the opinion of management include all adjustments
necessary for a fair presentation of the condensed consolidated financial position, results of operations, and cash flows of the Company as of and for these interim periods. The results of operations for the three months ended March 31, 2013
may not necessarily be indicative of the results to be expected for other interim periods and the year ending December 31, 2013. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates in these financial statements include MSDH allocation methodologies, revenue recognition, the valuation of acquired intangible assets and goodwill, share-based compensation, income taxes and the valuation of deferred tax
assets, and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.
The Company
evaluated subsequent events through May 14, 2013 to determine whether or not any such events required disclosure in this Form 10-Q and, except as described above related to the Companys revision to its operating plan, determined that
there was one such event occurring on May 13, 2013 regarding a notice of default on our lease payments which is more fully described in Footnote 10.
On March 14, 2012, as a wholly-owned subsidiary of the Parent, the Company completed its Separation from the Parent whereby each owner of Bitstream Class A Common Stock received a distribution
of one share of MSDH Common Stock for each share of Bitstream Class A Common Stock that they owned as of the close of trading on March 8, 2012. On January 1, 2012, MSDH recorded a contribution adjustment of $(920) for the contribution
of non-cash accounts comprised of various asset classifications of $231, various liability classifications of $(1,222) and equity related accounts of $71. The Company also recorded a cash contribution adjustment of $6,346 on January 1, 2012.
Total capital contributions from the Parent during the first quarter of 2012 totaled $9,005, inclusive of the contribution adjustment of $6,346. There were no capital contributions from the Parent since the Separation and Merger were completed
during the first quarter of 2012.
Reclassification
Certain accounts in the March 31, 2012 and December 31, 2012 financial statements have been reclassified for comparative purposes to
conform to the presentation in the March 31, 2013 financial statements.
Change in Accounting Principle
The Company periodically reviews its accounting principles for adequacy and preferability of presentation. The
Companys policy historically had been to exclude from deferred revenue any amounts that had not been collected by period end. During the first quarter of 2013, the Company determined it preferable to discontinue its policy of grossing down
accounts receivable and deferred revenue in instances where the Company has a valid receivable. This change was made as it more accurately reflects the financial position of the Company. As a result, the Company has increased its accounts receivable
and deferred revenue retrospectively.
Allocation Methodologies
Effective with the Separation on January 1, 2012, a management fee agreement between MSDH and Bitstream was executed, providing for
the chargeback of certain costs incurred from January 1, 2012 through March 19, 2012, the effective date of the Bitstream Merger. These costs included all Separation, Distribution, and Merger costs directly associated with the transactions
which amounted to $2,254, as well as a percentage ranging from 30% to 50% of general and administrative and manufacturing costs. The costs invoiced to Bitstream per this agreement are consistent with the allocation methodologies utilized for the
2011 consolidated financial statements.
The following table presents the allocable expense amounts allocated to the
Companys former Parent during the three months ended March 31, 2012:
|
|
|
|
|
Category
|
|
Three months ended
March 31, 2012
|
|
Cost of revenue
|
|
$
|
11
|
|
General and administrative
|
|
|
807
|
|
|
|
|
|
|
Total
|
|
$
|
818
|
|
|
|
|
|
|
6
There were no expense allocations to the Companys former Parent during the three
months ended March 31, 2013.
There is significant judgment in determining the allocation of income, expense, and
attribution of assets and liabilities. Management believes that the methodologies used in the allocation are reasonable.
Revenue Recognition
We derive revenue from the license of our software products, and from consulting and support and maintenance services. Primarily, we recognize revenue when persuasive evidence of an arrangement exists,
the product has been delivered or services have been provided, the fee is fixed or determinable, and collection of the fee is probable.
