XNAS:BSFT BroadSoft Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the Quarterly Period Ended March 31, 2012

or

 

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

Commission file number 001-34777

 

 

BroadSoft, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52 2130962

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9737 Washingtonian Boulevard, Suite 350

Gaithersburg, MD

  20878
(Address of principal executive offices)   (Zip Code)

(301) 977-9440

Registrant’s telephone number, including area code:

 

(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  x    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  x    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   x    Accelerated filer   ¨
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  x

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, on May 3, 2012, was 27,541,071.

 

 

 


Table of Contents

BroadSoft, Inc.

Table of Contents

 

        Page No.  

PART I. FINANCIAL INFORMATION

    4   

ITEM 1. Financial Statements:

    4   
 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

    4   
 

Unaudited Condensed Consolidated Statements of Operations for the three months ended March  31, 2012 and 2011

    5   
 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March  31, 2012 and 2011

    6   
 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2012 and 2011

    7   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March  31, 2012 and 2011

    8   
 

Notes to Unaudited Condensed Consolidated Financial Statements

    9   

ITEM  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

    21   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

    33   

ITEM 4. Controls and Procedures

    34   

PART II. OTHER INFORMATION

    34   

ITEM 1. Legal Proceedings

    34   

ITEM 1A. Risk Factors

    34   

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

    35   

ITEM 3. Defaults Upon Senior Securities

    35   

ITEM 4. Mine Safety Disclosures

    35   

ITEM 5. Other Information

    35   

ITEM 6. Exhibits

    35   
 

EX-10.1

 
 

EX-31.1

 
 

EX-31.2

 
 

EX-32.1

 
 

EX-32.2

 

 

2


Table of Contents
  101.INS XBRL  
  101.SCH XBRL  
  101.CAL XBRL  
  101.DEF XBRL  
  101.LAB XBRL  
  101.PRE XBRL  

 

3


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

BroadSoft, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

     March 31,
2012
    December 31,
2011
 
     (In thousands, except share
and per share data)
 

Assets:

    

Current assets:

    

Cash and cash equivalents

   $ 88,855      $ 94,072   

Short-term investments

     88,037        92,749   

Accounts receivable, net of allowance for doubtful accounts of $81 and $54 at March 31, 2012 and December 31, 2011, respectively

     40,672        47,048   

Deferred tax assets

     11,684        12,968   

Other current assets

     7,079        4,435   
  

 

 

   

 

 

 

Total current assets

     236,327        251,272   
  

 

 

   

 

 

 

Long-term assets:

    

Property and equipment, net

     4,636        4,221   

Long-term investments

     10,034        5,000   

Restricted cash

     959        959   

Intangible assets, net

     8,329        8,842   

Goodwill

     17,412        17,276   

Other long-term assets

     7,924        3,386   
  

 

 

   

 

 

 

Total long-term assets

     49,294        39,684   
  

 

 

   

 

 

 

Total assets

   $ 285,621      $ 290,956   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity:

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 9,160      $ 14,999   

Notes payable and bank loans, current portion

     503        891   

Deferred revenue, current portion

     50,101        55,372   
  

 

 

   

 

 

 

Total current liabilities

     59,764        71,262   

Convertible senior notes

     82,877        81,737   

Notes payable and bank loans

     474        461   

Deferred revenue

     1,530        1,764   

Deferred tax liabilities

     1,344        1,433   

Other long-term liabilities

     1,030        1,056   
  

 

 

   

 

 

 

Total liabilities

     147,019        157,713   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value per share; 5,000,000 shares authorized at March 31, 2012 and December 31, 2011; no shares issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Common stock, par value $0.01 per share; 100,000,000 shares authorized at March 31, 2012 and December 31, 2011; 27,495,213 and 27,106,393 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     275        271   

Additional paid-in capital

     195,286        191,714   

Accumulated other comprehensive loss

     (2,475     (2,557

Accumulated deficit

     (54,484     (56,185
  

 

 

   

 

 

 

Total stockholders’ equity

     138,602        133,243   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 285,621      $ 290,956   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands, except per share
data)
 

Revenue:

    

Licenses

   $ 21,265      $ 15,191   

Maintenance and services

     17,078        14,463   
  

 

 

   

 

 

 

Total revenue

     38,343        29,654   

Cost of revenue:

    

Licenses

     2,060        1,276   

Maintenance and services

     5,453        4,315   

Amortization of intangibles

     559        239   
  

 

 

   

 

 

 

Total cost of revenue

     8,072        5,830   
  

 

 

   

 

 

 

Gross profit

     30,271        23,824   

Operating expenses:

    

Sales and marketing

     11,072        8,484   

Research and development

     8,476        6,816   

General and administrative

     5,814        4,386   
  

 

 

   

 

 

 

Total operating expenses

     25,362        19,686   
  

 

 

   

 

 

 

Income from operations

     4,909        4,138   

Other expense (income):

    

Interest income

     (117     (43

Interest expense

     1,696        20   
  

 

 

   

 

 

 

Total other expense (income)

     1,579        (23
  

 

 

   

 

 

 

Income before income taxes

     3,330        4,161   

Provision for income taxes

     1,629        466   
  

 

 

   

 

 

 

Net income

   $ 1,701      $ 3,695   
  

 

 

   

 

 

 

Net income per common share available to BroadSoft, Inc. common stockholders:

    

Basic

   $ 0.06      $ 0.14   

Diluted

   $ 0.06      $ 0.13   

Weighted average common shares outstanding:

    

Basic

     27,235        25,704   

Diluted

     28,234        28,277   

Stock-based compensation expense included above:

    

Cost of revenue

   $ 408      $ 66   

Sales and marketing

     1,137        334   

Research and development

     799        247   

General and administrative

     847        455   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

BroadSoft, Inc.

Unaudited Consolidated Statements of Comprehensive Income

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands)  

Net income

   $ 1,701       $ 3,695   

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustment

     47         (103

Unrealized gain on investments

     35         5   
  

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     82         (98
  

 

 

    

 

 

 

Comprehensive income

   $ 1,783       $ 3,597   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

BroadSoft, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except per share data)

 

     Total
Stockholders’
    Common Stock Par
Value $0.01 Per Share
     Additional
Paid-in
     Accumulated
Other
Comprehensive
    Accumulated  
     Equity     Shares      Amount      Capital      Loss     Deficit  

Balance December 31, 2011

   $ 133,243        27,106       $ 271       $ 191,714       $ (2,557   $ (56,185
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of early exercises and withholding tax

     385        389         4         381         —          —     

Stock-based compensation expense

     3,191        —           —           3,191         —          —     

Equity component of convertible senior notes issuance

     —          —           —           —           —          —     

Tax windfall benefits on exercises of stock options

     —          —           —           —           —          —     

Foreign currency translation adjustment

     47                 47     

Unrealized gain on investments

     35                 35     

Net income

     1,701        —           —           —           —          1,701   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance March 31, 2012

   $ 138,602        27,495         275         195,286         (2,475     (54,484
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance December 31, 2010

   $ 52,545        25,452       $ 255       $ 142,508       $ (1,736   $ (88,482

Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of early exercises and withholding tax

     1,553        707         7         1,546         —          —     

Stock-based compensation expense

     1,102        —           —           1,102         —          —     

Foreign currency translation adjustment

     (103              (103  

Unrealized gain on investments

     5                 5     

Net income

     3,695        —           —           —           —          3,695   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance March 31, 2011

