Attached files
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EX-32.1 - EX-32.1 - Phase Forward Inc | a10-5968_1ex32d1.htm |
EX-10.1 - EX-10.1 - Phase Forward Inc | a10-5968_1ex10d1.htm |
EX-32.2 - EX-32.2 - Phase Forward Inc | a10-5968_1ex32d2.htm |
EX-31.2 - EX-31.2 - Phase Forward Inc | a10-5968_1ex31d2.htm |
EX-31.1 - EX-31.1 - Phase Forward Inc | a10-5968_1ex31d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-50839
Phase Forward Incorporated
(Exact name of registrant as specified in its charter)
Delaware |
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04-3386549 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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77 Fourth Avenue |
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Waltham, Massachusetts |
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02451 |
(Address of principal executive offices) |
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(Zip Code) |
(888) 703-1122
(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 o
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 o No o
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 |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 26, 2010, the registrant had 43,744,864 shares of common stock outstanding.
PHASE FORWARD INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2010
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3 |
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4 |
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5 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
6 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
19 |
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33 |
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35 |
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36 |
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36 |
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36 |
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39 |
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40 |
Item 1. Condensed Consolidated Financial Statements
Phase Forward Incorporated
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except per share amounts)
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December 31, 2009 |
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March 31, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
41,862 |
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$ |
53,290 |
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Short-term investments |
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67,241 |
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76,449 |
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Securities settlement agreement |
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4,345 |
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3,280 |
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Accounts receivable, net of allowance of $781 and $769, respectively |
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56,034 |
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44,660 |
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Deferred income taxes |
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9,521 |
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9,521 |
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Other current assets |
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14,694 |
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15,564 |
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Total current assets |
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193,697 |
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202,764 |
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Property and equipment, net |
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52,840 |
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52,015 |
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Intangible assets, net of accumulated amortization of $7,332 and $8,782, respectively |
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41,661 |
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40,211 |
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Goodwill |
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59,027 |
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59,027 |
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Deferred income taxes |
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5,465 |
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5,465 |
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Restricted cash |
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962 |
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982 |
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Long-term investments |
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26,439 |
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Other assets |
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9,865 |
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9,213 |
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Total assets |
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$ |
389,956 |
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$ |
369,677 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
5,909 |
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$ |
3,649 |
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Accrued expenses and other current liabilities |
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28,006 |
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19,136 |
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Deferred revenues |
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85,896 |
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95,394 |
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Total current liabilities |
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119,811 |
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118,179 |
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Deferred rent, net of current portion |
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2,115 |
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2,489 |
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Deferred revenue, net of current portion |
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12,478 |
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15,055 |
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Other long-term liabilities |
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10,224 |
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10,177 |
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Total liabilities |
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144,628 |
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145,900 |
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Commitments and contingencies (Note 10) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 5,000 shares authorized, none issued |
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Common stock, $0.01 par value; 100,000 shares authorized: 43,577 and 43,732 issued, respectively |
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436 |
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438 |
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Additional paid-in capital |
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296,572 |
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299,478 |
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Treasury stock, 980 and 2,915 shares at cost, respectively |
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(14,147 |
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(40,111 |
) |
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Accumulated other comprehensive income (loss) |
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71 |
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(357 |
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Accumulated deficit |
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(37,604 |
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(35,671 |
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Total stockholders equity |
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245,328 |
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223,777 |
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Total liabilities and stockholders equity |
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$ |
389,956 |
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$ |
369,677 |
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See accompanying notes.
Phase Forward Incorporated
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per share amounts)
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Three Months Ended |
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2009 |
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2010 |
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Revenues: |
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License |
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$ |
14,116 |
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$ |
15,141 |
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Service |
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34,700 |
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42,059 |
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Total revenues |
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48,816 |
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57,200 |
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Costs of revenues: |
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License (2) |
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566 |
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566 |
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Service (1), (2) |
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19,899 |
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25,716 |
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Total cost of revenues |
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20,465 |
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26,282 |
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Gross margin: |
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License |
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13,550 |
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14,575 |
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Service |
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14,801 |
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16,343 |
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Total gross margin |
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28,351 |
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30,918 |
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Operating expenses: |
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Sales and marketing (1), (2) |
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7,206 |
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8,986 |
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Research and development (1) |
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8,180 |
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9,698 |
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General and administrative (1), (2) |
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7,804 |
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9,184 |
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Total operating expenses |
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23,190 |
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27,868 |
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Income from operations |
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5,161 |
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3,050 |
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Other income: |
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Interest income |
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640 |
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316 |
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Other income (expense), net |
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409 |
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(184 |
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Total other income |
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1,049 |
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132 |
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Income before provision for income taxes |
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6,210 |
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3,182 |
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Provision for income taxes |
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2,132 |
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1,249 |
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Net income |
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$ |
4,078 |
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$ |
1,933 |
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Net income per share applicable to common stockholders: |
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Basic |
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$ |
0.10 |
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$ |
0.05 |
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Diluted |
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$ |
0.09 |
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$ |
0.05 |
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Weighted average number of common shares used in net income per share calculations: |
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Basic |
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42,430 |
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41,085 |
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Diluted |
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43,998 |
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42,764 |
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(1) Amounts include stock-based compensation expense, as follows: |
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Costs of service revenues |
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$ |
476 |
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$ |
636 |
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Sales and marketing |
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415 |
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468 |
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Research and development |
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621 |
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1,036 |
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General and administrative |
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1,057 |
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1,361 |
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(2) Amounts include amortization expense of acquired intangible assets, as follows: |
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Costs of license revenues |
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$ |
155 |
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$ |
237 |
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Cost of service revenues |
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261 |
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447 |
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Sales and marketing |
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320 |
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740 |
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General and administrative |
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25 |
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26 |
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See accompanying notes.
Phase Forward Incorporated
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
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Three
Months Ended |
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2009 |
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2010 |
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Operating activities |
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Net income |
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$ |
4,078 |
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$ |
1,933 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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3,713 |
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5,806 |
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Stock-based compensation expense |
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2,569 |
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3,501 |
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Amortization of leasehold incentive obligation |
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(198 |
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(247 |
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Provision for allowance for doubtful accounts |
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13 |
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12 |
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Deferred income taxes |
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2,444 |
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Amortization of premiums or discounts on investments |
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(3 |
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254 |
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Change in fair value of investments |
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(437 |
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(1,112 |
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Change in fair value of securities settlement agreement |
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185 |
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1,065 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(2,210 |
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11,406 |
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Other assets |
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(1,881 |
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(670 |
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Accounts payable |
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(4,125 |
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(2,254 |
) |
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Accrued expenses |
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(6,715 |
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(8,756 |
) |
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Deferred revenues |
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7,465 |
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12,137 |
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Deferred rent |
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1,135 |
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374 |
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Net cash provided by operating activities |
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6,033 |
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23,449 |
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Investing activities |
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Increase in restricted cash |
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(20 |
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Proceeds from maturities of short-term and long-term investments |
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12,000 |
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29,125 |
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Purchase of short-term and long-term investments |
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(9,536 |
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(10,750 |
) |
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Purchase of property and equipment |
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(5,174 |
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(3,049 |
) |
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Net cash (used in) provided by investing activities |
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(2,710 |
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15,306 |
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Financing activities |
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Proceeds from issuance of common stock |
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342 |
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134 |
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Purchase of treasury stock |
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(25,964 |
) |
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Withholding taxes in connection with vesting of restricted stock awards |
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(459 |
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(727 |
) |
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Net cash used in financing activities |
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(117 |
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(26,557 |
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Effect of exchange rate changes on cash and cash equivalents |
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(547 |
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(770 |
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Net increase in cash and cash equivalents |
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2,659 |
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11,428 |
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Cash and cash equivalents at beginning of period |
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131,550 |
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41,862 |
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Cash and cash equivalents at end of period |
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134,209 |
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53,290 |
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Short-term and long-term investments at end of period |
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43,891 |
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76,449 |
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Total cash, cash equivalents and short-term and long-term investments at end of period |
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$ |
178,100 |
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$ |
129,739 |
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See accompanying notes.
Phase Forward Incorporated
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Phase Forward Incorporated (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of March 31, 2010, the results of its operations for the three months ended March 31, 2009 and 2010 and its cash flows for the three months ended March 31, 2009 and 2010. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2010.
As of March 31, 2010, the Companys significant accounting policies and estimates, which are detailed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, have not changed except for the adoption or application of the accounting pronouncements applicable for subsequent periods as set forth in Note 16.
2. Revenue Recognition
The Company derives revenues from software licenses and services of its Integrated Clinical Research Suite (ICRS) products which can be purchased on a stand-alone basis or bundled together. License revenues are derived principally from the sale of term licenses of its software products and service revenues are derived principally from the Companys delivery of the hosted solutions of its software products, consulting services and customer support including training, for all of the Companys products. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In the first quarter of 2010, the Company adopted the guidance of Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements.
ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a sale arrangement. The selling price for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price if neither VSOE or TPE is available. The amendments in this ASU eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverables selling price. The Company adopted these standards in the first quarter of 2010, effective as of January 1, 2010 and on a prospective basis thereafter. The adoption of this standard did not materially affect the results of operations for three months ended March 31, 2010. See Note 16 for further discussion on the adoption of this standard.
The components of revenue are as follows:
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Three Months Ended |
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2009 |
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2010 |
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License |
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$ |
14,116 |
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$ |
15,141 |
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Application hosting services |
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26,626 |
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33,782 |
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Consulting services |
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4,861 |
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5,207 |
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Customer support |
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3,213 |
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3,070 |
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Total |
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$ |
48,816 |
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$ |
57,200 |
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Customers generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice. License agreements, multiple element arrangements, including license and service agreements and certain application hosting services can generally be terminated by either party for material breach of obligations not corrected within 30 days after notice of the breach.
The Company recognizes revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
The Company generally enters into software term licenses for its software products with its customers for 1 to 5 year periods. These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees annually in advance for each year of the license term. Payment terms are generally net 30 days.
The Companys software license revenues are earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to delivery to the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are for trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.
Customer support includes training services, telephone support and software maintenance. The Company generally bundles customer support with the software license for the entire term of the arrangement. As a result, the Company generally recognizes revenues for all elements, including consulting services, ratably over the term of the software license and support arrangement. The Company allocates the revenues recognized for these arrangements to the different elements based on managements estimate of the relative fair value of each element. For its term-based licenses, the Company allocates to consulting services, the anticipated service effort and value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The value of the Companys consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The remaining value is allocated to license and support services, with 10% of this amount allocated to support services. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. The Company believes this rate is substantive and represents an amount it believes reasonable to be allocated. The Company has allocated the estimated fair value to its multiple element arrangements to provide meaningful disclosures about each of its revenue streams. The costs associated with the consulting and customer support services are expensed as incurred. There are instances in which the Company sells software licenses based on usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenues are generally recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenues are recognized in the period of use. Revenues from certain follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are recognized as the services are performed.
The Company continues to sell additional perpetual licenses for software products in certain situations to existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. For the Clintrial and Empirica Trace products, the Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. For Clinical Development Center products, vendor specific objective evidence of fair value for the customer support has not been established, and therefore, revenue for the entire agreement is recognized ratably over the term of the underlying support agreement. The Company generates customer support and maintenance revenues from its perpetual license customer base. Training revenues are recognized as earned.
Revenues resulting from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Phase Forward IRT and Covance IVRS/IWRS application hosting services also consist of three stages for each clinical trial: the first stage involves application set up, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS products for the first and third stages are provided on a fixed-fee basis based upon the complexity of the trial and
system requirements. Services for the second stage are charged separately as a fixed monthly fee. The Company recognizes revenues from all stages of the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS hosting services ratably over the hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are billed based upon milestones. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Bundled into this revenue element are revenues attributable to the software license used by the customer.
Revenues resulting from hosting services for the Empirica Signal, Empirica Study and WebSDM products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged a monthly fixed fee. Revenues are recognized ratably over the period of the service.
In the event that an application hosting customer cancels its related statement of work, all deferred revenues are recognized. In addition, certain termination related fees may be charged and if so, such fees are recognized in the period of termination.
Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses become probable and can be reasonably estimated. To date, the Company has not experienced any material losses on uncompleted application hosting or consulting contracts.
In the three months ended March 31, 2009 and 2010, no customer accounted for 10% or more of the Companys total revenues for the period.
The Company may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on either a time-and-materials basis or using the proportional performance method. If the Company is not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.
Deferred revenue represents amounts billed or cash received in advance of revenue recognition.
Internal Use Software and Website Development Costs
The Company capitalizes qualifying computer software costs which are incurred during the application development stage, and amortizes them over the softwares estimated useful life. The Company capitalized $206 and $191 during the three months ended March 31, 2009 and 2010, respectively, related to Company-wide financial systems and outside software development costs associated with the Companys hosting operation, of which both had certain portions that became operational in 2009 and 2010. Capitalized amounts include software and direct external implementation costs and are classified as Property and Equipment, net in the accompanying unaudited condensed consolidated balance sheets. The Company-wide financial system is being amortized over five years while the outside software development costs associated with the Companys hosting operation is being amortized over three years. Amortization expense was $9 and $80 during the three months ended March 31, 2009 and 2010, respectively.
Computer Software Development Costs and Research and Development Expenses
The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has evaluated the establishment of technological feasibility of its products and concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short, and consequently, the amounts that could be capitalized are not material to the Companys financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred.
3. Prepaid Sales Commissions, Royalties and Deferred Set Up Costs
Prepaid Sales Commissions. For arrangements where revenues are recognized over the relevant contract period, the Company defers related commissions paid to its direct sales force and amortizes them over the period in which the related revenues are recognized.
Royalty Obligations. For arrangements where revenues are recognized over the relevant contract period, the Company defers related software license royalties paid to third parties, and amortizes them over the period in which the related revenues are
recognized. The Companys royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. The Company has the right to recover the royalties in the event the arrangement is cancelled.
Deferred Set Up Costs. Costs incurred for the trial system design, set up and implementation are deferred until the start of the hosting period and are amortized and recognized ratably over the estimated hosting period. The deferred costs include incremental direct costs with third parties and certain internal direct costs related to the trial and application set up. These costs include salary and benefits associated with direct labor costs incurred during trial set up, as well as third-party subcontract fees and other contract labor costs. In the event that an application hosting customer cancels its related statement of work, all deferred set up costs are expensed.
Prepaid sales commissions, royalty obligations and deferred set up costs are included in other current assets and other assets in the accompanying unaudited condensed consolidated balance sheets. Commissions, royalty obligations and deferred set up costs are amortized to sales and marketing, cost of revenues and cost of services, respectively.
The Company deferred and amortized the following amounts for the three months ended March 31, 2009 and 2010:
|
|
Deferred |
|
Amortized |
|
||||||||
Description |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
||||
Prepaid Sales Commissions |
|
$ |
1,984 |
|
$ |
2,325 |
|
$ |
1,744 |
|
$ |
2,173 |
|
Royalty Obligations |
|
1,089 |
|
535 |
|
661 |
|
367 |
|
||||
Deferred Set Up Costs |
|
1,295 |
|
2,054 |
|
917 |
|
1,292 |
|
||||
Total |
|
$ |
4,368 |
|
$ |
4,914 |
|
$ |
3,322 |
|
$ |
3,832 |
|
4. Warranties and Indemnification
The Companys software license arrangements and hosting services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Companys product documentation under normal use and circumstances. The Companys arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third partys intellectual property rights.
The Company has entered into service level agreements with some of its hosted application customers warranting certain levels of uptime reliability and permitting those customers to receive credits against monthly hosting fees or terminate their agreements in the event that the Company fails to meet those levels.
To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying unaudited condensed consolidated financial statements.
5. Acquisitions
From time to time the Company has expanded its product and service offerings through the acquisition of other businesses or technologies. The most recent transactions include the 2009 acquisitions of Waban Software, Inc. (Waban), Maaguzi LLC (Maaguzi), and the Interactive Voice and Web Response Services business (Covance IVRS/IWRS) of Covance Inc., all of which are further described below.
Covance IVRS/IWRS. In August 2009 the Company acquired the Interactive Voice and Web Response Services business of Covance Inc. (Covance IVRS/IWRS). The aggregate purchase price was $10,000 in cash, of which $5,280 and $5,610 was recorded as goodwill and intangible assets, respectively, with all of the intangible assets consisting of customer relationships. All of the goodwill is expected to be deductible for income tax purposes. While the Company has existing trials running on the Covance IVRS/IWRS system, no new trials or offerings will be sold or implemented.
Maaguzi. In July 2009 the Company acquired all of the outstanding membership interests of Maaguzi LLC (Maaguzi), a privately-held innovative provider of a Web-based product called OutcomeLogix, which is an electronic patient reported outcomes (ePRO) and late phase solution. The acquisition of Maaguzi extends the Companys ICRS and marks the Companys entry into the ePRO and observational studies markets. The aggregate purchase price was $11,000 in cash, of which $6,301and $5,338 was recorded as goodwill and intangible assets, respectively. All of the goodwill is expected to be deductible for income tax purposes.
Waban. In April 2009 the Company acquired all of the outstanding common stock of Waban Software, Inc. (Waban), a privately-held provider of platform solutions for the automation and compliance of clinical data analysis and reporting. Wabans software, which the Company has branded as Clinical Development Center product, provides automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data. The Company acquired the technology of
Waban to allow it to penetrate the market for statistical computing and clinical data repository solutions. The aggregate purchase price was $13,764 in cash, of which $7,850 and $8,905 was recorded as goodwill and intangible assets, respectively. None of the goodwill is expected to be deductible for income tax purposes.
All of the assets acquired and liabilities assumed in the above acquisitions are recognized at their acquisition-date fair values, while transaction costs were expensed as incurred. The difference between the aggregate purchase price and the fair value of assets acquired and liabilities assumed, if any, was allocated to goodwill. Acquired intangible assets were valued using the discounted cash flows and relief-from royalty approaches. If an allocated asset becomes impaired or is abandoned, the carrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period in which the impairment occurs. The acquired intangible assets are subject to review for impairment as indicators of impairment develop and, otherwise, at least annually. The results of each acquisition have been included in the unaudited condensed consolidated financial statements since the respective dates of acquisition.
6. Net Income Per Share
Basic net income per common share for all periods presented was determined by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Weighted average shares outstanding exclude unvested restricted common stock. Diluted net income per share includes the effects of all dilutive, potentially issuable common shares using the treasury stock method.
The calculation of basic and diluted net income per share is as follows:
|
|
Three Months Ended |
|
||||
|
|
2009 |
|
2010 |
|
||
Numerator: |
|
|
|
|
|
||
Net income |
|
$ |
4,078 |
|
$ |
1,933 |
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted-average common shares outstanding |
|
43,022,458 |
|
41,459,557 |
|
||
Less weighted-average unvested restricted common stock awards outstanding |
|
(592,150 |
) |
(374,625 |
) |
||
Basic weighted-average common shares outstanding |
|
42,430,308 |
|
41,084,932 |
|
||
Dilutive effect of common stock options |
|
1,071,713 |
|
917,886 |
|
||
Dilutive effect of unvested restricted common stock awards and units |
|
495,665 |
|
760,963 |
|
||
Diluted weighted-average common shares outstanding |
|
43,997,686 |
|
42,763,782 |
|
||
|
|
|
|
|
|
||
Net income per share applicable to common stockholders: |
|
|
|
|
|
||
Basic |
|
$ |
0.10 |
|
$ |
0.05 |
|
|
|
|
|
|
|
||
Diluted |
|
$ |
0.09 |
|
$ |
0.05 |
|
Diluted weighted average common shares outstanding do not include options, awards and units outstanding to purchase 350,011 and 629,678 common equivalent shares for the three months ended March 31, 2009 and 2010, respectively, as their effect would have been anti-dilutive.
7. Cash, Cash Equivalents, Short-term and Long-term Investments
Securities that the Company has the intent and ability to hold to maturity are reported at amortized cost and are classified as held-to-maturity. Securities for which it is not the Companys intent to hold to maturity are classified as either available-for-sale securities or trading securities. Available-for-sale securities are reported at fair value, with temporary unrealized gains/(losses) excluded from earnings and reported as a separate component of stockholders equity and other than temporary unrealized losses included in earnings. Trading securities are reported at fair value, with unrealized gains/(losses) included in earnings. The Companys cash equivalents principally consist of money market funds and corporate bonds with maturities of 90 days or less at the date of purchase. Short-term and long-term investments primarily consist of investment-grade corporate bonds, U.S. government agency notes and auction rate securities (ARS) with original maturities of greater than 90 days.
During the three-months ended March 31, 2010, the Company elected to sell certain investments which were classified as held-to-maturity. As a result, the Company determined that all investments should now be classified as available-for-sale, and accordingly, the Company recorded unrealized gains of $286 through other comprehensive income in the period ended March 31, 2010 to properly record the available-for-sale securities at fair value.
Cash, cash equivalents, short-term and long-term investments as of December 31, 2009 and March 31, 2010 consist of the following:
|
|
December 31, 2009 |
|
|||||||||
|
|
Contracted |
|
Amortized |
|
Fair Market |
|
Balance Per |
|
|||
Description |
|
Maturity |
|
Cost |
|
Value |
|
Balance Sheet |
|
|||
Cash and cash equivalents |
|
Demand |
|
$ |
41,862 |
|
$ |
41,862 |
|
$ |
41,862 |
|
|
|
|
|
|
|
|
|
|
|
|||
U.S. agency notes |
|
138 days |
|
$ |
22,348 |
|
$ |
22,413 |
|
$ |
22,348 |
|
Corporate bonds |
|
177 days |
|
25,523 |
|
25,678 |
|
25,523 |
|
|||
Auction rate securities |
|
181 days |
|
23,800 |
|
19,370 |
|
19,370 |
|
|||
Total short-term investments |
|
|
|
$ |
71,671 |
|
$ |
67,461 |
|
$ |
67,241 |
|
|
|
|
|
|
|
|
|
|
|
|||
U.S. agency notes |
|
499 days |
|
$ |
13,742 |
|
$ |
14,577 |
|
$ |
13,742 |
|
Corporate bonds |
|
460 days |
|
12,697 |
|
12,898 |
|
12,697 |
|
|||
Total long-term investments |
|
|
|
$ |
26,439 |
|
$ |
27,475 |
|
$ |
26,439 |
|
|
|
March 31, 2010 |
|
|||||||||
|
|
Contracted |
|
Amortized |
|
Fair Market |
|
Balance Per |
|
|||
Description |
|
Maturity |
|
Cost |
|
Value |
|
Balance Sheet |
|
|||
Cash and cash equivalents |
|
Demand |
|
$ |
53,290 |
|
$ |
53,290 |
|
$ |
53,290 |
|
|
|
|
|
|
|
|
|
|
|
|||
U.S. agency notes |
|
216 days |
|
$ |
27,694 |
|
$ |
27,724 |
|
$ |
27,724 |
|
Corporate bonds |
|
239 days |
|
30,236 |
|
30,493 |
|
30,493 |
|
|||
Auction rate securities |
|
90 days |
|
21,550 |
|
18,232 |
|
18,232 |
|
|||
Total short-term investments |
|
|
|
$ |
79,480 |
|
$ |
76,449 |
|
$ |
76,449 |
|
As of March 31, 2010 all securities, with the exception of ARS, are classified as available-for-sale securities. In prior periods and up through the execution of the signed settlement agreement with UBS AG (UBS) in November 2008 as further discussed below, the ARS were classified as available-for-sale because it was the Companys intent not to hold them to maturity. Upon the execution of the settlement agreement with UBS, the Company elected to make a one-time transfer of the ARS from available-for-sale securities to trading securities. Accordingly, on a prospective basis, all unrealized gains/(losses) for these trading securities have been included in earnings. Interest and dividends on all of the Companys securities are included in interest income in the accompanying unaudited condensed consolidated statement of income.
As of December 31, 2009 and March 31, 2010, the Company held ARS totaling $23,800 and $21,550, respectively, at par value, which are classified as short-term investments in the accompanying unaudited condensed consolidated balance sheets, and which are recorded at fair value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that the Company owns are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all have credit ratings of AAA (or equivalent) from a recognized rating agency. Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, the Companys ARS have experienced multiple failed auctions. While the Company continues to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.