Multiple-element arrangements
We recognize revenue under
multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for all of the undelivered elements under the arrangement. Under the residual method, the arrangement
consideration is first allocated to undelivered elements based on vendor-specific objective evidence of the fair value for each element and the residual amount is allocated to the delivered elements. Arrangement consideration allocated to
undelivered elements is deferred and recognized as revenue when the elements are delivered, if all other revenue recognition criteria are met. We have established sufficient vendor-specific objective evidence for the value of our training and
maintenance services, based on the price charged when these elements are sold separately. VSOE of the fair value of maintenance services is supported by substantive renewal rates within customer contracts.
License Revenue
We receive and recognize licensing fees and royalty revenue from: (1) Original Equipment Manufacturer (OEM) customers for page composition technologies; (2) direct and indirect
licenses of software publishing applications for the creation, enhancement, management, transport, viewing and printing of electronic information; (3) direct sales of custom design and consulting services to end users such as graphic artists,
desktop publishers, corporations and resellers; and (4) sales of publishing applications to foreign customers primarily through distributors and resellers.
We recognize license revenue from the resale of our products through various resellers. Resellers may sell our products in either an electronic format or CD format. Revenue is recognized if collection is
probable, upon notification from the reseller that it has sold the product, or for a CD product, upon delivery of the software.
Revenue from end user product sales is recognized upon delivery of the software, net of estimated returns and allowances, and when
collection is probable.
Services Revenue
Professional services include custom design and development, and training. We recognize professional services revenue under software
development contracts as services are provided for per diem contracts or by using the percentage-of-completion method of accounting for long-term fixed price contracts. Provisions for any estimated losses on contracts are made in the period in which
such losses become probable. There are no amounts accrued at the balance sheet dates presented.
We recognize revenue from
support and maintenance agreements ratably over the term of the agreement.
Deferred revenue includes unearned software
support and maintenance revenue, and advanced billings for unrecognized revenue from contracts.
Cost of revenue from software
licenses consists primarily of hosting costs, amortization of intangibles related to the iWay product, amortization of internally-developed capitalized software related to the Pageflex Storefront products, and costs to distribute the product,
including the cost of the media on which it is delivered. Cost of revenue from services consists primarily of costs associated with customer support, consulting and custom product development services.
We generally warrant that our products will function substantially in accordance with documentation provided to customers for
approximately 90 days following initial delivery. We have not incurred any material expenses related to warranty claims.
7
Subscription-Based Revenue
Subscription-based revenue primarily consists of revenues derived from software as a service (SaaS) arrangements, which
utilize the Pageflex Storefront and iWay software solutions. Subscription based revenue is recorded as license revenue.
We
recognize revenue for SaaS arrangements ratably over the period of the applicable agreement as services are provided. Contract terms for SaaS arrangements range from a minimum period of six months to one year and are renewable on a month to month
basis thereafter. The majority of our SaaS arrangements also include professional services and maintenance and support services, which are classified as services revenue.
For SaaS arrangements, the customer does not have the contractual right to take possession of our software at any time during the hosting period without significant penalty and the customer cannot
feasibly maintain the software on the customers hardware or enter into another arrangement with a third party to host the software. Therefore, we account for the elements under ASC 605-25, Multiple Element Arrangements using all applicable
facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. We allocate contract value to each element of
the arrangement that qualifies for treatment as a separate element based on VSOE, and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with SaaS
arrangements that we determine do not have stand-alone value to the customer or are contingent on delivery of other elements (e.g. hosting), we recognize the services revenue ratably over the remaining contractual period, or the client relationship,
whichever is longer, once hosting has gone live and we may begin billing for the hosting services. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition
criteria have been met.
Transaction fees primarily pertain to the number of jobs generated by the customers deployment.
The elements for these arrangements are accounted for under ASC 605-25. In cases where our customer is utilizing our Pageflex Connect or Dynamic Video SaaS services we also pay a transaction fee to our third party partner. We record as revenue the
transaction fee billed to our customer, while the portion of the transaction fee remitted to the third party is recorded as cost of sales as we are acting as a principal in the arrangement.
