UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 001-34777

BroadSoft, Inc.

(Exact name of registrant as specified in its charter)

Delaware		52 2130962
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
220 Perry Parkway, Gaithersburg, MD		20877
(Address of principal executive offices)		(Zip Code)

(301) 977-9440
Registrant’s 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 o No þ

     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 o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     The number of shares outstanding of Registrant’s common stock, par value $0.01 per share, on August 6, 2010, was 24,704,606.

 

 

BroadSoft, Inc.
Index to Consolidated Financial Statements

Table of Contents

Item		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:			1
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009			2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the Three and Six Months Ended June 30, 2010 and 2009			3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			4
Notes to Unaudited Condensed Consolidated Financial Statements			5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation			16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			31
ITEM 4. Controls and Procedures			31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			32
ITEM 1A. Risk Factors			32
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
ITEM 3. Defaults Upon Senior Securities			53
ITEM 4. (Removed and Reserved)			53
ITEM 5. Other Information			53
ITEM 6. Exhibits			53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

BroadSoft, Inc.

Unaudited Condensed Consolidated Balance Sheets

		June 30,				December
		2010				31, 2009
		(In thousands, except share
		and per share data)
Assets:
Current assets:
Cash and cash equivalents		$	47,366			$	22,869
Accounts receivable, net of allowance for doubtful accounts of $15 and $169 at June 30, 2010 and December 31, 2009, respectively			22,933				25,471
Other current assets			5,156				4,829
Total current assets			75,455				53,169
Long-term assets:
Property and equipment, net			2,547				1,563
Restricted cash			1,052				599
Intangible assets, net			2,778				3,163
Goodwill			4,728				4,728
Other long-term assets			2,420				3,441
Total long-term assets			13,525				13,494
Total assets		$	88,980			$	66,663
Liabilities, redeemable preferred stock and redeemable convertible preferred stock and stockholders’ equity (deficit):
Current liabilities:
Notes payable and bank loans, current portion		$	1,189			$	4,536
Accounts payable and accrued expenses			9,877				11,903
Deferred revenue, current portion			38,266				33,806
Total current liabilities			49,332				50,245
Notes payable and bank loans			1,584				14,035
Deferred revenue			8,674				6,241
Other long-term liabilities			1,022				756
Total liabilities			60,612				71,277
Redeemable preferred stock and redeemable convertible preferred stock:
Series A redeemable preferred stock, par value $0.01 per share; no and 9,000,000 shares authorized, issued and outstanding at June 30, 2010 and December 31, 2009, respectively			—				4,320
Redeemable convertible preferred stock, par value $0.01 per share, issuable in series: no shares and 71,364,939 authorized at June 30, 2010 and December 31, 2009, respectively; no shares and 11,831,531 issued and outstanding at June 30, 2010 and December 31, 2009, respectively			—				68,866
Total redeemable and redeemable convertible preferred stock			—				73,186
Stockholders’ equity (deficit):
BroadSoft, Inc. stockholders’ equity (deficit):
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $0.01 per share; 100,000,000 and 139,100,00 shares authorized at June 30, 2010 and December 31, 2009, respectively; 24,669,146 and 6,320,110 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			247				63
Additional paid-in capital			130,586				20,340
Accumulated other comprehensive loss			(1,584	)			(1,725	)
Accumulated deficit			(100,881	)			(96,474	)
Total BroadSoft, Inc. stockholders’ equity (deficit)			28,368				(77,796	)
Noncontrolling interest			—				(4	)
Total stockholders’ equity (deficit)			28,368				(77,800	)
Total liabilities and stockholders’ equity (deficit)		$	88,980			$	66,663

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

BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Operations

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Revenue:
Licenses		$	10,555			$	10,001			$	19,338			$	17,067
Maintenance and professional services			9,216				7,731				18,237				14,325
Total revenue			19,771				17,732				37,575				31,392
Cost of revenue:
Licenses			1,026				1,141				2,242				2,255
Maintenance and professional services			3,842				3,634				7,227				6,542
Amortization of intangibles			192				210				385				419
Total cost of revenue			5,060				4,985				9,854				9,216
Gross profit			14,711				12,747				27,721				22,176
Operating expenses:
Sales and marketing			7,710				7,503				14,812				14,594
Research and development			4,952				4,090				9,443				8,282
General and administrative			3,608				3,077				6,887				5,878
Total operating expenses			16,270				14,670				31,142				28,754
Loss from operations			(1,559	)			(1,923	)			(3,421	)			(6,578	)
Other expense (income):
Interest income			(10	)			(10	)			(12	)			(29	)
Interest expense			393				355				699				704
Other (income) expense			(12	)			(7	)			173				(3	)
Total other expense			371				338				860				672
Loss before income taxes			(1,930	)			(2,261	)			(4,281	)			(7,250	)
(Benefit) provision for income taxes			(156	)			383				126				628
Net loss			(1,774	)			(2,644	)			(4,407	)			(7,878	)
Net loss attributable to noncontrolling interest			—				(1	)			—				(2	)
Net loss attributable to BroadSoft, Inc.		$	(1,774	)		$	(2,643	)		$	(4,407	)		$	(7,876	)
Net loss per common share available to BroadSoft, Inc. common stockholders:
Basic and diluted		$	(0.20	)		$	(0.42	)		$	(0.58	)		$	(1.26	)
Weighted average common shares outstanding:
Basic and diluted			8,824				6,280				7,615				6,275
Stock-based compensation expense included above:
Cost of revenue		$	57			$	153			$	92			$	197
Sales and marketing			254				487				365				662
Research and development			201				397				267				516
General and administrative			551				822				660				1,075

