LOGMEIN, INC., 10-K filed on 3/1/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 24, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
LOGM 
 
 
Entity Registrant Name
LogMeIn, Inc. 
 
 
Entity Central Index Key
0001420302 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
52,572,017 
 
Entity Public Float
 
 
$ 1,546,359,082 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 140,756 
$ 123,143 
Marketable securities
55,710 
85,284 
Accounts receivable (net of allowance for doubtful accounts of $274 and $245 as of December 31, 2015 and 2016, respectively)
25,901 
16,011 
Prepaid expenses and other current assets
5,723 
11,997 
Total current assets
228,090 
236,435 
Property and equipment, net
23,867 
21,711 
Restricted cash
2,481 
2,467 
Intangibles, net
62,510 
71,590 
Goodwill
121,760 
117,545 
Other assets
4,282 
5,753 
Deferred tax assets
303 
198 
Total assets
443,293 
455,699 
Current liabilities:
 
 
Accounts payable
14,640 
10,327 
Accrued liabilities
35,253 
31,674 
Deferred revenue, current portion
156,966 
134,297 
Total current liabilities
206,859 
176,298 
Long-term debt
30,000 
60,000 
Deferred revenue, net of current portion
5,287 
2,692 
Deferred tax liabilities
2,332 
5,812 
Other long-term liabilities
2,699 
3,086 
Total liabilities
247,177 
247,888 
Commitments and contingencies (Note 11)
   
   
Preferred stock, $0.01 par value - 5,000 shares authorized, 0 shares outstanding as of December 31, 2015 and 2016
   
   
Equity:
 
 
Common stock, $0.01 par value - 75,000 shares authorized as of December 31, 2015 and 2016; 27,540 and 28,405 shares issued as of December 31, 2015 and 2016, respectively; 25,130 and 25,552 outstanding as of December 31, 2015 and 2016, respectively
284 
275 
Additional paid-in capital
314,700 
276,793 
Retained earnings (accumulated deficit)
(1,754)
21,074 
Accumulated other comprehensive loss
(6,618)
(5,216)
Treasury stock, at cost - 2,410 and 2,853 shares as of December 31, 2015 and 2016, respectively
(110,496)
(85,115)
Total equity
196,116 
207,811 
Total liabilities and equity
$ 443,293 
$ 455,699 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 245 
$ 274 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
75,000,000 
75,000,000 
Common stock, shares issued
28,405,000 
27,540,000 
Common stock, shares outstanding
25,552,000 
25,130,000 
Treasury stock, shares
2,853,000 
2,410,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Revenue
$ 336,068 
$ 271,600 
$ 221,956 
Cost of revenue
45,501 
35,458 
28,732 
Gross profit
290,567 
236,142 
193,224 
Operating expenses:
 
 
 
Research and development
57,193 
42,597 
33,516 
Sales and marketing
162,811 
138,946 
119,508 
General and administrative
60,693 
33,034 
30,526 
Legal settlements
 
3,600 
 
Amortization of acquired intangibles
5,457 
1,916 
987 
Total operating expenses
286,154 
220,093 
184,537 
Income from operations
4,413 
16,049 
8,687 
Interest income
698 
654 
604 
Interest expense
(1,403)
(574)
(2)
Other income (expense), net
(500)
1,389 
105 
Income before income taxes
3,208 
17,518 
9,394 
Provision for income taxes
(570)
(2,960)
(1,439)
Net income
$ 2,638 
$ 14,558 
$ 7,955 
Net income per share:
 
 
 
Basic
$ 0.10 
$ 0.59 
$ 0.33 
Diluted
$ 0.10 
$ 0.56 
$ 0.31 
Weighted average shares outstanding:
 
 
 
Basic
25,305 
24,826 
24,385 
Diluted
26,164 
25,780 
25,386 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 2,638 
$ 14,558 
$ 7,955 
Other comprehensive (loss) gain:
 
 
 
Net unrealized (losses) gains on marketable securities, (net of tax benefit of $61 for the year ended December 31, 2014 and net of tax provision of $31 and $6 for the years ended December 31, 2015 and 2016, respectively)
11 
55 
(107)
Net translation losses
(1,413)
(2,154)
(1,824)
Total other comprehensive loss
(1,402)
(2,099)
(1,931)
Comprehensive income
$ 1,236 
$ 12,459 
$ 6,024 
Consolidated Statements of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net unrealized gains (losses) on marketable securities, tax (benefit) provision
$ 6 
$ 31 
$ (61)
Consolidated Statements of Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
(Accumulated Deficit) Retained Earnings [Member]
Accumulated Other Comprehensive Loss [Member]
Treasury Stock [Member]
Balance at Dec. 31, 2013
$ 167,339 
$ 254 
$ 200,235 
$ (1,439)
$ (1,186)
$ (30,525)
Balance, shares at Dec. 31, 2013
 
24,103,201 
 
 
 
 
Issuance of common stock upon exercise of stock options
17,595 
17,586 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
858,988 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(5,766)
(5,770)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
300,145 
 
 
 
 
Excess tax benefits realized from stock-based awards
383 
 
383 
 
 
 
Stock-based compensation
24,769 
 
24,769 
 
 
 
Treasury stock
(36,500)
 
 
 
 
(36,500)
Treasury stock, shares
(843,574)
(843,574)
 
 
 
 
Net income
7,955 
 
 
7,955 
 
 
Unrealized gain (loss) on available-for-sale securities
(107)
 
 
 
(107)
 
Cumulative translation adjustments
(1,824)
 
 
 
(1,824)
 
Balance at Dec. 31, 2014
173,844 
267 
237,203 
6,516 
(3,117)
(67,025)
Balance, shares at Dec. 31, 2014
 
24,418,760 
 
 
 
 
Issuance of common stock upon exercise of stock options
17,794 
17,788 
 
 
 
Issuance of common stock upon exercise of stock options, shares
 
611,947 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(11,641)
(11,643)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
397,084 
 
 
 
 
Excess tax benefits realized from stock-based awards
6,946 
 
6,946 
 
 
 
Stock-based compensation
26,499 
 
26,499 
 
 
 
Treasury stock
(18,090)
 
 
 
 
(18,090)
Treasury stock, shares
(297,461)
(297,461)
 
 
 
 
Net income
14,558 
 
 
14,558 
 
 
Unrealized gain (loss) on available-for-sale securities
55 
 
 
 
55 
 
Cumulative translation adjustments
(2,154)
 
 
 
(2,154)
 
Balance at Dec. 31, 2015
207,811 
275 
276,793 
21,074 
(5,216)
(85,115)
Balance, shares at Dec. 31, 2015
 
25,130,330 
 
 
 
 
Issuance of common stock upon exercise of stock options
11,753 
11,749 
 
 
 
Issuance of common stock upon exercise of stock options, shares
409,065 
409,065 
 
 
 
 
Net issuance of common stock upon vesting of restricted stock units
(14,445)
(14,450)
 
 
 
Net issuance of common stock upon vesting of restricted stock units, shares
 
455,594 
 
 
 
 
Excess tax benefits realized from stock-based awards
2,258 
 
2,258 
 
 
 
Stock-based compensation
38,350 
 
38,350 
 
 
 
Treasury stock
(25,381)
 
 
 
 
(25,381)
Treasury stock, shares
(443,159)
(443,159)
 
 
 
 
Dividends on common stock
(25,466)
 
 
(25,466)
 
 
Net income
2,638 
 
 
2,638 
 
 
Unrealized gain (loss) on available-for-sale securities
11 
 
 
 
11 
 
Cumulative translation adjustments
(1,413)
 
 
 
(1,413)
 
Balance at Dec. 31, 2016
$ 196,116 
$ 284 
$ 314,700 
$ (1,754)
$ (6,618)
$ (110,496)
Balance, shares at Dec. 31, 2016
 
25,551,830 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities
 
 
 
Net income
$ 2,638 
$ 14,558 
$ 7,955 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation
38,350 
26,499 
24,769 
Depreciation and amortization
21,505 
13,698 
11,137 
Amortization of premium on investments
431 
328 
224 
Change in fair value of contingent consideration liability
502 
 
 
Amortization of debt issuance costs
293 
187 
 
Provision for bad debts
37 
61 
102 
Benefit from deferred income taxes
(3,304)
(1,062)
(2,707)
Excess tax benefits realized from stock-based awards
(6,467)
(2,743)
(383)
Other, net
12 
(12)
21 
Changes in assets and liabilities, excluding effect of acquisitions:
 
 
 
Accounts receivable
(10,214)
2,224 
(5,804)
Prepaid expenses and other current assets
5,996 
(2,794)
1,822 
Other assets
1,490 
(454)
476 
Accounts payable
6,149 
1,420 
1,727 
Accrued liabilities
8,353 
2,288 
9,234 
Deferred revenue
26,953 
28,874 
23,983 
Other long-term liabilities
(409)
2,698 
1,597 
Net cash provided by operating activities
92,315 
85,770 
74,153 
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(35,609)
(92,335)
(95,342)
Proceeds from sale or disposal or maturity of marketable securities
64,756 
107,042 
95,045 
Purchases of property and equipment
(14,015)
(14,219)
(7,471)
Intangible asset additions
(1,559)
(2,375)
(2,529)
Cash paid for acquisition
(6,083)
(107,575)
(22,449)
(Increase) decrease in restricted cash and deposits
(30)
1,488 
(196)
Net cash (used in) provided by investing activities
7,460 
(107,974)
(32,942)
Cash flows from financing activities
 
 
 
Borrowings (repayments) under credit facility
(30,000)
60,000 
 
Proceeds from issuance of common stock upon option exercises
11,753 
17,794 
17,595 
Excess tax benefits realized from stock-based awards
6,467 
2,743 
383 
Payments of withholding taxes in connection with restricted stock unit vesting
(14,445)
(11,641)
(5,766)
Payment of debt issuance costs
(346)
(988)
 
Payment of contingent consideration
(2,030)
(226)
 