Costs of performing services under subscription-based arrangements are expensed as incurred.
(3) Relationship with our Former Parent
In connection with the Separation, we entered into a series of agreements, in addition to the Contribution and
Distribution Agreements, with our former Parent. These agreements include a tax indemnification agreement and intellectual property assignment and license agreements with our former Parent, as well as a transition services agreement with Monotype.
The net expense to MSDH related to these agreements was not material for the three month periods ended March 31, 2013 and 2012.
(4) Off-Balance Sheet Risk and Concentration of Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. We place a majority of our cash investments, which exceed federally insured limits, in one highly-rated financial institution. We have not experienced significant losses related to receivables from any
individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by us to be inherent in our accounts receivable. As
of March 31, 2013 and December 31, 2012, we did not have any off-balance sheet arrangements or unconsolidated special-purpose entities within the meaning of Item 303(a)(4) of Regulation S-K and therefore did not have any off-balance
sheet risks as of such dates. At March 31, 2013, three customers accounted for 14%, 23%, and 34% of our accounts receivable, respectively. At December 31, 2012, two customers accounted for 15% and 13% of our accounts receivable. For the
three months ended March 31, 2013, three customers accounted for 10%, 11%, and 12% of our revenue, respectively. For the three month period ended March 31, 2012, one customer accounted for 19% of our revenue.
(5) Recently Issued Accounting Standards
There have been no new accounting pronouncements during the three months ended March 31, 2013, as compared to the
recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, that are of significance, or potential significance, to us.
8
(6) Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Property and
equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Computer equipment
|
|
$
|
1,131
|
|
|
$
|
1,131
|
|
Capitalized software
|
|
|
1,335
|
|
|
|
1,335
|
|
Purchased software
|
|
|
253
|
|
|
|
252
|
|
Furniture and fixtures
|
|
|
453
|
|
|
|
453
|
|
Leasehold improvements
|
|
|
156
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,328
|
|
|
|
3,327
|
|
|
|
|
Less Accumulated depreciation and amortization
|
|
|
1,742
|
|
|
|
1,605
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,586
|
|
|
$
|
1,722
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of
the related assets as follows:
|
|
|
Asset Classification
|
|
Estimated Useful Life
|
Computer equipment
|
|
3 Years
|
Capitalized software
|
|
5 Years
|
Purchased software
|
|
3 Years
|
Furniture and fixtures
|
|
5 Years
|
Leasehold improvements
|
|
Estimated useful life, or the lease term, whichever is shorter
|
Depreciation and amortization expense for the three months ended March 31, 2013 and 2012 was $137
and $71, respectively.
There were no disposals of property and equipment during the three months ended March 31, 2013.
During the three months ended March 31, 2012, we disposed of $547 of property and equipment with accumulated depreciation of $545, resulting in a net loss of $2.
During the three months ended March 31, 2012, we capitalized software of $141. The software became available for general release during the quarter ended September 30, 2012 and no amounts were
capitalized after that date. Amortization expense related to capitalized software for the three months ended March 31, 2013 was $67. There was no amortization expense during the three months ended March 31, 2012 as the developed software
was not yet ready for its intended use. The net book value of internally developed software at March 31, 2013 and December 31, 2012 was $1,179 and $1,246, respectively.
(7) Loss Per Share
The Company calculates net income (loss) per share in accordance with authoritative guidance and has determined that
its Series A Preferred Stock is considered a participating security for purposes of computing earnings per share and that it is appropriate to employ the two-class method for computing basic earnings per share. Under the two-class method, basic net
income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding for the fiscal period. The Company allocates net income first to preferred
stockholders based on dividend rights under the Companys certificate of incorporation and then to common stockholders based on ownership interests. Net losses are not allocated to preferred stockholders.