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

BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and
Comprehensive Loss
 

						BroadSoft, Inc. Stockholders' Equity (Deficit)
		Total								Common Stock Par								Additional				Accumulated Other
		Stockholders'				Comprehensive				Value $0.01 Per Share								Paid-in				Comprehensive				Accumulated				Noncontrolling
		Equity (Deficit)				Loss				Shares				Amount				Capital				Loss				Deficit				Interest
														(In thousands, except per share data)
Balance December 31, 2009		$	(77,800	)							6,320			$	63			$	20,340			$	(1,725	)		$	(96,474	)		$	(4	)
Issuance of common stock from IPO, net of discounts and issuance costs			39,981								5,048				50				39,931				—				—				—
Redeemable convertible preferred stock converted to common at IPO			68,866								12,962				130				68,736				—				—				—
Reclassification of warrant liability upon IPO			262								—				—				262				—				—				—
Warrant exercise			100								36				—				100				—				—				—
Issuance of common stock for exercise of stock options and lapse of RSUs and net effect of early exercises and income tax			(163	)							303				4				(167	)			—				—				—
Sale of shares to noncontrolling interest			4								—				—				—				—				—				4
Stock based compensation expense			1,384								—				—				1,384				—				—				—
Comprehensive loss:
Net loss			(4,407	)		$	(4,407	)			—				—				—				—				(4,407	)			—
Other comprehensive loss:
Foreign currency translation adjustment			141				141				—				—				—				141				—				—
Comprehensive loss			(4,266	)		$	(4,266	)			—				—				—				—				—				—
Balance June 30, 2010		$	28,368								24,669			$	247			$	130,586			$	(1,584	)		$	(100,881	)		$	—
Balance December 31, 2008		$	(72,724	)							6,259			$	63			$	16,596			$	(758	)		$	(88,625	)		$	—
Exercise of stock options and net effect of early exercises			51								23				—				51				—				—				—
Stock-based compensation expense			2,446								—				—				2,446				—				—				—
Comprehensive loss:
Net loss			(7,878	)		$	(7,878	)			—				—				—				—				(7,876	)			(2	)
Other comprehensive loss:
Foreign currency translation adjustment			(366	)			(366	)			—				—				—				(366	)			—				—
Comprehensive loss			(8,244	)		$	(8,244	)			—				—				—				—				—				—
Balance June 30, 2009		$	(78,471	)							6,282			$	63			$	19,093			$	(1,124	)		$	(96,501	)		$	(2	)

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

BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

		Six Months Ended
		June 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net loss		$	(4,407	)		$	(7,878	)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			1,277				1,135
Amortization of software licenses			910				910
Stock-based compensation expense			1,384				2,449
Other			(128	)			(44	)
Changes in operating assets and liabilities:
Accounts receivable			2,517				5,131
Other assets			(357	)			(194	)
Accounts payable and other liabilities			(1,217	)			(2,431	)
Deferred revenue			6,893				6,407
Net cash provided by operating activities			6,872				5,485
Cash flows from investing activities:
Purchases of property and equipment			(1,631	)			(316	)
Change in restricted cash			(453	)			8
Net cash used in investing activities			(2,084	)			(308	)
Cash flows from financing activities:
Proceeds from exercise of stock options			332				45
Proceeds from issuance of common stock in connection with the Company’s IPO, net of issuance costs			39,982				—
Proceeds from the exercise of common stock warrants			100				—
Redemption of Series A redeemable preferred stock			(4,224	)			—
Taxes paid on vesting of RSUs			(506	)			—
Notes payable and bank loans — payments			(15,895	)			(1,542	)
Net cash provided by (used in) financing activities			19,789				(1,497	)
Effect of exchange rate changes on cash and cash equivalents			(80	)			22
Net increase in cash and cash equivalents			24,497				3,702
Cash and cash equivalents, beginning of period			22,869				14,353
Cash and cash equivalents, end of period		$	47,366			$	18,055

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

BroadSoft, Inc.

1. Nature of Business

BroadSoft, Inc. (“BroadSoft” or the “Company”), a Delaware corporation, was formed in 1998. The Company is a global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based networks. The Company’s software enables its service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile and fixed-line services. The Company’s software, BroadWorks, performs a critical network function by serving as the software element that delivers and coordinates voice, video and messaging communications through a service provider’s IP-based network.

2. Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts and results of operations of the Company, its wholly owned subsidiaries and, until February 1, 2010, a variable interest entity for which the Company has determined it was the primary beneficiary. The Company disposed of its interest in this entity on February 1, 2010. All intercompany balances and transactions have been eliminated in consolidation.

Interim Financial Presentation

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity (deficit) and cash flows. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010 or any other period. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Company’s final prospectus, dated June 16, 2010, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, in connection with the initial public offering of the Company’s common stock (the “IPO”).

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates.

Recent Accounting Pronouncements

Effective January 1, 2010, the Company adopted new accounting guidance for revenue arrangements with multiple deliverables that are outside of the scope of previous authoritative software revenue recognition guidance. The new accounting guidance provides that, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”). The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

deliverable’s selling price. The Company concluded the new accounting guidance did not have a material impact on the Company’s results of operations, cash flows or financial position during the three and six months ended June 30, 2010, as the guidance applied only to the sale of certain products offered, which were not significant.