   $ 58,797        26,159       $ 262       $ 145,156       $ (1,834   $ (84,787
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 1,701      $ 3,695   

Adjustment to reconcile net income to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     1,122        632   

Amortization of software licenses

     455        455   

Stock-based compensation expense

     3,191        1,102   

Provision for deferred income taxes

     1,357        —     

Non-cash interest expense on convertible senior notes

     1,242        —     

Other

     (30     49   

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     6,404        3,384   

Other current and long-term assets

     (8,081     (339

Accounts payable, accrued expenses and other long-term liabilities

     (5,311     (4,388

Current and long-term deferred revenue

     (5,504     (1,484
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (3,454     3,106   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (978     (460

Purchases of marketable securities

     (36,656     (8,676

Proceeds from sale of marketable securities

     —          4,979   

Proceeds from maturities of marketable securities

     36,334        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,300     (4,157
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from the exercise of stock options

     948        1,591   

Taxes paid on vesting of RSUs

     (1,129     (38

Notes payable and bank loans - payments

     (376     (386
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (557     1,167   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     94        51   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (5,217     167   

Cash and cash equivalents, beginning of period

     94,072        47,254   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 88,855      $ 47,421   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8


Table of Contents

BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Nature of Business

BroadSoft, Inc. (“BroadSoft” or the “Company”), a Delaware corporation, was formed in 1998. The Company is the leading global provider of software and services that enable mobile, fixed-line and cable service providers to deliver Unified Communications and other voice and multimedia services over their Internet protocol-based, or IP-based, networks. The Company’s core communications platform consists of three offerings: BroadWorks, BroadCloud and BroadTouch.

 

2. Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

Interim Financial Presentation

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification for interim financial information and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity (deficit) and cash flows. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2012 or any other period. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on February 29, 2012.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates.

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other: Testing Goodwill for Impairment,” which simplifies the periodic testing of goodwill for impairment. This guidance will allow companies to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test required under current accounting standards. This guidance will be effective for the Company’s annual goodwill impairment test performed in 2012 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

3. Investments and Fair Value Disclosures

Investments in Marketable Securities

Marketable debt securities that the Company does not intend to hold to maturity are classified as available-for-sale, are carried at fair value, and are included on the Company’s balance sheet as either short-term or long-term investments depending on their maturity.

 

9


Table of Contents

BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments. Available-for-sale investments are marked-to-market at the end of each reporting period, with unrealized holding gains or losses, which represent changes in the fair value of the investment, reflected in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company’s primary objective when investing excess cash is preservation of principal.

 

    

March 31, 2012

 
    

Contracted
Maturity

   Carrying
Value
 
          (in thousands)  

Money market funds

   demand    $ 64,765   
     

 

 

 

Total cash equivalents

      $ 64,765   
     

 

 

 

U.S. agency notes

   166 - 319 days    $ 25,776   

Commercial paper

   147 - 319 days      30,393   

Corporate bonds

   60 - 319 days      31,868   
     

 

 

 

Total short-term investments

      $ 88,037   
     

 

 

 

U.S. agency notes

   382 - 662 days    $ 8,000   

Corporate bonds

   382 - 662 days      2,034   
     

 

 

 

Total long-term investments

      $ 10,034   
     

 

 

 

Fair Value

The following table summarizes the carrying and fair value of the Company’s financial assets and liabilities (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Value
     Fair Value      Carrying
Value
     Fair Value  

Assets

           

Cash equivalents and certificates of deposit *

   $ 65,770       $ 65,770       $ 71,147       $ 71,147   

Short and long-term investments

     98,071         98,071         97,749         97,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 163,841       $ 163,841       $ 168,896       $ 168,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Convertible senior notes **

   $ 82,877       $ 120,000       $ 81,737       $ 120,000   

Notes payable and bank loans

     977         977         1,352         1,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 83,854       $ 120,977       $ 83,089       $ 121,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Does not include $24.1 million and $23.9 million of operating cash balances as of March 31, 2012 and December 31, 2011, respectively.
** The carrying value represents the bifurcated debt component only, while the fair value is based on the principal amount of the notes, which did not separate the liability and equity components of the debt instrument.

 

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Table of Contents

BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The carrying amounts of the Company’s other financial instruments, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short-term nature. (See Note 6 Borrowings for additional information on the fair value of debt.)

The Company uses a three-tier fair value measurement hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The three tiers are defined as follows:

 

   

Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical instruments and include the Company’s investments in money market funds and certificates of deposit;

 

   

Level 2. Inputs valued using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data and include the Company’s investments and marketable securities in U.S. agency notes, commercial paper and corporate bonds; and

 

   

Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. This determination requires significant judgments to be made. There were no transfers between classifications during the periods. The following tables summarize the values (in thousands):

 

       March 31,  
2012
     Level 1      Level 2      Level 3  

Money market funds

   $ 64,765       $ 64,765       $ —         $ —     

Certificates of deposit

     1,005         1,005         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents and certificates of deposit

     65,770         65,770         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. agency notes

     33,776         —           33,776         —     

Commercial paper

     30,393         —           30,393         —     

Corporate bonds

     33,902         —           33,902         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     98,071         —           98,071         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents, certificates of deposit and investments

   $ 163,841       $ 65,770       $ 98,071       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31,
2011
     Level 1      Level 2      Level 3  

Money market funds

   $ 70,142       $ 70,142       $ —         $ —     

Certificates of deposit

     1,005         1,005         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents and certificates of deposit

     71,147         71,147         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. agency notes

     27,672         —           27,672         —     

Commercial paper

     15,735         —           15,735         —     

Corporate bonds

     54,342         —           54,342         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     97,749         —           97,749         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents, certificates of deposit and investments

   $ 168,896       $ 71,147       $ 97,749       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three months ended March 31, 2012 and 2011, there were no fair value measurements of assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.

 

4. Deferred Revenue

Deferred revenue represents amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. Deferred revenue consisted of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Licenses

   $ 14,382       $ 20,608   

Maintenance and services

     37,249         36,528   
  

 

 

    

 

 

 
   $ 51,631       $ 57,136   
  

 

 

    

 

 

 

Current portion

   $ 50,101       $ 55,372   

Non-current portion

     1,530         1,764   
  

 

 

    

 

 

 
   $ 51,631       $ 57,136   
  

 

 

    

 

 

 

 

5. Software Licenses

The Company is party to an agreement which provides the Company the right to distribute third-party software on a per-user basis up to 35,000,000 licenses over a four-year period for $6.4 million. The arrangement requires the Company to pay a per-user license fee for licenses distributed in excess of 35,000,000. The cost is being amortized to cost of revenue over a 3.5 year period ending May 2012, based on the greater of actual usage or the straight line method. Amortization expense related to this agreement was approximately $0.4 million for each of the three months ended March 31, 2012 and 2011.

In 2011, the Company entered into a new agreement which provides the Company the right to distribute this third-party software on an unlimited basis through May 2016 at a total cost of $10.2 million, of which $6.5 was paid during the quarter ended March 31, 2012. To the extent annual billed license revenue over the four-year period exceeds $460 million, the Company would be required to pay additional fees. The additional $10.2 million will be amortized to cost of revenue over the four-year period beginning June 2012 (the expiration date of the previous agreement), based on the straight line method.

