XNAS:ININ Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

____________

 

FORM 10-Q

 

(Mark One)

 

 

 

 

 

R

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

Or

 

 

 

 

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________to____________

 

Commission File Number: 000-54450

 

 

INTERACTIVE INTELLIGENCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Indiana

(State or other jurisdiction

of incorporation or organization)

 

45-1505676

(I.R.S. Employer

Identification No.)

 

 

 

7601 Interactive Way

Indianapolis, IN 46278

(Address of principal executive offices, including zip code)

 

 

 

(317) 872-3000

(Registrant’s telephone number, including area code)

 

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 


 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R                        No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

 

Yes     R   

No      ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

¨   

 

Accelerated filer

R

 

Non-accelerated filer

(Do not check if a smaller reporting company)

¨   

 

Smaller reporting company

¨   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No R

 

As of July 31, 2012, there were 19,279,989 shares outstanding of the registrant’s common stock, $0.01 par value.

 

 

2

 


 

 

 

 

TABLE OF CONTENTS

 

 

 

 

PART I. FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2012 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June, 2012 and 2011

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

23 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

37 

 

 

 

Item 4.

Controls and Procedures.

37 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

38 

 

 

 

Item 1A.

Risk Factors.

38 

 

 

 

Item 6.

Exhibits.

39 

 

 

 

SIGNATURE 

39 

 

3

 


 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Balance Sheet

As of June 30, 2012 and December 31, 2011

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2012

 

2011

Assets

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

23,940 

 

$

28,465 

Short-term investments

 

40,828 

 

 

40,589 

Accounts receivable, net of allowance for doubtful accounts of $1,858

 

 

 

 

 

at June 30, 2012 and  $1,718 at December 31, 2011

 

52,678 

 

 

56,331 

Deferred tax assets, net

 

9,562 

 

 

8,952 

Prepaid expenses

 

13,644 

 

 

11,474 

Other current assets

 

5,144 

 

 

4,966 

Total current assets

 

145,796 

 

 

150,777 

Long-term investments

 

19,739 

 

 

23,415 

Property and equipment, net

 

21,923 

 

 

18,304 

Goodwill

 

30,623 

 

 

22,696 

Intangible assets, net

 

17,860 

 

 

15,029 

Other assets, net

 

2,777 

 

 

2,581 

Total assets

$

238,718 

 

$

232,802 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

16,638 

 

$

16,545 

Accrued compensation and related expenses

 

7,549 

 

 

8,870 

Deferred product revenues

 

4,921 

 

 

3,870 

Deferred services revenues

 

58,688 

 

 

57,423 

Total current liabilities

 

87,796 

 

 

86,708 

Deferred revenue

 

15,177 

 

 

14,141 

Deferred tax liabilities, net

 

1,056 

 

 

1,688 

Other long-term liabilities

 

247 

 

 

291 

Total liabilities

 

104,276 

 

 

102,828 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

Preferred stock,  no par value;  10,000,000 authorized; no shares

 

 

 

 

 

issued and outstanding

 

 -

 

 

 -

Common stock, $0.01 par value; 100,000,000 authorized;

 

 

 

 

 

19,253,282 issued and outstanding at June 30, 2012 and

 

 

 

 

 

18,961,497 issued and outstanding at December 31, 2011

 

193 

 

 

190 

Additional paid-in capital

 

125,629 

 

 

119,644 

Accumulated other comprehensive loss

 

(794)

 

 

(193)

Retained earnings

 

9,414 

 

 

10,333 

Total shareholders' equity

 

134,442 

 

 

129,974 

Total liabilities and shareholders' equity

$

238,718 

 

$

232,802 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

4

 


 

 

 Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three and Six Months Ended June 30, 2012 and 2011

(in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2012

 

2011

 

2012

 

2011

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

19,662 

 

$

24,208 

 

$

39,097 

 

$

44,632 

Recurring revenue

 

 

28,398 

 

 

22,330 

 

 

56,037 

 

 

43,418 

Services

 

 

6,721 

 

 

5,443 

 

 

12,415 

 

 

11,661 

Total revenues

 

 

54,781 

 

 

51,981 

 

 

107,549 

 

 

99,711 

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of product

 

 

6,000 

 

 

6,392 

 

 

11,651 

 

 

12,588 

Costs of recurring revenue

 

 

7,838 

 

 

5,813 

 

 

15,079 

 

 

11,095 

Costs of services

 

 

5,200 

 

 

3,919 

 

 

9,775 

 

 

7,631 

Amortization of intangible assets

 

 

35 

 

 

35 

 

 

70 

 

 

70 

Total costs of revenues

 

 

19,073 

 

 

16,159 

 

 

36,575 

 

 

31,384 

Gross profit

 

 

35,708 

 

 

35,822 

 

 

70,974 

 

 

68,327 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

19,256 

 

 

15,320 

 

 

36,677 

 

 

29,477 

Research and development

 

 

10,966 

 

 

8,714 

 

 

21,345 

 

 

16,861 

General and administrative

 

 

6,943 

 

 

6,024 

 

 

13,832 

 

 

11,119 

Amortization of intangible assets

 

 

350 

 

 

274 

 

 

651 

 

 

458 

Total operating expenses

 

 

37,515 

 

 

30,332 

 

 

72,505 

 

 

57,915 

Operating income (loss)

 

 

(1,807)

 

 

5,490 

 

 

(1,531)

 

 

10,412 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

167 

 

 

92 

 

 

348 

 

 

135 

Other income (expense)

 

 

92 

 

 

256 

 

 

(92)

 

 

90 

Total other income

 

 

259 

 

 

348 

 

 

256 

 

 

225 

Income (loss) before income taxes

 

 

(1,548)

 

 

5,838 

 

 

(1,275)

 

 

10,637 

Income tax expense (benefit)

 

 

(440)

 

 

2,011 

 

 

(356)

 

 

3,715 

Net income (loss)

 

$

(1,108)

 

$

3,827 

 

$

(919)

 

$

6,922 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,164)

 

 

 -

 

 

(783)

 

 

 -

Net unrealized investment gain (loss)

 

 

(50)

 

 

(98)

 

 

182 

 

 

(43)

Comprehensive income (loss)

 

$

(2,322)

 