Effective January 1, 2010, the Company adopted new accounting guidance for revenue recognition for arrangements that include software elements. Under the new guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance. The Company concluded the new accounting guidance did not have a material impact on the Company’s results of operations, cash flows or financial position during the three and six months ended June 30, 2010, as the guidance applied only to the sale of certain products offered, which were not significant.

Effective January 1, 2010, the Company adopted new accounting guidance amending the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 inputs (quoted prices in active market for identical assets or liabilities) and Level 2 inputs (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, for all interim and year-end reporting periods beginning December 31, 2010, the guidance requires separate disclosure of purchases, sales, issuance and settlements of assets and liabilities measured using Level 3 fair value measurements (significant unobservable inputs). There were no transfers of assets or liabilities between Levels 1 and 2 of the fair value measurement hierarchy during the three and six months ended June 30, 2010. In conjunction with the IPO, the Series C-1 preferred stock warrants converted to common stock warrants. As a result, the Company reclassified the Series C-1 preferred stock warrants from Level 3 liabilities to additional paid in capital (“APIC”). The Company will include these additional disclosures, as applicable, in its interim and year-end financial statements in future periods.

3. Fair Value Disclosures

The following table summarizes the carrying and fair value of the Company’s financial assets and liabilities as of June 30, 2010 and December 31, 2009:

		June 30, 2010								December 31, 2009
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(In thousands)
Assets
Money market funds and certificates of deposit		$	31,622			$	31,622			$	8,167			$	8,167
Total assets		$	31,622			$	31,622			$	8,167			$	8,167
Liabilities
Series C-1 preferred stock warrants		$	—			$	—			$	153			$	153
Total liabilities		$	—			$	—			$	153			$	153

The carrying amounts of the Company’s other financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short-term nature.

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

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

• Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical instruments;

• Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes the Company’s conclusions reached as of June 30, 2010 and December 31, 2009 (in thousands):

		Balance at
		June 30,
		2010				Level 1				Level 2				Level 3
Assets:
Money market funds (1)		$	30,570			$	30,570			$	—			$	—
Certificates of deposit (2)			1,052				1,052				—				—
Total		$	31,622			$	31,622			$	—			$	—

		Balance at
		December
		31, 2009				Level 1				Level 2				Level 3
Assets:
Money market funds (1)		$	7,568			$	7,568			$	—			$	—
Certificates of deposit (2)			599				599				—				—
Total		$	8,167			$	8,167			$	—			$	—
Liabilities:
Series C-1 preferred stock warrants (3)		$	153			$	—			$	—			$	153
		$	153			$	—			$	—			$	153

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

determined utilizing the Black-Scholes valuation model and reasonable assumptions for stock price volatility, expected dividend yield, and risk-free interest rates over the remaining contractual life of the warrants. The fair value of the warrants is re-measured each reporting period and changes in fair value are recognized in other income or expense in the Company’s condensed consolidated statements of operations. These warrants were converted to common stock warrants in connection with the IPO, and were reclassified to APIC. As such, the Company no longer has Level 3 assets or liabilities.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

The following table presents the changes in the Company’s Level 3 instruments measured at fair value on a recurring basis during the six months ended June 30, 2010 (in thousands):

		Series C-1
		Preferred Warrants
Balance at December 31, 2009		$	(153	)
Total unrealized losses included in earnings			(109	)
Transfers out			262
Balance at June 30, 2010		$	—

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be impaired. During the six months ended June 30, 2009 and 2010, there were no fair value measurements of assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.

4. Deferred Revenue

Deferred revenue represents amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met.

		June 30,				December
		2010				31,2009
Licenses		$	21,804			$	19,562
Maintenance and professional services			25,136				20,485
		$	46,940			$	40,047
Current portion		$	38,266			$	33,806
Non-current portion			8,674				6,241
		$	46,940			$	40,047

5. Borrowings

Installment Bank Loans

On September 26, 2008 the Company entered into a $15.0 million Loan and Security Agreement with ORIX Venture Finance LLC (the “ORIX Loan”), which the Company voluntarily repaid in full during the quarter ended June 30, 2010. The ORIX Loan required 42 equal monthly principal payments of approximately $0.4 million beginning in April 2010 and was scheduled to mature in September 2013. Under the original terms of the ORIX Loan, borrowings under this agreement bore interest at the prime

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

rate plus 3.0%, provided that the interest rate in effect in each month could not be less than 7% per annum. On December 23, 2008, the Company amended the interest rate terms of the ORIX Loan such that the interest rate was equal to the sum of 3.0% plus the greater of (a) prime rate or (b) LIBOR rate plus 2.5%, provided that the interest rate in effect in each month could not be less than 7% per annum. The principal balance outstanding under this agreement at December 31, 2009 was $15.0 million.

The Company paid $0.2 million of loan origination fees related to its ORIX Loan, which was capitalized within other current and long-term assets in the condensed consolidated balance sheets. Amortization expense related to the loan origination fees was immaterial for the periods reported and is included as interest expense in the consolidated statements of operations. The Company paid in full the balance of the ORIX Loan in June 2010 and, as such, recorded into interest expense the remaining unamortized loan origination fees of approximately $0.1 million during the quarter ended June 30, 2010.