Dividends paid on common stock
(25,466)
 
 
Purchase of treasury stock
(25,381)
(18,090)
(36,500)
Net cash (used in) provided by financing activities
(79,448)
49,592 
(24,288)
Effect of exchange rate changes on cash and cash equivalents
(2,714)
(5,205)
(5,220)
Net increase in cash and cash equivalents
17,613 
22,183 
11,703 
Cash and cash equivalents, beginning of period
123,143 
100,960 
89,257 
Cash and cash equivalents, end of period
140,756 
123,143 
100,960 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
937 
574 
Cash paid (refunds received) for income taxes, net
(5,439)
861 
1,489 
Noncash investing and financing activities
 
 
 
Acquisition of property and equipment through capital lease
121 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
1,023 
3,145 
1,032 
Fair value of contingent consideration in connection with acquisition, included in accrued liabilities
 
$ 2,028 
$ 249 
Nature of the Business
Nature of the Business
1. Nature of the Business

LogMeIn, Inc. (the “Company”) provides a portfolio of cloud-based service offerings which make it possible for people and businesses to simply and securely connect to their workplace, colleagues and customers. The Company’s product line in 2016 included AppGuru™, BoldChat®, Cubby™, join.me®, LastPass®, LogMeIn Pro®, LogMeIn® Central™, LogMeIn Rescue®, LogMeIn® Rescue+Mobile™, LogMeIn Backup®, LogMeIn for iOS, LogMeIn Hamachi®, Meldium™, Xively™ and RemotelyAnywhere®. The Company is headquartered in Boston, Massachusetts with wholly-owned subsidiaries located in Australia, Bermuda, Brazil, Germany, Hungary, India, Ireland, Japan, the Netherlands and the United Kingdom.

On January 31, 2017, the Company completed a merger with GetGo, a wholly-owned subsidiary of Citrix, pursuant to which the Company combined with Citrix’s GoTo family of service offerings known as the “GoTo Business” in a Reverse Morris Trust transaction (the “Merger”). The Company’s merger with GetGo provides an opportunity to expand each business’ product portfolios resulting in a more complete suite of product offerings which the Company believes will benefit both existing and new customers. The Company is in the process of allocating the purchase price to the assets acquired and liabilities assumed. Any goodwill resulting from this acquisition will not be deductible for income tax purposes. For additional information regarding the Merger, see Note 15 below.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies

Principles of Consolidation — The accompanying consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates — The preparation of 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 financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Cash Equivalents — Cash equivalents consist of highly liquid investments with an original or remaining maturity of less than three months at the date of purchase. Cash equivalents consist of investments in money market funds which primarily invest in U.S. Treasury obligations. Cash equivalents are stated at cost, which approximates fair value.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2015 and 2016, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $85.3 million and $55.7 million, respectively. The securities have an aggregate fair value of $85.3 million and $55.7 million, including $10,000 and $17,000 of unrealized gains and $53,000 and $43,000 of unrealized losses, at December 31, 2015 and 2016, respectively.

Restricted Cash — In April 2012, the Company entered into a lease for a new corporate headquarters located in Boston, Massachusetts. The lease required a security deposit of approximately $3.3 million in the form of an irrevocable standby letter of credit which is collateralized by a bank deposit in the amount of approximately $3.5 million or 105 percent of the security deposit in accordance with the lease. In 2015, $1.5 million of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. Such amounts are classified as restricted cash in the accompanying consolidated balance sheets. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash.

 

Accounts Receivable — The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue.

Activity in the allowance for doubtful accounts was as follows (in thousands):

 

     December 31,  
     2014      2015      2016  

Balance beginning of period

   $ 269      $ 301      $ 274  

Provision for bad debt

     102        61        37  

Uncollectible accounts written off

     (70      (88      (66
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 301      $ 274      $ 245  
  

 

 

    

 

 

    

 

 

 

Property and Equipment — Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred.

Estimated useful lives of assets are as follows:

 

Computer equipment and software

     2 — 3 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold Improvements

    
Shorter of lease term
or estimated useful life
 
 

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill, but performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. As of November 30, 2016, our measurement date, the fair value of the Company as a whole exceeds the carrying amount of the Company. Through December 31, 2016, no impairments have occurred.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives, which range up to eleven years.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through December 31, 2016, the Company recorded no material impairments.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its premium subscription software services and to a lesser extent, the delivery of professional services, primarily related to its Internet of Things business. Revenues are reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction.

 

Revenue from the Company’s premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten years. The Company’s software cannot be run on another entity’s hardware and customers do not have the right to take possession of the software and use it on their own or another entity’s hardware.

The Company’s multi-element arrangements typically include subscription and professional services, which may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

In cases where the Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis, the arrangement is accounted for as a single unit of accounting and the related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from multi-element arrangements accounted for as a single unit of accounting which do not have value to the customer has been immaterial to date.

Deferred Revenue — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for products and services in advance on a monthly and annual basis. Deferred revenue to be recognized in the next twelve months is included in current deferred revenue, and the remaining amounts are included in long-term deferred revenue in the consolidated balance sheets.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, restricted cash and accounts receivable. Cash, cash equivalents and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

As of December 31, 2015 and 2016 no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10% or more of revenue for the years ended December 31, 2014, 2015 or 2016.

Legal Costs — Legal expenditures are expensed as incurred.

Research and Development — Research and development expenditures are expensed as incurred.

Software Development Costs — The Company has determined that technological feasibility of its software products that are sold as a perpetual license is reached shortly before their introduction to the marketplace.

The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a three-year period.

 

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations. The Company had foreign currency gains of $1.4 million and foreign currency losses of $0.5 million for the years ended December 31, 2015 and 2016, respectively, included in other income (expense), net in the consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period of the award, for those awards expected to vest, on a straight-line basis. The Company uses the with-or-without method to determine when it will realize excess tax benefits from stock-based compensation. Under this method, the Company will realize these excess tax benefits only after it realizes the tax benefits of net operating losses from operations.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carry-forwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2014, 2015 and 2016 was approximately $36.8 million, $35.8 million and $29.2 million, respectively, which consisted primarily of online paid searches, banner advertising, and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of operations.

Comprehensive Loss — Comprehensive loss is the change in stockholders’ equity during a period relating to transactions and other events and circumstances from non-owner sources and currently consists of net income, foreign currency translation adjustments, and unrealized gains and losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was $5.2 million at December 31, 2015 and consisted of $5.2 million related to foreign currency translation adjustments partially offset by $27,000 of unrealized losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was $6.6 million at December 31, 2016 and consisted of $6.6 million related to foreign currency translation adjustments offset by $16,000 of unrealized losses, net of tax on available-for-sale securities.

Segment Data — Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision making group when making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company, whose management uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

 

The Company’s revenue by geography (based on customer address) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

United States

   $ 148,532      $ 191,300      $ 240,469  

United Kingdom

     19,452        21,662        25,738  

International — all other

     53,972        58,638        69,861  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

Collaboration cloud

   $ 62,746      $ 88,234      $ 117,244  

Identity and Access Management cloud

     74,244        92,712        120,324  

Service and Support cloud

     82,767        88,206        96,245  

Other

     2,199        2,448        2,255  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2014      2015      2016  

United States

   $ 9,731      $ 16,342      $ 16,872  

Hungary

     2,018        2,525        3,015  

United Kingdom

     1,139        1,963        1,964  

International — all other

     588        881        2,016  
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,476      $ 21,711      $ 23,867  
  

 

 

    

 

 

    

 

 

 

Net Income Per Share — Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding during the period and the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

 

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income per share because they had an anti-dilutive impact (in thousands):

 

     Years Ended December 31,  
       2014          2015          2016    

Options to purchase common shares

     57                

Restricted stock units

     18        204        114  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     75        204        114  
  

 

 

    

 

 

    

 

 

 

Basic and diluted net income per share was calculated as follows (in thousands, except per share data):

 

     Years Ended December 31,  
     2014      2015      2016  

Basic:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,385        24,826        25,305  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.33      $ 0.59      $ 0.10  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,385        24,826        25,305  

Add: Common stock equivalents

     1,001        954        859  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,386        25,780        26,164  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.31      $ 0.56      $ 0.10  
  

 

 

    

 

 

    

 

 

 

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is, in many cases, unlimited. Through December 31, 2016, the Company has not experienced any losses related to these indemnification obligations.

Recently Issued Accounting Pronouncements — On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property plant and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2018, with early adoption permitted, but not earlier than January 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements, including the impact after considering the merger with GetGo on January 31, 2017.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

On March 30, 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, and is expected to impact net income, EPS, and the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of ASU 2016-09 on its consolidated financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The purpose of ASU 2016-13 is to require a financial asset measured on the amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

On October 24, 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. The Company is currently assessing the potential impact of the adoption of ASU 2016-16 on its consolidated financial statements.

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.

 

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB’s EITF) (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. We are currently assessing the potential impact of the adoption of ASC 2016-18 on our consolidated financial statements.

Fair Value of Financial Instruments
Fair Value of Financial Instruments
3. Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values due to their short maturities. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

 

   

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

 

   

Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

   

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the basis used to measure certain of the Company’s financial assets and contingent consideration liability that are carried at fair value (in thousands):

 

     Fair Value Measurements at December 31, 2015  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 10,138      $      $      $ 10,138  

Cash equivalents — bank deposits

            1               1  

Short-term marketable securities:

           

U.S. government agency securities

     50,237        17,994               68,231  

Corporate bond securities

            17,053               17,053  

Contingent consideration liability

                   2,028        2,028  
     Fair Value Measurements at December 31, 2016  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 11,599      $      $      $ 11,599  

Short-term marketable securities:

           

U.S. government agency securities

     34,961        8,001               42,962  

Corporate bond securities

            12,748               12,748  

Bank deposits, corporate bonds and certain U.S. government agency securities are classified within the second level of the fair value hierarchy as the fair value of those assets are determined based upon quoted prices for similar assets.