In November 2008, the Company accepted an offer from and entered into an agreement (the Agreement) with UBS with respect to all of the Companys ARS held at that time. As a UBS client who holds ARS, the Company will receive certain rights, which will
entitle the Company to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In accepting the Agreement, the Company granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of the Agreement and released UBS from any claims relating to the marketing and sale of ARS. UBS obligations under the Agreement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Agreement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Agreement. If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, the Company may incur further losses on the carrying value of the ARS.
The Company performed a fair value calculation of these ARS as of March 31, 2010. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in the Company continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for the securities.
Based upon the valuation performed, the Company concluded that the fair value of these ARS at December 31, 2009 was $19,370, a decline of $4,430 from par value. As of March 31, 2010, the Company concluded that the fair value of these ARS was $18,232, and therefore, recorded the change in fair value of $1,112 in the accompanying unaudited condensed consolidated statement of income for the three months ended March 31, 2010. During the three months ended March 31, 2010, $2,250 of the Companys ARS were called by the respective issuers at par value. As of March 31, 2010, it remained the Companys intent to sell the ARS on June 30, 2010 in accordance with its rights under the Agreement. Accordingly, the ARS are classified as short-term investments in the accompanying unaudited condensed consolidated balance sheets.
Fair value of the Companys put option was determined using a discounted cash flow method, which considered the following factors: term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, the Company concluded that the fair value of the put option as of December 31, 2009 and March 31, 2010 was $4,345 and $3,280, respectively. Accordingly, the decrease in fair value of $1,065 for the three months ended March 31, 2010 was recorded in the Companys accompanying unaudited condensed consolidated statements of income. As of March 31, 2010, it remained the Companys intent to sell the ARS on June 30, 2010 in accordance with its rights under the settlement agreement and, accordingly, the Company classifies the fair value of the securities settlement agreement as current assets in the accompanying unaudited condensed consolidated balance sheets.
Refer to Note 15 for further discussion on Fair Value Measurements.
8. Goodwill and Intangible Assets
Intangible assets that have indefinite lives are not amortized while intangible assets that have finite lives are amortized over their useful lives. Both goodwill and intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable.
The goodwill resulting from acquisitions is reviewed for impairment on an annual basis. Consistent with prior years, the Company will conduct its annual impairment test of goodwill during the fourth quarter of 2010. For the three months ended March 31, 2010, there have been no changes to the goodwill balance and there have been no impairment indicators that would lead the Company to write down an asset.
Intangible assets consist of the following:
|
|
|
|
As of December 31, 2009 |
|
As of March 31, 2010 |
|
||||||||
Description |
|
Estimated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
||||
Developed technology and know-how |
|
5-15 years |
|
$ |
21,447 |
|
$ |
3,604 |
|
$ |
21,447 |
|
$ |
4,288 |
|
Customer relationships |
|
5-18 years |
|
22,190 |
|
2,574 |
|
22,190 |
|
3,087 |
|
||||
Non-compete agreements |
|
2-3 years |
|
610 |
|
438 |
|
610 |
|
464 |
|
||||
Trade name |
|
1-8 years |
|
3,140 |
|
396 |
|
3,140 |
|
563 |
|
||||
In process research and development |
|
8 years |
|
886 |
|
|
|
886 |
|
|
|
||||
Customer backlog |
|
3 years |
|
720 |
|
320 |
|
720 |
|
380 |
|
||||
Total |
|
|
|
$ |
48,993 |
|
$ |
7,332 |
|
$ |
48,993 |
|
$ |
8,782 |
|
Amortization expense related to intangible assets for the three months ended March 31, 2009 and 2010 was $761 and $1,450, respectively.
The estimated remaining amortization expense for each of the five succeeding years is as follows:
Year ended December 31, |
|
Amount |
|
|
2010 (nine months ended December 31, 2010) |
|
$ |
4,158 |
|
2011 |
|
4,987 |
|
|
2012 |
|
4,914 |
|
|
2013 |
|
4,543 |
|
|
2014 |
|
4,039 |
|
|
2015 and thereafter |
|
17,570 |
|
|
Total |
|
$ |
40,211 |
|
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
As of |
|
As of |
|
||
|
|
2009 |
|
2010 |
|
||
Accrued payroll and related benefits |
|
$ |
17,278 |
|
$ |
10,244 |
|
Accrued royalties |
|
1,867 |
|
748 |
|
||
Accrued outside contractors |
|
2,013 |
|
1,621 |
|
||
Leasehold incentive obligation (1) |
|
956 |
|
1,002 |
|
||
Accrued other expenses |
|
5,892 |
|
5,521 |
|
||
|
|
|
|
|
|
||
Total |
|
$ |
28,006 |
|
$ |
19,136 |
|
(1) In conjunction with the February 2008 lease agreement (see Note 10) the Company was reimbursed for leasehold improvements totaling $8,104. In conjunction with the August 2009 lease agreement (see Note 10), the Company was reimbursed for leasehold improvements totaling $2,163, of which $1,640 was received in 2009 and $523 received in 2010. Both leasehold improvements are recognized in property and equipment in the accompanying condensed consolidated balance sheets, with the corresponding reimbursement recognized as accrued expenses and other current liabilities and other long-term liabilities on the unaudited condensed consolidated balance sheets. The amount of the incentive is being amortized on a straight-line basis over the lease term as a reduction of rental expense and commenced at the beginning of occupancy. The leasehold improvements in property and equipment will be amortized over the shorter of the lease term or the estimated useful life of the asset. The Company amortized the leasehold incentive obligation as a reduction to rent expense of $198 and $247 in the three months ended March 31, 2009 and 2010, respectively.
10. Commitments, Contingencies and Restricted Cash
From time to time and in the ordinary course of business, the Company is subject to various claims, charges and litigation. Intellectual property disputes often have a risk of injunctive relief which, if imposed against the Company, could materially and adversely affect its financial condition or results of operations. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to the Companys business and have demanded and may in the future demand that the Company license their technology. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.
On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against the Company, the members of the Companys board of directors, Oracle Corporation, and Pine Acquisition Corporation. Refer to Note 17 for further discussion.
On August 17, 2009, the Company entered into a lease (IRT Lease) with KBS Five Tower Bridge, LLC to secure office space for the Companys Phase Forward IRT business operations at 300 Barr Harbor Drive, West Conshohocken, Pennsylvania. The commencement date for occupancy under the IRT Lease was September 2009 with rent payments commencing in June 2010. The IRT Lease provides for the rental of 44,907 square feet of space and has an initial term of 10 years and one month. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five-year options. The annual rent under the IRT Lease for the first year is $1,325, or approximately $110 per month, with annual escalations in rent for each subsequent year in the amount of $22, or fifty cents per rentable square foot. The total base rent payable in the initial term is $14,258.
On February 13, 2008, the Company entered into a lease (Headquarters Lease) with BP Fourth Avenue, LLC (the Landlord) to secure office space for the Companys current corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the Headquarters Lease was December 2008. The lease for the Companys previous corporate headquarters at 880 Winter Street in Waltham, Massachusetts expired in February 2009. The Headquarters Lease provides for the rental of 165,129 square feet of space and has an initial term of 10 years and three months. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The Company was not required to pay any rent for the first three months of the initial Headquarters Lease term. After the initial three months, the annual rent under the Headquarters Lease for years one through five is $6,600, or approximately $548 per month. For years six through ten, the annual rent will be $7,200, or approximately $603 per month. The total base rent payable in the initial term is $69,100. In connection with the signing of the Headquarters Lease, the Company has deposited with the Landlord an unconditional, irrevocable letter of credit in Landlords favor in the amount of $962, secured by a certificate of deposit. The certificate of deposit has been classified as Restricted cash in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2009 and March 31, 2010.
11. Stockholders Equity and Stock-Based Compensation
Stock-based Compensation Expense
For stock options issued under the Companys 2004 Stock Option and Incentive Plan (the 2004 Plan), the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For restricted stock awards and units issued under the Companys 2004 Plan, the fair value of each grant is calculated based on the Companys stock price on the date of grant and an estimated forfeiture rate when calculating stock-based compensation expense for the period. During the three months ended March 31, 2009 and 2010, the Company recorded $2,569 and $3,501 of aggregate stock-based compensation expense, respectively. As of March 31, 2010, there was $27,675 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted average period of 2.33 years.
The Company applied forfeiture rates derived from an analysis of its historical data in determining the expense recorded in the Companys unaudited condensed consolidated statements of income as follows:
|
|
Three Months Ended |
|
||
|
|
2009 |
|
2010 |
|
Restricted stock units and awards |
|
5.8 |
% |
5.8 |
% |
Service-based stock options |
|
9.0 |
% |
9.0 |
% |
Milestone options |
|
12.0 |
% |
12.0 |
% |
Common Stock
In the three months ended March 31, 2010, the Company issued 30,899 shares of common stock in connection with the exercise of stock options resulting in proceeds of $132. In the three months ended March 31, 2010, the Company released 190,195 shares of
common stock in connection with the vesting of restricted stock awards and units and retired 65,755 of these shares to cover withholding taxes in the amount of $727.
Stock Option Activity
A summary of stock option activity under the Phase Forward Incorporated 1997 Stock Option Plan, the Phase Forward Incorporated 2004 Stock Option and Incentive Plan and the 2003 Non-Employee Director Stock Option Plan as of March 31, 2010, and changes during the three months ended March 31, 2010, is as follows:
|
|
Number of |
|
Weighted |
|
Weighted |
|
Aggregate Intrinsic |
|
||
Outstanding as of December 31, 2009 |
|
1,816,004 |
|
$ |
4.70 |
|
3.69 |
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
||
Exercised |
|
(30,899 |
) |
4.27 |
|
|
|
$ |
275 |
|
|
Canceled |
|
(3,600 |
) |
5.00 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Outstanding as of March 31, 2010 |
|
1,781,505 |
|
$ |
4.71 |
|
3.49 |
|
$ |
14,932 |
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable as of March 31, 2010 |
|
1,701,755 |
|
$ |
4.63 |
|
3.42 |
|
$ |
14,390 |
|
|
|
|
|
|
|
|
|
|
|
||
Vested or expected to vest as of March 31, 2010 (1) |
|
1,776,107 |
|
$ |
4.70 |
|
3.48 |
|
$ |
14,895 |
|
(1) The vested or expected to vest options at March 31, 2010 include both the vested options and the number of options expected to vest calculated after applying an estimated forfeiture rate to the unvested options.
(2) The aggregate intrinsic value for shares outstanding, exercisable and vested is calculated based on the positive difference between the fair value per share of the Companys common stock on March 31, 2010 of $13.09, or the date of exercise, as applicable, and the exercise price of the underlying options.
Restricted Stock Awards and Unit Activity
A summary of activity related to restricted common stock awards and unit awards as of March 31, 2010 and changes during the three months ended March 31, 2010, is as follows:
|
|
Number
of |
|
Market
Price |
|
Weighted |
|
Weighted |
|
Aggregate Intrinsic Value (2) |
|
|||
Unvested at December 31, 2009 |
|
2,931,363 |
|
$ |
10.85 - 23.20 |
|
$ |
15.21 |
|
|
|
|
|
|
Granted |
|
165,025 |
|
11.93 - 15.34 |
|
|
|
|
|
|
|
|||
Vested |
|
(190,195 |
) |
13.23 - 23.20 |
|
|
|
|
|
|
|
|||
Forfeited |
|
(26,268 |
) |
10.85 - 23.20 |
|
|
|
|
|
|
|
|||
Unvested at March 31, 2010 |
|
2,879,925 |
|
$ |
10.85 - 23.20 |
|
$ |
14.92 |
|
2.46 |
|
$ |
37,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Expected to be free of restrictions (1) |
|
2,284,312 |
|
$ |
10.85 - 23.20 |
|
$ |
14.93 |
|
2.46 |
|
$ |
29,902 |
|
(1) The expected to be free of restrictions at March 31, 2010 was calculated by applying an estimated forfeiture rate to the unvested shares.