In connection with obtaining the ORIX Loan, the Company issued a warrant to purchase up to 116,551 shares of common stock at $8.58 per share that expires on May 16, 2012. In accordance with the guidance to account for debt issued with a warrant, the Company allocated the total proceeds between the ORIX Loan and the warrant based on the relative fair value of the two instruments. Out of the total proceeds of $15.0 million, the Company allocated $14.9 million to the ORIX Loan and $0.1 million to the warrant based on their relative fair values. The fair value of the common stock warrant was recorded to additional paid-in capital. Fair value was determined using a Black-Scholes valuation model using the contractual life of the warrant and reasonable assumptions for stock price volatility, expected dividend yield and risk-free interest rates. The Company used a risk-free interest rate of 3.4%, stock price volatility of 75% and term of seven years, which resulted in an estimated fair value of the common stock warrant of approximately $1.20 per share. The discount on the ORIX Loan was being amortized over the term of the agreement using the effective interest method and the amortization charge is recorded as interest expense in the consolidated statements of operations. In connection with the repayment of the ORIX Loan, the Company recorded into interest expense the remaining unamortized balance of $0.1 million during the quarter ended June 30, 2010.

In December 2008, in connection with the acquisition of Sylantro Systems Corporation, the Company assumed a loan totaling $1.3 million at an interest rate of 9%. The balance outstanding under this agreement at December 31, 2009 was $0.1 million, which was paid in full February 2010.

Financing Arrangements

In May 2008, the Company amended a software license and maintenance agreement. The amended agreement provides the Company the right to distribute third party software on a user basis up to 35,000,000 licenses over a four-year period for an additional one-time fee of approximately $6.4 million. The agreement was financed with an installment bank loan with an effective interest rate of 4.0%. The loan provides for a payment of $0.4 million at loan inception and scheduled principal repayments of $0.4 million each quarter commencing July 1, 2008, with the final payment payable on April 1, 2012. At June 30, 2010 and December 31, 2009, the liability for the installment bank loan amounted to approximately $2.7 million and $3.5 million, respectively.

6. Stock-based Compensation

Equity Incentive Plans

In 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Plan”). The 1999 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights. The 1999 Plan terminated in June 2009 whereby no new options or awards are permitted to be granted, leaving 55,555 authorized shares expired under the 1999 Plan. In April 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock unit awards (“RSUs”) and stock appreciation rights. In June 2010, in connection with the Company’s IPO, the 2009 Plan was amended and restated to provide for, among other things, annual increases in the share

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

reserve. At the same time, an additional 333,333 shares of common stock were added to the share reserve. At June 30, 2010, the Company had 260,183 shares of common stock available for issuance under the 2009 Plan.

Stock Options

The following table presents a summary related to stock options for the six months ended June 30, 2010:

						Weighted
		Number of				Average
		Options				Exercise
		Outstanding				Price
Balance, December 31, 2009			2,841,096			$	2.26
Granted			280,838				8.94
Exercised			(172,123	)			1.98
Forfeited			(22,445	)			3.70
Balance, June 30, 2010			2,927,366			$	2.91
Vested at June 30, 2010			1,862,083			$	2.20

For the three months ended June 30, 2010 and 2009, stock compensation expense related to stock options was $0.4 million and $1.9 million, respectively. For the six months ended June 30, 2010 and 2009, stock compensation expense related to stock options was $0.6 million and $2.4 million, respectively. There were 280,838 and 2,371,919 stock options granted during the six months ended June 30, 2010 and June 30, 2009, respectively. For the six months ended June 30, 2010 and June 30, 2009, the intrinsic value of stock options exercised was $0.9 million and nominal, respectively, and cash received from stock options exercised was $0.3 million and nominal, respectively. At June 30, 2010, unrecognized compensation expense related to unvested options was $1.6 million, which is scheduled to be recognized over a weighted average period of 1.15 years.

Restricted Stock Unit Awards

During the six months ended June 30, 2010, the Company granted 99,998 RSUs to certain officers. These RSUs have a term of ten years and are settled in shares of common stock and will vest in two equal annual installments following the date of grant. The Company also granted an aggregate of 187,061 RSUs to certain employees and officers. These RSUs have a term of ten years and vest over four years following the date of grant. Also in the period, the Company granted an aggregate of 4,999 RSUs to certain directors. These RSUs vested immediately with the closing of the IPO. For the three and six months ended June 30, 2010, stock compensation expense related to RSUs was $0.7 million. At June 30, 2010, unrecognized compensation expense related to unvested RSUs was $1.5 million, which is scheduled to be recognized over a weighted average period of 1.65 years.

During the six months ended June 30, 2009, the Company granted 167,493 RSUs to certain employees. These RSUs, which have a term of 10 years and are settled in shares of common stock, vested in connection with the Company’s IPO. During the three months ended June 30, 2010, the Company incurred stock compensation expense of $0.4 million in connection with the vesting of these RSUs.

The following table presents a summary of activity for RSUs during the six months ended June 30, 2010:

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

						Weighted
		Number of				Average Grant
		Restricted				Date Fair
		Stock Units				Value
Balance, December 31, 2009			173,326			$	2.46
Granted			292,058				7.75
Forfeited			(3,749	)			4.47
Vested			(178,536	)			8.93
Balance, June 30, 2010			283,099			$	3.81

Tax Benefits

Upon adoption of the FASB’s guidance on stock-based compensation, the Company elected the alternative transition method (short cut method) provided for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows related to the tax effect of employee stock-based compensation awards that are outstanding upon adoption. As of June 30, 2010, the Company’s APIC pool balance was zero.