$

3,729 

 

$

(1,520)

 

$

6,879 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06)

 

$

0.20 

 

$

(0.05)

 

$

0.37 

Diluted

 

 

(0.06)

 

 

0.19 

 

 

(0.05)

 

 

0.35 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,213 

 

 

18,707 

 

 

19,156 

 

 

18,563 

Diluted

 

 

19,213 

 

 

19,933 

 

 

19,156 

 

 

19,860 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

5

 


 

 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statement of Shareholders’ Equity

For the Six Months Ended June 30, 2012

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Earnings

 

Total

Balances, December 31, 2011

18,961 

 

$

190 

 

$

119,644 

 

$

(193)

 

$

10,333 

 

$

129,974 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 -

 

 

 -

 

 

3,294 

 

 

 -

 

 

 -

 

 

3,294 

Exercise of stock options

260 

 

 

 

 

2,480 

 

 

 -

 

 

 -

 

 

2,483 

Issuances of common stock

13 

 

 

 -

 

 

320 

 

 

 -

 

 

 -

 

 

320 

Issuance of restricted stock units

19 

 

 

 -

 

 

(253)

 

 

 -

 

 

 -

 

 

(253)

Tax benefits from stock-based payment arrangements

 -

 

 

 -

 

 

144 

 

 

 -

 

 

 -

 

 

144 

Net loss

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(919)

 

 

(919)

Foreign currency translation adjustment

 -

 

 

 -

 

 

 -

 

 

(783)

 

 

 -

 

 

(783)

Net unrealized investment gain

 -

 

 

 -

 

 

 -

 

 

182 

 

 

 -

 

 

182 

Balances, June 30, 2012

19,253 

 

$

193 

 

$

125,629 

 

$

(794)

 

$

9,414 

 

$

134,442 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

6

 


 

 

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

 

2012

 

2011

Operating activities:

 

 

 

 

 

Net income (loss)

$

(919)

 

$

6,922 

Adjustments to reconcile net income to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

3,768 

 

 

3,080 

Stock-based compensation expense

 

3,294 

 

 

2,593 

Tax benefits from stock-based payment arrangements

 

(144)

 

 

(1,240)

Deferred income tax

 

(2,224)

 

 

1,517 

Accretion of investment income

 

294 

 

 

(1,660)

Gain on disposal of fixed assets

 

25 

 

 

 -

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

5,264 

 

 

(7,470)

Prepaid expenses

 

(2,102)

 

 

(1,646)

Other current assets

 

(178)

 

 

1,296 

Other assets

 

(196)

 

 

(133)

Accounts payable and accrued liabilities

 

680 

 

 

46 

Accrued compensation and related expenses

 

(1,507)

 

 

(667)

Deferred product revenues

 

970 

 

 

2,128 

Deferred services revenues

 

552 

 

 

5,659 

Net cash provided by operating activities

 

7,577 

 

 

10,425 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Sales of available-for-sale investments

 

27,487 

 

 

40,279 

Purchases of available-for-sale investments

 

(24,161)

 

 

(66,465)

Purchases of property and equipment

 

(6,799)

 

 

(5,625)

Acquisitions, net of cash

 

(11,322)

 

 

(4,111)

Unrealized gain (loss) on investment

 

(1)

 

 

40 

Net cash used in investing activities

 

(14,796)

 

 

(35,882)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from stock options exercised

 

2,483 

 

 

4,708 

Proceeds from issuance of common stock

 

320 

 

 

258 

Employee taxes withheld for restricted stock units

 

(253)

 

 

 -

Tax benefits from stock-based payment arrangements

 

144 

 

 

1,240 

Net cash provided by financing activities

 

2,694 

 

 

6,206 

Net decrease in cash and cash equivalents

 

(4,525)

 

 

(19,251)

Cash and cash equivalents, beginning of period

 

28,465 

 

 

48,300 

Cash and cash equivalents, end of period

$

23,940 

 

$

29,049 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

$

 

$

Income taxes

 

86 

 

 

1,106 

 

 

 

 

 

 

Other non-cash item:

 

 

 

 

 

Purchase of property and equipment payable at end of period

$

(174)

 

$

(7)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

7

 


 

 

Interactive Intelligence Group, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012 and 2011 (unaudited)

 

1.   FINANCIAL STATEMENT PRESENTATION

Effective July 1, 2011, Interactive Intelligence Group, Inc. (“Interactive Intelligence”) became the successor reporting company to Interactive Intelligence, Inc. (“ININ Inc.”), pursuant to a corporate reorganization approved by the shareholders of ININ Inc. at its 2011 annual meeting of shareholders (the “Reorganization”). Interactive Intelligence is conducting the business previously conducted by ININ Inc. in substantially the same manner. In these Notes to Condensed Consolidated Financial Statements, the term the “Company” means ININ Inc. and its wholly-owned subsidiaries for the periods through and including June 30, 2011, and Interactive Intelligence and its wholly-owned subsidiaries for the periods after June 30, 2011.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions for Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, certain information and note disclosures normally included in the Company’s financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC). 

 

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, at the respective balance sheet dates, and the reported amounts of revenues and expenses during the respective reporting periods. Despite management’s best effort to establish good faith estimates and assumptions, actual results could differ from these estimates. In management’s opinion, the Company’s accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature, except as otherwise noted) for the fair presentation of the results of the interim periods presented.

 

The Company’s accompanying condensed consolidated financial statements as of December 31, 2011 have been derived from the Company’s audited consolidated financial statements at that date but do not include all of the information and notes required by GAAP for complete financial statements. These accompanying condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2011, included in the Companys most recent Annual Report on Form 10-K as filed with the SEC on March 15, 2012. The Companys results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions.

 

Reclassification and Adjustments

 

Effective January 1, 2012, the Company reclassified certain subscription revenues which were included in product revenues in prior periods as recurring revenues. In prior years, these revenues were not significant; however, as we have signed additional agreements with increasing revenues, we concluded that it is appropriate to report these revenues as recurring. For the three and six months ended June 30, 2011, $287,000 and $629,680, respectively, have been reclassified as recurring revenues based on this new revenue presentation. The reclassification did not have any impact on the overall results previously reported.