 

6. Borrowings

Convertible Senior Notes

In June 2011, the Company issued $120.0 million aggregate principal amount of 1.50% convertible senior notes due in 2018 (the “Notes”). The Notes are senior unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.

The Notes may be converted by the holders of Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding April 1, 2018 only under the following

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

circumstances: (a) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such day; (b) during any calendar quarter (and only during such quarter) after the calendar quarter ended March 31, 2012, if the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (c) upon the occurrence of specified corporate events; or (d) if the Company calls the Notes for redemption. The Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, April 1, 2018 through the second scheduled trading day immediately preceding the maturity date.

The initial conversion rate for the Notes is 23.8126 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to a conversion price of approximately $41.99 per share of the common stock, a 17.5% conversion premium based on the last reported sale price of $35.74 per share of the Company’s common stock on June 14, 2011. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make-whole fundamental change, as defined in the indenture governing the Notes (the “Indenture”), occurs prior to the maturity date, the Company will in some cases increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of the common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted.

Holders of the Notes may require the Company to repurchase some or all of the Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the Indenture, at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date.

The Company may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, the Company may redeem for cash all or part of the Notes (except for the Notes that the Company is required to repurchase as described above) if the last reported sale price of the common stock exceeds 140% of the applicable conversion price for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice. The redemption price will equal the sum of 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date, including Notes converted after the date the Company delivered the notice of redemption.

The Company has separately accounted for the liability and equity components of the convertible debt instrument by allocating the gross proceeds from the issuance of the Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate, estimated at 8%, was used to compute the initial fair value of the liability component of $79.4 million. The excess of the gross proceeds received from the issuance of the Notes over the initial amount allocated to the liability component, of $40.6 million, was allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and subsequently amortized as interest expense, using the interest method, through July 2018, the maturity date of the Notes. Offering costs, consisting of the initial purchasers’ discount and offering expenses payable by the Company, were $4.3 million. These offering costs were allocated to the liability component and the equity component based on the relative valuations of such components. As a result, $2.9 million of the offering costs were classified as debt issuance costs and recorded on the balance sheet in other assets. This amount is being amortized as interest expense through the July 2018 maturity date of the Notes. The unamortized offering costs at March 31, 2012 were $2.5 million. The remaining $1.4 million of offering costs were allocated to the equity component.

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following table shows the amounts recorded within the Company’s financial statements with respect to the Notes (in thousands):

 

     March 31, 2012  

Convertible debt principal

   $ 120,000   

Unamortized convertible debt discount

     (37,123
  

 

 

 

Net carrying amount of convertible debt

   $ 82,877   
  

 

 

 

The following table presents the interest expense recognized related to the Notes (in thousands):

 

     Three Months Ended
March 31, 2012
 

Contractual interest expense

   $ 450   

Amortization of debt issuance costs

     101   

Accretion of debt discount

     1,141   
  

 

 

 

Net expense

   $ 1,692   
  

 

 

 

As of March 31, 2012, the unamortized debt discount, which will be amortized over approximately six years, was $37.1 million.

Installment Loans

In May 2008, the Company amended a software license and maintenance agreement that provides the Company the right to distribute third-party software for a one-time fee of approximately $6.4 million. The agreement was financed with an installment bank loan with an effective interest rate of 4.0%. The loan provided for a payment of $0.4 million at loan inception and scheduled principal repayments of $0.4 million each quarter commencing July 1, 2008, with the final payment payable on April 1, 2012. At March 31, 2012, the loan was paid in full and at December 31, 2011, the liability for the installment bank loan amounted to approximately $0.4 million.

In connection with the acquisition of Movial Applications, Inc. in October 2011, the Company assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, totalling $1.0 million. The terms of the loans are governed by the Finnish Act on State Lending and State Guarantees, Government Decree on Research, Development and Innovation Funding. The loans funded approved research and development projects, repayment terms are on a per project basis, and the interest rate on each loan is variable, which is currently 3.0%. The Company expects to repay these loans in full during 2012.

Fair value for the Company’s borrowings is estimated using a discounted cash flow analysis. The Company believes its creditworthiness and the financial market in which it operates has not materially changed since entering into the arrangements, therefore the carrying value of the borrowings approximates their fair values at March 31, 2012 and December 31, 2011. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The aggregate maturities of borrowings as of March 31, 2012 were as follows (in thousands):

 

2012

   $ 503   

2013

     56   

2014

     133   

2015

     133   

2016, and thereafter

     120,152   
  

 

 

 
   $ 120,977   
  

 

 

 

 

7. Stock-based Compensation

Equity Incentive Plans

In 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Plan”). The 1999 Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights. The 1999 Plan terminated in June 2009 whereby no new options or awards are permitted to be granted. In April 2009, the Company adopted the 2009 Equity Incentive Plan. This plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units (“RSUs”) and stock appreciation rights. In June 2010, in connection with the Company’s initial public offering (“IPO”), the 2009 Equity Incentive Plan was amended and restated to provide for, among other things, annual increases in the share reserve (as amended and restated, the “2009 Plan”). At the same time, an additional 333,333 shares of common stock were added to the share reserve. On January 1, 2011 and 2012, 1,145,860 and 1,219,787 shares, respectively, were added to the 2009 Plan. At March 31, 2012, the Company had 1,610,473 shares of common stock available for issuance under the 2009 Plan.

Stock-based compensation expense recognized by the Company was as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Stock options

   $ 1,389       $ 501   

Restricted stock awards

     —           23   

Restricted stock units

     1,802         578   
  

 

 

    

 

 

 

Total recognized stock-based compensation expense

   $ 3,191       $ 1,102   
  

 

 

    

 

 

 

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Stock Options

The following table presents summary information related to stock options:

 

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

Balance, December 31, 2011

     1,682,911      $ 11.82         

Granted

     92,500           

Exercised

     (320,944        

Forfeited

     (50,335        
  

 

 

         

Balance, March 31, 2012

     1,404,132      $ 14.25         7.95       $ 34,172,012   
  

 

 

         

Vested at March 31, 2012

     678,929      $ 3.84         7.11       $ 23,379,611   

Exercisable at March 31, 2012

     769,549      $ 3.68         3.83       $ 26,603,491   

The Company granted 92,500 stock options during the three months ended March 31, 2012 and 47,500 stock options during the three months ended March 31, 2011. For the three months ended March 31, 2012 and March 31, 2011, the intrinsic value of stock options exercised was $3.2 million and $25.6 million, respectively, and cash received from stock options exercised was $0.9 million and $1.6 million, respectively. At March 31, 2012, unrecognized stock-based compensation expense related to unvested options was $5.9 million, which is scheduled to be recognized over a weighted average period of 1.38 years.

Restricted Stock Units

The following table presents a summary of activity for RSUs:

 

     Number of
RSUs
    Weighted
Average Grant
Date Fair Value
 

Balance, December 31, 2011

     359,815      $ 27.17   

Granted

     339,337        32.81   

Vested

     (105,027     18.31   

Forfeited

     (3,598     30.42   
  

 

 

   

Balance, March 31, 2012

     590,527      $ 31.96   
  

 

 

   

During the three months ended March 31, 2012, the Company granted 311,100 RSUs to certain officers and employees, which vest over four years following the date of grant, and 16,003 RSUs to certain officers that were fully vested at the date of grant. In addition, the Company granted 12,234 RSUs to certain directors that vest quarterly through December 31, 2012. During the three months ended March 31, 2011, the Company granted an aggregate of 110,430 RSUs to certain officers, which vest over four years following the date of grant. In addition, the Company granted 11,466 RSUs to certain directors that fully vested on December 31, 2011. At March 31, 2012, unrecognized stock-based compensation expense related to unvested RSUs was $10.6 million, which is scheduled to be recognized over a weighted average period of 1.75 years.

