|• FORM 10-Q • CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C SECTION 1350 • CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C SECTION 1350 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
(Commission File Number)
(Exact name of Registrant as specified in its charter)
(Registrants telephone number, including area code)
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 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.
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 Registrants Common Stock, $0.001 par value, as of April 30, 2012 was 60,515,991.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
See Accompanying Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited, in thousands, except share and per share amounts)
See Accompanying Notes to the Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
See Accompanying Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of iPass Inc. (the Company) and its wholly owned subsidiaries. The condensed consolidated financial statements that accompany these notes have been prepared in accordance with U.S. generally accepted accounting principles or GAAP consistent in all material respects with those applied in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The December 31, 2011 Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The interim financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim period presented. This interim financial information should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three months ended March 31, 2012, are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results that the Company experiences may differ materially from those estimates. Estimates are used for, but not limited to the valuation of accounts receivables, other long-lived assets, network access costs, stock-based compensation, legal contingencies, and income taxes.
The Company reports comprehensive loss in a single continuous financial statement within the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Companys comprehensive loss is equivalent to its net loss because the Company does not have any transactions that are recorded through accumulated other comprehensive income (loss).
Note 2. Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction in the principal or most advantageous market between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
The recurring fair value measurements of these financial assets (excluding cash) and nonfinancial liabilities were determined using the following inputs at March 31, 2012 and December 31, 2011, respectively:
There were no transfers between Levels 1, 2, and 3 from December 31, 2011 through March 31, 2012.
As of March 31, 2012, and December 31, 2011, the carrying amounts of accounts receivable, accounts payable and accrued liabilities, closely approximate fair value due to their short maturities.
Note 3. Property and Equipment, net
Property and equipment, net, consisted of the following:
Depreciation expense was approximately $0.6 million for each of the three months ended March 31, 2012 and 2011. During the three months ended March 31, 2012, the Company wrote-off approximately $2.3 million of gross property and equipment, all of which were fully depreciated. Less than $0.1 million of property and equipment, net were written off during the three months ended March 31, 2011.
Note 4. Intangible Assets, net
The following tables set forth the carrying amount of intangible assets that will continue to be amortized:
Amortization of intangible assets was approximately $0.1 million for each of the three months ended March 31, 2012 and 2011. The remaining intangible assets of approximately $0.1 million are expected to be fully amortized during 2012.
Note 5. Other Assets
Other assets consisted of the following:
Note 6. Accrued Liabilities
Accrued liabilities consisted of the following:
Note 7. Accrued Restructuring
During the year ended December 31, 2009, the Company announced restructuring plans to reduce its operating costs and focus its resources on key strategic priorities, which resulted in a workforce reduction of 146 positions across all functional areas and abandonment of certain facilities and termination of a contract obligation. The restructuring plans were completed during 2010.
The following is a roll forward of restructuring liability for the three months ended March 31, 2012 and 2011:
As of March 31, 2012, the Company classified approximately $0.3 million of the restructuring liability in accrued liabilities and the remaining $0.4 million in long-term liabilities based on the Companys expectation that the remaining lease payments for the abandoned facilities will be paid over the remaining term of the related leases ending in April 2015 (net of expected sublease income).
During the three months ended March 31, 2011, the Company recorded a restructuring benefit of approximately $0.2 million related to an adjustment of previously recorded facility exit costs arising from a favorable termination and lease surrender agreement that was executed in the first quarter of 2011.
Note 8. Commitments and Contingencies
Lease and Purchase Commitments
The Company leases facilities under operating leases that expire at various dates through May 2017. Certain leases are cancellable prior to lease expiration dates. Future minimum lease payments under these operating leases, including payments on leases accounted for under the Companys restructuring plans, as of March 31, 2012, are as follows:
The table above includes approximately $0.7 million in facility lease obligations which are included in accrued restructuring liabilities.
The Company has contracts with certain network service providers, mobile data providers and other vendors which have minimum purchase commitments that expire on various dates through March 2014. Future minimum purchase commitments under all agreements are as follows:
At March 31, 2012, the Company had no material commitments for capital expenditures.
The Company is involved in legal proceedings and claims arising in the ordinary course of business. While there can be no assurances as to the ultimate outcome of any litigation involving the Company, management does not believe any such pending legal proceeding or claim will result in a judgment or settlement that would have a material adverse effect on the Companys financial position, results of operations or cash flows.
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. Certain indemnification agreements may not be subject to maximum loss clauses. If the potential loss from any indemnification claim is considered probable and the amount or the range of the loss can be estimated, the Company accrues a liability for the estimated loss. To date, claims under such indemnification provisions have not been significant.