 


 

 

 

2.            SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING
            PRONOUNCEMENTS

 

 

The Company’s interim critical accounting policies and estimates include the recognition of income taxes using an estimated annual effective tax rate.  For a complete summary of the Company’s other significant accounting policies and other critical accounting estimates, refer to Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”), which amends FASB Accounting Standards Codification (“ASC”) Topic 820,  Fair Value Measurements and Disclosures (“FASB ASC 820”). This updated guidance clarifies the FASB’s intent about the application of existing fair value measurement and disclosure requirements. In order to develop common requirements in accordance with GAAP and IFRS, this update also provides changes to particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This guidance became effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption was not permitted. The Company adopted this guidance on January 1, 2012 and there was no material impact on its consolidated financial statements upon adoption.

 

In June 2011, the FASB issued FASB ASU 2011-05, Presentation of Comprehensive Income, which amends FASB ASC Topic 220, Comprehensive Income. This updated guidance requires companies to report comprehensive income in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The updated guidance does not change what items are reported in other comprehensive income or the GAAP requirement to report reclassification of items from other comprehensive income to net income. The guidance became effective for public entities with fiscal years and interim periods beginning after December 15, 2011. The Company adopted this guidance on January 1, 2012 and there was no material impact on its consolidated financial statements upon adoption.

 

In December 2011, the FASB issued FASB ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the presentation requirements for reclassification adjustments out of accumulated other comprehensive income. This update was issued to allow the FASB more time to decide whether companies should present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  All other requirements under FASB ASU 2011-05 were not impacted by this update. The Company will continue to monitor the status of this updated guidance.

 

During the six months ended June 30, 2012, there were no material changes to the Company’s significant accounting policies or critical accounting estimates.

 

 

3.            INVESTMENTS

 

FASB ASC 820, as amended, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes the following three levels of inputs that may be used to measure fair value:

 

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

9

 


 

 

·

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  

 

·

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 Company’s short-term investments all mature in less than one year and its long-term investments all mature within three years. Both short-term and long-term investments are considered available for sale. The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include money market securities. Such instruments are classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include corporate notes, agency bonds, commercial paper, certificates of deposit, and international government bonds. Such instruments are classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. 

 

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents, short-term investments and long-term investments on its condensed consolidated balance sheet, measured at fair value as of June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2012 Using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

 

Other Observable

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

Description

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

Cash & cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

470 

 

$

470 

 

$

 -

 

$

 -

Cash

 

 

3,314 

 

 

3,314 

 

 

 -

 

 

 -

Total

 

$

3,784 

 

$

3,784 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

27,225 

 

$

 -

 

$

27,225 

 

$

 -

Agency bonds

 

 

3,001 

 

 

 -

 

 

3,001 

 

 

 -

Commercial paper

 

 

8,491 

 

 

 -

 

 

8,491 

 

 

 -

Certificates of deposit

 

 

1,100 

 

 

 -

 

 

1,100 

 

 

 -

International government bonds

 

 

1,011 

 

 

 -

 

 

1,011 

 

 

 -

Total

 

$

40,828 

 

$

 -

 

$

40,828 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

17,718 

 

$

 -

 

$

17,718 

 

$

 -

Agency bonds

 

 

2,021 

 

 

 -

 

 

2,021 

 

 

 -

Total

 

$

19,739 

 

$

 -

 

$

19,739 

 

$

 -

 

 

 

10

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2011 Using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

 

Other Observable

 

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

Description

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

Cash & cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,027 

 

$

3,027 

 

$

 -

 

$

 -

Cash

 

 

384 

 

 

384 

 

 

 -

 

 

 -

Total

 

$

3,411 

 

$

3,411 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

29,084 

 

$

 -

 

$

29,084 

 

$

 -

Agency bonds

 

 

5,409 

 

 

 -

 

 

5,409 

 

 

 -

Commercial paper

 

 

4,997 

 

 

 -

 

 

4,997 

 

 

 -

Certificates of deposit

 

 

1,099 

 

 

 -

 

 

1,099 

 

 

 -

Total

 

$

40,589 

 

$

 -

 

$

40,589 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

21,395 

 

$

 -

 

$

21,395 

 

$

 -

Agency bonds

 

 

2,020 

 

 

 -

 

 

2,020 

 

 

 -

Total

 

$

23,415 

 

$

 -

 

$

23,415 

 

$

 -

 

 

4.            NET INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. Potential common shares consist of shares of common stock issuable upon the exercise of stock options and vesting of restricted stock units (“RSUs”). The calculation of diluted net income per share excludes shares underlying stock options outstanding that would be anti-dilutive. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

Net income (loss), as reported (A)

$

(1,108)

 

$

3,827 

 

$

(919)

 

$

6,922 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding and RSUs (B)

 

19,213 

 

 

18,707 

 

 

19,156 

 

 

18,563 

Dilutive effect of employee stock options

 

 -

 

 

1,226 

 

 

 -

 

 

1,297 

Common stock and common stock equivalents (C)

 

19,213 

 

 

19,933 

 

 

19,156 

 

 

19,860 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

$

(0.06)

 

$

0.20 

 

$

(0.05)

 

$

0.37 

Diluted (A/C)

 

(0.06)

 

 

0.19 

 

 

(0.05)

 

 

0.35 

 

The Company’s calculation of diluted net income per share for the three and six months ended June 30, 2011 excludes stock options to purchase approximately 320,000 and 915,000 shares of the Company’s common stock, respectively, as their effect would be anti-dilutive.

11

 


 

 

 

 

5.

STOCK-BASED COMPENSATION

 

Stock Option Plans

 

The Company’s stock option plans, adopted in 1995, 1999 and 2006, authorize the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options, and, in the case of the 2006 Equity Incentive Plan, as amended and as assumed by Interactive Intelligence (the “2006 Plan”), stock appreciation rights, restricted stock, RSUs, performance shares, performance units and other stock-based awards. After adoption of the 2006 Plan by the Company’s shareholders in May 2006, the Company may no longer make any grants under previous plans, but any shares subject to awards under the 1999 Stock Option and Incentive Plan and the Outside Directors Stock Option Plan (collectively, the “1999 Plans”) that are cancelled are added to shares available under the 2006 Plan. A maximum of 7,050,933 shares are available for delivery under the 2006 Plan, which consists of (i) 3,350,000 shares, plus (ii) 320,000 shares available for issuance under the 1999 Plans, but not underlying any outstanding stock options or other awards under the 1999 Plans, plus (iii) up to 3,380,933 shares subject to outstanding stock options or other awards under the 1999 Plans that expire, are forfeited or otherwise terminate unexercised on or after May 18, 2006. The number of shares available under the 2006 Plan is subject to adjustment for certain changes in the Company’s capital structure. The exercise price of options granted under the 2006 Plan is equal to the closing price of the Company’s common stock, as reported by The NASDAQ Global Select Market, on the business day immediately preceding the date of grant.