The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets was $1.3 million and $0.4 million at June 30, 2010 and December 31, 2009, respectively.

7. Commitments and Contingencies

In the normal course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any claims or been required to defend any action related to indemnification obligations to date. The Company is currently disputing an indemnity claim asserted by one of its customers. This customer seeks $3.6 million for reimbursement of a portion of the legal expenses incurred in defending a patent infringement lawsuit filed against it by another of the Company’s customers. While the Company believes this indemnity claim is without merit and management plans to continue to vigorously dispute this claim, the customer seeking indemnity has substantially greater resources than the Company. At this point, the Company is unable to determine the likelihood of any outcome in this matter, nor is it able to estimate the amount or range of loss or the impact on the Company or its financial condition in the event of an unfavorable outcome.

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

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

8. Taxes

The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate for each of its legal entities in accordance with the interim reporting requirements of ASC-740 — Income Taxes and ASC- 270 — Interim Reporting. Discrete items that impact tax expense are recorded in the period incurred.

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

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

For the six months ended June 30, 2010 and 2009, the Company recorded a tax provision of $0.1 million and $0.6 million, respectively. The tax provisions for the six months ended June 30, 2010 and 2009 primarily pertained to taxable income generated by the Company’s foreign operations. There is no tax benefit recognized on the net operating losses incurred in the U.S. and certain foreign jurisdictions due to the lack of evidence supporting the Company’s ability to utilize these losses in the future.

9. Stockholders’ Equity (Deficit)

Reverse Stock Split and Initial Public Offering

On May 24, 2010, the Company’s board of directors approved an amendment to the Company’s restated certificate of incorporation to effect a 6-for-1 reverse stock split of its common stock and all series of its redeemable convertible preferred stock. The par value and the authorized shares of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, redeemable convertible preferred stock, warrants for common stock, warrants for preferred stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on June 14, 2010.

In June 2010, the Company completed the IPO in which it issued and sold 5,048,131 shares of common stock at a public offering price of $9.00 per share. The Company raised a total of $45.5 million in gross proceeds from the IPO, or $40.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other estimated offering costs of $2.3 million. Upon the closing of the IPO, all shares of the Company’s then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 12,962,405 shares of common stock. In connection with the closing, the Company used $4.3 million of the net proceeds ($0.1 million of which was paid subsequent to June 30, 2010) from the IPO to redeem and subsequently cancel all outstanding shares of the Company’s Series A redeemable preferred stock.

In connection with the closing of the IPO in June 2010, the Company amended and restated its certificate of incorporation and reduced its authorized number of shares of common stock to 100,000,000 and reduced the authorized number of shares of preferred stock to 5,000,000.

Preferred Stock

Pursuant to the Company’s amended and restated certificate of incorporation filed on June 21, 2010 in connection with the closing of the IPO, the Company is authorized to issue 5,000,000 shares of preferred stock. The board of directors has the authority, without action by its stockholders, to designate and issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, preventing or deterring a change in control. To date, the board of directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock have been issued.

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

Warrants

Preferred Stock Warrants

During 2004 and 2005, the Company issued warrants to purchase up to an aggregate of 45,955 shares of Series C-1 redeemable convertible preferred stock at $3.97 per share in connection with financing arrangements. Upon the closing of the IPO, these warrants automatically converted into warrants to purchase an equivalent number of shares of common stock. As of June 30, 2010, all of these warrants had been exercised and the underlying shares issued to the warrant holders.

Common Stock Warrants

In addition to the warrants described above, in September 2008, the Company issued a warrant to purchase up to 116,551 shares of common stock at $8.58 per share in connection with the ORIX Loan, which expires on June 16, 2012. As of June 30, 2010, this warrant remained outstanding.

10. Loss per share data

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

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s losses.

The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for the three and six months ended June 30, 2009 and 2010. In the table below, net loss represents the numerator and weighted average common shares outstanding represents the denominator:

		Three Months Ended								Six Months Ended
				June 30,						June 30,
		2010				2009				2010				2009
		(In thousands except per								(In thousands except per
		share data)								share data)
Basic loss per common share:
Net loss attributable to BroadSoft, Inc.		$	(1,774	)		$	(2,644	)		$	(4,407	)		$	(7,878	)
Weighted average basic common shares outstanding			8,824				6,280				7,615				6,275
Basic loss per common share		$	(0.20	)		$	(0.42	)		$	(0.58	)		$	(1.25	)
Diluted loss per common share:
Net loss attributable to BroadSoft, Inc.		$	(1,774	)		$	(2,644	)		$	(4,407	)		$	(7,878	)
Weighted average diluted common shares outstanding			8,824				6,280				7,615				6,275
Diluted loss per common share		$	(0.20	)		$	(0.42	)		$	(0.58	)		$	(1.25	)

The weighted average effect of potentially dilutive securities that have been excluded from the calculation of diluted net loss per common share because the effect is anti-dilutive is as follows:

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(in thousands)
Redeemable convertible preferred stock: *
Series B-1			524				589				556				589
Series C-1			8,698				9,771				9,232				9,771
Series D			716				805				760				805
Series E			371				417				394				417
Series E-1			223				—				236				—
Series C-1 preferred stock warrants **			40				46				43				46
Common stock warrants			117				117				117				117
Restricted stock units and awards			316				148				288				91
Early exercise shares			2				23				2				23
Stock options			74				2,477				57				2,424