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Tax Benefits

Upon adoption of the FASB’s guidance on stock-based compensation, the Company elected the alternative transition method (short cut method) provided for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid in capital (“APIC”) pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows related to the tax effect of employee stock-based compensation awards that are outstanding upon adoption.

The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets were $68.3 million and $60.2 million at March 31, 2012 and December 31, 2011, respectively.

 

8. Commitments and Contingencies

In the normal course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any claims or been required to defend any action related to indemnification obligations to date.

In accordance with its bylaws and certain agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date under these indemnification obligations.

In addition, the Company is involved in litigation incidental to the conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible to have a material adverse effect on its financial position, results of operations or cash flows.

 

9. Taxes

The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate for each of its legal entities in accordance with the accounting guidance for income taxes. Where the Company has entities with losses and does not expect to release the tax benefits in the foreseeable future, those entities are excluded from the effective tax calculation. Non-recurring and discrete items that impact tax expense are recorded in the period incurred.

In determining the Company’s provision for income taxes, net deferred tax assets, liabilities, valuation allowances and uncertain tax positions, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of loss carryforwards, applicable tax rates, transfer pricing methods, expected tax authority positions on audit and prudent and feasible tax planning strategies. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain and, therefore, actual results could differ materially from projections.

As of March 31, 2012, the Company had U.S. net operating loss carryforwards of approximately $105.7 million, foreign net operating loss carryforwards of approximately $13.9 million, and domestic and foreign research and experimentation tax credit carryforwards of $2.1 million. The earliest expiration of these net operating losses is 2012, however the earliest net operating loss with a deferred tax asset established expires in 2019. The utilization of domestic and foreign net operating loss and tax credit carryforwards may be subject to annual limitations due to ownership changes as provided by the local tax law. The Company has not recorded a deferred tax

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

liability for undistributed earnings of $0.4 million of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company would be subject to federal income and foreign withholding taxes. Determination of an unrecognized deferred income tax liability with respect to such earnings is not practicable.

The following table summarizes the Company’s provision for (benefit from) income taxes included in its unaudited condensed consolidated statements of operations for the periods indicated:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands)  

Interim period provision for income taxes before valuation allowance

   $ 1,660      $ 1,964   

Release of valuation allowance

     (31     (1,498
  

 

 

   

 

 

 

Provision for income taxes

   $ 1,629      $ 466   
  

 

 

   

 

 

 

 

10. Income per share data

Basic income per common share is computed based on the weighted average number of outstanding shares of common stock. Diluted income per common share adjusts the basic weighted average common shares outstanding for the potential dilution that could occur if stock options, restricted stock and convertible securities were exercised or converted into common stock.

The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation. In the table below, net income represents the numerator and weighted average common shares outstanding represents the denominator:

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands except per share
data)
 

Net income

   $ 1,700       $ 3,695   

Weighted average basic common shares outstanding

     27,235         25,704   

Dilutive effect of stock-based awards

     999         2,573   
  

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     28,234         28,277   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.06       $ 0.14   

Diluted

   $ 0.06       $ 0.13   

Due to the cash settlement feature of the principal amount of the Notes, we only include the impact of the premium feature in our diluted earnings per common share calculation when the average stock price exceeds the conversion price of the Note, which did not occur as of March 31, 2012.

For the three months ended March 31, 2012 and 2011, certain stock options to purchase common stock were not included in the computation of diluted earnings per share as their effect was anti-dilutive because their exercise prices exceeded the average market price of the Company’s common stock during the period. The weighted average effect of potentially dilutive securities that have been

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

excluded from the calculation of diluted net income per common share because the effect was anti-dilutive was as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  
     (in thousands)  

Restricted stock units and awards

     31         53   

Early exercise shares

     1         1   

Stock options

     388         33   

 

11. Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer (the “CEO”). The CEO reviews financial information presented on a consolidated basis, along with information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Discrete information on a geographic basis, except for revenue, is not provided below the consolidated level to the CEO. The Company has concluded that it operates in one segment and has provided the required enterprise-wide disclosures.

Revenue by geographic area is based on the location of the end-user carrier. The following tables present revenue and long-lived assets, net, by geographic area (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Revenues:

     

United States

   $ 25,829       $ 17,072   

EMEA

     5,746         4,747   

APAC

     5,053         3,573   

Other

     1,715         4,262   
  

 

 

    

 

 

 

Total Revenue

   $ 38,343       $ 29,654   
  

 

 

    

 

 

 

 

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

     March 31,
2012
     December 31,
2011
 

Long-Lived Assets, net

     

United States

   $ 12,441       $ 9,603   

EMEA

     337         269   

APAC

     168         155   

Other

     572         596   
  

 

 

    

 

 

 

Total Long-Lived Assets, net

   $ 13,518       $ 10,623   
  

 

 

    

 

 

 

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission, or SEC, on February 29, 2012.

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. Forward-looking statements in this Quarterly Report on Form 10-Q may include statements about:

 

   

our dependence on the success of BroadWorks;

 

   

our dependence on our service provider customers to sell services using our applications;

 

   

claims that we infringe intellectual property rights of others;

 

   

our ability to protect our intellectual property;

 

   

intense competition;

 

   

any potential loss of or reductions in orders from certain significant customers;

 

   

our ability to predict our revenue, operating results and gross margin accurately;

 

   

the length and unpredictability of our sales cycles;

 

   

our ability to expand our product offerings;

 

   

our international operations;

 

   

our significant reliance on distribution partners in international markets;

 

   

our ability to sell our products in certain markets;

 

   

our ability to manage our growth;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

the interoperability of our products with service provider networks;

 

   

the quality of our products and services, including any undetected errors or bugs in our software; and

 

   

our ability to maintain proper and effective internal controls.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including those factors we discuss in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our other filings with the SEC. You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. These risks are not exhaustive. Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

Company Overview

We are the leading global provider of software and services that enable mobile, fixed-line and cable service providers to deliver Unified Communications and other voice and multimedia services over their Internet protocol, IP, based networks. Our core communications platform consists of three offerings:

 

   

BroadWorks. Our BroadWorks software powers Unified Communications applications such as call processing, hosted IP Centrex (also referred to as hosted PBX) and SIP Trunking. Typically, we license our BroadWorks software to service providers who host the software and resell services enabled by the BroadWorks software to their end-users.

 

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BroadCloud. BroadCloud was introduced in 2010. Our BroadCloud services are Unified Communications services hosted by us, and resold by service providers, under their brand. Typically, service providers pay us a monthly recurring fee for providing such services.

 

   

BroadTouch. We introduced BroadTouch at the end of 2011. BroadTouch user experience client applications enable carriers to put the power of our Unified Communications services in the hands of the end-user, whether they are communicating using a desktop computer, laptop, smartphone or tablet.