Note 9. Net Loss Per Common Share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted daily average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted daily average number of common shares outstanding plus potentially dilutive common shares outstanding during the period from the issuance of stock options and awards using the treasury stock method. Participating securities are included in the weighted daily average number of shares outstanding used in the calculation of diluted net income per share but are excluded from the calculation of diluted net loss per share. As the Company was in a net loss position for all periods presented, basic and diluted net loss per share are equal to each other as the weighted average number of shares used to compute diluted net loss per share excludes anti-dilutive securities, including participating securities.
The following table sets forth the computation of basic and diluted net loss per share:
The following weighted average potential shares of common stock have been excluded from the computation of diluted net loss per share because the effect of including these shares would have been anti-dilutive:
Note 10. Segment and Geographical Information
The Companys two reportable operating segments are: Mobility Services; and Managed Network Services (iPass MNS or MNS). The Mobility Services segment includes the platform and network services that help enterprises manage the networks, connections and devices used by their mobile workforce as well as the network connection services itself. The MNS Segment includes enterprise remote and branch office secure connectivity services. The Companys Chief Operating Decision Maker (the CODM) has been identified as the Companys President and Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income or loss.
The Company evaluates performance and allocates resources based on segment profit or loss from operations before income taxes, not including amortization of intangibles, restructuring and incremental sales tax, penalties and interest. The accounting policies of the reportable segments are substantially the same as those the Company uses for consolidated financial statements. All direct costs are allocated to the respective segments. In addition to direct costs, each segment has indirect costs. Indirect costs that are allocated to each segment include certain costs relating to facilities, employee benefits and payroll taxes, and shared services in management, finance, legal, human resources, and information technology. Indirect costs are allocated based on headcount, salaries and segment revenue contribution. The total operating costs and network access costs allocated to the reportable segments for the three months ended March 31, 2012 and 2011, were $34.4 million and $38.0 million, respectively. The Company does not allocate to its reportable segments amortization of intangibles, restructuring and any associated adjustments related to restructuring actions, and incremental sales tax penalties and interest. By definition, segment operating income (loss) also excludes interest income, foreign exchange gains and losses, and income taxes.
Revenue and operating loss for each reportable segment for the three months ended March 31, 2012 and 2011, were as follows:
Substantially all of the Companys long-lived assets are located in the United States. The CODM does not evaluate operating segments using discrete asset information. Accordingly, no segment assets have been reported.
There were no material intersegment sales or transfers for the three months ended March 31, 2012 and 2011, to arrive at net revenue. Depreciation allocated to the Mobility Services segment was $0.6 million for each of the three months ended March 31, 2012 and 2011. Depreciation allocated to the MNS segment for each of the three months ended March 31, 2012 and 2011, was less than $0.1 million.
Reconciliations of total segment operating loss to total operating loss and total loss before income taxes for the three months ended March 31, 2012 and 2011, are as follows:
The following table summarizes total Company revenue by country or by geographical region for the periods presented:
The only individual foreign country to account for 10% or more of total revenues for the periods presented was the United Kingdom, which represented approximately 9% and 10% of total revenue for the three months ended March 31, 2012 and 2011, respectively. No individual customer represented 10% or more of total revenue for the three months ended March 31, 2012 and 2011.
Our Managements Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.
This MD&A is organized as follows:
The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as expects, will, anticipates, targets, goals, projects, intends, plans, believes, seeks, estimates, potential, variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
We provide global enterprises and telecommunications carriers with cloud-based mobility management and network connectivity services. With our unique technology platform, we offer enterprises cross-device, cross-network Internet connectivity services through the iPass global network along with connection policy enforcement, real time reporting and analysis of all mobile network activity across their employee base and Internet access. Based on this same technology and our global authentication and settlements infrastructure, we also offer global telecommunications service providers with Wi-Fi enablement services that allow Wi-Fi providers to monetize their Wi-Fi network with visiting subscribers, provide their subscribers with global Wi-Fi connectivity, and enable data offload solutions for Wi-Fi transactions and settlements exchange among global telecommunication providers.
We believe that the proliferation of mobile devices, including smartphones and tablets, has led to an explosive growth in global data traffic. As a result of this and other trends, the costs of mobility are large and growing as the global demand for bandwidth exceeds supply. We believe that enterprises will need to manage the mobility costs of providing always-on high-speed connectivity to their employees, as well as address the proliferation of employee-liable devices (the Bring Your Own Device trend). In addition, we see global telecommunications carriers and providers looking to monetize their network infrastructures, obtain additional network capacity, improve their subscribers experience and differentiate their consumer offerings to meet the accelerating demand for data services on smartphone and tablet devices.
We believe iPass is uniquely positioned to address the global Wi-Fi opportunity and this is being accomplished through our Wi-Fi enablement services for carriers and integration into their core network offerings. We also believe that Wi-Fi has emerged as a critical element to meet the demands of enterprises and carriers.
Our business is structured and reported around two segments: (i) Mobility Services; and (ii) Managed Network Services (iPass MNS or MNS). Our Mobility Services segment is comprised of two service offerings: (1) Enterprise Mobility Services; and (2) Carrier Wi-Fi Enablement Services. We believe that we are leveraging our technology, global infrastructure expertise and market presence in the mobility space to address the market demands and needs of enterprises and telecommunication carriers, as follows:
iPass MNS provides enterprise customers in North America with network and management services that connect their branch offices and retail locations. The MNS value proposition is a significant price-for-performance value over traditional or legacy private networking services and is used by enterprises in a range of industries. We have recently begun to leverage our mobility services expertise within the MNS business and customer base, and have launched a new Managed Wi-Fi business that expands the MNS platform to enable enterprises and retailers to deliver in-store/in-office Wi-Fi experience to their employees and customers.
iPass was incorporated in California in July 1996 and reincorporated in Delaware in June 2000. Our corporate headquarters is located in Redwood Shores, California.
For a detailed discussion regarding our business, including our strategy and our service offerings, see Item 1. Business included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Significant Trends and Events, and Key Operating Highlights
A key initiative of iPass is to drive both sales of Open Mobile Enterprise and customer deployments of the Open Mobile Platform to produce greater Open Mobile user penetration and greater frequency-of-use of both our mobility platform services and network services. In addition, we are focused on continuing to build-out the OMX ecosystem of carrier partners to provide for Wi-Fi exchange functionality. Under our MNS business, we are also focused on continued revenue growth through a renewed focus on new customer acquisitions and by delivering additional offerings that leverage synergies with our Mobility expertise.
The following describes significant trends and events, and key operating highlights of our business during the first quarter of 2012:
(1) Strong Growth and Scale in Open Mobile Enterprise
We have continued to increase the number of customers signed on to our Open Mobile Platform as well as the number of Open Mobile monetized users, both active and gross. During the first quarter of 2012, we signed numerous global enterprise customers to the Open Mobile Enterprise Platform, including several Fortune 1000 enterprises, exiting the quarter with over 440 enterprise customers on the Open Mobile Enterprise Platform. The number of Active Open Mobile Enterprise Monetized users has continued to reflect a strong increase from approximately 54,000 in December of 2011 to approximately 135,000 in March of 2012, growing by approximately 80,000 or 150%. In March 2012, there were more than 320,000 Gross Open Mobile Enterprise Monetized users compared to more than 230,000 in December 2011, growing by approximately 90,000 or 39%. See Key Operating Metrics below for a full discussion of our user metrics.
We recently launched iPass Open Mobile Express, a lightweight version of iPass Open Mobile, which provides enterprises quick, easy and cost-effective access to our global footprint. iPass Open Mobile Express offers individual departments and enterprises of all sizes seamless Wi-Fi connectivity and basic reporting services for smartphones, tablets and laptops while ensuring consistent user
experience across all devices without costly 3G/4G roaming charges and expensive Wi-Fi day passes. We also released new versions of iPass Open Mobile with continued expansion of functionalities for laptops (Windows and Macintosh) as well as smartphone and tablet clients (Android & iOS), such as the new version of iPass Open Mobile for iOS that is optimized to take advantage of the higher resolution and user interface of the iPad. In addition, we released the Japanese version of iPass Open Mobile 2.0 for laptops (Windows) as well as smartphone and tablet clients (Android & iOS).
(2) Continued Expansion of the Breadth and Strategic Reach of iPass Global Wi-Fi Network
During the quarter, we grew the iPass global Wi-Fi Network to more than 780,000 Wi-Fi hotspots in 118 countries, including more than 3,000 airport hotspots, more than 60,000 hotels and convention centers, and over 657,000 retail and small business locations. We also joined the Wi-Fi Alliance and announced support for the development of Next Generation Hotspot and Hotspot 2.0, Wi-Fi standard initiatives that are important to simplify connectivity to Wi-Fi hotspots from mobile devices such as smartphones and tablets. This new technology helps remove end-user friction, drives potential exponential increase in market opportunities for mobile carriers and further drives the iPass value proposition around our role of policy distribution and enforcement, and connectivity intelligence.
(3) Increased Momentum and Traction with iPass Open Mobile Exchange (iPass OMX)
We are continuing to develop our OMX business, adding functionality and building-out the network of key carrier partners including mobile operators, telecommunication service providers, resellers and mobile virtual network operators. During the first quarter of 2012, we signed several strategic carrier partners across Europe, the Middle-East, the United States, South America and Asia to the iPass OMX platform, exiting the quarter with 12 carrier customers. iPass Open Mobile Exchange enables these carriers to offer their subscribers new Wi-Fi based mobility services.
(4) Continued Revenue Growth in iPass Managed Network Services (iPass MNS)
For the three months ended March 31, 2012, compared to the same period in 2011, MNS revenue increased by 15%, on continued traction with our fully-managed high bandwidth Branch VPN service in retail and financial markets. We also recently released a new Wide Area Network product offering with significantly faster speeds over MPLS services called iPass MultiLink Connect which offers enterprises a fully-managed, highly available WAN IP VPN solution and that provides a strong foundation for retail or branch office Wi-Fi networks. In addition, we launched a new managed Wi-Fi service offering in North America during the quarter that leverages iPass mobility expertise to enable enterprises and large retailers to deliver in-store/in-office Wi-Fi to their employees and customers.
(5) Continued Decline in Legacy Network Revenue
Network revenue is predominantly generated from the use of our network services by users on our legacy Mobile Office product. In 2011, we began to generate network revenue from users on our new Open Mobile product. While we continue to sign-on new users and migrate users from our legacy platform to our new Open Mobile product, we have experienced a decline in Wi-Fi network usage by our legacy Mobile Office users, which to-date has outpaced the growth in Wi-Fi network usage by Open Mobile users.
In addition, we have also continued to experience the anticipated decline in network revenues from 3G, dial-up and minimum commitment, which we believe will continue during the remainder of 2012. The decline in 3G revenues was a result of lower usage levels due to anticipated customer terminations as we move away from 3G network sales and continue to focus on growing our Open Mobile platform revenue and Wi-Fi services. The anticipated decline in dial-up revenue was due to the continued erosion in our dial-up base as customers migrated to alternative faster connectivity technologies. The continued and anticipated decline in minimum commitment revenue was due to renegotiating customer agreements to lower commit levels.
Key Operating Metrics
Described below are key metrics that we use to evaluate our operating performance and our success in transforming our business and driving future growth.
Total Average Monthly Monetized Users
Total Average Monthly Monetized Users (referred to as AMMU) is a key metric that we use to track and evaluate the operating performance of our overall enterprise mobility business. The AMMU metric is based on the number of active users of our network and platform services across both our legacy Mobile Office offering and new Open Mobile Enterprise offerings. There is some overlap for users that may be active users of both our network and platform services in a given month. Network users are billed for their use of our Wi-Fi, dial-up or 3G network services. Platform users are billed for their use of our legacy Mobile Office client or our Open Mobile client. AMMU is defined as the average number of users per month, during a given quarter, for which a fee was billed by us to a customer for such users.
The following table summarizes the Total Average Monthly Monetized Users for the three months ended March 31, 2012 and 2011:
The AMMU of our network services decreased for the three months ended March 31, 2012, compared to the same period in 2011, primarily due to the decline in network users on our legacy Mobile Office product, specifically legacy dial-up, Wi-Fi, and 3G users that declined by 48%, 23%, and 7%, respectively.
The AMMU of our platform services decreased for the three months ended March 31, 2012, compared to the same period in 2011, primarily due to the attrition of legacy Mobile Office client users, which to date has outpaced the growth we have been experiencing in our Open Mobile platform users.
Open Mobile Enterprise Monetized Users
We also track users on our new Open Mobile offering to provide additional visibility into the overall adoption and monetization of the new Open Mobile platform. These metrics are defined as follows:
The following table reflects the number of Open Mobile Enterprise (OME) monetized users for the three broad categories of monetized users, (i) active OME monetized users, (ii) paying, undeployed OME monetized users, and (iii) Gross OME monetized users, which is the sum of (i) and (ii), as follows:
Open Mobile Enterprise Monetized Users are presented as a monthly metric as this provides increased visibility into the traction we are experiencing with enterprise customers on our new Open Mobile platform and allows us to measure the progress and performance of the business over time. Our number of Open Mobile Monetized Users has continued to increase as a result of our focus on signing-on new users and migrating legacy Mobile Office users to the Open Mobile Platform.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
Adjusted EBITDA is used by our management as a measure of operating efficiency, financial performance and as a benchmark against our peers and competitors. In addition, we also use this metric to determine a portion of our incentive compensation payouts. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to understand our performance excluding the impact of items which may obscure trends in our core operating performance. Furthermore, the use of Adjusted EBITDA facilitates comparisons with other companies in our industry which may use similar financial measures to supplement their GAAP results. We defined Adjusted EBITDA as net loss adjusted for interest income; income taxes; depreciation and amortization; stock-based compensation; restructuring charges; certain state sales and federal tax charges, and one-time non recurring discrete items. We adjust for these excluded items because we believe that, in general, these items possess one or more of the following characteristics: their magnitude and timing is largely outside of our control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and we do not expect them to occur in the ordinary course
of business; or they are non-operational, or non-cash expenses involving stock option grants. Adjusted EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States or GAAP and should not be considered in isolation or as a substitute for operating income, operating performance, net income or any other measure determined in accordance with GAAP.
The following table reconciles Adjusted EBITDA to GAAP net loss:
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