 

The Company grants RSUs and three types of stock options. The first type of stock option is non-performance-based subject only to time-based vesting, and these stock options are granted by the Company as annual grants to executives, to certain new employees and to newly-elected non-employee directors.  These stock options vest in four equal annual installments beginning one year after the grant date.  The fair value of these option grants is determined on the date of grant and the related compensation expense is recognized for the entire award on a straight-line basis over the requisite service period.  

 

The second type of stock option granted by the Company is performance-based subject to cancellation if the specified performance targets are not met. If the applicable performance targets have been achieved, the options will vest in four equal annual installments beginning one year after the performance-related period has ended.  The fair value of these stock option grants is determined on the date of grant and the related compensation expense is recognized over the requisite service period, including the initial period for which the specified performance targets must be met.

 

The third type of stock option granted by the Company is director options granted to non-employee directors annually. These options are similar to the non-performance-based options described above except that the director options vest one year after the grant date. The fair value of these option grants is determined on the date of the grant and the related compensation expense is recognized over one year. The director options are generally granted at the Company’s Annual Meeting of Shareholders during the second quarter of a fiscal year.

 

Commencing in January 2011, the Company began granting RSUs to certain key employees and certain new employees. The fair value of the RSUs is determined on the date of grant and the RSUs vest in four equal annual installments beginning one year after the grant date. RSUs are not included in issued and outstanding common stock until the shares are vested and settlement has occurred.

 

The plans may be terminated by the Company’s Board of Directors at any time.

 

12

 


 

 

Stock-Based Compensation Expense Information

 

The following table summarizes the allocation of stock-based compensation expense related to employee and director stock options and RSUs under FASB ASC Topic 718,  Compensation – Stock Compensation for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

Stock-based compensation expense by category:

 

 

 

 

 

 

 

 

 

 

 

Costs of recurring revenues

$

130 

 

$

103 

 

$

253 

 

$

208 

Costs of services revenues

 

42 

 

 

11 

 

 

76 

 

 

36 

Sales and marketing

 

569 

 

 

433 

 

 

1,101 

 

 

825 

Research and development

 

473 

 

 

395 

 

 

870 

 

 

803 

General and administrative

 

500 

 

 

333 

 

 

993 

 

 

721 

Total stock-based compensation expense

$

1,714 

 

$

1,275 

 

$

3,293 

 

$

2,593 

 

 

Stock Option and RSU Valuation

 

The Company estimated the fair value of stock options using the Black-Scholes valuation model. There were no material changes in the way the assumptions were calculated as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Non-performance based options can be granted to all employees throughout the year, while performance-based options are only granted to sales and marketing employees during the first quarter of each year and option grants to directors only occur during the second quarter of each year. The weighted-average estimated per option value of each category of options granted during the six months ended June 30, 2012 and 2011 used the following assumptions:

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

Valuation assumptions for non-performance-based options:

 

2012

 

2011

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

59.65 - 64.68

%

 

62.42 - 63.10

%

Risk-free interest rate

 

0.57 - 0.71

%

 

1.25 - 1.74

%

Expected life of option (in years)

 

4.25 

 

 

4.25 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

Valuation assumptions for performance-based options:

 

2012

 

2011

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

63.23 

%

 

65.55 

%

Risk-free interest rate

 

0.79 

%

 

1.97 

%

Expected life of option (in years)

 

4.75 

 

 

4.75 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

Valuation assumptions for directors

 

2012

 

2011

Dividend yield

 

 -

%

 

 -

%

Expected volatility

 

57.10 

%

 

64.38 

%

Risk-free interest rate

 

0.49 

%

 

0.93 

%

Expected life of option (in years)

 

3.50 

 

 

3.50 

 

 

 

RSUs are valued using the fair market value of the Company’s stock on the date of grant and expense is recognized on a straight line basis taking into account an estimated forfeiture rate.   

 

13

 


 

 

Stock Option and RSU Activity

 

The following table sets forth a summary of stock option activity for the six months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

Average

 

 

 

 

Exercise

 

 

Options

 

Price

Balances, beginning of year

 

2,665,654 

 

$

15.16 

Options granted

 

405,000 

 

 

24.79 

Options exercised

 

(260,055)

 

 

9.54 

Options cancelled, forfeited or expired

 

(2,750)

 

 

16.11 

Options outstanding

 

2,807,849 

 

 

17.07 

Option price range

$

2.59 - 37.76

 

 

 

Weighted-average fair value of options granted

$

12.20 

 

 

 

Options exercisable

 

1,719,821 

 

 

13.36 

 

The following table sets forth information regarding the Company’s stock options outstanding and exercisable at June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Weighted-

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Remaining

 

Average

 

 

 

Average

Range of Exercise

 

 

 

Contractual

 

Exercise

 

 

 

Exercise

Prices

 

Number

 

Life

 

Price

 

Number

 

Price

$

2.59 

-

$

5.61 

 

 

305,030 

 

1.66 

 

$

4.51 

 

305,030 

 

$

4.51 

$

5.72 

-

$

6.03 

 

 

190,405 

 

1.93 

 

 

5.83 

 

190,405 

 

 

5.83 

$

6.66 

-

$

6.66 

 

 

324,059 

 

2.63 

 

 

6.66 

 

214,184 

 

 

6.66 

$

6.70 

-

$

14.79 

 

 

288,214 

 

1.72 

 

 

13.15 

 

276,309 

 

 

13.34 

$

14.86 

-

$

19.13 

 

 

312,550 

 

2.27 

 

 

17.48 

 

265,677 

 

 

17.52 

$

19.19 

-

$

19.66 

 

 

456,779 

 

3.61 

 

 

19.65 

 

198,904 

 

 

19.65 

$

19.77 

-

$

22.92 

 

 

176,312 

 

1.06 

 

 

20.67 

 

161,312 

 

 

20.53 

$

24.50 

-

$

24.50 

 

 

325,000 

 

5.71 

 

 

24.50 

 

 -

 

 

 -

$

25.00 

-

$

37.76 

 

 

429,500 

 

4.93 

 

 

31.29 

 

108,000 

 

 

32.38 

Total shares/average price

 

2,807,849 

 

3.11 

 

 

17.07 

 

1,719,821 

 

 

13.36 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The total intrinsic value of options exercised during quarter ended June 30, 2012 was $4.6 million. The aggregate intrinsic value of options outstanding as of June 30, 2012 was $32.8 million and the aggregate intrinsic value of options currently exercisable as of June 30, 2012 was $26.0 million. The aggregate intrinsic value represents the total intrinsic value, based on the Company’s closing stock price per share of $28.21 as of June 29, 2012, which would have been realized by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of June 30, 2012 represented 1.7 million shares with a weighted average exercise price of $13.36.

 

As of June 30, 2012, there was $16.4 million of total unrecognized compensation cost related to non-vested stock options. These costs are expected to be recognized over the weighted average remaining vesting period of 2.33 years.

 

14

 


 

 

The following table sets forth a summary of RSU activity for the six months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

Average Grant

 

Awards

 

Date Price

Balances, beginning of year

116,340 

 

$

32.33 

RSUs granted

136,700 

 

 

28.39 

RSUs vested

(28,869)

 

 

32.48 

RSUs forfeited

(7,082)

 

 

32.60 

RSUs outstanding

217,089 

 

 

 

 

 

As of June 30, 2012, there were 758,983 shares of stock available for issuance for equity compensation awards under the 2006 Plan.

 

6.    CONCENTRATION OF CREDIT RISK

 

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of June 30, 2012 or December 31, 2011 or revenues for the three and six months ended June 30, 2012 or 2011. No country accounted for more than 10% of the Company’s revenues except for the United States, which accounted for 73% of the Company’s revenues in each of the three and six months ended June 30, 2012, and 56% and 59% of the Company’s revenues in the three and six months ended June 30, 2011, respectively.

 

7.    COMMITMENTS AND CONTINGENCIES

Legal Proceedings

 

From time to time, the Company has received notification from competitors and other technology providers claiming that the Company’s technology infringes their proprietary rights. The Company cannot provide assurance that these matters can be resolved amicably without litigation, or that the Company will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on its business, financial condition or results of operations.

 

From time to time, the Company is also involved in certain legal proceedings in the ordinary course of conducting its business. While the ultimate liability pursuant to these actions cannot currently be determined, the Company believes these legal proceedings will not have a material adverse effect on its financial position or results of operations. Litigation, in general, and intellectual property litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

 

Guarantees

The Company provides indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products. The Company’s direct software license agreements, in accordance with FASB ASC Topic 460, Guarantees, include certain provisions for indemnifying customers, in material compliance with their license agreement, against liabilities if the Company’s software products infringe upon a third party's intellectual property rights, over the life of the agreement. There is no maximum potential amount of future payments set under the guarantee. However, the Company may at any time and at its option and expense:  (i) procure the right of the customer to continue to use the Company’s software that may infringe a third party’s rights; (ii) modify its software so as to avoid infringement; or (iii) require the customer to return its software and refund the customer the fee actually paid by the customer for its software less depreciation based on a five-year straight-line depreciation schedule. The customer’s failure to provide timely notice or reasonable assistance will relieve the Company of its obligations under this indemnification to the extent that it has been actually and materially prejudiced by such failure. To date, the Company has not incurred, nor does it expect to incur, any material related costs and, therefore, has not reserved for such liabilities.

15

 


 

 

The Company’s software license agreements also include a warranty that its software products will substantially conform to its software user documentation for a period of one year, provided the customer is in material compliance with the software license agreement. To date, the Company has not incurred any material costs associated with these product warranties, and as such, has not reserved for any such warranty liabilities in its operating results.

Lease Commitments

 

The Company leases space for its world headquarters in Indianapolis, Indiana under an operating lease agreement and amendments which expire on March 31, 2018. The Company also has multiple leases for offices and other space throughout the world. The office space for sales, services, development and international offices and a product distribution center located in Indianapolis, Indiana are rented under operating leases and expire at various times through 2016. In accordance with FASB ASC Topic 840, Leases, rental expense is recognized ratably over the lease period, including those leases containing escalation clauses. 

 

Other Contingencies

 

The Company has received and may continue to receive certain payroll tax credits and real estate tax abatements that were granted to the Company based upon certain growth projections.  If the Company’s actual results are less than those projections, the Company may be subject to repayment of some or all of the tax credits or payment of additional real estate taxes in the case of the abatements.  The Company does not believe that it will be subject to payment of any money related to these taxes; however, the Company cannot provide assurance as to the outcome.

 

 

8.

INCOME TAXES 

 

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for the settlement of prior period amounts (“discrete items”) arising in that quarter.  The Company’s effective tax rates for the three and six months ended June 30, 2012 decreased to 28.8% and 27.9%, respectively, compared to 34.4% and 35.0%, respectively, for the same periods in 2011. The decrease was a result of the discrete items, partially offset by the federal research and development tax credits which were enacted in 2011 but have yet to be extended for 2012. Without the effect of the discrete items, the Company’s effective tax rate for the three and six months ended June 30, 2012 would have been 36.7% and 37.3%, respectively.

 

Additionally, the Company’s effective tax rates for the three and six months ended June 30, 2012 were lower than the federal statutory tax rate of 35% primarily due to the discrete items recorded during the three months ended June 30, 2012 and various non-deductible expenses.  

 

The Company’s quarterly tax provision and its quarterly estimate of its annual effective tax rate are subject to significant volatility due to several factors, including the Company’s ability to accurately predict its pre-tax income and loss in multiple jurisdictions.

 

16

 


 

 

9.  OTHER COMPREHENSIVE INCOME (LOSS)

 

Other comprehensive income (loss), net of related tax effects, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

Foreign currency translation adjustment,

 

 

 

 

 

 

 

 

 

 

 

net of tax expense of $427 and $292, for the three and six months ended June 30, 2012, respectively

$

(737)

 

$

 -

 

$

(491)

 

$

 -

Net unrealized investment gain,

 

 

 

 

 

 

 

 

 

 

 

net of tax benefit (expense) of $(18) and $68, for the three and six months ended June 30, 2012, respectively, and $(34) and $(15) for the same periods in 2011, respectively

 

(32)

 

 

(64)

 

 

114 

 

 

(28)

Other comprehensive income (loss), net of tax

$

(769)

 

$

(64)

 

$

(377)

 

$

(28)

 

 

10.

 ACQUISITIONS 

Brightware Acquisition

 

The Company entered into a stock purchase agreement, dated as of April 1, 2012, with Brightware B.V. (“Brightware”), a reseller offering sales, deployment and integration services focused on the contact center market. Pursuant to the terms of the stock purchase agreement, the Company purchased 100% of Brightware’s outstanding capital stock for an aggregate purchase price of $6.4 million, funded with cash-on-hand. The Company deposited $461,800 of the purchase price into an escrow account to ensure funds are available to pay indemnification claims, if any. The Company acquired Brightware as a continued part of its strategy for growing existing operations in key international markets. The acquisition was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805,  Business Combinations (“FASB ASC 805”). The results of Brightware’s operations resulting from the acquisition date were included in the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2012.  

 

The preliminary purchase price allocations for the Company’s acquisition of Brightware are based on a third-party valuation report which was prepared in accordance with the provisions of FASB ASC 805. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

 

 

 

 

 

 

 

April 1,

 

 

2012

Cash and cash equivalents

 

$

2,143 

Accounts receivable

 

 

579 

Prepaid expenses

 

 

28 

Property and equipment, net

 

 

196 

Intangible assets

 

 

1,456 

Goodwill

 

 

3,347 

Total assets acquired

 

 

7,749 

Accounts payable and accrued liabilities

 

 

313 

Accrued compensation and related expenses

 

 

(22)

Deferred tax liability

 

 

(983)

Deferred service revenue

 

 

(678)

Net assets acquired

 

$

6,379 

 

 

The fair value of financial assets acquired includes accounts receivable with a fair and a contractual value of $579,000. The receivables consist of amounts due from customers for products sold and/or services rendered. 

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Professional fees recognized as of June 30, 2012 totaled approximately $96,000, with approximately $32,000 recognized during the second quarter of 2012, and included transaction costs such as legal, accounting, and valuation services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of income.

 

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to Brightware’s existing client base. Included within goodwill is the assembled workforce, comprised of 14 employees, which does not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.

 

Customer relationships are amortized based upon historical patterns in which the economic benefits are expected to be realized. Other finite-lived identifiable intangible assets are amortized on a straight-line basis. The following sets forth the customer relationships acquired and their economic useful life at the date of acquisition (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

 

 

 

Accumulated

 

 

 

 

Useful Life

 

 

Gross Amount

 

Amortization

 

Net Amount

 

(in years)

Customer relationships

 

$

1,457 

 

$

19 

 

$

1,438 

 

10

 

 

 

ATIO Acquisition

 

On January 5, 2012, the Company closed its acquisition of certain assets of ATIO Corporation (Pty) Ltd. (“ATIO”), a reseller of its multichannel contact center solutions based in South Africa.  Pursuant to the terms of the asset purchase agreement, the Company purchased certain contact center assets of ATIO for approximately $7 million, funded with cash-on-hand.  The Company deposited $704,000 of the purchase price into an escrow account to ensure funds are available to pay indemnification claims, if any. The Company acquired the assets of ATIO as a continued part of its growth strategy to accelerate business in key international markets.   The acquisition was accounted for using the acquisition method of accounting in accordance with FASB ASC 805. The results of ATIO’s operations related to the acquired assets from the acquisition date were included in the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2012.

 

The preliminary purchase price allocations for the ATIO transaction are based on a third-party valuation report which was prepared in accordance with the provisions of FASB ASC 805. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

 

 

 

 

 

 

 

January 5,

 

 

2012

Accounts receivable

 

$

1,119 

Property and equipment, net

 

 

539 

Prepaid expenses

 

 

42 

Intangible assets, net

 

 

1,472 

Goodwill

 

 

5,269 

Total assets acquired

 

 

8,441 

Accrued compensation and related expenses

 

 

(174)

Deferred services revenues

 

 

(1,225)

Net assets acquired

 

$

7,042 

 

 

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The fair value of financial assets acquired includes accounts receivable with a fair and a contractual value of $1.1 million. The receivables consist of amounts due from customers for products sold and/or services rendered. 

 

Professional fees recognized as of June 30, 2012 totaled approximately $33,000 and included transaction costs such as legal, accounting, and valuation services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of income.

 

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to ATIO’s existing client base. Included within goodwill is the assembled workforce, comprised of 40 employees, which does not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.

 

During the second quarter of 2012, the Company recorded a $920,000 adjustment to true up the intangible assets acquired as a result of the Company’s ongoing valuation analysis of the ATIO assets. The valuation is expected to be completed during the third quarter of 2012. 

 

Customer relationships are amortized based upon historical patterns in which the economic benefits are expected to be realized. Other finite-lived identifiable intangible assets are amortized on a straight-line basis. The following sets forth the customer relationships acquired and their economic useful life at the date of acquisition (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

 

 

 

Accumulated

 

 

 

 

Useful Life

 

 

Gross Amount

 

Amortization

 

Net Amount

 

(in years)

Customer relationships

 

$

1,400 

 

$

38 

 

$

1,362 

 

18

 

 

 

CallTime Acquisition

 

The Company entered into a stock purchase agreement, dated as of July 1, 2011, with CallTime Technology Sdn. Bnd., the ultimate parent company of CallTime Solutions Ltd. (“CallTime”). CallTime is based in Australia and New Zealand, and is an exclusive reseller of the Company’s solutions. Pursuant to the terms of the stock purchase agreement, the Company purchased 100% of CallTime’s outstanding capital stock for an aggregate purchase price of $11.4 million, funded with cash-on-hand. The Company deposited $2.1 million of the purchase price into an escrow account to ensure funds would be available to pay any indemnification claims. This escrow amount was released in four equal installments, with first the installment released on October 1, 2011 and the last installment released on July 1, 2012. The Company acquired CallTime as part of its growth strategy of accelerating business in key international markets. CallTime was the Company’s largest revenue-producing reseller in Australia and New Zealand from 2008 through 2010. The acquisition was accounted for using the acquisition method of accounting in accordance with FASB ASC 805. The results of CallTime’s operations were included in the Company’s consolidated financial statements commencing on the July 2011 acquisition date.

 

The purchase price allocations for the Company’s acquisition of CallTime are based on a third-party valuation report which was prepared in accordance with the provisions of FASB ASC 805. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

 

19

 


 

 

 

 

 

 

 

 

July 1,

 

 

2011

Cash and cash equivalents

 

$

2,106 

Accounts receivable

 

 

5,790 

Property and equipment, net

 

 

419 

Prepaid expenses

 

 

842 

Intangible assets, net

 

 

2,410 

Goodwill

 

 

9,197 

Total assets acquired

 

 

20,764 

Accounts payable and accrued liabilities

 

 

(3,537)

Accrued compensation and related expenses

 

 

(3,133)

Other liability, net

 

 

(329)

Deferred tax liability

 

 

(723)

Deferred service revenue

 

 

(1,671)

Net assets acquired

 

$

11,371 

 

            The fair value of financial assets acquired includes accounts receivable with a fair and a contractual value of $5.8 million. The receivables consist of amounts due from customers for products sold and/or services rendered.

 

The Company has recorded a deferred tax liability of $723,000 associated with the intangible asset recorded in connection with the CallTime acquisition. This resulted in a corresponding adjustment recorded to goodwill.

 

Professional fees recognized as of June 30, 2012 totaled approximately $186,000 and included transaction costs such as legal, accounting, valuation and other professional services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of income.

 

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to CallTime’s existing client base. Included within goodwill is the assembled workforce, comprised of 21 employees, which does not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.

 

Customer relationships are amortized based upon historical patterns in which the economic benefits are expected to be realized. Other finite-lived identifiable intangible assets are amortized on a straight-line basis. The following sets forth the customer relationships acquired and their economic useful life at the date of acquisition (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

 

 

 

Accumulated

 

 

 

 

Useful Life

 

 

Gross Amount

 

Amortization

 

Net Amount

 

(in years)

Customer relationships

 

$

2,410 

 

$

199 

 

$

2,211 

 

12

 

Agori Acquisition

 

The Company entered into a stock purchase agreement, dated as of February 28, 2011, with Agori Communications, GmbH (“Agori”), a Frankfurt, Germany-based reseller of the Company’s solutions. Pursuant to the terms of the stock purchase agreement, the Company purchased 100% of Agori’s outstanding capital stock for an aggregate purchase price of $4.9 million, including $808,000 related to the working capital of Agori, funded with cash-on-hand. The Company deposited $493,000 of the purchase price into an escrow account to ensure funds would be available to pay any indemnification claims. These funds were distributed to the former shareholders in February 2012. The Company acquired Agori as part of its growth strategy of accelerating business in key international markets, including Germany, which is currently the fourth largest economy in the world and the Company’s largest market in Europe, the Middle East and Africa. The acquisition was accounted for using the

20

 


 

 

acquisition method of accounting in accordance with FASB ASC 805, and the results of Agori’s operations were included in the Company’s condensed consolidated financial statements commencing on the February 2011 acquisition date.  

 

The purchase price allocations for the Company’s acquisition of Agori are based on a third-party valuation report which was prepared in accordance with the provisions of FASB ASC 805. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

 

 

 

 

 

 

 

February 28,

 

 

2011

Cash and cash equivalents

 

$

815 

Accounts receivable

 

 

1,098 

Prepaid expenses

 

 

288 

Property and equipment, net

 

 

123 

Other assets, net

 

 

221 

Intangible assets, net

 

 

2,670 

Goodwill

 

 

2,344 

Total assets acquired

 

 

7,559 

Accounts payable and accrued liabilities

 

 

(812)

Accrued compensation and related expenses

 

 

(102)

Contingent liability

 

 

(370)

Deferred tax liability

 

 

(801)

Deferred services revenues

 

 

(548)

Net assets acquired

 

$

4,926 

 

 

The fair value of financial assets acquired includes accounts receivable with a fair and a  contractual value of $1.1 million. The receivables consist of amounts due from customers for products sold and/or services rendered.

 

The Company has recorded a reversal of the deferred tax liability of $800,000, which resulted in a corresponding adjustment recorded to goodwill.

 

Professional fees recognized as of June 30, 2012 totaled approximately $391,000 and included transaction costs such as legal, accounting, valuation and other professional services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of income.

 

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to Agori’s existing client base. Included within goodwill is the assembled workforce, comprised of 16 employees, which does not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes.

 

Customer relationships are amortized based upon historical patterns in which the economic benefits are expected to be realized. Other finite-lived identifiable intangible assets are amortized on a straight-line basis. The following sets forth the customer relationships acquired and their economic useful live at the date of acquisition (dollars in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

 

 

 

Accumulated

 

 

 

 

Useful Life

 

 

Gross Amount

 

Amortization

 

Net Amount

 

(in years)

Customer relationships

 

$

2,670 

 

$

327 

 

$

2,343 

 

10

 

 

 

In accordance with the stock purchase agreement with Agori, the Company agreed to make contingent earn-out payments based upon pre-defined terms. The Company estimates the earn-out payments will total

21

 


 

 

approximately $370,000 and will be paid over the next two and a half years. A corresponding liability has been recorded for this amount. A payment of approximately $100,000 was paid in January 2012 related to this earn-out.  In connection with FASB ASC 805, the fair value of any contingent consideration is established at the acquisition date and included in the total purchase price. The contingent consideration is then adjusted to fair value as an increase or decrease in current earnings in each reporting period.  

 

Pro Forma Results

 

      We have not furnished pro forma financial information related to our Brightware, ATIO, CallTime or Agori acquisitions because such information is not material individually or in the aggregate to the overall financial results of the Company.

 

 

 

11.

SUBSEQUENT EVENT

 

The Company entered into a stock purchase agreement, effective August 1, 2012, with Bay Bridge Decision Technologies Inc. (“Bay Bridge”), a privately-held Maryland-based company. Pursuant to the terms of the stock purchase agreement, the Company purchased 100% of Bay Bridge’s outstanding capital stock for an aggregate purchase price of $12.9 million, funded with cash-on-hand. The Company deposited $1.3 million of the purchase price into an escrow account to ensure funds are available to pay indemnification claims, if any. The Company acquired Bay Bridge to broaden its workforce optimization (WFO) portfolio of applications and to add advanced, long-term contact center capacity planning and strategic analytics capabilities that supplement Interaction Optimizer®s workforce management functionality. The allocation of the purchase price was not completed as of the date of this Quarterly Report on Form 10-Q and the results of Bay Bridge’s operations were not included in the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2012.  The acquisition will be accounted for using the acquisition method of accounting in accordance with FASB ASC 805.

 

 

22

 


 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide our investors with an understanding of our past performance, our financial condition and our prospects and should be read in conjunction with other sections of this Quarterly Report on Form 10-Q. Investors should carefully review the information contained in this report under Part II, Item 1A “Risk Factors” and in the Part I, Item 1A Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The following will be discussed and analyzed:

 

·

Forward-Looking Information

·

Overview

·

Financial Highlights 

·

Historical Results of Operations

·

Comparison of Three and Six Months Ended June 30, 2012 and 2011

·

Liquidity and Capital Resources

·

Critical Accounting Policies and Estimates

 

Forward-Looking Information

 

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking information (as defined in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that involves risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can often be identified by the use of such verbs as expects,  anticipates,  believes,  intend,  plan,  may,  should,  will,  would,  will be,  will continue,  will likely result, or similar verbs or conjugations of such verbs. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors, including, but not limited to, unstable economic conditions,  rapid technological changes in the industry, our ability to maintain profitability, to manage successfully our growth, to manage successfully our increasingly complex third-party relationships resulting from the software and hardware components being licensed or sold with our solutions, to maintain successful relationships with certain suppliers which may be impacted by competition in the technology industry, to maintain successful relationships with our current and any new partners, to maintain and improve our current products, to develop new products, to protect our proprietary rights adequately, to successfully integrate acquired businesses and other factors set forth in our Securities and Exchange Commission (SEC) filings.

 

Overview

 

We are a recognized leader in the global market for contact center and business communications solutions, offering a suite of applications that can be deployed as a cloud-based or on-premise multi-channel communications platform. This platform is also the foundation of our solutions for unified communications and business process automation.  Our solutions are used by businesses and organizations across a wide range of industries, including teleservices, insurance, banking, accounts receivable management, utilities, healthcare, retail, technology, government and business services.

 

In 2011, we completed our organizational transformation into a new holding company structure pursuant to a corporate reorganization whereby Interactive Intelligence Group, Inc. became the successor reporting company to Interactive Intelligence, Inc. (the "Reorganization").  This new structure is intended to provide us with enhanced

23

 


 

 

strategic, operational and financial flexibility, improve our ability to determine financial results and profitability of different lines of business, and better manage tax expenses and exposure to liabilities.

 

We plan to expand our global reach by:

 

1.         Continuing to gain market share with our contact center and unified communications solutions, particularly through our cloud-based deployment;

2.         Increasing sales of our business process automation offering;

3.         Acquiring complementary applications and distribution channels; and

4.         Leveraging our strategic and distribution partners to further penetrate existing accounts and markets.

 

For further information on our business and the products and services we offer, refer to the Part I, Item 1 “Business” section of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Our management monitors certain key measures to assess our financial results. In particular, we track trends in product orders, contracted professional services, and cloud-based orders from quarter to quarter and in comparison to the prior year actual results and current year projected amounts. We also review leading market indicators to identify trends in economic conditions. In addition to orders and revenues, management reviews costs of revenue and operating expenses and staffing levels to ensure we are managing new expenditures and controlling costs. For additional discussions regarding trends and our expectations for the remainder of 2012, see “Financial Highlights” and “Comparison of Three and Six Months ended June 30, 2012 and 2011” below.

 

In addition to the above, our management monitors diluted earnings per share (“EPS”), a key measure of performance also used by analysts and investors, based on accounting principles generally accepted in the United States of America (“GAAP”) and on a non-GAAP basis. Management uses non-GAAP EPS, non-GAAP net income and non-GAAP operating income to analyze our business. These non-GAAP measures include revenue which was not recognized on a GAAP basis due to purchase accounting adjustments and exclude non-cash stock-based compensation expense for stock options, the amortization of certain intangible assets related to acquisitions by us, and non-cash income tax expense. These measures are not in accordance with, or an alternative for, GAAP, and may be different from non-GAAP measures used by other companies. Stock-based compensation expense and amortization of intangibles related to acquisitions are non-cash and certain amounts of income tax expense are non-cash. We believe that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to our management and investors regarding financial and business trends related to our results of operations. Further, our management believes that these non-GAAP measures improve management’s and investors’ ability to compare our financial performance with other companies in the technology industry. Because stock-based compensation expense, amortization of intangibles related to acquisitions and non-cash income tax expense amounts can vary significantly between companies, it is useful to compare results excluding these amounts. Our management also uses financial statements that exclude stock-based compensation expense related to stock options, amortization of intangibles related to acquisitions and non-cash income tax amounts for our internal budgets.

 

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Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included below (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), as reported

 

$

(1,108)

 

$

3,827 

 

$

(919)

 

$

6,922 

Purchase accounting adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Increase to revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

 

70 

 

 

39 

 

 

200 

 

 

98 

Services

 

 

 -

 

 

17 

 

 

 -

 

 

48 

Reduction of operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

305 

 

 

229 

 

 

561 

 

 

368 

Technology

 

 

35 

 

 

35 

 

 

70 

 

 

70 

Non-compete agreements

 

 

45 

 

 

45 

 

 

90 

 

 

90 

Acquisition costs

 

 

29 

 

 

131 

 

 

151 

 

 

332 

Total