BroadWorks. The BroadWorks software enables our service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, communications offerings, such as hosted IP Centrex, video calling, Unified Communications, or UC, SIP Trunking, Voice over Long Term Evolution, or VoLTE, Unified Messaging, call centers and audio conferencing. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates voice, video and messaging communications through a service provider’s IP-based network. Service providers use BroadWorks to offer services that generate new revenue, reduce subscriber churn, capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks, including such IP communications services across 4G wireless networks, such as Long Term Evolution, or LTE, networks. We believe we are well positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of services to their end-users.

BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. It interoperates with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems.

BroadCloud. Our BroadCloud hosted or “cloud” service offering enables our service provider customers to offer their end-users additional UC applications, such as web collaboration, video conferencing, instant messaging, or IM, presence and short messaging. Such applications are hosted and managed on our network. The key objectives of providing these services from our own BroadCloud network include expediting our service provider customers’ time to market by our hosting and managing the services and enabling the service provider to brand such UC applications.

BroadTouch. BroadTouch enables our service provider customers to offer compelling end user client experiences using our BroadTouch communications clients for smartphones, tablets, desktops and laptops. These clients are often referred to as “soft phones” and the BroadTouch clients allow enterprise and consumer end-users the full range of the service provider’s BroadWorks and BroadCloud services through a client experience branded by the service provider.

We were incorporated in Delaware in 1998 and we began selling BroadWorks in 2001. Over 500 service providers in more than 65 countries have purchased and/or are delivering services utilizing our software, including 18 of the top 25 telecommunications service providers globally, as measured by revenue in the year ended December 31, 2010. We sell our products to service providers both directly and indirectly through distribution partners, such as telecommunications equipment vendors, value-added resellers, or VARs, and other distributors.

Industry

We believe telecommunications service providers are facing significant challenges to their traditional business models, including declining revenues in their legacy businesses (both fixed line and mobile), rapidly evolving customer communications demands and the need to generate returns on their increasing investments in IP-based networks. Historically, service providers derived much of their revenue from providing reliable voice and highspeed data access. However, these legacy services have been increasingly commoditized as technological and regulatory changes have brought increased competition and lower prices. At the same time, enterprises and consumers have started to seek new and enhanced cloud-based communications services, which can provide service providers with opportunities to counter falling legacy revenues and increase subscriber growth. Service providers are using both their existing IP-based networks and third-party cloud-based platforms to deliver these services to their customers.

 

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We believe that, as service providers look to rapidly introduce these new UC services through their own networks, they need a product like BroadWorks that is capable of coordinating delivery of a large and rapidly increasing number of applications, operating across heterogeneous network elements and devices, ensuring high levels of reliability and quality and efficiently scaling as more subscribers are added.

Company Strategy

Our goal is to strengthen our position as the leading global provider of IP communications application servers by enabling service providers to increase revenue opportunities by delivering feature-rich services to their enterprise and consumer subscribers. Key elements of our strategy include:

 

   

Extend our technology leadership and product depth and breadth. We intend to provide an industry-leading solution through continued focus on product innovation and substantial investment in research and development for new features, applications and services.

 

   

Drive revenue growth by:

 

   

Assisting our current service provider customers to sell more of their currently-deployed BroadWorks and BroadCloud services. We support our service provider customers by regularly offering enhanced and new features to their current applications, as well as providing tools and training to help them market their services to subscribers.

 

   

Selling new applications and features to our current service provider customers. Although our initial engagement with a service provider may be for a single initiative or business unit, once services using our core applications communications platform are deployed by a service provider, we believe we are well-positioned to sell additional applications and features to that service provider, as software (BroadWorks) and/or through our BroadCloud services delivery platform. These BroadSoft service offerings can be tied together with service provider-branded BroadTouch mobile smart phone and tablet, and personal computer clients.

 

   

Continuing to acquire new customers. Our customers are located around the world and include 18 of the top 25 telecommunications service providers globally. We believe we are well positioned to grow by adding customers in regions where we already have a strong presence, by expanding our geographic footprint and by penetrating more deeply into some types of service provider customers, such as additional cable and mobile service providers.

 

   

Pursue selected acquisitions and collaborations that complement our strategy. We intend to continue to pursue acquisitions and collaborations where we believe they are strategic to strengthen our leadership position.

 

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Key Financial Highlights

Some of our key financial highlights for the quarter ended March 31, 2012 include:

 

   

Total revenue increased by 29% to $38.3 million, compared to $29.7 million in the quarter ended March 31, 2011;

 

   

Gross profit increased to $30.3 million, compared to $23.8 million in the quarter ended March 31, 2011;

 

   

Gross margin decreased to 79%, compared to 80% in the quarter ended March 31, 2011;

 

   

Operating income increased to $4.9 million, or 13% of total revenue, compared to $4.1 million, or 14% of total revenue, in the quarter ended March 31, 2011;

 

   

Deferred revenue was $51.6 million as of March 31, 2012, a decrease of $5.5 million in the quarter ended March 31, 2012, compared to a decrease of $1.5 million in the same period in 2011; and

 

   

Cash used in operating activities was $3.5 million, compared to cash provided by operating activities of $3.1 million for the quarter ended March 31, 2011. Cash used in the quarter includes a $6.5 million fee in connection with a new third-party software licensing agreement.

Components of Operating Results

Revenue

We derive our revenue from the sale of licenses, maintenance and services. We recognize revenue when all revenue recognition criteria have been met in accordance with revenue recognition guidance. This guidance provides that revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Our total revenue consists of the following:

 

   

Licenses. We derive license revenue from the sale of perpetual software licenses. We price our software based on the types of features and applications provided and on the number of subscriber licenses sold. These factors impact the average selling price of our licenses and the comparability of average selling prices. Our license revenue may vary significantly from quarter to quarter or from year to year as a result of long sales and deployment cycles, variations in customer ordering practices and the application of management’s judgment in applying complex revenue recognition rules. Our deferred license revenue balance consists of software orders that do not meet all the criteria for revenue recognition. We are unable to predict the proportion of orders that will meet all the criteria for revenue recognition relative to those orders that will not meet all such criteria and, as a result, we cannot forecast whether any historical trends in recognized license revenue and deferred license revenue will continue. As of March 31, 2012, our deferred license revenue balance was $14.4 million.

 

   

Maintenance and services. We generally sell annual maintenance contracts with our software licenses. These contracts provide for software updates, upgrades and technical support. Our typical warranty on licensed software is 90 days and, during this period, our customers are entitled to receive maintenance and support without the purchase of a maintenance contract. After the expiration of the warranty period, our customers must purchase an annual maintenance contract to continue receiving ongoing software maintenance and customer support. We also sell professional services, which consist of implementation, training and consulting services. As of March 31, 2012, our deferred maintenance and services revenue balance was $37.2 million.

Cost of Revenue

Our total cost of revenue consists of the following:

 

   

Cost of license revenue. A substantial majority of the cost of license revenue consists of royalties paid to third parties whose technology or products are sold as part of BroadWorks and, to a lesser extent, amortization of acquired technology. Most of these royalty payments are for the underlying embedded data base technology within BroadWorks for which we currently incur a fixed expense and/or pay a fixed fee per quarter, which will increase beginning in June 2012 as a result of our recently executed third-party license agreement. Such costs are expensed in the period in which they are incurred.

 

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Cost of maintenance and services revenue. Cost of maintenance and services revenue consists primarily of personnel-related expenses and other direct costs associated with the support, maintenance and implementation of our software licenses, as well as training and consulting services. Personnel expenses include salaries, commissions, benefits, bonuses, reimbursement of expenses and stock-based compensation. Such costs are expensed in the period in which they are incurred.