9
The following table presents a reconciliation of the numerator and denominator used in the calculation of
basic and diluted net income (loss) per share under the two class method (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net loss
|
|
$
|
(1,037
|
)
|
|
$
|
(3,220
|
)
|
Amortization of financing costs on redeemable preferred stock
|
|
|
7
|
|
|
|
|
|
Accrued dividends on redeemable preferred stock
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to common stockholders
|
|
$
|
(1,077
|
)
|
|
$
|
(3,220
|
)
|
|
|
|
|
|
|
|
|
|
MSDH had 5 authorized shares of common stock, par value $0.001 per share at the date of incorporation. On
November 10, 2011, the Company amended its authorized shares to be 30,500 shares of common stock, par value of $0.01 and 10,000 shares of preferred stock, par value $0.01 per share. On March 19, 2012, MSDH issued 10,752 shares of MSDH
stock on a one for one basis to holders of Bitstream stock. On October 9, 2012, the Company established a 6.5% Series A Redeemable Preferred Stock with the authorized number of shares of 1,940. These shares were created from the 10,000 shares
of authorized preferred stock.
Basic net loss per share of MSDH for the three months ended March 31, 2013 is determined
by dividing the net loss of MSDH by MSDHs weighted average number of shares of common stock outstanding during the periods. MSDHs outstanding shares from January 1, 2011 to March 19, 2012 were determined to be 10,752 for purposes of
calculating Basic net loss per share with no common stock equivalents considered outstanding. Diluted earnings per share do not include the effect of common stock equivalents as MSDH has incurred a net loss for the periods presented, and therefore
common stock equivalents are considered anti-dilutive. As a result, there is no difference between MSDHs basic and diluted loss per share for three months ended March 31, 2013 and 2012.
If MSDH had reported a profit for the periods, the potential common shares would have increased the weighted average shares outstanding
by 0 and 92 for the three months ended March 31, 2013 and 2012, respectively, based on the weighted average number of common stock equivalents outstanding. Additionally, there were warrants and options outstanding to purchase 4,463 and 374
shares for the three months ended March 31, 2013 and 2012, respectively, that were not included in the potential common share computations because their exercise prices were greater than the average market price of MSDHs common stock.
These common stock equivalents are anti-dilutive even when a profit is reported in the numerator.
(8) Income Taxes
Presentation
For purposes of MSDHs consolidated financial statements, income tax expense and deferred tax balances, for the short period through the Separation date, have been recorded as if the Company had
filed tax returns on a separate return basis from Bitstream. The calculation of income taxes for the Company on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. In most cases, the tax
losses and tax credits of Bitstream that are included in these financial statements of MSDH have either been utilized by Bitstreams other businesses or remained with Bitstream post-separation. Balances at December 31, 2012 include
preliminary amounts available to the Company as of the Separation Date and have been derived from preliminary data from the consolidated Bitstream tax returns which have not been filed as of the date of this report.
Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various state jurisdictions in which
we operate. An estimated effective tax rate for a year is applied to our quarterly operating results, adjusted for losses in tax jurisdictions where the losses cannot be tax benefited due to valuation allowances. In the event that there is a
significant unusual or discrete item recognized, or expected to be recognized, in our quarterly operating results, including the resolution of prior-year tax matters, the tax attributable to that item would be separately calculated and recorded at
the same time as the unusual or discrete item. Significant judgment is required in determining our effective tax rate and in evaluating its tax positions. We establish reserves when it is deemed more likely than not we will not realize the full tax
benefit of the position. We periodically adjust these reserves in light of changing facts and circumstances.
Tax regulations
may require items of income and expense to be included in a tax return in different periods than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in the consolidated financial statements
may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary
differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax
10
return in future years for which we have already recorded the tax benefit in the financial statements. Deferred tax liabilities generally represent tax expense recognized in the financial
statements for which payment has been deferred or expense for which we have already taken a deduction on an income tax return, but has not yet been recognized in the consolidated financial statements.