 

The Company’s Level 3 liability at December 31, 2015 consisted of contingent consideration related to the September 5, 2014 acquisition of Zamurai and the October 15, 2015 acquisition of Marvasol, Inc. (d/b/a “LastPass”), each as described further in Note 4 below. The LastPass contingent consideration of up to $2.5 million was based on the achievement of certain bookings goals, the fair value of which was estimated at $2.0 million as of December 31, 2015, and $2.5 million as of the payout date. The fair value of contingent consideration was estimated by applying a probability based model, which utilized inputs that were unobservable in the market. Changes in the fair value of the contingent consideration liability were reflected in acquisition-related costs in general and administrative expense. The fair value of the LastPass contingent consideration liability of $2.5 million was paid in October 2016. A reconciliation of the beginning and ending Level 3 liability is as follows:

 

     Years Ended
December 31,
 
     2015      2016  

Balance beginning of period

   $ 249      $ 2,028  

Additions to Level 3

     2,000         

Payments

     (226      (2,530

Change in fair value of contingent consideration liability

     5        502  
  

 

 

    

 

 

 

Balance end of period

   $ 2,028      $  
  

 

 

    

 

 

 
Acquisitions
Acquisitions
4. Acquisitions

In 2016, the Company completed the acquisition of AuthAir (on October 31, 2016); in 2015, the Company completed the acquisition of LastPass (on October 15, 2015); and in 2014, the Company completed the acquisitions of Ionia (on March 7, 2014), Meldium (on August 27, 2014) and Zamurai (on September 5, 2014). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates.

These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

In the years ended December 31, 2014, 2015 and 2016, acquisition-related costs were $4.5 million, $6.4 million and $25.1 million, respectively, including $4.1 million, $5.6 million and $8.2 million, respectively, of contingent retention-based bonus expense related to the Company’s 2014 and 2015 acquisitions, which are typically earned over the first two years following the acquisition. The Company paid $7.7 million during the year ended December 31, 2016 for contingent retention-based bonuses and contingent earnout payments related to the Company’s 2014 and 2015 acquisitions. Included in the year ended December 31, 2016 is $16.2 million of acquisition-related costs associated with the Merger.

2016 Acquisitions

AuthAir

On October 31, 2016, the Company acquired all of the outstanding equity interests in AuthAir, a Woodbridge, Connecticut-based provider of proximity-based security and wireless authentication solutions, for $6.0 million plus contingent retention-based bonuses totaling up to $0.5 million to be paid to former AuthAir employees on the first and second anniversaries of the acquisition, contingent upon their continued employment and achievement of certain product integration goals. The Company has concluded that the arrangement is a compensation arrangement and is accruing the maximum payout ratably over the performance period, as it believes it is probable that the criteria will be met. The results of operations of AuthAir have been included in our consolidated financial results since the acquisition date and have not been material.

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash and other current assets

   $ 1  

Property and equipment

     18  

Deferred tax assets, net

     666  

Other current liabilities

     (78

Completed technology

     1,200  

Goodwill

     4,215  
  

 

 

 

Total purchase price

   $ 6,022  
  

 

 

 

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its current security offerings, customer base, sales force and business plan with AuthAir’s product and technical expertise. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded deferred tax assets of $1.1 million, primarily related to net operating losses that were acquired as a part of the acquisition. The Company also recorded a deferred tax liability of $0.5 million related to the amortization of intangible assets which cannot be deducted for tax purposes.

The allocation of the purchase price related to income taxes is preliminary, including the Company finalizing the valuation of the acquired net operating loss carryforwards. The Company expects to complete this review in the first quarter of 2017.

2015 Acquisition

LastPass

On October 15, 2015, the Company acquired all of the outstanding equity interests in LastPass, a Fairfax, Virginia-based provider of an identity and password management service, for $107.6 million, net of cash acquired, plus contingent payments totaling up to $15.0 million which are expected to be paid over a two-year period following the date of acquisition. The operating results of LastPass, which are included in the consolidated financial statements beginning on the acquisition date, are comprised of $2.7 million and $18.8 million of revenue and $3.8 million and $27.7 million of expenses for the years ended December 31, 2015 and 2016, respectively, including amortization of acquired intangible assets of $0.9 million and $6.2 million, contingent retention-based bonuses of $1.4 million and $6.7 million and a contingent consideration fair value adjustment of $0.5 million, respectively.

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Cash

   $ 2,518  

Accounts receivable

     639  

Property and equipment

     40  

Deferred tax asset

     3,050  

Current and other assets

     134  

Intangible assets:

  

Completed technology

     29,400  

Customer relationships

     23,900  

Trade name and trademark

     3,000  

Deferred revenue

     (6,600

Accrued expenses

     (66

Deferred tax liability

     (23,478

Goodwill

     79,617  
  

 

 

 

Total purchase price

     112,154  

Liability for contingent consideration

     (2,000
  

 

 

 

Total cash paid

   $ 110,154  
  

 

 

 

The LastPass stock purchase agreement obligates the Company to make additional contingent and retention-based bonus payments totaling up to $12.5 million to employees and former LastPass stockholders now employed by the Company on the first and second anniversaries of the acquisition date, contingent upon their continued employment and, for the first anniversary payment only, the achievement of certain bookings goals. The Company has concluded that the contingent payment arrangement is a compensation arrangement and is accruing the maximum payout ratably over the performance period, as it believes it is probable that the criteria will be met. The stock purchase agreement also included non-retention based payments of $2.5 million to LastPass stockholders which were contingent on the achievement of certain bookings goals, which the Company concluded was contingent consideration and was accounted for as part of the purchase price. This contingent consideration liability was recorded at its fair value of $2.0 million at the acquisition date. The Company assessed the probability of the bookings goals being met and at what level each reporting period. The contingent consideration liability of $2.5 million was paid in October 2016.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its IT management offerings, customer base, sales force and IT management business plan with LastPass’ product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax asset of $3.1 million primarily related to net operating losses that were acquired as a part of the acquisition. The Company recorded a long-term deferred tax liability of $23.5 million primarily related to the amortization of intangible assets which cannot be deducted for tax purposes.

The unaudited financial information in the table below summarizes the combined results of operations of the Company and LastPass, on a pro forma basis, as though the companies had been combined. The pro forma information for the period presented includes the effects of business combination accounting resulting from the acquisition as though the acquisition had been consummated as of the beginning of 2014, including amortization charges from acquired intangible assets, interest expense on borrowings and lower interest income in connection with the Company funding the acquisition with existing cash and investments and borrowings under its credit facility, the exclusion of acquisition-related costs of the Company and LastPass, the inclusion of expense related to contingent and retention-based bonuses assuming full achievement of the financial metric and retention requirements ($7.0 million in 2014 and $5.5 million in 2015), offset by the exclusion of LastPass historical bonuses paid to LastPass non-stockholder employees in 2015 in connection with the acquisition close of $6.1 million, and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2014.

Unaudited Pro Forma Financial Information

 

     Year Ended
December 31, 2014
     Year Ended
December 31, 2015
 
     Pro Forma      As Reported      Pro Forma      As Reported  
     (in thousands, except
per share amounts)
     (in thousands, except
per share amounts)
 

Revenue

   $ 230,477      $ 221,956      $ 281,980      $ 271,600  

Net income

   $ 1,687      $ 7,955      $ 12,038      $ 14,558  

Earnings per share — Basic

   $ 0.07      $ 0.33      $ 0.48      $ 0.59  

Earnings per share — Diluted

   $ 0.07      $ 0.31      $ 0.47      $ 0.56  

2014 Acquisition

Ionia

On March 7, 2014, the Company acquired all of the outstanding capital stock of Ionia, a Boston, Massachusetts based systems integrator, for a cash purchase price of $7.5 million plus contingent retention-based bonuses totaling up to $4.0 million to employees, including former Ionia stockholders now employed by the Company, on the first and second anniversaries of the acquisition, contingent upon their continued employment and achievement of certain bookings goals. The Company concluded that the arrangement was a compensation arrangement and accrued the maximum payout ratably over the performance period, as it believed it probable that the criteria would be met. The Company paid $2.0 million in March 2015 and the remaining $2.0 million in March 2016.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its Xively platform, customer base, sales force and Internet of Things business plan with Ionia’s technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax liability of $0.7 million related to the amortization of intangible assets which cannot be deducted for tax purposes and is included in the accompanying table above as other liabilities.

Meldium

On August 27, 2014, the Company acquired Meldium, a San Francisco, California-based provider of single sign-on password management software, through a merger transaction for a cash purchase price of $10.6 million plus contingent payments totaling up to $4.6 million to employees, including former Meldium stockholders now employed by the Company. These contingent payments included retention-based bonuses which were paid in the first two years from the date of acquisition, contingent upon continued employment and achievement of certain product integration goals. The Company concluded that the arrangement was a compensation arrangement and accrued the maximum payout ratably over the performance period, as it believed it probable that the criteria would be met. The Company paid $2.0 million in contingent payments in 2015 and the remaining $2.6 million in February 2016.

 

The contingent payments also included payments to non-employee stockholders of $0.2 million, which the Company concluded was contingent consideration and was part of the purchase price. This contingent liability was recorded at its fair value of $216,000 at the acquisition date and was paid in 2015.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its IT management offerings, customer base, sales force and IT management business plan with Meldium’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded deferred tax assets of $0.5 million, primarily related to net operating losses that were acquired as a part of the acquisition and are shown in the accompanying table above as current and other assets. The Company also recorded a long-term deferred tax liability of $0.7 million related to the amortization of intangible assets which cannot be deducted for tax purposes and are included in the accompanying table above as other liabilities.