Gross Profit

Gross profit is the calculation of total revenue minus cost of revenue. Our gross profit as a percentage of revenue, or gross margin, has been and will continue to be affected by a variety of factors, including:

 

   

Mix of license, maintenance and services revenue. We generate higher gross margins on license revenue compared to maintenance and services revenue.

 

   

Growth or decline of license revenue. A substantial portion of cost of license revenue is fixed and is expensed in the period in which it occurs. This cost consists primarily of the royalty payments to our embedded database provider. If license revenue increases, these fixed payments will decline as a percentage of revenue. If license revenue declines, these fixed payments will increase as a percentage of revenue.

 

   

Impact of deferred revenue. If we are unable to determine vendor-specific objective evidence, or VSOE, of fair value for any undelivered element within an arrangement, or any other revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license, maintenance and services revenue, until all elements for which we could not determine VSOE have been delivered or other revenue recognition criteria have been met. However, the cost of revenue, including the costs of license, maintenance and services, is typically expensed in the period in which it is incurred. Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period. Because the ability to recognize revenue on sales depends largely on the terms of the sale arrangement, and because we are not able to predict the proportion of orders that will not meet all the criteria for revenue recognition, we cannot forecast whether any historical trends in gross margin will continue.

Operating Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We grew to 509 employees at March 31, 2012 from 487 employees at December 31, 2011, and we expect to continue to hire new employees to support our anticipated growth.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. We expect our sales and marketing expenses to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. Over the long term, we expect sales and marketing expenses to decrease as a percentage of total revenue as sales grow. In 2012, however, we do not expect sales and marketing expenses to decrease as a percentage of total revenue.

Research and development expenses. Research and development expenses consist primarily of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Additional expenses include costs related to development, quality assurance and testing of new software and enhancement of existing software, consulting, travel and other related overhead. We engage third-party international and domestic consulting firms for various research and development efforts, such as software development, documentation, quality assurance and software support. We intend to continue to invest in our research and development efforts, including by hiring additional development personnel and by using outside consulting firms for various research and development efforts. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. We expect research and development expenses to increase in the foreseeable future, but over the long-term to decrease as a percentage of total revenue as sales grow.

 

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General and administrative expenses. General and administrative expenses consist primarily of salary and personnel costs for administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other corporate expenses. We expect general and administrative expenses to increase in the foreseeable future, but over the long-term to decrease as a percentage of total revenue as sales grow.

Stock-Based Compensation

We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant or modification of stock options and other equity awards to our directors, employees and consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The total cost of the grant or modification is measured based on the estimated fair value of the award at the date of grant. The fair value is then recognized as stock-based compensation expense over the requisite service period, which is the vesting period, of the award. For the three months ended March 31, 2012 and 2011, we recorded stock-based compensation expense of $3.2 million and $1.1 million, respectively.

Based on stock options and other equity awards outstanding as of March 31, 2012, we expect to recognize future expense related to the non-vested portions of such options and other equity awards in the amount of $16.5 million over a weighted average period of approximately 1.59 years.

Other Expense (Income), Net

Other (income) expense, net consists primarily of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest related to the Notes and our five installment loans with Tekes.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. Historically, we have not been required to pay U.S. federal income taxes due to our accumulated net operating losses. As of December 31, 2011, we had net operating loss carryforwards of approximately $103.1 million to offset future taxable income in the U.S.

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other: Testing Goodwill for Impairment,” which simplifies the periodic testing of goodwill for impairment. This guidance will allow companies to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test required under current accounting standards. This guidance will be effective for our annual goodwill impairment test performed in 2012 and is not expected to have a material impact on our consolidated financial statements.

 

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Results of Operations

Comparison of the Three Months Ended March 31, 2012 and 2011

Revenue

 

     Three Months Ended March 31,     Period-to-Period
Change
 
     2012     2011    
     Amount      Percent
of Total
Revenue
    Amount      Percent
of Total
Revenue
    Amount      Percentage  
     (dollars in thousands)  

Revenue by Type:

               

Licenses

   $ 21,265         55   $ 15,191         51   $ 6,074         40

Maintenance and services

     17,078         45        14,463         49        2,615         18   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 38,343         100   $ 29,654         100   $ 8,689         29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Revenue by Geography:

               

Americas

   $ 27,544         72   $ 21,334         72   $ 6,210         29

EMEA

     5,746         15        4,747         16        999         21   

APAC

     5,053         13        3,573         12        1,480         41   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 38,343         100   $ 29,654         100   $ 8,689         29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue for the three months ended March 31, 2012 increased by 29%, or $8.7 million, to $38.3 million, compared to the same period in 2011. This growth was driven by a 40% increase in license revenue and an 18% increase in maintenance and services revenue. Deferred revenue decreased by $5.5 million for the three months ended March 31, 2012, compared to a decrease of $1.5 million for the same period in 2011.

Revenue from the Americas for the three months ended March 31, 2012 increased by 29%, or $6.2 million, to $27.5 million compared to the same period in 2011. The increase in the Americas revenue for the three months ended March 31, 2012 was primarily due to growth in software license sales, particularly our hosted UC and trunking applications, consumer applications and related maintenance, in addition to strong growth in services. Europe, Middle East and Africa, or EMEA, revenue for the three months ended March 31, 2012 increased 21%, or $1.0 million, to $5.7 million compared to the same period in 2011. The increase in EMEA revenue for the three months ended March 31, 2012 was primarily due to growth in software license sales, particularly our hosted Unified Communications and trunking applications, and related maintenance. Asia Pacific, or APAC, revenue for the three months ended March 31, 2012 increased by 41%, or $1.5 million, to $5.1 million compared to the same period in 2011. The increase in APAC revenue for the three months ended March 31, 2012 was primarily due to growth in software license sales due to general growth in our hosted Unified Communications applications and related maintenance.

License Revenue

License revenue for the three months ended March 31, 2012 increased by 40%, or $6.1 million, to $21.3 million. The increase in license revenue for the three months ended March 31, 2012 was driven by strong growth in sales of software licenses in the Americas. Deferred license revenue decreased by $6.2 million for the three months ended March 31, 2012, compared to a decrease of $0.6 million for the same period in 2011. The decrease in deferred revenue for the three months ended March 31, 2012 was primarily driven by license orders that we deferred in prior periods and for which we recognized the revenue in the quarter.

 

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Table of Contents

Maintenance and Services Revenue

Maintenance and services revenue for the three months ended March 31, 2012 increased by 18%, or $2.6 million, to $17.1 million, compared to the same period in 2011. The increase in maintenance and services revenue was the result of growth in our installed base of customers and licenses and growth in demand by our customers for our professional service offerings. Deferred maintenance and services revenue increased by $0.7 million for the three months ended March 31, 2012, compared to a $0.9 million decrease for the same period in 2011. The increase in deferred revenue was a result of the growth of software licenses purchased by our install base of customers and new customers.

Cost of Revenue and Gross Profit

 

     Three Months Ended March 31,     Period-to-Period
Change
 
     2012     2011    
     Amount      Percent
of
Related
Revenue
    Amount      Percent
of
Related
Revenue
    Amount      Percentage  
     (dollars in thousands)  

Cost of Revenue:

               

Licenses (1)

   $ 2,619         12   $ 1,515         10   $ 1,104         73

Maintenance and services

     5,453         32        4,315         30        1,138         26   
  

 

 

      

 

 

      

 

 

    

Total cost of revenue

   $ 8,072         21   $ 5,830         20   $ 2,242         38
  

 

 

      

 

 

      

 

 

    

Gross Profit:

               

Licenses (1)

   $ 18,646         88   $ 13,676         90   $ 4,970         36

Maintenance and services

     11,625         68        10,148         70        1,477         15   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 30,271         79   $ 23,824         80   $ 6,447         27
  

 

 

      

 

 

      

 

 

    

 

(1) Includes amortization of intangibles aggregating $559 and $239 for the three months ended March 31, 2012 and 2011, respectively.

For the three months ended March 31, 2012, gross margin decreased to 79% of revenue, compared to 80% for the same period in 2011. Our gross profit increased by 27%, or $6.4 million, to $30.3 million. We experienced an increase in both license revenue gross profit and maintenance and services revenue gross profit for the three months ended March 31, 2012, primarily due to growth in license revenue and maintenance and services revenue.

For the three months ended March 31, 2012, license gross margin decreased to 88% as compared to 90% in the same period in 2011, and license gross profit increased by 36% to $18.6 million. License cost of revenue increased by 73% to $2.6 million for the three months ended March 31, 2012. This increase was primarily due to an increase of $0.3 million in amortization of acquired intangibles as a result of our business acquisitions in 2011 and an increase of $0.6 million for third-party software expenses.

For the three months ended March 31, 2012, maintenance and services gross margin decreased to 68% compared to 70% for the same period in 2011. Our gross profit increased by 15% to $11.6 million, due to increased services revenue. Maintenance and services cost of revenue increased by 26% to $5.5 million for the three months ended March 31, 2012 as compared to the same period in 2011. The increase in maintenance and services cost of revenue was primarily due to a $0.6 million increase in personnel costs due to an increase in services personnel working directly on specific projects for certain customers which will also be included in future releases of our products.

 

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Table of Contents

Operating Expenses

 

     Three Months Ended March 31,     Period-to-Period
Change
 
     2012     2011    
     Amount      Percent
of Total
Revenue
    Amount      Percent
of Total
Revenue
    Amount      Percentage  
     (dollars in thousands)  

Sales and marketing

   $ 11,072         29   $ 8,484         29   $ 2,588         31

Research and development

     8,476         22        6,816         23        1,660         24   

General and administrative

     5,814         15        4,386         14        1,428         33   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 25,362         66   $ 19,686         66   $ 5,676         29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Sales and Marketing. Sales and marketing expense increased by 31%, or $2.6 million, to $11.1 million for the three months ended March 31, 2012. The primary drivers of this increase were a $1.9 million increase in personnel related costs and a $0.3 million increase in outside consulting expenses.

Research and Development. Research and development expense increased by 24%, or $1.7 million, to $8.5 million for the three months ended March 31, 2012. This increase was primarily due to a $1.3 million increase in personnel related costs, driven by both organic growth and our recent acquisitions.

General and Administrative. General and administrative expense increased by 33%, or $1.4 million, to $5.8 million for the three months ended March 31, 2012. This increase was primarily attributable to a $0.9 million increase in personnel costs, a $0.2 million increase in professional fees and a $0.2 million increase in outside consulting fees. Key drivers of this growth in expense were the transaction costs and added costs of integrating and managing our recent acquisitions.

Income from Operations

We had income from operations of $4.9 million for the three months ended March 31, 2012, compared to $4.1 million for the same period in 2011. The increase in income from operations for the three months ended March 31, 2012 was primarily a result of revenue and associated gross profit growing more quickly than expenses increased.

Other Expense (Income)

 

     Three Months Ended March 31,      Period-to-Period
Change
 
     2012     2011     
     Amount     Percent
of Total
Revenue
    Amount     Percent
of Total
Revenue
     Amount     Percentage  
     (dollars in thousands)  

Interest income

   $ (117     (2 )%    $ (43     *       $ (74     172

Interest expense

     1,696        4     20        *         1,676        NM   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

Total other expense (income)

   $ 1,579        2   $ (23     *       $ 1,602        NM   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

* Less than 1%

NM – Not meaningful

Interest income for the three months ended March 31, 2012 was relatively unchanged as compared to the same period in 2011. Interest expense for the three months ended March 31, 2012 increased by $1.7 million as a result of the issuance of the Notes.

 

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Table of Contents

Provision For Income Taxes

Income tax expense was $1.6 million for the three months ended March 31, 2012, compared to $0.5 million for the same period in 2011. The income tax expense for the three months ended March 31, 2012 relates primarily to current foreign and state taxes and the utilization of deferred tax assets in the U.S. Changes in our taxes are due primarily to the change in the mix of earnings by jurisdiction and due to the fact that in the three months ended March 31, 2011, the tax expense was offset by the reduction in valuation allowance forecasted for 2011. The following table summarizes our provision for income taxes included in our unaudited condensed consolidated statements of operations for the periods indicated:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands)  

Interim period provision for income taxes before valuation allowance

   $ 1,660      $ 1,964   

Release of valuation allowance

     (31     (1,498
  

 

 

   

 

 

 

Provision for income taxes

   $ 1,629      $ 466   
  

 

 

   

 

 

 

Liquidity and Capital Resources

Resources

Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities, which has resulted primarily from growth in revenue and deferred revenue. Cash flow from operations was $28.6 million and $19.4 million for the years ended December 31, 2011 and 2010, respectively. We used $3.5 million of cash in operations during the three months ended March 31, 2012, primarily due to the payment of a $6.5 million fee in connection with a new third-party software licensing agreement, and $0.9 million to GENBAND Inc in connection with the final earn-out payment from our acquisition of the M6 application server business from GENBAND Inc. In June 2010, we completed our IPO through which we raised net proceeds of $40.0 million. In December 2010, we completed our follow-on offering through which we raised net proceeds of $9.9 million. In June 2011, we completed the offering of our Notes, with net proceeds from the offering of approximately $115.7 million.

 

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Table of Contents

Cash and Cash Equivalents, Accounts Receivable and Working Capital

The following tables present a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated (in thousands).

 

     March 31,
2012
     December 31,
2011
 

Cash and cash equivalents

   $ 88,855       $ 94,072   

Accounts receivable, net

     40,672         47,048   

Working capital

     176,563         180,010   

 

     Three Months Ended
March 31,
 
     2012     2011  

Cash (used in) provided by:

    

Operating activities

   $ (3,454   $ 3,106   

Investing activities

     (1,300     (4,157

Financing activities

     (557     1,167   

Our cash and cash equivalents at March 31, 2012 were held for working capital and other general corporate purposes and were invested primarily in demand deposit accounts or money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which totaled $1.0 million at March 31, 2012 and is not included in cash and cash equivalents, consisted primarily of certificates of deposit that secure letters of credit related to operating leases for office space.