11. Other (Income) Expense

Other (income) expense consists of the following (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Interest income		$	(10	)		$	(10	)		$	(12	)		$	(29	)
Interest expense			393				355				699				704
Other expense, net			—				—				64				—
Change in fair value of preferred stock warrants			(12	)			(7	)			109				(3	)
Total other expense		$	371			$	338			$	860			$	672

12. Segment and Geographic Information

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

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

BroadSoft, Inc.
Notes to Condensed Consolidated Financial Statements (continued)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues:
United States		$	9,204			$	10,838			$	18,743			$	17,958
EMEA			4,264				3,298				8,708				7,346
APAC			3,662				2,720				6,558				4,363
Other			2,641				876				3,566				1,725
		$	19,771			$	17,732			$	37,575			$	31,392

		June 30,				December
		2010				31, 2009
Long-Lived Assets, net
United States		$	5,235			$	4,861
EMEA			187				41
APAC			148				217
Other			447				484
		$	6,017			$	5,603

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC, on June 16, 2010.

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

•

our dependence on the success of BroadWorks;

•

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

•

claims that we infringe intellectual property rights of others;

•

our ability to protect our intellectual property;

•

intense competition;

•

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

•

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

•

the length and unpredictability of our sales cycles;

•

our ability to expand our product offerings;

•

our international operations;

•

our significant reliance on distribution partners in international markets;

•

our ability to sell our products in certain markets;

•

our ability to manage our growth;

•

the attraction and retention of qualified employees and key personnel;

•

the interoperability of our products with service provider networks;

•

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

•

our ability to maintain proper and effective internal controls.

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

Company Overview

We are the leading global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. Our software, BroadWorks, enables our service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile

and fixed-line services. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates voice, video and messaging communications through a service provider’s IP-based network. Service providers use BroadWorks to offer services that generate new revenue, reduce subscriber churn, capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks to their IP-based networks. We believe we are well-positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of services to their end-users.

BroadWorks delivers and coordinates the enterprise, consumer, mobile and trunking communications applications that service providers offer through their IP-based networks. BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. It interoperates with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems.

We began selling BroadWorks in 2001. Over 425 service providers, located in more than 65 countries, including 15 of the top 25 telecommunications service providers globally as measured by revenue in the first three quarters of 2009, have purchased our software. We sell our products to service providers both directly and indirectly through distribution partners, such as telecommunications equipment vendors, value-added resellers, or VARs, and other distributors.

Industry Background

We believe telecommunications service providers are facing significant challenges to their traditional business models, including declining revenues in their legacy businesses, rapidly evolving customer communications demands and the need to generate returns on their increasing investments in IP-based networks. Historically, service providers derived much of their revenue from providing reliable voice and high speed data access. However, these legacy services have been increasingly commoditized as technological and regulatory changes have brought increased competition and lower prices. At the same time, enterprises and consumers have started to seek new and enhanced cloud-based communications services, such as hosted voice and multimedia communications, converged mobile and fixed-line services, video calling and collaboration. These new and enhanced services provide service providers with opportunities to counter falling legacy revenues and increase subscriber growth. Service providers are utilizing their existing IP-based networks to deliver these services. Although these IP-based networks were originally built to deliver high speed data, they are being configured, through the use of new network software, to efficiently enable the broader, richer services that subscribers increasingly demand.

Company Strategy

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

•

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

•

Drive revenue growth by:

•

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

•

Selling new applications and features to our current service provider customers. Although our initial engagement with a service provider may be for a single initiative or business unit, once

BroadWorks is implemented by a service provider, we believe we are well-positioned to sell additional applications and features to that service provider.

•

Continuing to acquire new customers. Our customers are located around the world and include 15 of the top 25 telecommunications service providers globally. We believe we are well positioned to grow by adding customers in regions where we already have a strong presence, by expanding our geographic footprint and by penetrating more deeply into some types of service provider customers, such as additional cable and mobile service providers.

•

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

Initial Public Offering

In June 2010, we completed the initial public offering, or IPO, of our common stock in which we issued and sold 5,048,131 shares of common stock at a public offering price of $9.00 per share. We raised a total of $45.5 million in gross proceeds from the IPO, or $40.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other estimated offering costs of $2.3 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 12,962,405 shares of common stock. In connection with the closing, we used $4.3 million of the net proceeds from the IPO to redeem and subsequently cancel all outstanding shares of our Series A redeemable preferred stock. After the closing of the IPO, we used approximately $14.3 million of the net proceeds from the IPO to repay the outstanding balance under our credit facility with ORIX Venture Finance LLC, or ORIX, which we refer to as the ORIX Loan.

Key Financial Highlights

Some of our key financial highlights for the quarter ended June 30, 2010 include:

•

Total revenue increased over $2.0 million to $19.8 million, compared to $17.7 million in the quarter ended June 30, 2009;

•

During the three months ended June 30, 2010, deferred revenue increased $0.6 million to $46.9 million, compared to an increase of $2.5 in the quarter ended June 30, 2009;

•

Gross profit and profit margin were $14.7 million and 74%, respectively, compared to $12.7 million and 72%, respectively, in the quarter ended June 30, 2009;

•

Operating loss decreased to $1.6 million, compared to $1.9 million in the quarter ended June 30, 2009;

•

Net loss decreased to $1.8 million, compared to $2.6 million in the quarter ended June 30, 2009; and

•

Cash provided by operating activities for the six months ended June 30, 2010 was $6.9 million, compared to $5.5 million for the six months ended June 30, 2009.

Components of Operating Results

Revenue

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

Our total revenue consists of the following:

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

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

Cost of Revenue

Our total cost of revenue consists of the following:

• Cost of license revenue. A substantial majority of the cost of license revenue consists of royalties paid to third parties whose technology or products are sold as part of BroadWorks and, to a lesser extent, amortization of acquired technology. Most of these royalty payments are for the underlying embedded data base technology within BroadWorks for which we currently pay a fixed fee per quarter. Such costs are expensed in the period in which they are incurred.

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

Gross Profit

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

•

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

•

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

•

Impact of deferred revenue. If revenue is deferred because we are unable to determine vendor-specific objective evidence, or VSOE, of fair value for any undelivered element within an arrangement, all of the revenue derived from the arrangement is deferred, including license, maintenance and professional services revenue, until all elements for which we could not determine VSOE have been delivered. However, the cost of revenue, including the costs of license, maintenance and professional services, is expensed in the period in which it is incurred.

Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period. Because the ability to recognize revenue on sales depends largely on the terms of the sale arrangement, and because we are not able to predict the proportion of orders that will not meet all the criteria for revenue recognition, we cannot forecast whether any historical trends in gross margin will continue.

Operating Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We grew from 318 employees at December 31, 2009 to 347 employees at June 30, 2010 and we expect to continue to hire new employees to support our anticipated growth.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. We expect our sales and marketing expenses to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. Through leveraging our sales and marketing personnel and our indirect sales channel, we expect sales and marketing expenses will decrease as a percentage of total revenue as sales grow.

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

General and administrative expenses. General and administrative expenses primarily consist of salary and personnel costs for administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other corporate expenses.

Stock-Based Compensation

We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant or modification of stock options and other equity awards to our directors, employees and consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The fair value is then recognized as stock-based compensation expense over the requisite service period, which is the vesting period, of the award. For the three months ended June 30, 2010 and 2009, we recorded stock-based compensation expense of $1.1 million and $1.9 million, respectively. For the six months ended June 30, 2010 and 2009, we recorded stock-based compensation expense of $1.4 million and $2.5 million, respectively.

Of the stock-based compensation expense recorded for the three and six months ended June 30, 2010, $0.4 million related to the vesting of restricted stock units, or RSUs, covering an aggregate of 172,492 shares that were subject to a performance-based vesting condition and that vested in full upon the completion of the IPO.

Based on stock options and other equity awards outstanding as of June 30, 2010, we expect to recognize future expense related to the non-vested portions of such options and other equity awards in the amount of $3.1 million over a weighted average period of approximately 1.3 years.

Other (Income) Expense, Net

Other (income) expense, net consists primarily of interest income, interest expense and change in the fair value of the preferred stock warrants. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest accrued on outstanding borrowings under the ORIX Loan, and our installment bank loan with Bank of America Leasing and Capital, LLC, or Bank of America. We expect interest expense to decrease in future periods as a result of our repayment, in the quarter ended June 30, 2010, of all amounts outstanding under the ORIX Loan.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

Recent Accounting Pronouncements

Effective January 1, 2010, we adopted new accounting guidance for revenue arrangements with multiple deliverables that are outside of the scope of previous authoritative software revenue recognition guidance. The new accounting guidance provides that, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”). The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. We concluded the new accounting guidance did not have a material impact on our results of operations, cash flows or financial position during the three and six months ended June 30, 2010, as the guidance applied only to the sale of certain products offered, which were not significant.

Effective January 1, 2010, we adopted new accounting guidance for revenue recognition for arrangements that include software elements. Under the new guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance. We concluded the new accounting guidance did not have a material impact on our results of operations, cash flows or financial position during the three and six months ended June 30, 2010, as the guidance applied only to the sale of certain products offered, which were not significant.

Effective January 1, 2010, we adopted new accounting guidance amending the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 inputs (quoted prices in active market for identical assets or liabilities) and Level 2 inputs (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, for all interim and year-end reporting periods beginning December 31, 2010, the guidance requires separate disclosure of purchases, sales, issuance and settlements of assets and liabilities measured using Level 3 fair value measurements (significant unobservable inputs). There were no transfers of assets or liabilities between Levels 1 and 2 of the fair value measurement hierarchy during the three and six months ended June 30, 2010. In conjunction with the IPO, the Series C-1 preferred stock warrants converted to common stock warrants. As a result, we reclassified the Series C-1 preferred stock warrants from Level 3 liabilities to APIC. We will include these additional disclosures, as applicable, in our interim and year-end financial statements in future periods.

Results of Operations

Comparison of the Three Months Ended June 30, 2010 and 2009

Revenue

		Three Months Ended June 30,
		2010								2009								Period-to-Period Change
						Percent								Percent
						of Total								of Total
		Amount				Revenue				Amount				Revenue				Amount				Percentage
		(dollars in thousands)
Revenue by Type:
Licenses		$	10,555				53	%		$	10,001				56	%		$	554				6	%
Maintenance and
professional services			9,216				47				7,731				44				1,485				19
Total revenue		$	19,771				100	%		$	17,732				100	%		$	2,039				11	%
Revenue by Geography:
Americas		$	11,845				60	%		$	11,714				66	%		$	131				1	%
EMEA			4,264				22				3,298				19				966				29
APAC			3,662				18				2,720				15				942				35
Total revenue		$	19,771				100	%		$	17,732				100	%		$	2,039				11	%

Total revenue for the three months ended June 30, 2010 increased by 11%, or $2.0 million, to $19.8 million, compared to the same period in 2009. Additionally, deferred revenue grew by $0.6 million for the three months ended June 30, 2010, compared to growth of $2.5 million for the same period in 2009. Substantially all of the deferred revenue growth in 2010 was attributable to increased sales of software licenses and related maintenance and professional services.