Zamurai

On September 5, 2014, the Company acquired all of the outstanding capital stock of Zamurai, a San Francisco, California-based collaboration software provider, for a cash purchase price of $4.5 million plus contingent payments totaling up to $1.5 million to employees, including former Zamurai stockholders now employed by the Company. These contingent payments included retention-based bonuses which were paid on the second anniversary of the acquisition, contingent upon continued employment and achievement of certain product integration goals. The Company concluded that the arrangement was a compensation arrangement and accrued the maximum payout ratably over the performance period, as it believed it probable that the criteria would be met. The Company paid $1.5 million in contingent payments in September 2016.

The stock purchase agreement included contingent payments to non-employee stockholders of $30,000, which the Company concluded was contingent consideration and was part of the purchase price. This contingent liability was recorded at its fair value of $24,000 at the acquisition date. The Company re-measured the fair value of the contingent consideration at each subsequent reporting period and recognized any adjustments to fair value as part of earnings. The Company paid $30,000 in September 2016.

The goodwill recorded in connection with this transaction is primarily related to the expected synergies to be achieved related to the Company’s ability to leverage its join.me product, customer base, sales force and join.me business plan with the collaboration software provider’s product, technical expertise and customer base. All goodwill and intangible assets acquired are not deductible for income tax purposes.

The Company recorded a long-term deferred tax asset of $0.4 million related to net operating losses that were acquired as a part of the acquisition, which is included in the accompanying table above as current and other assets. The Company also recorded a long-term deferred tax liability of $0.4 million related to the amortization of intangible assets which cannot be deducted for tax purposes and is included in the accompanying table above as other liabilities.

Goodwill and Intangible Assets
Goodwill and Intangible Assets
5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill for the years ended December 31, 2015 and 2016 are due to the addition of goodwill resulting from the acquisitions of LastPass in 2015 and AuthAir in 2016 (See Note 4 to the Consolidated Financial Statements).

 

Changes in goodwill for the years ended December 31, 2015 and 2016 are as follows (in thousands):

 

Balance, January 1, 2015

   $ 37,928  

Goodwill related to the acquisition of LastPass

     79,617  
  

 

 

 

Balance, December 31, 2015

     117,545  

Goodwill related to the acquisition of AuthAir

     4,215  
  

 

 

 

Balance, December 31, 2016

   $ 121,760  
  

 

 

 

Intangible assets consist of the following (in thousands):

 

          December 31, 2015     December 31, 2016  
    Estimated
Useful
Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 

Identifiable intangible assets:

             

Trade names and trademarks

    1-11 years     $ 3,806     $ 824     $ 2,982     $ 3,806     $ 955     $ 2,851  

Customer relationships

    5-8 years       29,249       4,209       25,040       29,249       9,315       19,934  

Domain names

    5 years       915       665       250       913       796       117  

Technology

    3-9 years       49,978       10,368       39,610       51,179       14,942       36,237  

Other

    4-5 years       442       241       201       442       359       83  

Internally developed software

    3 years       6,754       3,247       3,507       8,313       5,025       3,288  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 91,144     $ 19,554     $ 71,590     $ 93,902     $ 31,392     $ 62,510  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the year ended December 31, 2016, the Company capitalized $1.2 million for completed technology as an intangible asset in connection with the AuthAir acquisition. The Company also capitalized $2.2 million and $1.6 million during the years ended December 31, 2015 and 2016, respectively, of costs related to internally developed computer software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services.

The Company is amortizing its intangible assets over the estimated lives noted above based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Amortization relating to technology, documented know-how (other) and internally developed software is recorded within cost of revenues and the amortization of trade name and trademark, customer relationships, domain names and non-compete agreements (other) is recorded within operating expenses. Amortization expense for intangible assets consisted of the following (in thousands):

 

      Years Ended December 31,  
     2014      2015      2016  

Cost of revenue:

        

Amortization of internally developed computer software

   $ 1,176      $ 1,196      $ 1,778  

Amortization of acquired intangibles (1)

     2,783        2,955        4,604  
  

 

 

    

 

 

    

 

 

 

Sub-Total amortization of intangibles in cost of revenue

     3,959        4,151        6,382  

Amortization of acquired intangibles (1)

     987        1,916        5,457  
  

 

 

    

 

 

    

 

 

 

Total amortization of intangibles

   $ 4,946      $ 6,067      $ 11,839  
  

 

 

    

 

 

    

 

 

 

 

(1) Total amortization of acquired intangibles was $3.8 million, $4.9 million and $10.1 million for the years ended December 31, 2014, 2015, and 2016, respectively.

 

Future estimated amortization expense for intangible assets at December 31, 2016 is as follows (in thousands):

 

Amortization Expense (Years Ending December 31)

   Amount  

2017

   $ 12,062  

2018

     11,623  

2019

     8,878  

2020

     7,824  

2021

     7,251  

Thereafter

     14,872  
  

 

 

 

Total

   $ 62,510  
  

 

 

 

 

Property and Equipment
Property and Equipment
6. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

     December 31,  
     2015      2016  

Computer equipment and software

   $ 30,030      $ 35,432  

Office equipment

     5,428        6,315  

Furniture & fixtures

     8,448        8,947  

Construction in progress

     93        1,443  

Leasehold improvements

     8,121        9,979  
  

 

 

    

 

 

 

Total property and equipment

     52,120        62,116  

Less accumulated depreciation and amortization

     (30,409      (38,249
  

 

 

    

 

 

 

Property and equipment, net

   $ 21,711      $ 23,867  
  

 

 

    

 

 

 

Depreciation expense for property and equipment was $6.2 million, $7.6 million and $9.7 million for the years ended December 31, 2014, 2015 and 2016, respectively.

Accrued Liabilities
Accrued Liabilities
7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     December 31,  
     2015      2016  

Marketing programs

   $ 4,323      $ 4,274  

Payroll and payroll-related

     11,459        11,886  

Professional fees

     1,782        1,429  

Acquisition-related

     6,942        9,539  

Other accrued liabilities

     7,168        8,125  
  

 

 

    

 

 

 

Total accrued liabilities

   $ 31,674      $ 35,253  
  

 

 

    

 

 

 

Acquisition-related costs include transaction, transition and integration-related fees and expenses and contingent retention-based bonus costs.

Income Taxes
Income Taxes
8. Income Taxes

The domestic and foreign components of income (loss) before provision for income taxes are as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Domestic

   $ (4,462    $ 1,059      $ (15,748

Foreign

     13,856        16,459        18,956  
  

 

 

    

 

 

    

 

 

 

Total income (loss) before provision for income taxes

   $ 9,394      $ 17,518      $ 3,208  
  

 

 

    

 

 

    

 

 

 

The provision for income taxes is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Current:

        

Federal

   $ 2,804      $ 2,521      $ 1,264  

State

     1,184        274        647  

Foreign

     1,052        1,227        1,963  
  

 

 

    

 

 

    

 

 

 

Total

     5,040        4,022        3,874  
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (3,069      (1,281      (2,705

State

     (748      278        (428

Foreign

     216        (59      (171
  

 

 

    

 

 

    

 

 

 

Total

     (3,601      (1,062      (3,304
  

 

 

    

 

 

    

 

 

 

Total provision for income taxes

   $ 1,439      $ 2,960      $ 570  
  

 

 

    

 

 

    

 

 

 

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

 

     Years Ended December 31,  
         2014             2015             2016      

Statutory tax rate

     35.0     35.0     35.0

Change in valuation allowance

                  

Impact of permanent differences

     1.6       1.1       27.0  

Non-deductible stock-based compensation

     14.6       8.4       27.4  

Non-deductible transaction related costs

                 82.1  

Foreign tax rate differential

     (39.1     (26.7     (165.3

Research and development credits

     (2.6     (1.3     (10.6

State taxes, net of federal benefit

     2.9       2.4       0.4  

Impact of uncertain tax positions

     3.8       1.4       18.6  

Other

     (0.8     (3.4     3.2  
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     15.4     16.9     17.8
  

 

 

   

 

 

   

 

 

 

The Company recorded a tax provision for income taxes of $1.4 million, $3.0 million and $0.6 million on profit before income taxes of $9.4 million, $17.5 million and $3.2 million for the years ended December 31, 2014, 2015 and 2016, respectively. The Company recorded a provision as a result of taxable income, excluding the direct effects of windfall tax deductions, generated in the United States as well as in certain foreign jurisdictions. The Company’s effective tax rates for the years ended December 31, 2014, 2015 and 2016 were lower than the U.S. federal statutory rate of 35% due to profits earned in certain foreign jurisdictions, primarily by our Irish subsidiaries, which are subject to significantly lower tax rates than the U.S. federal statutory rate. For the year ended December 31, 2016, the Company incurred $16.8 million of acquisition-related costs primarily related to the Merger, of which, $7.5 million is capitalized and not deductible for tax purposes.

The Company has deferred tax assets related to temporary differences and operating loss carryforwards as follows (in thousands):

 

     December 31,  
     2015      2016  

Deferred tax assets:

     

Net operating loss carryforwards

   $ 4,033      $ 3,190  

Deferred revenue

     583        1,161  

Amortization

     2,287        756  

Stock-based compensation

     10,268        10,903  

Accrued bonus

     4,032        4,409  

Other

     2,311        1,989  
  

 

 

    

 

 

 

Total deferred tax assets

     23,514        22,408  

Deferred tax asset valuation allowance

     (1,829      (1,708
  

 

 

    

 

 

 

Net deferred tax assets

     21,685        20,700  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Depreciation

     (466      (1,314

Goodwill amortization

     (2,638      (1,542

Acquired intangibles not deductible

     (23,561      (19,814

Other

     (634      (59
  

 

 

    

 

 

 

Total deferred tax liabilities

     (27,299      (22,729
  

 

 

    

 

 

 

Total

   $ (5,614    $ (2,029
  

 

 

    

 

 

 

Deferred tax assets, related valuation allowances, current tax liabilities, and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, the Company estimates deferred tax assets, current tax liabilities, and deferred tax liabilities, and the Company assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. As of December 31, 2016, the Company maintained a full valuation allowance against the deferred tax assets of its Hungarian subsidiary. This entity has historical tax losses and the Company concluded it was not more likely than not that these deferred tax assets are realizable. During the years ended December 31, 2014, 2015 and 2016, the valuation allowance decreased by $0.6 million, $0.4 million and $0.2 million, respectively, as a result of a tax return to provision adjustment which decreased the net operating loss carryforwards.