Operating Activities

For the three months ended March 31, 2012, net cash used in operating activities was $3.5 million, compared to net cash provided by operating activities of $3.1 million for the same period in 2011. Cash used in operating activities during the quarter was primarily the result of an increase in other current and long-term assets of $8.1 million (which was predominantly attributable to our up-front payment of the $6.5 million fee in connection with our new four-year third-party software licensing agreement), a $5.3 million decrease in accounts payables, accrued expenses and other long-term liabilities and a $5.5 million decrease in deferred revenue, partially offset by net income of $1.7 million, a decrease in accounts receivable of $6.4 million and non-cash items, such as stock-based compensation expense of $3.2 million, amortization of software licenses of $0.5 million, provision for deferred income taxes of $1.4 million, depreciation and amortization of $1.1 million and non-cash interest expense on our Notes of $1.2 million.

Investing Activities

Our investing activities have consisted primarily of purchases of marketable securities and property and equipment.

For the three months ended March 31, 2012, net cash used in investing activities was $1.3 million, compared to $4.2 million for the same period in 2011. This decrease was primarily attributable to a $3.4 million decrease in net purchases of marketable securities, and a $0.5 million decrease in purchases of property and equipment.

Financing Activities

For the three months ended March 31, 2012, net cash used in financing activities was $0.6 million, compared to net cash provided by financing activities of $1.2 million for the same period in 2011. The change is primarily related to a $1.1 million increase in cash paid for taxes on vesting of restricted stock units and a $0.6 million decrease in proceeds from stock option exercises, compared to the same period in 2011.

 

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Table of Contents

Borrowings and Credit Facilities

Convertible Senior Notes

In June 2011, we issued $120.0 million aggregate principal amount of our Notes. The Notes are our senior unsecured obligations, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.

The initial conversion rate for the Notes is approximately $41.99 per share. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. Upon conversion, we will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted. See footnote 6 to our Unaudited Condensed Consolidated Financial Statements contained elsewhere in this report for additional details about the Notes.

Bank of America Installment Loan

We were party to an installment loan with Bank of America, in the original principal amount of $6.4 million, to finance the payment of a one-time license and maintenance fee in connection with our license of certain third party software. The interest rate on the loan was fixed at 4.0%. The loan provided for scheduled quarterly principal repayments of $0.4 million with the final principal payment due on April 1, 2012. During the quarter ended March 31, 2012, we made the final payment under the loan and the loan has now been paid in full.

Tekes

In connection with our acquisition of Movial Applications, Inc. in October 2011, we assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, totalling $1.0 million. The terms of the loans are governed by the Finnish Act on State Lending and State Guarantees, Government Decree on Research, Development and Innovation Funding. The loans are for funding approved research and development projects, repayment terms are on a per project basis, and the interest rate on each loan is variable, which is currently 3.0%. We expect to repay these loans in full during 2012.

Operating and Capital Expenditure Requirements

We believe that the cash generated from operations, our current cash and investment balances and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to grow as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology and enterprise resource planning system. As sales grow, we expect our accounts receivable balance to increase.

If our available cash resources are insufficient to satisfy our capital requirements, we may seek to sell equity or convertible debt securities or enter into a credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

 

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Contractual Obligations

We have contractual obligations for non-cancelable office space, notes payable and other short-term and long-term liabilities. The following table discloses aggregate information about our contractual obligations and periods in which payments are due as of March 31, 2012 (in thousands):

 

     Payments Due by Year  
     Total      Remainder
of 2012
     2013 - 2014      2015 - 2016      After 2016  

Convertible Senior Notes, including interest *

   $ 131,700       $ 900       $ 3,600       $ 3,600       $ 123,600   

Operating lease obligations

     10,944         1,727         3,339         3,149         2,729   

Equipment leases

     106         55         50         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 142,750       $ 2,682       $ 6,989       $ 6,749       $ 126,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Contractual interest obligations related to our Notes totaled $11.7 million at March 31, 2012, including $0.9 million, $3.6 million, $3.6 million and $3.6 million due in years 2012, 2013-2014, 2015 - 2016 and after 2016, respectively.

As of March 31, 2012, we had unrecognized tax benefits of $0.6 million, which did not include any interest or penalties. We do not expect to recognize any of these benefits in 2012. Furthermore, we are not able to provide a reliable estimate of the timing of future payments relating to these unrecognized benefits.

Off-Balance Sheet Arrangements

As of March 31, 2012, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into interest rate or exchange rate hedging arrangements to manage the risks described below.

Interest Rate Risk

The interest rate is fixed on all our outstanding loan balances; consequently, we do not have exposure to risks due to increases in the variable rates tied to indexes. We maintain a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which we consider to be cash equivalents. Our restricted cash consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space. These securities and investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. At March 31, 2012, we had long-term debt of $120.0 million associated with our Notes, which are fixed rate instruments. We would not expect a 10% change in interest rates to have a material impact on our results of operations.

Foreign Currency Exchange Risk

Substantially all of our sales contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue. With international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and if our exposure increases, adverse movement

 

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in foreign currency exchange rates could have a material adverse impact on our financial results. Historically, our primary exposures have been related to non-U.S. dollar denominated operating expenses in Canada, Europe and the APAC region. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreign currencies. However, we believe this exposure is not material at this time. As we continue to grow our international operations, our exposure to foreign currency risk could become more significant. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we are a defendant in litigation arising out of the ordinary course of business. Except as described in our Annual Report on Form 10-K for the year ended December 31, 2011, we are not a party to any material, pending legal proceeding, nor are we aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our common stock are adverse to us or have a material interest adverse to us.

 

Item 1A. Risk Factors

See Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012, for a detailed discussion of risk factors.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock

In June 2010, we completed our initial public offering. We raised a total of $45.5 million in gross proceeds from the initial public offering, or $40.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other estimated offering costs of $2.3 million.

We intend to use the remaining net proceeds from the offering for working capital and other general corporate purposes, including financing our growth, developing new products and funding capital expenditures. Pending such usage, we have invested the net proceeds primarily in short-term, interest-bearing investment grade securities.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

 

Exhibit

Number

  

Description of Document

    3.1

   Amended and Restated Certificate of Incorporation. (1)

    3.2

   Amended and Restated Bylaws. (2)

    4.1

   Indenture, dated as of June 20, 2011, by and between the Company and Wells Fargo Bank, N.A., as Trustee. (3)

    4.2

   Form of Note representing the Company’s 1.50% Convertible Senior Notes due 2018. (3)

  10.1 †

   BroadSoft, Inc. 2012 Executive Bonus Plan.

  31.1

   Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2

   Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32.1

   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2

   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

35


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101.INS XBRL#

   Instance Document

101.SCH XBRL#

   Taxonomy Extension Schema

101.CAL XBRL#

   Taxonomy Extension Calculation Linkbase

101.DEF XBRL#

   Taxonomy Extension Definition Linkbase

101.LAB XBRL#

   Taxonomy Extension Label Linkbase

101.PRE XBRL#

   Taxonomy Extension Presentation Linkbase

 

(1) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 25, 2010 and incorporated herein by reference.
(2) Previously filed as an exhibit to the registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
(3) Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 1-34777) filed with the Securities and Exchange Commission on June 21, 2011 and incorporated by reference herein.
Confidential treatment has been requested with respect to certain portions of this exhibit. A complete copy of the document, including the redacted portions, has been filed separately with the SEC.
# Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BROADSOFT, INC.
By:  

/s/ James A. Tholen

  James A. Tholen
  Chief Financial Officer
  (Principal Financial and Accounting Officer and duly authorized signatory)

Date: May 7, 2012

 

37

XNAS:BSFT BroadSoft Inc Quarterly Report 10-Q Filling

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