Total revenue from the Americas for the three months ended June 30, 2010 was relatively unchanged, at $11.8 million, compared to the same period in 2009. Deferred revenue from the Americas decreased by $0.6 million for the three months ended June 30, 2010, compared to decrease of $0.4 million for the same period in 2009. Europe, Middle East and Africa, or EMEA, total revenue for the three months ended June 30, 2010 increased by 29%, or $1.0 million, compared to the same period in 2009, while EMEA deferred revenue grew by $1.4 million in the three months ended June 30, 2010, compared to an increase of $2.4 million for the same period in 2009. The increase in EMEA revenue in the three months ended June 30, 2010 was primarily a result of recognition of maintenance and professional services revenue that was previously deferred related to an order for which we delivered a committed feature. The increase in EMEA deferred revenue was a result of a number of orders received in the three months ended June 30, 2010 for which there were undelivered elements or incomplete evidence of an arrangement. Asia Pacific, or APAC, total revenue for the three months ended June 30, 2010 increased by 35%, or $0.9 million, compared to the same period in 2009. APAC deferred revenue for the three months ended June 30, 2010 decreased by $0.2 million, compared to an increase of $0.5 million for the same period in 2009. The increase in APAC revenue for the three months ended June 30, 2010 was due to growth in software license sales and associated maintenance and professional services.

License Revenue

License revenue for the three months ended June 30, 2010 increased by 6%, or $0.6 million, to $10.6 million. Deferred license revenue grew by $0.7 million for the three months ended June 30, 2010, compared to growth of $1.7 million for the same period in 2009. The increase in revenue for the three months ended June 30, 2010 was primarily related to growth in sales of software licenses. The increase in deferred revenue for the three months ended June 30, 2010 was primarily driven by a number of orders

for which there were undelivered elements, incomplete evidence of an arrangement or non-standard payment terms.

Maintenance and Professional Services Revenue

Maintenance and professional services revenue for the three months ended June 30, 2010 increased by 19%, or $1.5 million, to $9.2 million, compared to the same period in 2009. Deferred maintenance and professional services revenue remained relatively unchanged during the three months ended June 30, 2010, compared to growth of $0.7 million for the same period in 2009. The increase in maintenance and professional services was the result of growth in our installed base of customers and licenses, and as the result of an order for which we delivered a committed feature, which allowed us to recognize revenue previously deferred.

Cost of Revenue and Gross Profit

		Three Months Ended June 30,
		2010								2009								Period-to-Period Change
						Percent								Percent
						of								of
						Related								Related
		Amount				Revenue				Amount				Revenue				Amount				Percentage
		(dollars in thousands)
Cost of Revenue:
Licenses (1)		$	1,218				12	%		$	1,351				14	%		$	(133	)			(10	)%
Maintenance and professional services			3,842				42				3,634				47				208				6
Total cost of revenue		$	5,060				26	%		$	4,985				28	%		$	75				2	%
Gross Profit:
Licenses (1)		$	9,337				88	%		$	8,650				86	%		$	687				8	%
Maintenance and professional services			5,374				58				4,097				53				1,277				31
Total gross profit		$	14,711				74	%		$	12,747				72	%		$	1,964				15	%

For the three months ended June 30, 2010, our gross profit increased by 15%, or $2.0 million, to $14.7 million. Gross margin increased to 74% during the three months ended June 30, 2010 compared to 72% for the same period in 2009. We experienced an increase in both license revenue gross profit and maintenance and professional services gross profit for the three months ended June 30, 2010, primarily due to growth in license revenue and maintenance and professional services revenue relative to the respective cost of revenue.

License cost of revenue decreased by 10% to $1.2 million for the three months ended June 30, 2010. This decrease was primarily due to a $0.1 million decrease in software support expenses. For the three months ended June 30, 2010, license gross profit increased by 8% to $9.3 million, with a corresponding increase in gross margin to 88% compared to 86% for the same period in 2009.

Maintenance and professional services cost of revenue increased by 6% to $3.8 million in the three months ended June 30, 2010. The increase in maintenance and professional services cost of revenue was primarily due to an increase in personnel costs allocated to cost of revenue due to an increase in the number of research and development employees working directly on specific features for certain customers and an increase in professional services personnel. For the three months ended June 30, 2010, maintenance and professional services gross profit increased by 31% to $5.4 million, with a

corresponding increase in gross margin to 58% compared to 53% for the same period in 2009, due to higher utilization of maintenance and professional services resources.

Operating Expenses

		Three Months Ended June 30,
		2010								2009								Period-to-Period Change
						Percent								Percent
						of Total								of Total
		Amount				Revenue				Amount				Revenue				Amount				Percentage
		(dollars in thousands)
Sales and marketing		$	7,710				39	%		$	7,503				42	%		$	207				3	%
Research and development			4,952				25				4,090				23				862				21
General and administrative			3,608				18				3,077				17				531				17
Total operating expenses		$	16,270				82	%		$	14,670				82	%		$	1,600				11	%