For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2016, the Company had federal and state net operating loss carryforwards of $16.5 million and $22.4 million, respectively, which expire on various dates from 2025 through 2035.

The Company has performed an analysis of its ownership changes as defined by Section 382 of the Internal Revenue Code and has determined that the net operating loss carryforwards acquired from the acquisitions of Meldium, Zamurai, and LastPass are subject to limitation. As of December 31, 2016, all net operating loss carryforwards generated by the Company, including those subject to limitation, are available for utilization. Subsequent ownership changes as defined by Section 382 could potentially limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.

 

As of December 31, 2016, the Company had foreign net operating loss carryforwards of $15.8 million. These net operating loss carryforwards are related to the Company’s Hungarian subsidiary, are not subject to expiration, and the Company has recognized a full valuation allowance against these carryforwards.

The Company generally considers all earnings generated outside of the U.S. to be indefinitely reinvested offshore. Therefore, the Company does not accrue U.S. tax for the repatriation of the foreign earnings it considers to be indefinitely reinvested outside the U.S. As of December 31, 2016, the Company has not provided for federal income tax on $45.1 million of accumulated undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed foreign earnings.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company and its subsidiaries are examined by various tax authorities, including the IRS in the United States. As of December 31, 2016, we remained subject to examination in the following major tax jurisdictions for the years indicated:

 

Major Tax Jurisdictions

   Open Tax Years  

United States (Federal)

     2014-2016  

United States (State)

     2010-2016  

Hungary

     2011-2016  

Ireland

     2012-2016  

The Company incurred expenses related to stock-based compensation for the years ended December 31, 2014, 2015 and 2016 of $24.8 million, $26.5 million and $38.4 million, respectively. Accounting for the tax effects of stock-based awards requires the recording of a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and will be recorded as increases to APIC in the period when the tax deduction reduces income taxes payable. The Company follows the with-and-without approach for the direct effects of windfall tax deductions to determine the timing of the recognition of benefits for windfall tax deductions. In 2016, the Company recorded a windfall tax benefit to additional paid-in capital of $2.2 million. As of December 31, 2016, the “windfall tax benefit pool” available to offset future shortfalls was $23.3 million.

As of December 31, 2015 and 2016, the Company has provided a liability of $0.9 million and $1.5 million, respectively, for uncertain tax positions. These uncertain tax positions would impact the Company’s effective tax rate if recognized.

 

The Company has provided liabilities for uncertain tax provisions as follows (in thousands):

 

     Years Ended December 31,  
         2014              2015              2016      

Balance beginning of period

   $ 304      $ 652      $ 884  

Tax positions related to prior periods:

        

Increases

     7        2        34  

Decreases

     (11      (3       

Tax positions related to current period:

        

Increases

     397        428        588  

Settlements

     (45      (195      (26

Statute expiration

                    
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 652      $ 884      $ 1,480  
  

 

 

    

 

 

    

 

 

 

The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. The Company recognized $3,000 and $42,000 of interest expense during the years ended December 31, 2015 and 2016, respectively.

Common Stock and Equity/ Accumulated Other Comprehensive Loss
9. Common Stock and Equity

Authorized Shares — On June 9, 2009, the Company’s Board of Directors approved a Restated Certificate of Incorporation to be effective upon the closing of the Company’s IPO. This Restated Certificate of Incorporation, among other things, increased the Company’s authorized common shares to 75 million and authorized 5 million shares of undesignated preferred stock.

Common Stock Reserved — As of December 31, 2015 and 2016, the Company has reserved shares of common stock for the exercise of stock options and restricted stock units of 4.8 million and 5.3 million, respectively.

On August 13, 2013, the Board of Directors approved a $50 million share repurchase program and approved an additional $75 million share repurchase program on October 20, 2014. Share repurchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise, in accordance with applicable securities laws and regulations. The timing and amount of any share repurchases are determined by the Company’s management based on its evaluation of market conditions, the trading price of the stock, regulatory requirements and other factors. The share repurchase program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice.

During the years ended December 31, 2014, 2015 and 2016, the Company repurchased 843,574, 297,461 and 443,159 shares of its common stock at an average price of $43.27, $60.81 and $57.27 per share for a total cost of $36.5 million, $18.1 million and $25.4 million, respectively.

In connection with the Merger, the Company declared and paid three special cash dividends of $0.50 per share of common stock. The first cash dividend was declared by the Company’s Board of Directors on July 26, 2016 and paid on August 26, 2016 to stockholders of record as of August 8, 2016, and totaled $12.7 million. The second cash dividend was declared by the Company’s Board of Directors on October 27, 2016 and paid on November 22, 2016 to stockholders of record as of November 7, 2016, and totaled $12.8 million. The third cash dividend was declared by the Company’s Board of Directors on January 6, 2017 and paid on January 31, 2017 to stockholders of record as of January 16, 2017, and totaled $12.8 million.

13. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of foreign currency translation adjustments and changes in unrealized losses and gains (net of tax) on marketable securities. For the purposes of comprehensive income disclosures, we do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to reinvest permanently undistributed earnings of our foreign subsidiaries. Accumulated other comprehensive loss is reported as a component of stockholders’ equity and, as of December 31, 2015 and 2016, was comprised of cumulative translation adjustment losses of $5.2 million and $6.6 million, respectively, and unrealized losses (net of tax) on marketable securities of $27,000 and $16,000, respectively. There were no material reclassifications to earnings in the years ended December 31, 2015 or 2016.

Stock Incentive Plan
Stock Incentive Plan
10. Stock Incentive Plan

The Company’s 2009 Stock Incentive Plan (“2009 Plan”) is administered by the Board of Directors and Compensation Committee, which have the authority to designate participants and determine the number and type of awards to be granted and any other terms or conditions of the awards. The Company awards restricted stock units as the principal equity incentive award. Restricted stock units with time-based vesting conditions generally vest over a three-year period while restricted stock units with market-based vesting conditions generally vest over two or three-year periods. Until 2012, the Company generally granted stock options as the principal equity incentive award. Options generally vest over a four-year period and expire ten years from the date of grant. Certain stock-based awards provide for accelerated vesting if the Company experiences a change in control. As of December 31, 2016, there were 3.5 million shares available for grant under the 2009 Plan.

The Company’s Board of Directors and stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan, which was effective on January 31, 2017, to increase the number of shares of the Company’s common stock that may be issued under the plan by an additional 4,500,000 shares and to extend the term of the plan to December 5, 2026 (See Note 15 to the Consolidated Financial Statements).

The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $17.6 million, $17.8 million and $11.7 million in cash from stock option exercises during the years ended December 31, 2014, 2015 and 2016, respectively.

The following table summarizes stock option activity (shares and intrinsic value in thousands):

 

     Number
of Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(Years)
     Aggregate
Intrinsic
Value
 

Outstanding, January 1, 2016

     768     $ 30.74        5.4      $ 27,942  
          

 

 

 

Granted

                  

Exercised

     (409     28.73         $ 16,960  
          

 

 

 

Forfeited

     (4     21.98        
  

 

 

   

 

 

       

Outstanding, December 31, 2016

     355     $ 33.15        5.0      $ 22,529  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2016

     272     $ 38.03        5.3      $ 15,895  
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at December 31, 2016

     355     $ 33.16        5.0      $ 22,504  
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value was calculated based on the positive differences between the fair value of the Company’s common stock of $49.34, $67.10 and $96.55 per share on December 31, 2014, 2015 and 2016, respectively, or at time of exercise, and the exercise price of the options.

During the year ended December 31, 2016, the Company granted 759,736 restricted stock units, of which 705,236 have time-based vesting conditions and 54,500 have market-based vesting conditions. Restricted stock units with time-based vesting conditions are valued on the grant date using the grant date closing price of the underlying shares. The Company recognizes the expense on a straight-line basis over the requisite service period of the restricted stock unit, which is generally three years.

Since 2013, the Company has granted to certain key executives restricted stock unit awards with market-based vesting conditions, which are tied to the individual executive’s continued employment with the Company throughout the applicable performance period and the level of the Company’s achievement of a pre-established relative total stockholder return, or TSR, goal, as measured over an applicable performance period ranging from two to three years as compared to the TSR realized for that same period by the Russell 2000 Index (the “TSR Units”). In February and March 2016, the Company granted TSR Units with a target number of underlying shares of 37,500 and 17,000, respectively, but the actual number of shares that may be earned under these TSR Units can range from 0% to 200% of the target number of shares awarded, or up to 75,000 and 34,000 shares, respectively, based on the Company’s level of achievement of its relative TSR goal for the applicable performance period. Compensation cost for TSR Units is recognized on a straight-line basis over the requisite service period and is recognized regardless of the actual number of awards that are earned based on the market condition.

 

The assumptions used in the Monte Carlo simulation model to value the TSR Unit grants include (but are not limited to) the following:

 

     May 2014 Grant     May 2015 Grant     February 2016 Grant     May 2016 Grant  

Risk-free interest rate

     0.78     0.93     0.89     1.02

Volatility

     54     50     40     37

The following table summarizes restricted stock unit activity, including performance-based TSR Units (shares in thousands):

 

     Number of shares
Underlying Restricted
Stock Units
     Weighted Average
Grant Date Fair
Value
 

Unvested as of January 1, 2016

     1,438      $ 54.37  

Restricted stock units granted

     760        63.47  

Restricted stock units earned(1)

     36     

Restricted stock units vested(1)

     (676      47.17  

Restricted stock units forfeited

     (113      56.70  
  

 

 

    

 

 

 

Unvested as of December 31, 2016

     1,445      $ 62.23  
  

 

 

    

 

 

 

 

  (1) Included in both restricted stock units earned and vested in the table above are 36,200 TSR Units earned during 2016 above the target number of underlying shares initially granted.