(2) The aggregate intrinsic value is calculated based on the fair value per share of the Companys common stock on March 31, 2010 of $13.09.
Stock Repurchase Program
On November 3, 2009, the Companys Board of Directors authorized the repurchase of up to $40,000 of its common stock, par value $0.01 per share, through a share repurchase program. On February 12, 2010, the Companys Board of Directors increased the amount available under the share repurchase program by an additional $25,000. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company. For the three months ended March 31, 2010 1,934,707 shares of the Companys common stock had been purchased as part of this repurchase program at an average price of $13.42 per share
12. Comprehensive Income
The Companys other comprehensive income relates to foreign currency translation adjustments and unrealized gains and losses on marketable securities. Accumulated other comprehensive income is presented separately on the balance sheet as required.
Comprehensive income consisted of the following:
|
|
Three Months Ended |
|
||||
|
|
2009 |
|
2010 |
|
||
Net income |
|
$ |
4,078 |
|
$ |
1,933 |
|
Unrealized gain/(loss) on marketable securities |
|
|
|
286 |
|
||
Cumulative Translation adjustment |
|
373 |
|
(712 |
) |
||
Comprehensive income |
|
$ |
4,451 |
|
$ |
1,507 |
|
13. Forward Foreign Exchange Contracts and Foreign Currency Translation
The Company enters into transactions in currencies other than the U.S. dollar and holds cash in foreign currencies which expose the Company to transaction gains and losses as foreign currency exchange rates fluctuate against the U.S. dollar. The Company from time to time enters into forward foreign exchange contracts to hedge the foreign currency exposure of non-U.S. dollar denominated third-party and intercompany receivables and cash balances. The contracts, which relate to the British pound, euro, and the Japanese yen, generally have terms of one month. The Company settles forward foreign exchange contracts in cash. These hedges are deemed fair value hedges and have not been designated for hedge accounting. The gains or losses on the forward foreign exchange contracts along with the associated losses and gains on the revaluation and settlement of the short-term intercompany balances, accounts receivable and cash balances are recorded in current operations in other income.
The following table summarizes the outstanding forward foreign exchange contracts held by the Company as of December 31, 2009 and March 31, 2010:
|
|
|
|
As of December 31, 2009 |
|
As of March 31, 2010 |
|
||||||
Currency |
|
Hedge Type |
|
Local |
|
Approximate |
|
Local |
|
Approximate |
|
||
British pound |
|
Sale |
|
1,000 |
|
$ |
1,612 |
|
560 |
|
$ |
847 |
|
Euro |
|
Sale |
|
3,200 |
|
4,571 |
|
3,200 |
|
4,339 |
|
||
|
|
|
|
|
|
$ |
6,183 |
|
|
|
$ |
5,186 |
|
The financial statements of the Companys foreign subsidiaries are translated into U.S. dollars, which is the Companys reporting currency. The functional currency of the Companys subsidiaries in Australia, Belgium, France, India, Japan, Romania and the United Kingdom are the local currencies of those countries. Accordingly, the assets and liabilities of the Companys foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts are translated using an average rate of exchange during the period. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and cash accounts and accounts receivable denominated in non-functional currencies.
Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders equity. Realized and unrealized foreign currency gains and losses, net of hedging, are accounted for in other income. The Company recorded foreign currency gains/(losses) of $147 and $(236) in the three months ended March 31, 2009 and 2010. As of March 31, 2009 and 2010, the Company recorded $(248) and $31, respectively, of foreign exchange gains/(losses) in other income (expense) as a result of outstanding forward foreign exchange contracts.
14. Income Taxes
The Companys effective tax rates for the three months ended March 31, 2009 and 2010 were 34% and 39%, respectively. The Companys effective tax rate for the three months ended March 31, 2010 is higher than the effective tax rate for the three months ended March 31, 2009 principally due to the benefit derived in the prior year from the federal research and development tax credit. The federal research and development tax credit expired effective December 31, 2009 and, as such, the Company has not forecasted a current tax benefit for this item in 2010.
As of March 31, 2010, the Company had a liability of $1,535 for net unrecognized tax benefits, all of which would favorably impact the Companys effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of March 31, 2010, the Company had approximately $12 and $7, respectively, of accrued interest and penalties related to unrecognized tax benefits. The Company anticipates a reduction of approximately $81 to the amount of unrecognized tax benefits over the next twelve months associated with lapsing statutes of limitations. The unrecognized tax liability of $1,535 and accrued interest and penalties of $19 are classified as other long-term liabilities on the unaudited condensed consolidated balance sheet.
15. Fair Value Measurements
Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
· Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and
· Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.
The valuation techniques that may be used to measure fair value are as follows:
Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)
The following table sets forth the Companys financial instruments carried at fair value and using the lowest level of input as of March 31, 2010:
|
|
Quoted Prices |
|
Significant Other |
|
Significant |
|
|
|
||||
|
|
in Active Markets |
|
Observable |
|
Unobservable |
|
|
|
||||
|
|
for Identical Items |
|
Inputs |
|
Inputs |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
53,290 |
|
$ |
|
|
$ |
|
|
$ |
53,290 |
|
Restricted cash |
|
982 |
|
|
|
|
|
982 |
|
||||
Total cash equivalents and restricted cash |
|
$ |
54,272 |
|
$ |
|
|
$ |
|
|
$ |
54,272 |
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. agency notes (2) |
|
$ |
|
|
$ |
27,724 |
|
$ |
|
|
$ |
27,724 |
|
Corporate bonds (2) |
|
|
|
30,493 |
|
|
|
30,493 |
|
||||
Securities settlement agreement (1) |
|
|
|
|
|
3,280 |
|
3,280 |
|
||||
Auction rate securities (1) |
|
|
|
|
|
18,232 |
|
18,232 |
|
||||
Total short-term investments |
|
$ |
|
|
$ |
58,217 |
|
$ |
21,512 |
|
$ |
79,729 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Assets |
|
$ |
54,272 |
|
$ |
58,217 |
|
$ |
21,512 |
|
$ |
134,001 |
|
(1) The Companys investments in ARS and the securities settlement agreement with UBS are classified within Level 3 because there are currently no active markets for ARS and the Company is unable to obtain independent valuations from market sources. Therefore, the ARS were primarily valued based on an income approach using an estimate of future cash flows. For additional information regarding ARS, see Note 7.
(2) Fair value for Level 2 assets was determined using quoted market prices for similar assets. For the three months ended March 31, 2010 the Companys Level 2 transaction activity included $10,750 of purchases, $2,000 of sales, $16,875 of maturities and $8,000 of settlements.
The following table sets forth a summary of changes in the fair value of the Companys Level 3 financial assets for the three months ended March 31, 2010:
|
|
Level 3 Financial |
|
|
|
|
Assets |
|
|
Balance, beginning of period |
|
$ |
23,715 |
|
Transfers in (out) of Level 3 |
|
|
|
|
Purchase |
|
|
|
|
Sales |
|
|
|
|
Issuance |
|
|
|
|
Settlement |
|
(2,250 |
) |
|
Realized gains/(losses) |
|
|
|
|
Unrealized gains/(losses) on securities held at period end |
|
47 |
|
|
Balance, end of period |
|
$ |
21,512 |
|
The Company has also adopted the provisions of FASB ASC No. 825, Financial Instruments, in the first quarter of 2008 which allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the year-ended December 31, 2009. To date, the Company has only elected the fair value option for the put option related to the Companys ARS that was recorded in conjunction with a settlement agreement with UBS as more fully described in Note 7.
16. Recently Issued Accounting Pronouncements
On January 1, 2010, the Company adopted the guidance of ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the FASB Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendors multiple-deliverable revenue arrangements. The impact of this standard was not material to the Companys reported results of operations for the three months ended March 31, 2010.
On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements. The ASU requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by FASB ASC 820, Fair Value Measurements. During the three months ended March 31, 2010 the Company had no movements among Levels 1 and 2 of the three-tier fair value hierarchy. Entities will also need to provide a reconciliation of purchases, sales, issuance, and settlements of anything valued with a Level 3 method, which is used to price the hardest to value instruments. The new disclosures and clarifications of existing disclosures were adopted on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Companys consolidated financial position and results of operation. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company elected to adopt this portion of ASU No. 2010-06 on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Companys consolidated financial position and results of operation.
17. Subsequent Event
Merger Agreement with Oracle (Non-recognized subsequent event)
On April 15, 2010, the Company, Oracle Corporation, a Delaware corporation (Oracle) and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the Merger) with the Company surviving as a wholly-owned subsidiary of Oracle. A description of the Merger Agreement is contained in the Companys Current Report on Form 8-K filed with the SEC on April 16, 2010, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.
Shareholder Litigation (Non-recognized subsequent event)
On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against the Company, the members of the Companys board of directors, Oracle Corporation, and Pine Acquisition Corporation. The action, brought by plaintiffs who are purported stockholders of the Company, individually and on behalf of a putative class of stockholders, alleges that the board breached fiduciary duties, and that the Company and Oracle aided and abetted the purported breaches, in connection with the proposed Merger. The complaint seeks equitable relief, including, among other things, to enjoin consummation of the proposed Merger, rescission of the Merger Agreement and an award of all costs of the action, including reasonable attorneys fees. The Company denies the allegations in the complaint, and intends to vigorously defend the lawsuit. However, there can be no assurance that the Company or the other defendants will be successful in such defense.
Item 2. Managements 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 unaudited condensed consolidated financial statements and related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009, which has been filed with the Securities and Exchange Commission (SEC).
Overview
Phase Forward Incorporated is a provider of an Integrated Clinical Research Suite, or ICRS, of enterprise-level software products, services and hosted solutions for use in our customers global clinical trial and drug safety monitoring activities. Our customers include pharmaceutical, biotechnology and medical device companies, as well as academic institutions, governmental regulatory agencies, contract research organizations, or CROs, and other entities engaged in clinical trial and drug safety monitoring activities. By automating essential elements of the clinical trial and drug safety monitoring processes, we believe our products allow our customers to accelerate the market introduction of new medical therapies and corresponding revenues, reduce overall research and development expenditures, enhance existing data quality control efforts, increase drug safety compliance and reduce clinical and economic risk.
Subsequent Event
On April 15, 2010, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Oracle Corporation, a Delaware corporation (Oracle) and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (Merger Sub), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with us (the Merger) with the Company surviving as a wholly-owned subsidiary of Oracle. A description of the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on April 16, 2010, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.
On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against us, our board of directors, Oracle, and Pine Acquisition Corporation. The action, brought by plaintiffs who are purported stockholders of our Company, individually and on behalf of a putative class of stockholders, alleges that the board breached fiduciary duties, and that Oracle and Phase Forward aided and abetted the purported breaches, in connection with the proposed Merger. The complaint seeks equitable relief, including, among other things, to enjoin consummation of the proposed Merger, rescission of the Merger Agreement and an award of all costs of the action, including reasonable attorneys fees. We deny the allegations in the complaint, and intend to vigorously defend the lawsuit. However, there can be no assurance that we, or the other defendants, will be successful in such defense.
Sources of Revenues
We derive our revenues from software licenses and services of our ICRS products, which can be purchased on a stand-alone basis or bundled together. Our product line is comprised of four general categories that include the following software products:
· Electronic Data Capture (EDC)
· InForm, our Internet-based electronic data capture solution for collection and transmission of patient information in clinical trials;
· LabPas, our system for Phase I clinic automation; and
· OutcomeLogix, our electronic patient reported outcomes, or ePRO, and late phase solution for data capture which supports data entry via web interface and/or mobile interface for handheld devices, which we acquired as a result of the acquisition of Maaguzi, LLC in July 2009.
· Clinical Data Management
· Clintrial, our clinical data management solution;
· WebSDM, our system for validating and reviewing clinical trial data represented in formats meeting industry standards, such as those established by the Clinical Data Interchange Standards Consortium, or CDISC; and
· Clinical Development Center, which includes our clinical data repository product for storing and managing clinical trials data and our statistical control environment, which we acquired as a result of the acquisition of Waban Software, Inc. in April 2009.
· Drug Safety
· Empirica Trace, our adverse event management solution for monitoring drug safety and reporting adverse events that occur during and after conclusion of the clinical trial process;
· Empirica Signal, our data mining and signal detection solution for post-marketing data; and
· Empirica Study (formerly known as CTSD), our signal detection solution for data from clinical trials.
· Interactive Response Technology (IRT)
· Phase Forward IRT (formerly known as Clarix), our Web-integrated interactive response technology; and
· Covance IVRS/IWRS, a legacy phone-integrated interactive response technology, which we acquired from Covance, Inc. in August 2009.
We generally offer our software products under term enterprise licenses or as a hosted application solution delivered through a standard Web-browser. The following table details these offerings:
|
|
Available As: |
|
||
Product |
|
Term |
|
Hosted |
|
Electronic Data Capture |
|
|
|
|
|
InForm |
|
Yes |
|
Yes |
|
LabPas |
|
Yes |
|
Yes |
|
OutcomeLogix |
|
No |
|
Yes |
|
Clinical Data Management |
|
|
|
|
|
Clintrial |
|
Yes |
|
No |
|
WebSDM |
|
Yes |
|
Yes |
|
Clinical Development Center |
|
Yes |
|
Yes |
|
Drug Safety |
|
|
|
|
|
Empirica Trace |
|
Yes |
|
Yes |
|
Empirica Signal |
|
Yes |
|
Yes |
|
Empirica Study |
|
Yes |
|
Yes |
|
Interactive Response Technology |
|
|
|
|
|
Phase Forward IRT |
|
No |
|
Yes |
|
Covance IVRS/IWRS (1) |
|
No |
|
Yes |
|
(1) While we have existing trials running on the Covance IVRS/IWRS system, we do not intend to sell this offering or implement any new trials for use on this system.
In the three months ended March 31, 2009 and 2010, no customer accounted for 10% or more of our total revenues for the period. Our top 20 customers accounted for approximately 64% and 58% of our total revenues, net of reimbursable out-of-pocket expenses, in the three months ended March 31, 2009 and 2010, respectively.
Cost of Revenues and Operating Expenses
We allocate overhead expenses such as rent and occupancy charges and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in cost of service revenues and in the sales and marketing, research and development, and general and administrative expense categories.
Costs of Revenues. Costs of license revenues consist primarily of the amortization of royalties paid for certain modules within our Clintrial software product as well as our InForm software product. In addition, costs of revenues include expense for the amortization of acquired technologies associated with acquisitions. The costs of license revenues vary based upon the mix of revenues from software licenses for our products. We operate our service organization on a global basis as one distinct unit, and do not segment costs for our various service revenue elements. These services include performing application hosting, consulting and customer support services. Costs for these services consist primarily of employee-related costs associated with these services, amortization of the deferred clinical trial set up costs, allocated overhead, outside contractors, royalties associated with providing customer support for use with the Clintrial and InForm software products and reimbursable out-of-pocket expenses. Costs of services also include hosting costs that primarily consist of hosting facility fees and server depreciation and amortization of acquired technologies associated with the acquisition of Clarix and Maaguzi.
The costs of service revenues vary based upon the number of employees in the service organization, the type of work performed, and royalties associated with revenues derived from providing customer support, as well as costs associated with the flexible use of outside contractors to support internal resources. We supplement the trial design and set up activity for our InForm, Phase Forward IRT and OutcomeLogix application hosting services through the use of outside contractors. This allows us to utilize outside contractors in those periods where trial design and set up activity is highest while reducing the use of outside contractors in those periods where trial activity lessens, allowing for a more flexible delivery model. The percentage of the services workforce represented by outside contractors varies from period to period depending on the volume of specific support required. The costs of service revenues is
significantly higher as a percentage of revenues as compared to our costs of license revenues primarily due to the employee-related and outside contractor expenses associated with providing services.
Gross Margin. Our gross margin on license revenues varies based on the mix of royalty-bearing and non-royalty-bearing license revenues and the amount of amortization of acquired technologies. Our gross margin on service revenues varies primarily due to variations in the utilization levels of the professional service team and the timing of expense and revenue recognition under our service arrangements. In situations where the service revenues are recognized ratably over the software license term, our costs associated with delivery of the services are recognized as the services are performed, which is typically during the first 6 to 12 months of the contract period. Accordingly, our gross margin on service revenues will vary significantly over the life of a contract due to the timing, amount and type of service required in delivering certain projects. In addition, consolidated gross margin will vary depending upon the mix of license and service revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses, including travel, marketing programs which include product marketing expenses such as trade shows, workshops and seminars, corporate communications, other brand building and advertising, allocated overhead and the amortization of commissions. In addition, sales and marketing include expense for the amortization of intangible assets associated with our acquisitions. We expect that sales and marketing expenses will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available, but may fluctuate quarter over quarter due to the timing of marketing programs.
Research and Development. Research and development expenses consist primarily of employee-related expenses, allocated overhead and outside contractors. We focus our research and development efforts on increasing the functionality, performance and integration of our software products. We expect that in the future, research and development expenses will increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offering.
General and Administrative. General and administrative expenses consist primarily of employee-related expenses, professional fees, primarily consisting of expenses for accounting, compliance with the Sarbanes-Oxley Act of 2002, and legal services, including litigation, information technology and other corporate expenses and allocated overhead. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.
Stock-Based Compensation Expenses. Our cost of service revenues, sales and marketing, research and development, and general and administrative expenses include stock-based compensation expense. Stock-based compensation expense is the fair value of outstanding stock options and restricted stock awards and units, which are recognized over the respective stock option and award or unit service periods.
Foreign Currency Translation
With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenues, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, Indian rupee, Japanese yen and Romanian leu. In the three months ended March 31, 2009 and 2010, approximately 38% and 37%, respectively, of our revenues were generated in locations outside the United States. The majority of these revenues are in currencies other than the U.S. dollar, as are many of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses generally increase in value when translated into U.S. dollars.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions with our audit committee, including those related to revenue recognition, deferred set up costs, commissions and royalties, accounts receivable reserves, stock-based compensation expense, long-lived assets, intangibles assets and goodwill, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There have been no material changes to these estimates for the periods presented in this Quarterly Report on Form 10-Q. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 and Note 2 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, the following condensed accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition. We derive revenues from software licenses and services of our ICRS products which can be purchased on a stand-alone basis or bundled together. License revenues are derived principally from the sale of term licenses of our software products and service revenues are derived principally from the delivery of the hosted solutions of our software products, consulting services and customer support including training, for all of our products. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In the first quarter of 2010, we adopted the guidance of Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which was ratified by the Financial Accounting Standards Board (FASB) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements. The adoption of this standard did not materially affect the results of operations for three months ended March 31, 2010.
Customers generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice. License agreements, multiple element arrangements, including license and services agreements and certain application hosting services can generally be terminated by either party for material breach of obligations not corrected within 30 days after notice of the breach.
We recognize revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
We generally enter into software term licenses for our products with our customers for 1- to 5-year periods. These arrangements typically include multiple elements: software license, consulting services and customer support. We bill our customers in accordance with the terms of the underlying contract. Generally, we bill license fees annually in advance for each year of the license term. Our payment terms are generally net 30 days.
Our software license revenues are earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to delivery to the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are for trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.
Customer support includes training services, telephone support and software maintenance. We generally bundle customer support with the software license for the entire term of the arrangement. As a result, we generally recognize revenues for all elements, including consulting services, ratably over the term of the software license and support arrangement. We allocate the revenues recognized for these arrangements to the different elements based on managements estimate of the relative fair value of each element. For our term-based licenses, we allocate to consulting services the anticipated service effort and value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The value of our consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The remaining value is allocated to license and support services, with 10% of this amount allocated to support services. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. We believe this rate is substantive and represents a reasonable basis of allocation. We have allocated the estimated fair value to our multiple element arrangements to provide meaningful disclosures about each of our revenue streams. The costs associated with the consulting and customer support services are expensed as incurred. There are instances in which we sell software licenses based on usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenues are generally recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenues are recognized in the period of use. Revenues from certain follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are recognized as the services are performed.
We continue to sell additional perpetual licenses for the Clintrial, Empirica Trace and Clinical Development Center software products in certain situations to our existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. For our Clintrial and Empirica Trace products we have
established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. For our Clinical Development Center products vendor specific objective evidence of fair value for the customer support has not been established, and therefore, revenue for the entire agreement is recognized ratably over the term of the underlying support agreement. We continue to generate customer support and maintenance revenues from our perpetual license customer base. Training revenues are recognized as earned.
Revenues resulting from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Phase Forward IRT and Covance IVRS/IWRS application hosting services also consist of three stages for each clinical trial: the first stage involves application set up, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS for the first and third stages are provided on a fixed fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. We recognize revenue from all stages of the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS hosting service ratably over the hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the services are billed based upon milestones. Fees for application hosting and related services in the second stage are billed quarterly in advance. Bundled into this revenue element are the revenues attributable to the software license used by the customer.
Revenues resulting from hosting services for our Empirica Signal, Empirica Study and WebSDM products consist of installation and server configuration, application hosting and related support services. Services for these offerings are charged monthly as a fixed fee. Revenues are recognized ratably over the period of the service.
In the event that an application hosting customer cancels its related statement of work, all deferred revenues are recognized. In addition, certain termination related fees may be charged and if so, such fees are recognized in the period of termination.
We may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on either a time-and-materials basis or using the proportional performance method. If we are not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.
Deferred revenues represent amounts billed or cash received in advance of revenue recognition.
Accounting for Prepaid Sales Commissions, Royalties and Deferred Set Up Costs. For arrangements where we recognize revenue over the relevant contract period, we defer related commission payments to our direct sales force and software license royalties paid to third parties and amortize these amounts over the same period that the related revenues are recognized. This is done to better match commission and royalty expenses with the related revenues. Commission payments are nonrefundable unless amounts due from a customer are determined to be uncollectible or if the customer subsequently changes or terminates the level of service, in which case commissions which were paid are recoverable by us.
Our royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. Royalties are paid on a percentage of billings basis for certain of our products, and we have the right to recover royalties in the event an arrangement is cancelled.
Fees charged and costs incurred for the trial system design, set up and implementation are deferred as applicable, until the start of the hosting period and then amortized and recognized, as applicable, ratably over the estimated hosting period. The deferred costs include incremental direct costs with third parties and certain internal direct costs related to the trial and application set up. These costs include salary and benefits associated with direct labor costs incurred during trial set up, as well as third-party subcontract fees and other contract labor costs. In the event that an application hosting customer cancels its related statement of work, all deferred set up costs are expensed.
Accounts Receivable Reserve. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectability of our trade receivables based on a combination of factors, which may include dialogue with the customer to determine the cause of non-payment, the use of collection agencies, and/or
the use of litigation. In the event it is determined that the customer may not be able to meet its full obligation to us, we record a specific allowance to reduce the related receivable to the amount that we expect to recover given all information available to us. We continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Accounting for Income Taxes. We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes using the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. This process requires that we project our current tax liability and estimate our deferred tax assets and liabilities, including net operating loss and tax credit carryforwards. In assessing the need for a valuation allowance, we have considered our recent operating results, future taxable income projections and all prudent and feasible tax planning strategies.
Accounting for Stock-Based Awards. For service-based options and restricted stock units and awards, we recognize compensation expense on a straight-line basis over the requisite service period of the award. For performance based options, we recognize expense over the estimated performance period. In addition the benefits of tax deductions in excess of recognized stock-based compensation is reported as a financing activity rather than an operating activity in the statements of cash flows. This requirement can have the effect of reducing net operating cash flows and increasing net financing cash flows in certain periods. To date, we have not recorded these benefits as they have not been realized.
We use the Black-Scholes option pricing model to determine the weighted average fair value of options granted.
For the three months ending March 31, 2009 and 2010, stock-based compensation expense reduced basic earnings per share by $0.04 and $0.05, respectively, and diluted earnings per share by $0.04 and $0.05, respectively.
Other Significant Estimates
Goodwill and Intangible Assets Impairment. We review the carrying value of goodwill and intangible assets annually based upon the expected future discounted operating cash flows of our business. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of our operating results in future periods. Actual results may differ materially from these estimates. The timing and size of impairment charges, if any, involves the application of managements judgment regarding the estimates and could significantly affect our operating results.
Overview of Results of Operations in the Three Months Ended March 31, 2009 and 2010
Total revenues increased by 17%, or $8.4 million, in the three months ended March 31, 2010, or 2010, compared to the three months ended March 31, 2009, or 2009, primarily due to an increase in total service revenues of 21%, or $7.4 million, and to a lesser extent, an increase in license revenues of 7%, or $1.0 million. Our revenue growth included a 20% increase in revenues from contract research organizations, or CROs, which increased to $13.1 million from $10.9 million. The increase in services revenues is primarily associated with revenues from application hosting services due to increased production trials under management for our InForm license customers as well as trials under management as a result of our recent acquisitions of Maaguzi, and Covance IVRS/IWRS. Through these recent acquisitions and the acquisition of Clarix in 2008, our objective is to provide an Integrated Clinical Research Suite (ICRS) of technology solutions, which consists of multiple products that can be purchased on a stand-alone basis, to automate and integrate the entire clinical development process from study initiation and regulatory submission through post-approval trials. Our ability to provide ICRS as a single source vendor and to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenues.
Our gross margin increased by 9%, or $2.6 million, in 2010 compared to 2009, primarily due to a higher increase in revenues in relation to cost of revenues. The increase in gross margins is primarily due to the increase in the services gross margin of $1.5 million resulting from higher services revenues and lower services expense. With the continued shift in our revenues from license revenues to services revenues associated primarily with our recent acquisitions and our ICRS strategy, our ability to continue to maintain our overall gross margins will depend on our ability to continue to increase services efficiencies and lower our cost of delivery.
Operating income in 2010 of $3.1 million decreased by $2.1 million, or 41%, compared to 2009. Operating income for 2009 and 2010 included $2.6 million and $3.5 million of stock-based compensation expense, respectively, and $0.8 million and $1.5 million of amortization expense related to acquisitions, respectively. We expect to increase operating income through increased revenues from
our recent acquisitions and execution of our ICRS strategy and through our ability to lower services and operating expenses as a percentage of revenues through improved efficiencies throughout our services organization and leveraging our operating expenses as revenues continue to increase.
The results of 2010 compared to 2009 were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $0.6 million, or 1% of revenues, and an increase in expense of approximately $1.2 million, or 3% of expenses.
As of March 31, 2010, we had $129.7 million of unrestricted cash, cash equivalents and short-term investments, an increase of $20.6 million from $109.1 million at December 31, 2009. In addition, as of March 31, 2010, we had $3.3 million in current assets associated with a securities settlement agreement with UBS AG. As of March 31, 2010, we had no outstanding debt.
Revenues
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Revenues by Product Line (in thousands) (1) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Electronic data capture |
|
$ |
36,527 |
|
75 |
% |
$ |
40,325 |
|
71 |
% |
$ |
3,798 |
|
10 |
% |
Clinical data management |
|
5,618 |
|
11 |
|
4,797 |
|
8 |
|
(821 |
) |
(15 |
) |
|||
Safety |
|
5,383 |
|
11 |
|
6,188 |
|
11 |
|
805 |
|
15 |
|
|||
Interactive Response Technology |
|
1,288 |
|
3 |
|
5,890 |
|
10 |
|
4,602 |
|
357 |
|
|||
Total |
|
$ |
48,816 |
|
100 |
% |
$ |
57,200 |
|
100 |
% |
$ |
8,384 |
|
17 |
% |
(1) Revenues by Product Line include product license revenues and product-related service revenues.
The increase in electronic data capture revenues is primarily due to an increase in application hosting services of $2.4 million as well as an increase in license revenues of $1.5 million. These increases were partly off-set by a decrease in consulting revenues of $0.2 million. The decrease in clinical data management is primarily due to a decrease in license revenues of $0.7 million. The increase in safety revenues is primarily due to increases in consulting and license revenues of $0.3 million and $0.2 million, respectively. The increase in interactive response technology revenues is primarily related to increased application hosting revenues of $4.6 million. To a lesser extent the increase is attributable to revenues related to the acquisition of Covance IVRS/IWRS in August 2009.
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Revenues by Type (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
License |
|
$ |
14,116 |
|
29 |
% |
$ |
15,141 |
|
27 |
% |
$ |
1,025 |
|
7 |
% |
Application hosting services |
|
26,626 |
|
55 |
|
33,782 |
|
59 |
|
7,156 |
|
27 |
|
|||
Consulting services |
|
4,861 |
|
10 |
|
5,207 |
|
9 |
|
346 |
|
7 |
|
|||
Customer support |
|
3,213 |
|
6 |
|
3,070 |
|
5 |
|
(143 |
) |
(4 |
) |
|||
Total |
|
$ |
48,816 |
|
100 |
% |
$ |
57,200 |
|
100 |
% |
$ |
8,384 |
|
17 |
% |
Total revenues increased in 2010 as compared to 2009, primarily due to increases in application hosting and license revenues. The increase in 2010 revenues associated with our application hosting services was partially due to a 10% increase in production trials under management from approximately 955 in 2009 to approximately 1,050 in 2010, which includes application hosting services trials and trials hosted for our InForm license customers. The increase in production trials relates to a relative increase in the number of customers who purchase all trial-related services from us, customers who license InForm and build their own studies. Our application hosting services also increased due to the impact of additional trials under management for our web-integrated Phase Forward IRT product offering with production trials increasing 85% from 96 in 2009 to 178 in 2010. The increase in license revenues was primarily the result of additional electronic data capture revenues from both new and existing customers, and to a lesser extent, growth in sales relating to our safety products. The increase in consulting services was primarily attributable to additional revenue related to consulting services provided for our safety products for both new and existing customers, and to a lesser extent, growth in sales relating to our clinical data management products. The decrease in customer support revenues was primarily due to decreases in
clinical data management products. Our revenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.
|
|
Three Months Ended March 31, |
|
|
|
|
|
||||||||||
|
|
2009 |
|
2010 |
|
Change |
|
||||||||||
Revenues by Geography (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
North America |
|
$ |
30,339 |
|
62 |
% |
$ |
35,843 |
|
63 |
% |
$ |
5,504 |
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
United Kingdom |
|
12,619 |
|
26 |
|
14,358 |
|
25 |
|
1,739 |
|
14 |
|
||||
France |
|
3,651 |
|
7 |
|
3,758 |
|
7 |
|
107 |
|
3 |
|
||||
Asia Pacific |
|
2,207 |
|
5 |
|
3,241 |
|
5 |
|
1,034 |
|
47 |
|
||||
International subtotal |
|
18,477 |
|
38 |
|
21,357 |
|
37 |
|
2,880 |
|
16 |
|
||||
Total |
|
$ |
48,816 |
|
100 |
% |
$ |
57,200 |
|
100 |
% |
$ |
8,384 |
|
17 |
% |
|
The increase in revenues worldwide was primarily due to an increase in interactive response technology revenues and electronic data capture revenues of $4.6 million and $3.8 million, respectively. The increase in North American revenues is primarily related to an increase in interactive response technology revenues and electronic data capture revenues of $3.8 million and $1.4 million, respectively. The increase in interactive response technology revenues is primarily a result of the acquisition of Clarix. To a lesser extent, the increase is attributable to the 2010 period including a full quarter of application hosting services revenues relating to the acquisition of Covance IVRS/IWRS in August 2009, while the 2009 period included no revenue. The increase in international revenues is primarily related to an increase in electronic data capture revenues, interactive response technology revenues and safety revenues of $2.4 million, $0.8 million and $0.4 million, respectively. These increases were slightly off-set by a decrease in clinical data management revenues of $0.8 million.
Cost of Revenues
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Costs of Revenues (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
License |
|
$ |
566 |
|
4 |
% |
$ |
566 |
|
4 |
% |
$ |
|
|
|
% |
Services |
|
19,899 |
|
57 |
|
25,716 |
|
61 |
|
5,817 |
|
29 |
|
|||
Total |
|
$ |
20,465 |
|
42 |
% |
$ |
26,282 |
|
46 |
% |
$ |
5,817 |
|
28 |
% |
There was no change in the cost of license revenues when comparing 2010 to 2009. The increase in cost of services in 2010 was primarily due to increases in employee-related expenses of $2.4 million related to a headcount increase of 66 people, and increases in depreciation expenses of $1.0 million. We also had expense increases for network hosting, outside contractors, customer pass-though expenses and computer related expenses of $0.7 million, $0.5 million, $0.4 million and $0.3 million, respectively. Computer-related expenses include hardware and software support agreements as well as computer accessories.
Gross Margin
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Gross Margin (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
License |
|
$ |
13,550 |
|
96 |
% |
$ |
14,575 |
|
96 |
% |
$ |
1,025 |
|
8 |
% |
Services |
|
14,801 |
|
43 |
|
16,343 |
|
39 |
|
1,542 |
|
10 |
|
|||
Total |
|
$ |
28,351 |
|
58 |
% |
$ |
30,918 |
|
54 |
% |
$ |
2,567 |
|
9 |
% |
The overall gross margin percentage decreased in 2010 as compared to 2009 due to a lower service margin percentage. The decrease in the services gross margin percentage was due to higher services expenses as a percentage of related revenues, as well as the inclusion of our OutcomLogix product from the acquisition of Maaguzi in July 2009 and the acquisition of Covance IVRS/IWRS in August 2009. The license gross margin percentage remained the same in 2010 as compared to 2009. It is likely that gross margin, as a percentage of revenues, will fluctuate quarter by quarter due to the timing and mix of license and service revenues, and the type, amount and timing of service required in delivering certain projects.
Operating Expenses
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Operating Expenses (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sales and marketing |
|
$ |
7,206 |
|
15 |
% |
$ |
8,986 |
|
16 |
% |
$ |
1,780 |
|
25 |
% |
Research and development |
|
8,180 |
|
17 |
|
9,698 |
|
17 |
|
1,518 |
|
19 |
|
|||
General and administrative |
|
7,804 |
|
16 |
|
9,184 |
|
16 |
|
1,380 |
|
18 |
|
|||
Total |
|
$ |
23,190 |
|
48 |
% |
$ |
27,868 |
|
49 |
% |
$ |
4,678 |
|
20 |
% |
Sales and Marketing. Sales and marketing expenses increased in 2010 primarily due to employee-related expense of $0.5 million related to a headcount increase of 18 people, as well as an increase in amortization of intangible assets of $0.4 million. We also had increases in commissions expenses, outside contractor expenses and travel expenses of $0.4 million, $0.1 million and $0.1 million, respectively. We expect that our sales and marketing expense will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available. We expect that such increases may fluctuate, however, due to the timing of marketing programs.
Research and Development. Research and development expenses increased in 2010 primarily due to employee-related expenses of $1.3 million related to a headcount increase of 74 people. We also had expense increases related to stock-based compensation, facilities expenses and travel expenses of $0.4 million, $0.2 million and $0.1 million, respectively. Increases were partially off-set by a decrease in outside contractor expenses of $0.4 million. We expect that our research and development costs will continue to increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offerings.
General and Administrative. General and administrative expenses increased in 2010 primarily due to increases in depreciation, outside contractor and stock-based compensation expenses of $0.4 million, $0.3 million and $0.3 million, respectively. We also had expense increases related to facilities and taxes and fees expenses of $0.3 million and $0.1 million, respectively. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.
Other Income
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Other income (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest income |
|
$ |
640 |
|
1 |
% |
$ |
316 |
|
1 |
% |
$ |
(324 |
) |
(51 |
)% |
Other, net |
|
409 |
|
1 |
|
(184 |
) |
|
|
(593 |
) |
(145 |
) |
|||
Total other income |
|
$ |
1,049 |
|
2 |
% |
$ |
132 |
|
|
% |
$ |
(917 |
) |
(87 |
)% |
The decrease in interest income in 2010 was primarily due to the net decrease in cash and cash equivalents and short and long-term investments. The decrease in other, net in 2010 was primarily due to decreases in the fair value associated with our securities settlement agreement.
Provision for Income Taxes
|
|
Three Months Ended March 31, |
|
|
|
|
|
|||||||||
|
|
2009 |
|
2010 |
|
Change |
|
|||||||||
Provision for income taxes (in thousands) |
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
Amount |
|
% |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Provision for income taxes |
|
$ |
2,132 |
|
4 |
% |
$ |
1,249 |
|
2 |
% |
$ |
(883 |
) |
(41 |
)% |
Our effective tax rate for 2009 and 2010 was 34% and 39%, respectively. Our effective tax rate for 2010 is higher than the effective tax rate for 2009 principally due to the benefit derived in the prior year from the federal research and development tax credit. The federal research and development tax credit expired effective December 31, 2009 and, as such, we have not forecasted a current tax benefit for this item in 2010.
Non-GAAP Financial Information
We provide non-GAAP revenues, income from operations, net income, and net income per share applicable to common stockholders data as additional information for our operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. We believe these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons to prior periods. We use these non-GAAP measures to evaluate our financial results, develop budgets and manage expenditures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP results.
The table below presents a reconciliation of GAAP to non-GAAP revenues, income from operations and net income and net income per share applicable to common stockholders for the three months ended March 31, 2009 and 2010. Non-GAAP results exclude the impact of stock-based compensation expense, amortization of intangible assets, the effects of purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value, impairment of intangible assets and restructuring expenses.
Reconciliation of GAAP Revenues, GAAP Income From Operations and GAAP Net Income (Loss) to
Non-GAAP Revenues, Non-GAAP Income From Operations and Non-GAAP Net Income (Loss)
(unaudited)
(in thousands, except per share amounts)
|
|
Three Months Ended |
|
||||
|
|
2009 |
|
2010 |
|
||
TOTAL REVENUES: |
|
|
|
|
|
||
GAAP total revenues |
|
$ |
48,816 |
|
$ |
57,200 |
|
Deferred revenues and backlog adjustments related to acquisitions(1) |
|
628 |
|
296 |
|
||
Non-GAAP total revenues |
|
$ |
49,444 |
|
$ |
57,496 |
|
INCOME FROM OPERATIONS: |
|
|
|
|
|
||
GAAP income from operations |
|
$ |
5,161 |
|
$ |
3,050 |
|
Stock-based compensation expense |
|
2,570 |
|
3,501 |
|
||
Amortization of intangible assets |
|
761 |
|
1,450 |
|
||
Deferred revenues and backlog adjustments related to acquisitions(1) |
|
628 |
|
296 |
|
||
Non-GAAP income from operations |
|
$ |
9,120 |
|
$ |
8,297 |
|
NET INCOME (LOSS): |
|
|
|
|
|
||
GAAP net income (loss) |
|
$ |
4,078 |
|
$ |
1,933 |
|
Stock-based compensation expense, net of tax |
|
1,687 |
|
2,197 |
|
||
Amortization of intangible assets, net of tax |
|
500 |
|
910 |
|
||
Deferred revenues and backlog adjustments related acquisitions, net of tax(1) |
|
412 |
|
187 |
|
||
Non-GAAP net income |
|
$ |
6,677 |
|
$ |
5,227 |
|
GAAP net income per share applicable to common stockholders: |
|
|
|
|
|
||
Diluted |
|
$ |
0.09 |
|
$ |
0.05 |
|
Non-GAAP net income per share applicable to common stockholders: |
|
|
|
|
|
||
Diluted |
|
$ |
0.15 |
|
$ |
0.12 |
|
(1) Fair value adjustments to deferred revenues and backlog. Purchase accounting requires that deferred revenue assumed in an acquisition be recorded and subsequently recognized at its fair value as of the time of the acquisition. Consequently, we do not recognize the full amount of these deferred revenues and backlog. We add back non-GAAP revenues associated with
deferred revenues and backlog that were excluded as a result of purchase accounting adjustments, as we believe that this provides information about the operating impact of the acquired business in a manner consistent with the revenue recognition for our pre-existing products and services.
Liquidity and Capital Resources
Our principal sources of liquidity were unrestricted cash, cash equivalents, short and long-term investments totaling $135.5 million and $129.7 million at December 31, 2009 and March 31, 2010, respectively, and accounts receivable of $56.0 million and $44.7 million, respectively. For the periods ended March 31, 2009 and 2010 we had no outstanding debt and, in general, we do not enter into long-term binding purchase commitments. We currently expect to retain any future earnings for use in the operation and expansion of our business, including our stock repurchase program, and do not anticipate paying any cash dividends on our common stock.
We believe that our existing cash, cash equivalents, short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services and the continuing market acceptance of our products and services. From time to time, we may also enter into agreements with respect to potential investments in, or acquisitions of, businesses, services or technologies, which could also require us to seek additional equity or debt financing. To the extent that existing cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.
Substantially all of our long-lived assets at December 31, 2009 and March 31, 2010 are located in the United States.
Net Operating Loss Carryforwards
At December 31, 2009, we had $19.2 million of net operating loss carryforwards that may be used to offset future U.S. federal taxable income, which may reduce our future cash tax liability. In addition, we had $20.3 million of net operating losses resulting from excess tax deductions related to stock-based compensation. We will realize the benefit of these excess tax deductions through increases to stockholders equity in the periods in which the losses are utilized to reduce tax payments. At December 31, 2009, we had $3.7 million of federal research and development tax credit carryforwards that may be utilized to offset future U.S. taxes. In addition, we had $0.4 million of federal research and development tax credits resulting from excess tax deductions related to stock-based compensation, the benefits of these credits will be realized through increases to stockholders equity in the periods in which the credits are utilized to offset future U.S. taxes. The net operating loss and tax credit carryforward periods extend through 2029. We also had $4.5 million of research and development tax credit carryforwards and $1.4 million of investment tax credits that may be utilized to offset future Massachusetts state taxable income. The Massachusetts research and development tax credit carryforward period extends through 2024. The Massachusetts investment tax credits begin to expire in 2010. The federal and state net operating loss carryforwards and research and development tax credits are subject to review and possible adjustment by the taxing authorities. Also, the Internal Revenue Code contains provisions that may limit the net operating loss and tax credit carryforwards available in any given year in the event of certain changes in the ownership interests of significant stockholders. We currently expect to realize the benefit of all recorded deferred tax assets as of December 31, 2009. Our conclusion that such assets will be recovered is based upon our expectation that our future earnings combined with tax planning strategies available to us will provide sufficient taxable income to realize recorded tax assets.
We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $1.6 million as of December 31, 2009 have been excluded from the contractual obligations table below under the heading Contractual Obligations. For further information on unrecognized tax benefits, see Note 6 in the notes to our 2009 consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.
Auction Rate Securities
Included within our investment portfolio at December 31, 2009 and March 31, 2010 were $23.8 million and $21.6 million of auction rate securities, or ARS, at par value, which are classified as short-term investments on our unaudited condensed consolidated balance sheets, and recorded at fair market value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that we own are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all had credit ratings of AAA (or equivalent) from a recognized rating agency.
Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, our ARS have experienced multiple failed auctions. While we continue to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.
In November 2008, we accepted an offer from UBS AG, or UBS, with respect to all of our ARS held at that time. Under our agreement with UBS, we received certain rights which entitle us to sell our ARS to UBS affiliates during the period from June 30, 2010 to July 20, 2012, for a price equal to par value. In accepting the offer, we granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of our agreement with UBS and released UBS from any claims relating to the marketing and sale of the ARS. UBSs obligations under the agreement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the agreement. If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS.
We performed a fair value calculation of our ARS as of December 31, 2009 and March 31, 2010. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in our continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for the securities.
Based upon the valuation performed, we concluded that the fair value of these ARS at December 31, 2009 was $19.4 million, a decline of $4.4 million from par value. As of March 31, 2010, we concluded that the fair value of these ARS was $18.2 million, and therefore, recorded the change in fair value of $1.1 million in the accompanying unaudited condensed consolidated statement of income for the three months ended March 31, 2010. As of March 31, 2010, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement. Accordingly the ARS are classified as short-term investments in the unaudited condensed consolidated balance sheets.
We elected to measure the fair value of the settlement agreement (the put option) under the fair value option. Fair value was determined using a discounted cash flow method which considered the following factors: the term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, we concluded that the fair value of the put option as of December 31, 2009 and March 31, 2010 was $4.3 million and $3.3 million, respectively. Accordingly, the decrease in fair value of $1.1 million for the three months ended March 31, 2010 was recorded in our accompanying unaudited condensed consolidated statement of income. As of March 31, 2010, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement, and accordingly we classify the fair value of the securities settlement agreement as current assets in the unaudited condensed consolidated balance sheets.
Cash Flows
Cash provided by and used in operating activities has historically been affected by changes in working capital accounts, primarily deferred revenues, accounts receivable and accrued expenses, and add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation expense. Fluctuations within accounts receivable and deferred revenues are primarily related to the timing of billings to our customers, payments from our customers and the associated revenue recognition. Movements in deferred costs are related to the volume and stages of hosted clinical trials and movements in accrued expenses and accounts payable are due to the timing of certain transactions.
Net Cash Provided by Operating Activities. Net cash provided by operating activities was $23.4 million in the three months ended March 31, 2010, which was more than net income of $1.9 million. The difference is primarily due to various changes in working capital accounts of $12.2 million which include changes to accounts receivable and deferred revenue of $11.4 million and 12.1 million, respectively, off-set by changes to accrued expenses and accounts payable of $8.8 million and $2.3 million, respectively. Non-cash adjustments included $5.8 million of depreciation and amortization expense, $3.5 million of stock-based compensation expense, and $1.1 million related to the change in fair value of the securities settlement agreement, partially offset by a $1.1 million change in fair value of our investments.
Net Cash Provided by Investing Activities. Net cash provided by investing activities was $15.3 million during the three months ended March 31, 2010, which was primarily due proceeds from maturities of short-term and long-term investments of $29.1 million.
Cash provided by investing activities was partially offset by the purchase of short and long-term investments of $10.8 million, and the purchase of property and equipment of $3.0 million.
Net Cash Used In Financing Activities. Net cash used in financing activities was $26.6 million in the three months ended March 31, 2010, primarily due to the purchase of treasury stock of $26.0 million.
Contractual Obligations
Our principal commitments consist of obligations under non-cancelable operating leases for office space. The following table of our material contractual obligations as of December 31, 2009 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:
|
|
Payments Due by Period |
|
|||||||||||||
Contractual Obligations (in thousands) |
|
Total |
|
1 year or less |
|
2-3 years |
|
4-5 years |
|
More than |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating lease obligations |
|
$ |
83,440 |
|
$ |
10,041 |
|
$ |
19,166 |
|
$ |
17,552 |
|
$ |
36,681 |
|
Total |
|
$ |
83,440 |
|
$ |
10,041 |
|
$ |
19,166 |
|
$ |
17,552 |
|
$ |
36,681 |
|
The above table includes the lease entered into on February 13, 2008 with BP Fourth Avenue, L.L.C. to secure office space for our corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the lease was December 2008.
The lease provides for the rental of 165,129 rentable square feet of space and has an initial term of 10 years and three months. We can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. We were not required to pay any rent for the first three months of the initial lease term. Thereafter, the annual rent on the lease for years one through five will be $6.6 million, or approximately $0.5 million per month. For years six through ten, the annual rent will be $7.2 million, or approximately $0.6 million per month. The total base rent payable in the initial term is $69.1 million.
In addition to base rent, commencing on January 1, 2010, the lease for our current headquarters requires us to pay our proportionate share of the amount by which defined operating expenses incurred by the landlord exceed the base year (2009) operating expenses, as defined in the lease. The lease also requires us to pay our proportionate share of the amount by which real estate taxes paid or incurred by the landlord exceed the tax base year (fiscal 2010), as defined in the lease. In addition, we are receiving lease incentives, including free rent for the first three months of occupancy, which totaled approximately $1.6 million, and allowances for tenant improvements totaling approximately $8.1 million. The allowances for tenant improvements are being amortized on a straight-line basis over the lease term as a reduction of rental expense.
In connection with the signing of the lease for our current headquarters, we have deposited with the landlord an unconditional, irrevocable letter of credit in the landlords favor in the amount of $1.0 million.
The above table also includes the lease which we entered into on August 17, 2009 with KBS Five Tower Bridge, L.L.C. to secure office space for our IRT business operations at 300 Barr Harbor Drive, West Conshohocken, Pennsylvania. The commencement date for occupancy under the lease was September 2009 with rent payments commencing in February 2010. The lease provides for the rental of 44,907 square feet of space and has an initial term of 10 years and one month. We can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The annual rent under this lease for the first year is $1.3 million, or approximately $0.1 million per month, with annual escalations in rent for each subsequent year in the amount fifty cents per square foot. The total base rent payable in the initial term is $14.2 million.
In addition to base rent, commencing on January 1, 2012, the lease for our IRT operations requires us to pay our proportionate share of the amount by which defined operating expenses incurred by the landlord exceed the base year operating expenses, as defined in the lease. The lease also requires us to pay our proportionate share of the amount by which real estate taxes paid or incurred by the landlord exceed the tax base year, as defined in the lease.
Recently Issued Accounting Pronouncements
On January 1, 2010, we adopted the guidance of ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the FASB Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendors multiple-deliverable revenue arrangements. The impact of this standard was not material to our reported results of operations. Refer to our revenue recognition policies for further discussion.
On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements. The ASU requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by FASB ASC 820, Fair Value Measurements. During the three months ended March 31, 2010 we had no movements among Level 1 and 2 of the three-tier fair value hierarchy. Entities will also need to provide a reconciliation of purchases, sales, issuance, and settlements of anything valued with a Level 3 method, which is used to price the hardest to value instruments. The new disclosures and clarifications of existing disclosures were adopted on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on our consolidated financial position and results of operation. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We elected to adopt this portion of ASU No. 2010-06 on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on our consolidated financial position and results of operation.
Off-Balance Sheet Arrangements
We do not have any special purpose entities or off-balance sheet arrangements.
Special Note Regarding Forward-Looking Statements
In addition to historical consolidated financial information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future net sales, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words anticipates, believes, estimates, expects, intends, may, plans, projects, will, would and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. We discuss many of the risks that we believe could cause actual results or events to differ materially from these forward-looking statements in greater detail in the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009. We urge you to consider the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 in evaluating our forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We are exposed to a variety of market risks, including changes in interest rates and the market value of our investments.
Financial Instruments, Other Financial Instruments
Financial instruments meeting fair value disclosure requirements consist of cash equivalents, short-term investments, securities settlement agreement, accounts receivable, accounts payable and forward foreign exchange contracts. The fair value of these financial instruments approximates their carrying amount.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar and Japanese yen. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign customers.
Percentage of revenues and expenses in foreign currency is as follows:
|
|
Three Months Ended |
|
||
|
|
2009 |
|
2010 |
|
Revenues generated in locations outside the United States |
|
38 |
% |
37 |
% |
Revenues in currencies other than the United States dollar (1) |
|
22 |
|
26 |
|
Expenses in currencies other than the United States dollar (1) |
|
21 |
|
25 |
|
(1) Percentage of revenues and expenses denominated in foreign currency for the three months ended March 31, 2010:
|
|
Revenues |
|
Expenses |
|
euros |
|
15 |
% |
5 |
% |
British pound |
|
6 |
|
12 |
|
Japanese yen |
|
5 |
|
5 |
|
Other |
|
|
|
3 |
|
Total |
|
26 |
% |
25 |
% |
As of March 31, 2009 and 2010, we had $9.0 million and $21.1 million, respectively, of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency which exposes us to foreign exchange rate movements.
In addition, although our foreign subsidiaries have intercompany accounts that eliminate upon consolidation, such accounts expose us to foreign currency rate movements. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under other income (expense), net, while exchange rate fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under accumulated other comprehensive income (loss) in stockholders equity, as they are considered part of our net investment and hence do not give rise to gains or losses.
We have implemented a risk management program under which we measure foreign currency exchange risk monthly and manage those exposures through the use of various operating strategies and, as more fully described in Note 13 of the notes to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report. We regularly purchase short-term foreign currency forward contracts, designed to hedge fluctuation in non-functional currencies and our subsidiaries against the U.S. dollar. This process is designed to minimize foreign currency translation exposures that could otherwise affect consolidated results of operations. The terms of these contracts are generally for periods of one month.
Currently, our largest foreign currency exposures are the British pound and euro, primarily because our European operations have a higher proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at December 31, 2008 and 2009, a 10% unfavorable movement in foreign currency exchange rates would expose us to significant losses in earnings or cash flows or significantly diminish the fair value of our foreign currency financial instruments. For the year ended December 31, 2009, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $5.3 million, decreased expenses by $4.5 million and decreased operating income by $0.8 million. For the three months ended March 31, 2010, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues
by $1.5 million, decreased expenses by $1.3 million and decreased operating income by $0.1 million. The estimates used assumes that all currencies move in the same direction at the same time and the ratio of non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels. Since a large portion of our revenue is deferred revenue that is recorded at different foreign currency exchange rates, the impact to revenue of a change in foreign currency exchange rates is recognized over time, whereas the impact to expenses is more immediate, as expenses are recognized at the current foreign currency exchange rate in effect at the time the expense is incurred. All of the potential changes noted above are based on sensitivity analyses performed on our financial results as of December 31, 2009 and March 31, 2010.
As of March 31, 2010, we entered into forward foreign exchange contracts to hedge approximately $5.2 million of receivables, intercompany accounts and cash balances denominated in currencies other than the U.S. dollar. We recorded foreign currency gains/(losses) of $0.1 million and $(0.2) million for the three months ended March 31, 2009 and 2010, respectively. We settle forward foreign exchange contracts in cash. As of December 31, 2009 and March 31, 20109, we recorded $0.2 and less than $0.1 million, respectively, of foreign exchange gains in other income (expense) as a result of outstanding forward foreign exchange contracts.
Interest Rate Sensitivity
We had unrestricted cash, cash equivalents, short-term and long-term investments totaling $129.7 million at March 31, 2010. These amounts were invested primarily in money market funds, corporate bonds and government agency securities, and are held for working capital purposes. We do not use derivative financial instruments in our investment portfolio. We have established investment guidelines relative to credit quality, diversification, marketability and performance measurement designed to maintain safety and liquidity. With the exception of auction rate securities, investments in securities are invested primarily in high quality securities of a short duration and historically have not been materially affected by fluctuations in interest rates. With the exception of auction rate securities, which are recorded at fair value, investments are reported at amortized cost. We considered the historical volatility of short-term and long-term interest rates and determined that, due to the size and duration of our investment portfolio, a 100-basis-point increase in interest rates would not have any material exposure to changes in the fair value of our portfolio at March 31, 2010. A decline in interest rates, however, would reduce future investment income.
We believe that our existing cash, cash equivalents, short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of March 31, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level in (i) enabling us to record, process, summarize and report information required to be included in our periodic Securities and Exchange Commission filings within the required time period and (ii) ensuring that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are described under the title Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009 other than as set forth below. There are no material changes to the risk factors described in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2009. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the foregoing risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
The announcement and pendency of our agreement to be acquired by Oracle could adversely affect our business.
On April 15, 2010, we entered into a Merger Agreement with Oracle and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (Merger Sub), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with us (the Merger) with the Company surviving as a wholly-owned subsidiary of Oracle. Subject to the terms of the Merger Agreement, which has been approved by our board of directors and the boards of directors of Oracle and Merger Sub, at the effective time of the Merger (the Effective Time), each share of our common stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $17.00 in cash, without interest. The Merger is conditioned upon, among other things, approval by our stockholders, the expiration or early termination of the applicable premerger waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary conditions. We will continue to operate separately from Oracle until the transaction closes. The announcement and pendency of the Merger could cause disruptions in our business, including affecting our relationship with our customers, vendors and employees, which could have an adverse effect on our business, financial results and operations.
The failure to complete the merger could adversely affect our business.
There is no assurance that the Merger with Oracle or any other transaction will occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $24.7 million and, in certain circumstances, reimburse reasonable out-of-pocket fees and expenses of Oracle up to $4.0 million incurred with respect to the transactions contemplated by the Merger Agreement. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community.
In certain instances, the Merger Agreement requires us to pay a termination fee of $24.7 million to Oracle. This payment could affect the decisions of a third party considering making an alternative acquisition proposal to the merger.
Under the terms of the merger agreement, we will be required to pay to Oracle a termination fee of $24.7 million if the Merger Agreement is terminated under certain circumstances. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could deter such third party from making a competing acquisition proposal.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Under the terms of our 2004 Amended and Restated Stock Option and Incentive Plan, or the 2004 Plan, we have issued shares of restricted stock to our employees. On the date that these restricted shares vest, we withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2004 Plan, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax withholdings required by us. Up until May 2009 the shares withheld from the grantees to settle their tax liability were reallocated to the number of shares available for issuance under the 2004 Plan; in May 2009 the 2004 Plan was amended and shares withheld from the grantees to settle taxes are no longer reallocated to the number of shares available for issuance. For the three month period ending March 31, 2010, we withheld an aggregate of 65,755 common shares under restricted stock units at a price of $11.04 per share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 3, 2009, our board of directors authorized the repurchase of up to $40.0 million of our common stock, par value $0.01 per share, through a share repurchase program. On February 12, 2010, our board of directors increased the amount available under the share repurchase program by an additional $25.0 million. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by us.
This share repurchase program does not obligate us to acquire any specific number of shares and may be extended, suspended or discontinued at any time. All repurchases are expected to be funded from our cash and investment balances. While our board of directors have approved the share purchasing guidelines, the timing of the repurchases and the exact number of shares of common stock to be purchased were determined at managements discretion, and depended upon market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. The new repurchase program is currently scheduled to terminate on December 31, 2010.
For the three months ended March 31, 2010, we repurchased 1,934,707 shares of our common stock for an aggregate purchase price, including applicable brokers fees, of $26.0 million pursuant to this stock repurchase program.
The following table sets forth our purchases of equity securities for the three months ended March 31, 2010:
Period |
|
Total number |
|
Average |
|
Total number of |
|
Approximate dollar |
|
||
January 1, 2010January 31, 2010 |
|
731,843 |
|
$ |
14.96 |
|
731,843 |
|
$ |
40,013 |
|
February 1, 2010February 28, 2010 |
|
1,202,864 |
|
12.48 |
|
1,202,864 |
|
25,000 |
|
||
March 1, 2010March 31, 2010 |
|
|
|
|
|
|
|
|
|
||
Total |
|
1,934,707 |
|
|
|
1,934,707 |
|
|
|
||
(1) Includes applicable brokers fees and commissions
Item 4. (Removed and Reserved)
Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company. As of the date of this filing no directors or officers have trading plans in effect.
We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of executive officers and directors who establish a trading plan in compliance with Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. However, we undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports.
Exhibit |
|
|
No. |
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger by and among Phase Forward Incorporated, Oracle Corporation and Pine Acquisition Corporation, dated as of April 15, 2010. (Incorporated by reference herein to Exhibit 2.1 of the Companys Current Report on Form 8-K filed with the SEC on April 16, 2010.) |
10.1 *+ |
|
Amended and restated summary of cash compensation practices for non-employee directors |
31.1 * |
|
Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934. |
31.2 * |
|
Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934. |
32.1 * |
|
Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 * |
|
Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
+ Indicates a management contract or any compensatory plan, contract or arrangement
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.
|
PHASE FORWARD INCORPORATED |
|
|
|
|
|
By: |
/s/ ROBERT K. WEILER |
|
|
Robert K. Weiler |
|
|
Chief Executive Officer |
|
|
(Duly authorized officer) |
|
|
|
|
By: |
/s/ CHRISTOPHER A. MENARD |
|
|
Christopher A. Menard |
|
|
Chief Financial Officer |
|
|
(Duly authorized officer and principal financial officer) |
Date: May 10, 2010 |
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger by and among Phase Forward Incorporated, Oracle Corporation and Pine Acquisition Corporation, dated as of April 15, 2010. (Incorporated by reference herein to Exhibit 2.1 of the Companys Current Report on Form 8-K filed with the SEC on April 16, 2010.) |
10.1 *+ |
|
Amended and restated summary of cash compensation practices for non-employee directors |
31.1 * |
|
Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934. |
31.2 * |
|
Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934. |
32.1 * |
|
Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 * |
|
Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
+ Indicates a management contract or any compensatory plan, contract or arrangement