We account for income taxes in accordance with authoritative guidance, which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of the temporary differences between the book and tax basis of recorded assets and liabilities. We make estimates and judgments with regard to the calculation of certain income tax assets and
liabilities. This guidance requires that deferred tax assets be reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized.
Significant weight is given to evidence that can be objectively verified.
We evaluate deferred income taxes on a quarterly
basis to determine whether valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and feasible. As of December 31, 2012, our U.S.
operations had generated four consecutive years of pre-tax losses. Because of our recent history of losses, we believe that the weight of negative historic evidence precludes us from considering any forecasted income from our analysis of the
recoverability of its U.S. deferred tax assets. We also considered in our analysis tax planning strategies that are prudent and can be reasonably implemented. Based on all available positive and negative evidence, we concluded that a full valuation
allowance should be recorded against the net deferred tax assets of our U.S. operations.
The tax loss and credit carry
forwards reflected in our consolidated financial statements, represent $2,741 of deferred tax assets. The tax carry forwards include U.S. tax carry forwards for federal and state net operating losses, general business credits and state tax
credits. As the Company continues to incur cumulative taxable losses in the United States, the Company recorded a full valuation allowance against the Companys U.S. deferred tax assets, net of reversing taxable temporary differences.
Components of earnings (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Foreign income
|
|
$
|
56
|
|
|
$
|
102
|
|
Domestic loss
|
|
|
(1,034
|
)
|
|
|
(3,270
|
)
|
|
|
|
|
|
|
|
|
|
Total pretax loss
|
|
$
|
(978
|
)
|
|
$
|
(3,168
|
)
|
|
|
|
|
|
|
|
|
|
We have made an indefinite reinvestment of earnings in our foreign Israeli subsidiary and, therefore, we
do not provide for U.S. income taxes applicable to its undistributed earnings.
We have recorded a deferred tax liability and
related income tax expense for the naked credit resulting from the amortization of goodwill for tax purposes. The total deferred liability at March 31, 2013 and December 31, 2012 was $211 and $192, respectively.
(9) Stock-based Compensation Plans and Stock-based Compensation Expense
(a) General
On January 25, 2012, the Board of Directors of MSDH, and the Board of Directors of Bitstream acting in its capacity as sole stockholder of MSDH, adopted the MSDH Incentive Compensation Plan (the
Plan) under which 1,724 shares of MSDH common stock were authorized for issuance under the Plan. The Plan provides for the grant of awards in the form of options (which may be incentive stock options or non-qualified options), stock
appreciation rights, restricted stock and restricted stock units, stock granted as a bonus or in lieu of another award, other stock-based awards, performance awards or annual incentive awards. Each stock option granted will have an exercise price of
no less than 100% of the fair market value of the common stock on the date of grant. The awards will generally have a contractual life of ten years and will generally vest over four to ten years. The maximum number of shares of stock with respect to
which awards can be granted will be 1,073 shares, plus the number of shares subject to the New MSDH Options, subject to adjustment as provided in the Plan to reflect the effect of mergers, recapitalizations, stock splits and reverse splits,
extraordinary dividends, and similar transactions. On March 8, 2012, in connection with the Bitstream Merger Agreement, all outstanding former Parent stock option awards for the Companys employees were replaced with awards in the Company
using a formula designed to preserve the intrinsic value and fair value of the award immediately prior to Separation. There was no incremental compensation expense to the Company related to the replacement of the former Parent stock-based
compensation awards. The vesting of all outstanding options was accelerated and restrictions from restricted stock awards were removed as part of the Separation and Merger of the former Parent and thus no unrecognized compensation expense existed
for the replaced awards. Accordingly, on March 8, 2012, 651 fully vested new MSDH options with a weighted average exercise price of $1.493 were granted to holders of the
11
Bitstream options. On September 10, 2012, the Company granted a total of 1,199 options to purchase the Companys Common Stock at an exercise price of $0.67 per share and a total of 50
shares that vested immediately to employees, consultants and non-employee directors under the Companys incentive plan. Each stock option granted had an exercise price in excess of the $0.40 fair market value of the common stock on the date of
grant. The stock option awards have a contractual life of ten years and vest over four years.
We account for stock-based
compensation in accordance with authoritative guidance. Under the fair value recognition provisions of this guidance, stock-based compensation expense is measured at the grant date based on the fair value of the award, net of an estimated forfeiture
rate, and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
(b)
Stock-based Compensation Expense
We currently estimate the fair value of MSDH stock options using the Black-Scholes
valuation model. Key input assumptions to be used to estimate the fair value of stock options will include the exercise price of the award, the expected option term, the expected volatility of our stock over the options expected term, the
risk-free interest rate over the options expected term, and our expected annual dividend yield, which will all be based on the historical information of Bitstream. The expected term of options granted will be estimated by calculating the
average term from our historical stock option exercise experience. Estimated volatility of our common stock will be based on Bitstreams historical volatility. The risk-free interest rate used in the option pricing model will be based on
zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term of the options. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. Historical data for Bitstream will be used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We believe that the valuation
technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized
by persons who receive equity awards. These amounts, and the amounts applicable to future quarters, are also subject to future quarterly adjustments based upon a variety of factors, which include but are not limited to, the issuance of new options.
No stock options were granted during the three month period ended March 31, 2013.
No stock awards were granted during the three months ended March 31, 2013 and 2012. Stock awards are valued at the fair market value
at the grant date.
The stock-based compensation expense of $1,420 for the period of January 1, 2012 through
March 14, 2012 was recorded through an intercompany transaction with our former Parent and is included as Bitstreams stockholders equity, as it relates exclusively to Bitstream stock. Therefore, this stock-based compensation is not
included in the Companys condensed consolidated statements of stockholders equity for 2012. A portion of the adjustments for the Separation from the Parent was directly related to the $1,420 of stock-based compensation and the amount was
therefore netted against stock-based compensation for presentation purposes on the condensed consolidated statements of cash flow for the three months ended March 31, 2012 resulting in no stock-based compensation reflected for the period.
Stock-based compensation expense for MSDH stock is derived from the awards granted on September 10, 2012, discussed above.
Our results for the three months ended March 31, 2013 and 2012 include $8 and $1,420, respectively, of stock-based compensation
within the applicable expense classification where we report the option holders compensation cost. The expense includes stock option expense associated with the MSDH awards on September 10, 2012 and for the Bitstream options granted to
those employees specifically assigned to MSDH as well as an allocation of the stock option expense for options granted to executives and other general shared personnel. The following table presents stock-based compensation expense for the three
months ended March 31, 2013 and 2012 by category:
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|
|
|
|
|
|
|
|
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Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost of revenuesoftware licenses
|
|
$
|
1
|
|
|
$
|
|
|
Cost of revenueservices
|
|
|
|
|
|
|
2
|
|
Marketing and selling
|
|
|
1
|
|
|
|
(5
|
)
|
Research and development
|
|
|
2
|
|
|
|
324
|
|
General and administrative
|
|
|
4
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
8
|
|
|
$
|
1,420
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense for 2012 is prior to Parent allocation.
(10) Subsequent Events
On May 13, 2013, MSDH received a notice of default from Normandy Nickerson Road, LLC, the landlord for
MSDHs leased premises in Marlborough, Massachusetts. The notice stated that MSDH had failed to pay rent for the months of April and May 2013 and certain utility charges and failure to pay the amounts past due within 5 days would result in a
default of the lease for the premises. MSDH paid the amount for utilities prior to receiving the notice but does not anticipate paying the outstanding rent amount in time to avert a default. The outstanding rent for those two months is $89. The
Companys commitments under the current lease are discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 in Note 6(a) to the financial statements included therein, and such information is incorporated
herein by reference.
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