The Company recognized stock-based compensation expense within the accompanying consolidated statements of operations as summarized in the following table (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Cost of revenue

   $ 1,107      $ 1,560      $ 2,289  

Research and development

     3,653        5,188        6,201  

Sales and marketing

     9,033        11,090        16,181  

General and administrative

     10,976        8,661        13,679  
  

 

 

    

 

 

    

 

 

 
   $ 24,769      $ 26,499      $ 38,350  
  

 

 

    

 

 

    

 

 

 

As of December 31, 2016, there was approximately $59.5 million of total unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock awards which are expected to be recognized over a weighted average period of 1.91 years.

 

Commitments and Contingencies
Commitments and Contingencies
11. Commitments and Contingencies

Operating Leases — The Company has operating lease agreements for offices in the United States, Hungary, Australia, the United Kingdom, Ireland and India that expire at various dates through 2028.

In December 2014, the Company entered into a lease for new office space in Boston, Massachusetts which began in December 2015 and extends through June 2028. The aggregate amount of minimum lease payments to be made over the term of the lease is approximately $47.0 million. Pursuant to the terms of the lease, the landlord was responsible for making certain improvements to the leased space up to an agreed upon cost to the landlord. Any excess costs for these improvements were billed by the landlord to the Company as additional rent. These excess costs total $3.4 million, all of which were paid as of December 31, 2016. The lease required a security deposit of $3.3 million in the form of an irrevocable, unsecured standby letter of credit. The lease includes an option to extend the original term of the lease for two successive five-year periods.

Rent expense under all leases was $7.1 million, $8.2 million and $11.8 million for the years ended December 31, 2014, 2015 and 2016, respectively. The Company records rent expense on a straight-line basis for leases with scheduled escalation clauses or free rent periods.

 

The Company also enters into hosting services agreements with third-party data centers and internet service providers that are subject to annual renewal. Hosting fees incurred under these arrangements aggregated $5.1 million, $6.9 million and $10.0 million for the years ended December 31, 2014, 2015 and 2016, respectively.

Future minimum lease payments under non-cancelable operating leases including one year commitments associated with the Company’s hosting services arrangements are approximately as follows at December 31, 2016 (in thousands):

 

Years Ending December 31

      

2017

   $ 20,932  

2018

     15,307  

2019

     15,011  

2020

     11,676  

2021

     10,743  

Thereafter

     35,546  
  

 

 

 

Total minimum lease payments

   $ 109,215  
  

 

 

 

Litigation — The Company routinely assesses its current litigation and/or 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.

On September 2, 2016, Meetrix IP, LLC, or Meetrix, filed a complaint against the Company in the U.S. District Court for the Western District of Texas (Case No. 1:16-cv-1034). The complaint, which was served upon the Company on September 22, 2016, alleges that the Company’s join.me service infringes upon U.S. Patent Nos. 9,253,332, 9,094,525 and 8,339,997, each of which are allegedly owned by Meetrix and which Meetrix asserts relate to audio-video conferencing collaboration. The complaint seeks monetary damages in an unspecified amount, attorneys’ fees and costs, and additional relief as is deemed appropriate by the Court. The Company believes it has meritorious defenses to these claims and intends to defend against them vigorously. Given the inherent unpredictability of litigation and the fact that this litigation is still in its early stages, the Company is unable to predict the outcome of this litigation or reasonably estimate a possible loss or range of loss associated with this litigation at this time.

On April 24, 2015, the Company entered into a Settlement Agreement with Sensory Technologies, LLC, or Sensory, whereby Sensory agreed to assign its JOIN ® trademark to the Company and the parties agreed to mutually release each other from any and all claims related to the complaint filed by Sensory against the Company in the U.S. District Court for the Southern District of Indiana on August 26, 2014. In the second quarter of 2015, the Company paid Sensory a one-time fee of $8.3 million, $4.7 million of which was reimbursed by the Company’s insurance provider, in connection with the Settlement Agreement. The Company believed that the JOIN ® trademark had de minimis value and therefore expensed $3.6 million in the first quarter of 2015 as legal settlement expense, which was paid in the second quarter of 2015.

The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s consolidated financial statements.

401(k) Plan
401(k) Plan
12. 401(k) Plan

On January 1, 2007, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan is available to all employees upon employment and allows participants to defer a portion of their annual compensation on a pre-taxbasis. On July 1, 2016, the Company implemented a 401k Employer Match program in which all employees who are making eligible 401k contributions will receive an employer  match in which the Company contributes 50% of the amount contributed by the employee, up to a maximum of 6% of the employee’s earnings. The match vests over 3 years beginning from an employee’s hire date anniversary at 33.3% per year. Employees who joined the Company on or before July 1, 2013 were immediately 100% vested in their match as of the program launch date. The Company made matching contributions of $0.8 million for the year ended December 31, 2016.

Credit Facility
Credit Facility
14. Credit Facility

On February 18, 2015, the Company entered into a multi-currency credit agreement with a syndicate of banks, financial institutions and other lending entities (the “Credit Agreement”), pursuant to which a secured revolving credit facility of up to $100 million in the aggregate was made available to the Company. On January 22, 2016, the Company entered into the First Amendment to the Credit Agreement, pursuant to which the Company exercised its option to increase the credit facility to up to $150 million in the aggregate with the existing lenders and an additional lender and amended the Credit Agreement to provide the Company with an option to further increase the credit facility by an additional $50 million, which, if exercised, would provide the Company with access to a secured revolving credit facility of up to $200 million. On February 1, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which amended and restated the Credit Agreement. The Amended Credit Agreement increased the Company’s secured revolving credit facility from $150 million to $400 million in the aggregate, and permits the Company to increase the revolving credit facility and/or enter into one or more tranches of term loans up to an additional $200 million. The Amended Credit Agreement also extended the maturity date of the revolving credit facility to February 1, 2022. The Company and its subsidiaries expect to use the credit facility for general corporate purposes, including, but not limited to, the potential acquisition of complementary products or businesses, share repurchases, as well as for working capital. See Note 15 to the Consolidated Financial Statements.

The Company may prepay the loans or terminate or reduce the commitments in whole or in part at any time, without premium or penalty, subject to certain conditions and costs in the case of Eurodollar rate loans. The outstanding debt balance is $30.0 million as of December 31, 2016. Loans under the Credit Agreement bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by the Company as described below. As of December 31, 2016, the annual rate on the $30.0 million revolving loan was 2.313% and was renewed at 2.0625% on February 1, 2017. The average interest rate on borrowings outstanding for the year ending December 31, 2016 was 2.013%. The quarterly commitment fee on the undrawn portion of the credit facility ranges from 0.20% to 0.30% per annum, based upon the Company’s total leverage ratio. As of December 31, 2016, the fair value of the credit facility approximated its book value.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, change the nature of its business, make investments and acquisitions, pay dividends or make distributions, or enter into certain transactions with affiliates, in each case subject to customary and other exceptions for a credit facility of this size and type, each as further described in the Credit Agreement. As of December 31, 2016, the Credit Agreement also imposed limits on capital expenditures of the Company and its subsidiaries and required the Company to maintain a maximum total leverage ratio (not greater than 2.75:1.00) and a minimum interest coverage ratio (not less than 3.00:1.00), each as further defined in the Credit Agreement. As of December 31, 2016, the Company was in compliance with all financial and operating covenants of the Credit Agreement.

 

Any failure to comply with the financial or operating covenants of the Credit Agreement would prevent the Company from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility.

As of December 31, 2016, the Company had $0.9 million of origination costs recorded in other assets. The Company incurred $1.0 million of origination costs for the period ending December 31, 2015 in connection with entering into the Credit Agreement. The Company incurred an additional $0.3 million of origination costs in connection with the First Amendment to the Credit Agreement executed in January 2016.

Subsequent Events
Subsequent Events
15. Subsequent Events

Amendment to 2009 Stock Incentive Plan

The Company’s Board of Directors and stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan, which was effective as of January 31, 2017, to increase the number of shares of the Company’s common stock that may be issued under the plan by an additional 4,500,000 shares and extend the term of the plan to December 5, 2026.

Third Special Cash Dividend

On January 6, 2017, the Company announced that its Board of Directors declared a special cash dividend of $0.50 per share of common stock, payable to the Company’s stockholders of record as of January 16, 2017. The dividend was paid on January 31, 2017 and totaled $12.8 million.

GetGo Merger

At 11:59 p.m. eastern time on January 31, 2017, the Company completed the transactions contemplated by the previously disclosed (i) Agreement and Plan of Merger, dated as of July 26, 2016, by and among the Company, Lithium Merger Sub, Inc., Citrix Systems, Inc. and GetGo, Inc., and (ii) Separation and Distribution Agreement by and among Citrix, GetGo and the Company, dated as of July 26, 2016. The completion of the Merger, including the merger of Lithium Merger Sub, Inc. with and into GetGo, with GetGo surviving the merger as a wholly owned subsidiary of the Company, resulted in the acquisition by the Company of Citrix’s GoTo family of service offerings.

Prior to the Merger and pursuant to the Separation Agreement, Citrix transferred the GoTo Business to GetGo and its subsidiaries and thereafter distributed all of the outstanding shares of common stock, par value $0.01 per share, of GetGo, to Citrix stockholders of record as of January 20, 2017 on pro rata basis. At the effective time of the Merger, each issued and outstanding share of GetGo common stock was automatically converted into the right to receive one share of the Company’s common stock, together with cash in lieu of any fractional shares. The Company issued 26,868,269 shares of its common stock in connection with the Merger, with Citrix stockholders receiving 0.1718 shares of the Company’s common stock for each share of common stock, par value $0.01 per share, of Citrix, held as of January 20, 2017. In addition, the Company issued 446,039 restricted stock unit awards in substitution for outstanding Citrix restricted stock unit awards held by employees of GetGo, pursuant to the terms of the Agreement and Plan of Merger. These restricted stock unit awards vesting dates match the vesting dates of the substituted Citrix restricted stock awards.

The Company and Citrix entered into a transition services agreement, pursuant to which each party will provide to the other party certain services on a transitional basis following the completion of the Merger to facilitate the transition of the GoTo Business to the Company. Among other services, the transition services generally relate to information technology and security operations, facilities, human resources support and accounting and finance support. The Company estimates that it will pay approximately $5 million to Citrix during the term of the transition services agreement, primarily in the first six months after the Merger.

 

Credit Facility

On February 1, 2017, the Company entered an Amended and Restated Credit Agreement by and between the Company and a syndicate of banks to amend and restate the Company’s existing credit agreement dated as of February 18, 2015, as amended on January 22, 2016 to, among other things:

 

   

increase the Company’s secured revolving credit facility from $150 million to $400 million in the aggregate (the “Revolving Facility”). The Credit Agreement also permits the Company to increase the Revolving Facility and/or enter into one or more tranches of term loans up to an additional $200 million subject to further commitment from the Lenders or additional lenders;

 

   

include Australian Dollars as a currency available for borrowing under the Revolving Facility;

 

   

extend the maturity date of the Revolving Facility to February 1, 2022, meaning that revolving loans under the Revolving Facility may be borrowed, re-paid and re-borrowed until February 1, 2022, at which time all amounts outstanding must be repaid;

 

   

adjust interest rates such that interest rates for U.S. Dollar loans under the Revolving Facility are determined, at the option of the Company, by reference to a Eurodollar rate or a base rate, ranging from 1.25% to 2.00% above the Eurodollar rate for Eurodollar-based borrowings or from 0.250% to 1.00% above the defined base rate for base rate borrowings, in each case based upon the Company’s total leverage ratio. Interest rates for loans in currencies other than U.S. Dollars will range from 1.25% to 2.00% above the respective London interbank offered interest rates for those currencies, also based on the Company’s total leverage ratio;

 

   

eliminate the financial covenant with respect to capital expenditures and require the Company to maintain a maximum consolidated senior secured leverage ratio, a maximum consolidated total leverage ratio, and a minimum consolidated fixed charge coverage ratio, each as further defined in the Credit Agreement;

 

   

remove LogMeIn Ireland Holding Company Limited (“LogMeIn Ireland”) as a named borrower under the facility, and remove any material subsidiaries of LogMeIn Ireland as guarantors of the Revolving Facility; and

 

   

adjust the quarterly commitment fee on the undrawn portion of the Revolving Facility such that it ranges from 0.15% to 0.30% per annum, based upon the Company’s total leverage ratio.

The Company incurred approximately $2.0 million of origination costs in connection with the Amended and Restated Credit Agreement.

Capital Return Plan

On February 23, 2017, the Company’s Board of Directors approved a three-year capital return plan. Pursuant to the plan, the Company intends to return to its stockholders approximately 75% of its free cash flow over the period, up to $700 million, through a combination of share repurchases and dividends. As part of this capital return plan, the Company expects to initiate a quarterly cash dividend of $0.25 per share, with the first dividend under this plan to be paid on May 26, 2017 to stockholders of record as of May 10, 2017. The Company’s Board of Directors will continue to review this capital return plan for potential modifications based on the Company’s financial performance, business outlook and other considerations. The timing and number of shares to be repurchased will depend upon prevailing market conditions and other factors, including potential tax restrictions imposed on the Company related to the Merger and the resolution of the company’s related IRS private letter ruling. Additionally, the Company’s credit facility contains certain financial and operating covenants that may restrict its ability to pay dividends in the future.

Quarterly Information (Unaudited)
Quarterly Information (Unaudited)
16. Quarterly Information (Unaudited)

 

    For the Three Months Ended  
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
 
    (in thousands, except for per share data)  

Statement of Operations Data:

               

Revenue

  $ 61,109     $ 64,834     $ 69,573     $ 76,084     $ 79,734     $ 83,266     $ 85,103     $ 87,965  

Gross profit

    53,127       56,299       60,895       65,821       68,534       71,830       73,618       76,585  

(Loss) income from operations

    (964     2,549       7,844       6,620       (707     3,360       (228     1,988  

Net income (loss)

    372       2,388       5,563       6,235       (1,073     2,506       (657     1,862  

Net income (loss) per share-basic

  $ 0.02     $ 0.10     $ 0.22     $ 0.25     $ (0.04   $ 0.10     $ (0.03   $ 0.07  

Net income (loss) per share-diluted

  $ 0.01     $ 0.09     $ 0.22     $ 0.24     $ (0.04   $ 0.10     $ (0.03   $ 0.07  
Summary of Significant Accounting Policies (Policies)

Principles of Consolidation — The accompanying consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates — The preparation of 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 financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Cash Equivalents — Cash equivalents consist of highly liquid investments with an original or remaining maturity of less than three months at the date of purchase. Cash equivalents consist of investments in money market funds which primarily invest in U.S. Treasury obligations. Cash equivalents are stated at cost, which approximates fair value.

Marketable Securities — The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss in equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of earnings based on the specific identification method. Fair value is determined based on quoted market prices. At December 31, 2015 and 2016, marketable securities consisted of U.S. government agency securities and corporate bonds that have remaining maturities within two years and have an aggregate amortized cost of $85.3 million and $55.7 million, respectively. The securities have an aggregate fair value of $85.3 million and $55.7 million, including $10,000 and $17,000 of unrealized gains and $53,000 and $43,000 of unrealized losses, at December 31, 2015 and 2016, respectively.

Restricted Cash — In April 2012, the Company entered into a lease for a new corporate headquarters located in Boston, Massachusetts. The lease required a security deposit of approximately $3.3 million in the form of an irrevocable standby letter of credit which is collateralized by a bank deposit in the amount of approximately $3.5 million or 105 percent of the security deposit in accordance with the lease. In 2015, $1.5 million of the security deposit was returned to the Company due to a planned decrease in the security deposit obligation. Such amounts are classified as restricted cash in the accompanying consolidated balance sheets. In addition, the Company has made security deposits for various other leased facilities, which are also classified as restricted cash.

Accounts Receivable — The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance and the balance related to services not yet delivered is charged as an offset to deferred revenue.

Activity in the allowance for doubtful accounts was as follows (in thousands):

 

     December 31,  
     2014      2015      2016  

Balance beginning of period

   $ 269      $ 301      $ 274  

Provision for bad debt

     102        61        37  

Uncollectible accounts written off

     (70      (88      (66
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 301      $ 274      $ 245  
  

 

 

    

 

 

    

 

 

 

 

Property and Equipment — Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred.

Estimated useful lives of assets are as follows:

 

Computer equipment and software

     2 — 3 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold Improvements

    
Shorter of lease term
or estimated useful life
 
 

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill, but performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. As of November 30, 2016, our measurement date, the fair value of the Company as a whole exceeds the carrying amount of the Company. Through December 31, 2016, no impairments have occurred.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives, which range up to eleven years.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through December 31, 2016, the Company recorded no material impairments.

Revenue Recognition — The Company derives revenue primarily from subscription fees related to its premium subscription software services and to a lesser extent, the delivery of professional services, primarily related to its Internet of Things business. Revenues are reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction.

Revenue from the Company’s premium services is recognized on a daily basis over the subscription term as the services are delivered, provided that there is persuasive evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. Subscription periods range from monthly to ten years. The Company’s software cannot be run on another entity’s hardware and customers do not have the right to take possession of the software and use it on their own or another entity’s hardware.

The Company’s multi-element arrangements typically include subscription and professional services, which may include development services. The Company evaluates each element within the arrangement to determine if they can be accounted for as separate units of accounting. If the delivered item or items have value to the customer on a standalone basis, either because they are sold separately by any vendor or the customer could resell the delivered item or items on a standalone basis, the Company has determined that the deliverables within these arrangements qualify for treatment as separate units of accounting. Accordingly, the Company recognizes revenue for each delivered item or items as a separate earnings process commencing when all of the significant performance obligations have been performed and when all of the revenue recognition criteria have been met. Professional services revenue recognized as a separate earnings process under multi-element arrangements has been immaterial to date.

In cases where the Company has determined that the delivered items within its multi-element arrangements do not have value to the customer on a stand-alone basis, the arrangement is accounted for as a single unit of accounting and the related consideration is recognized ratably over the estimated customer life, commencing when all of the significant performance obligations have been delivered and when all of the revenue recognition criteria have been met. Revenue from multi-element arrangements accounted for as a single unit of accounting which do not have value to the customer has been immaterial to date.

Deferred Revenue — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for products and services in advance on a monthly and annual basis. Deferred revenue to be recognized in the next twelve months is included in current deferred revenue, and the remaining amounts are included in long-term deferred revenue in the consolidated balance sheets.

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, marketable securities, restricted cash and accounts receivable. Cash, cash equivalents and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality and custody of its marketable securities is with an accredited financial institution. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for potential credit losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

As of December 31, 2015 and 2016 no customers accounted for more than 10% of accounts receivable and there were no customers that represented 10% or more of revenue for the years ended December 31, 2014, 2015 or 2016.

Legal Costs — Legal expenditures are expensed as incurred.

Research and Development — Research and development expenditures are expensed as incurred.

Software Development Costs — The Company has determined that technological feasibility of its software products that are sold as a perpetual license is reached shortly before their introduction to the marketplace.

The Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements of its on-demand products that are probable to result in additional functionality. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized as part of intangible assets until the software is substantially complete and ready for its intended use. Internally developed software costs that are capitalized are classified as intangible assets and amortized over a three-year period.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations. The Company had foreign currency gains of $1.4 million and foreign currency losses of $0.5 million for the years ended December 31, 2015 and 2016, respectively, included in other income (expense), net in the consolidated statements of operations.

Stock-Based Compensation — The Company values all stock-based compensation, including grants of stock options and restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period of the award, for those awards expected to vest, on a straight-line basis. The Company uses the with-or-without method to determine when it will realize excess tax benefits from stock-based compensation. Under this method, the Company will realize these excess tax benefits only after it realizes the tax benefits of net operating losses from operations.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carry-forwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2014, 2015 and 2016 was approximately $36.8 million, $35.8 million and $29.2 million, respectively, which consisted primarily of online paid searches, banner advertising, and other online marketing and is included in sales and marketing expense in the accompanying consolidated statements of operations.

Comprehensive Loss — Comprehensive loss is the change in stockholders’ equity during a period relating to transactions and other events and circumstances from non-owner sources and currently consists of net income, foreign currency translation adjustments, and unrealized gains and losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was $5.2 million at December 31, 2015 and consisted of $5.2 million related to foreign currency translation adjustments partially offset by $27,000 of unrealized losses, net of tax on available-for-sale securities. Accumulated comprehensive loss was $6.6 million at December 31, 2016 and consisted of $6.6 million related to foreign currency translation adjustments offset by $16,000 of unrealized losses, net of tax on available-for-sale securities.

Segment Data — Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision making group when making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company, whose management uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

The Company’s revenue by geography (based on customer address) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

United States

   $ 148,532      $ 191,300      $ 240,469  

United Kingdom

     19,452        21,662        25,738  

International — all other

     53,972        58,638        69,861  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

Collaboration cloud

   $ 62,746      $ 88,234      $ 117,244  

Identity and Access Management cloud

     74,244        92,712        120,324  

Service and Support cloud

     82,767        88,206        96,245  

Other

     2,199        2,448        2,255  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2014      2015      2016  

United States

   $ 9,731      $ 16,342      $ 16,872  

Hungary

     2,018        2,525        3,015  

United Kingdom

     1,139        1,963        1,964  

International — all other

     588        881        2,016  
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,476      $ 21,711      $ 23,867  
  

 

 

    

 

 

    

 

 

 

Net Income Per Share — Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding during the period and the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

 

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income per share because they had an anti-dilutive impact (in thousands):

 

     Years Ended December 31,  
       2014          2015          2016    

Options to purchase common shares

     57                

Restricted stock units

     18        204        114  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     75        204        114  
  

 

 

    

 

 

    

 

 

 

Basic and diluted net income per share was calculated as follows (in thousands, except per share data):

 

     Years Ended December 31,  
     2014      2015      2016  

Basic:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,385        24,826        25,305  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.33      $ 0.59      $ 0.10  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,385        24,826        25,305  

Add: Common stock equivalents

     1,001        954        859  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,386        25,780        26,164  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.31      $ 0.56      $ 0.10  
  

 

 

    

 

 

    

 

 

 

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and by-laws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director’s and officer’s insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is, in many cases, unlimited. Through December 31, 2016, the Company has not experienced any losses related to these indemnification obligations.

Recently Issued Accounting Pronouncements — On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of ASU 2014-09’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (i.e., property plant and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2018, with early adoption permitted, but not earlier than January 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements, including the impact after considering the merger with GetGo on January 31, 2017.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

On March 30, 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, and is expected to impact net income, EPS, and the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of ASU 2016-09 on its consolidated financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The purpose of ASU 2016-13 is to require a financial asset measured on the amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

On October 24, 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The purpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. The Company is currently assessing the potential impact of the adoption of ASU 2016-16 on its consolidated financial statements.

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.

 

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB’s EITF) (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. We are currently assessing the potential impact of the adoption of ASC 2016-18 on our consolidated financial statements.

Summary of Significant Accounting Policies (Tables)

Activity in the allowance for doubtful accounts was as follows (in thousands):

 

     December 31,  
     2014      2015      2016  

Balance beginning of period

   $ 269      $ 301      $ 274  

Provision for bad debt

     102        61        37  

Uncollectible accounts written off

     (70      (88      (66
  

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 301      $ 274      $ 245  
  

 

 

    

 

 

    

 

 

 

Estimated useful lives of assets are as follows:

 

Computer equipment and software

     2 — 3 years  

Office equipment

     3 years  

Furniture and fixtures

     5 years  

Leasehold Improvements

    
Shorter of lease term
or estimated useful life
 
 

The Company’s revenue by geography (based on customer address) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

United States

   $ 148,532      $ 191,300      $ 240,469  

United Kingdom

     19,452        21,662        25,738  

International — all other

     53,972        58,638        69,861  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s revenue by service cloud (product grouping) is as follows (in thousands):

 

     Years Ended December 31,  
     2014      2015      2016  

Revenues:

        

Collaboration cloud

   $ 62,746      $ 88,234      $ 117,244  

Identity and Access Management cloud

     74,244        92,712        120,324  

Service and Support cloud

     82,767        88,206        96,245  

Other

     2,199        2,448        2,255  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 221,956      $ 271,600      $ 336,068  
  

 

 

    

 

 

    

 

 

 

The Company’s long-lived assets by geography are as follows (in thousands):

 

     Years Ended December 31,  
Long-lived assets:    2014      2015      2016  

United States

   $ 9,731      $ 16,342      $ 16,872  

Hungary

     2,018        2,525        3,015  

United Kingdom

     1,139        1,963        1,964  

International — all other

     588        881        2,016  
  

 

 

    

 

 

    

 

 

 

Total long-lived assets

   $ 13,476      $ 21,711      $ 23,867  
  

 

 

    

 

 

    

 

 

 

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income per share because they had an anti-dilutive impact (in thousands):

 

     Years Ended December 31,  
       2014          2015          2016    

Options to purchase common shares

     57                

Restricted stock units

     18        204        114  
  

 

 

    

 

 

    

 

 

 

Total options and restricted stock units

     75        204        114  
  

 

 

    

 

 

    

 

 

 

Basic and diluted net income per share was calculated as follows (in thousands, except per share data):

 

     Years Ended December 31,  
     2014      2015      2016  

Basic:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, basic

     24,385        24,826        25,305  
  

 

 

    

 

 

    

 

 

 

Net income per share, basic

   $ 0.33      $ 0.59      $ 0.10  
  

 

 

    

 

 

    

 

 

 

Diluted:

        

Net income

   $ 7,955      $ 14,558      $ 2,638  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     24,385        24,826        25,305  

Add: Common stock equivalents

     1,001        954        859  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     25,386        25,780        26,164  
  

 

 

    

 

 

    

 

 

 

Net income per share, diluted

   $ 0.31      $ 0.56      $ 0.10  
  

 

 

    

 

 

    

 

 

 
Fair Value of Financial Instruments (Tables)

The following table summarizes the basis used to measure certain of the Company’s financial assets and contingent consideration liability that are carried at fair value (in thousands):

 

     Fair Value Measurements at December 31, 2015  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 10,138      $      $      $ 10,138  

Cash equivalents — bank deposits

            1               1  

Short-term marketable securities:

           

U.S. government agency securities

     50,237        17,994               68,231  

Corporate bond securities

            17,053               17,053  

Contingent consideration liability

                   2,028        2,028  
     Fair Value Measurements at December 31, 2016  
     Level 1      Level 2      Level 3      Total  

Cash equivalents — money market funds

   $ 11,599      $      $      $ 11,599  

Short-term marketable securities:

           

U.S. government agency securities

     34,961        8,001               42,962  

Corporate bond securities

            12,748               12,748  

A reconciliation of the beginning and ending Level 3 liability is as follows:

 

     Years Ended
December 31,
 
     2015      2016  

Balance beginning of period

   $ 249      $ 2,028  

Additions to Level 3

     2,000         

Payments

     (226      (2,530

Change in fair value of contingent consideration liability

     5        502  
  

 

 

    

 

 

 

Balance end of period

   $ 2,028      $  
  

 

 

    

 

 

 
Acquisitions (Tables)

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

     Amount  

Cash and other current assets

   $ 1  

Property and equipment

     18  

Deferred tax assets, net

     666  

Other current liabilities

     (78

Completed technology

     1,200  

Goodwill

     4,215  
  

 

 

 

Total purchase price

   $ 6,022  
  

 

 

 

The following table summarizes the fair value (in thousands) of the assets acquired and liabilities assumed at the date of acquisition:

 

Cash

   $ 2,518  

Accounts receivable

     639  

Property and equipment

     40  

Deferred tax asset

     3,050  

Current and other assets

     134  

Intangible assets:

  

Completed technology

     29,400  

Customer relationships

     23,900  

Trade name and trademark

     3,000  

Deferred revenue

     (6,600

Accrued expenses

     (66

Deferred tax liability

     (23,478

Goodwill

     79,617  
  

 

 

 

Total purchase price

     112,154  

Liability for contingent consideration

     (2,000
  

 

 

 

Total cash paid

   $ 110,154  
  

 

 

 

Unaudited Pro Forma Financial Information

 

     Year Ended
December 31, 2014
     Year Ended
December 31, 2015
 
     Pro Forma      As Reported      Pro Forma      As Reported  
     (in thousands, except
per share amounts)
     (in thousands, except
per share amounts)
 

Revenue

   $ 230,477      $ 221,956      $ 281,980      $ 271,600  

Net income

   $ 1,687      $ 7,955      $ 12,038      $ 14,558  

Earnings per share — Basic

   $ 0.07      $ 0.33      $ 0.48      $ 0.59  

Earnings per share — Diluted

   $ 0.07      $ 0.31      $ 0.47      $ 0.56  
Goodwill and Intangible Assets (Tables)

Changes in goodwill for the years ended December 31, 2015 and 2016 are as follows (in thousands):

 

Balance, January 1, 2015

   $ 37,928  

Goodwill related to the acquisition of LastPass

     79,617  
  

 

 

 

Balance, December 31, 2015

     117,545  

Goodwill related to the acquisition of AuthAir

     4,215  
  

 

 

 

Balance, December 31, 2016

   $ 121,760  
  

 

 

 

Intangible assets consist of the following (in thousands):

 

          December 31, 2015     December 31, 2016  
    Estimated
Useful
Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization