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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2010

 

OR

 

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

 

Commission File Number: 001-34357

 


 

OPENTABLE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

 

94-3374049

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

799 Market Street, 4th Floor, San Francisco, CA

 

94103

(Address of Principal Executive Offices)

 

(Zip Code)

 

(415) 344-4200

(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 x  No o.

 

Indicate by checkmark 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 during the preceding 12 months (or for such shorter time 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 definition 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 x

 

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 x.

 

As of November 2, 2010, 23,015,805 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

OPENTABLE, Inc.

Table of Contents

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

[Removed and Reserved]

28

Item 5.

Other Information

28

Item 6.

Exhibits

28

Signatures

 

30

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

OPENTABLE, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

74,278,000

 

$

19,807,000

 

Short-term investments

 

13,604,000

 

50,221,000

 

Accounts receivable, net of allowance for doubtful accounts of $635,000, and $590,000 at September 30, 2010 and December 31, 2009

 

9,906,000

 

7,617,000

 

Prepaid expenses and other current assets

 

1,922,000

 

1,301,000

 

Deferred tax asset

 

6,463,000

 

6,024,000

 

Restricted cash

 

171,000

 

172,000

 

 

 

 

 

 

 

Total current assets

 

106,344,000

 

85,142,000

 

 

 

 

 

 

 

Property, equipment and software, net

 

13,757,000

 

11,516,000

 

Goodwill

 

4,537,000

 

1,805,000

 

Intangibles, net

 

1,054,000

 

992,000

 

Deferred tax asset

 

1,787,000

 

498,000

 

Other assets

 

351,000

 

378,000

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

127,830,000

 

$

100,331,000

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

1,308,000

 

$

1,385,000

 

Accrued expenses

 

5,787,000

 

5,827,000

 

Accrued compensation

 

3,838,000

 

2,993,000

 

Deferred revenue

 

1,891,000

 

1,538,000

 

Dining rewards payable

 

14,084,000

 

11,611,000

 

Total current liabilities

 

26,908,000

 

23,354,000

 

 

 

 

 

 

 

Deferred revenue — non-current

 

2,971,000

 

3,572,000

 

Other long-term liabilities

 

2,190,000

 

 

 

 

 

 

 

 

Total liabilities

 

32,069,000

 

26,926,000

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 5)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, $0.0001 par value — 100,000,000 shares authorized; 23,182,862 and 22,652,716 shares issued, 22,972,615 and 22,442,469 shares outstanding at September 30, 2010 and December 31, 2009

 

2,000

 

2,000

 

Additional paid-in capital

 

140,844,000

 

127,454,000

 

Treasury stock, at cost (210,247 shares at September 30, 2010 and December 31, 2009)

 

(647,000

)

(647,000

)

Accumulated other comprehensive loss

 

(105,000

)

(128,000

)

Accumulated deficit

 

(44,333,000

)

(53,276,000

)

 

 

 

 

 

 

Total stockholders’ equity

 

95,761,000

 

73,405,000

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

127,830,000

 

$

100,331,000

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

OPENTABLE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

24,520,000

 

$

17,042,000

 

$

68,224,000

 

$

49,427,000

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Operations and support

 

6,769,000

 

5,077,000

 

19,095,000

 

15,195,000

 

Sales and marketing

 

5,185,000

 

3,845,000

 

14,971,000

 

11,652,000

 

Technology

 

2,967,000

 

2,378,000

 

8,707,000

 

7,689,000

 

General and administrative

 

5,045,000

 

3,379,000

 

12,947,000

 

10,321,000

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

19,966,000

 

14,679,000

 

55,720,000

 

44,857,000

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

4,554,000

 

2,363,000

 

12,504,000

 

4,570,000

 

Other income, net

 

67,000

 

111,000

 

209,000

 

256,000

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

4,621,000

 

2,474,000

 

12,713,000

 

4,826,000

 

Income tax expense

 

786,000

 

1,578,000

 

3,770,000

 

2,872,000

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,835,000

 

$

896,000

 

$

8,943,000

 

$

1,954,000

 

 

 

 

 

 

 

 

 

 

 

Net income per share (See Note 7):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.04

 

$

0.39

 

$

0.12

 

Diluted

 

$

0.16

 

$

0.04

 

$

0.37

 

$

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

22,706,000

 

21,640,000

 

22,471,000

 

15,791,000

 

Diluted

 

24,102,000

 

23,713,000

 

23,866,000

 

22,360,000

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

OPENTABLE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

8,943,000

 

$

1,954,000

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,653,000

 

3,796,000

 

Amortization of intangibles

 

227,000

 

 

Provision for doubtful accounts

 

858,000

 

1,462,000

 

Stock-based compensation

 

5,361,000

 

2,330,000

 

Write-off of property, equipment and software

 

383,000

 

521,000

 

Deferred taxes

 

(1,728,000

)

1,968,000

 

Excess tax benefit related to stock compensation

 

(4,354,000

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,087,000

)

(1,771,000

)

Prepaid expenses and other current assets

 

(1,000

)

(1,129,000

)

Accounts payable

 

(224,000

)

42,000

 

Accrued expenses

 

5,806,000

 

1,514,000

 

Accrued compensation

 

835,000

 

305,000

 

Deferred revenue

 

(264,000

)

(43,000

)

Other long-term liabilities

 

664,000

 

 

Dining rewards payable

 

2,473,000

 

2,293,000

 

 

 

 

 

 

 

Net cash provided by operating activities

 

20,545,000

 

13,242,000

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, equipment and software

 

(6,737,000

)

(4,220,000

)

Purchases of investments

 

(24,926,000

)

(48,183,000

)

Sales of investments

 

60,993,000

 

16,048,000

 

Acquisition of business

 

(1,350,000

)

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

27,980,000

 

(36,355,000

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Excess tax benefit related to stock-based compensation

 

4,354,000

 

 

Proceeds from issuance of common stock upon exercise of employee stock options

 

2,626,000

 

804,000

 

Proceeds from issuance of common stock in connection with initial public offering, net of offering costs

 

 

34,638,000

 

Cash overdrafts

 

(988,000

)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

5,992,000

 

35,442,000

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATES ON CASH

 

(46,000

)

260,000

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

54,471,000

 

12,589,000

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — Beginning of period

 

19,807,000

 

5,528,000

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — End of period

 

$

74,278,000

 

$

18,117,000

 

 

 

 

 

 

 

 

 

(Continued)   

 

 

 

 

5



Table of Contents

 

OPENTABLE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

683,000

 

$

883,000

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING ACTIVITIES:

 

 

 

 

 

Contingent liability recorded in other long-term liabilities

 

$

1,526,000

 

$

 

 

 

 

 

 

 

Unpaid portion of acquisition purchase price recorded in accrued expenses

 

$

150,000

 

$

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Purchase of property, equipment and software recorded in accounts payable and accrued expenses

 

$

629,000

 

$

301,000

 

 

 

 

 

 

 

Vesting of early exercised stock options

 

$

896,000

 

$

935,000

 

 

 

 

 

 

 

Accrued offering costs

 

$

 

$

11,000

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock

 

$

 

$

21,909,000

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

(Concluded)

 

 

 

 

6



Table of Contents

 

OPENTABLE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

1. Organization and Description of Business

 

OpenTable, Inc., a Delaware corporation (together with its wholly-owned subsidiaries, the “Company”), was formed on October 13, 1998. The Company provides solutions that form an online network connecting reservation-taking restaurants and people who dine at those restaurants. For restaurant customers, in addition to other products, the Company provides a proprietary Electronic Reservation Book (“ERB”), which combines proprietary software with computer hardware to deliver a solution that computerizes restaurant host-stand operations and replaces traditional pen-and-paper reservation books. The OpenTable ERB streamlines and enhances a number of business-critical functions and processes for restaurants, including reservation management, table management, guest recognition and email marketing. The Company also provides a web-based product for restaurants called OpenTable Connect (“Connect”). Like the ERB, Connect allows restaurants to take online reservations via the OpenTable website; however, Connect does not provide the operational benefits that the ERB delivers to reservation-intensive restaurants. For diners, the Company operates www.opentable.com, a popular restaurant reservation website. The OpenTable website enables diners to find, choose and book tables at restaurants on the OpenTable network, overcoming the inefficiencies associated with the traditional process of reserving by phone.

 

Certain Significant Risks and Uncertainties

 

The Company operates in a dynamic industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative effect on the Company’s future financial position, results of operations or cash flows: the ability to maintain an adequate rate of growth; the impact of the current economic climate on its business; the ability to effectively manage its growth; the ability to attract new restaurant customers; the ability to increase the number of visitors to its website and convert those visitors into diners; and the ability to retain existing restaurant customers and diners or encourage repeat reservations.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

These condensed consolidated financial statements include the accounts of OpenTable, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

During the third quarter of 2010, the Company began selling third-party restaurant coupons through its website. The Company earns a commission for acting as an agent in these transactions which is recorded on a net basis and is included in revenue upon completion of the third-party coupon sale. The liability for redemption and potential income for breakage remain with the third-party restaurants; therefore, the Company does not record redemption or breakage of the coupons. The Company applies a sales allowance for potential coupon refunds.

 

7



Table of Contents

 

Acquisition of Table Maestro

 

In August 2010, the Company acquired substantially all of the assets and certain liabilities of Table Maestro, LLC (“Table Maestro”), a provider of telephone reservation services for a purchase price of $1,500,000 in cash and additional contingent performance-based cash payments valued at $1,526,000. The Company recorded $2,732,000 of goodwill and $289,000 of identifiable intangible assets in connection with the acquisition which is being accounted for as a business combination. The Company has included the effects of the transaction within the results of operations prospectively from August 12, 2010, the date of acquisition. Pro forma financial information for this business combination has not been presented, as the effects were not material to the Company’s historical consolidated financial statements.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed on March 11, 2010 with the SEC (the “2009 Annual Report”). The condensed consolidated balance sheet as of December 31, 2009, included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures required by GAAP, including notes to the financial statements.

 

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company’s statement of financial position at September 30, 2010 and December 31, 2009, and the Company’s results of operations for the three and nine months ended September 30, 2010 and 2009, and its cash flows for the nine months ended September 30, 2010 and 2009. The results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. All references to September 30, 2010 or to the three or nine months ended September 30, 2010 and 2009 in the notes to the condensed consolidated financial statements are unaudited.

 

The Company has made a reclassification on its condensed consolidated statement of cash flows for the nine months ended September 30, 2009 to conform the presentation of accounts payable and accrued expenses to the current period presentation. In addition, proceeds from issuance of common stock upon exercise of employee stock options have been included in a separate line item within financing activities. These reclassifications did not change cash flows from operating activities, financing activities or total cash flows.

 

Use of Estimates

 

The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

 

8



Table of Contents

 

Recently Issued Accounting Standards

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Topic 605—Revenue Recognition (EITF 08-1, Multiple-Deliverable Revenue Arrangements, (amendments to Topic 605, Revenue Recognition)) and Topic 985—Software (EITF 09-3, Certain Arrangements That Include Software Elements, (amendments to Topic 985, Software)). Topic 605—Revenue Recognition requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. Topic 985—Software removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. Topic 605—Revenue Recognition and Topic 985—Software should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010, with early adoption permitted. The Company is currently evaluating the impact of Topic 605—Revenue Recognition and Topic 985—Software on its consolidated financial statements.

 

Effective January 1, 2010, the Company adopted the FASB’s updated guidance related to fair value measurements and disclosures which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3 inputs, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Adoption of the updated guidance did not have an impact on the Company’s consolidated results of operations or financial condition.

 

3. Short-Term Investments and Fair Value Measurements

 

Short-term investments are summarized as follows:

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Estimated Fair
Value

 

At September 30, 2010:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

5,553,000

 

$

5,000

 

$

 

$

5,558,000

 

Certificates of deposit

 

_8,047,000

 

 

(1,000

)

8,046,000

 

Total

 

$

13,600,000

 

$

5,000

 

$

(1,000

)

$

13,604,000

 

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Estimated Fair
Value

 

At December 31, 2009:

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

20,722,000

 

$

6,000

 

$

(7,000

)

$

20,721,000

 

Certificates of deposit

 

27,131,000

 

7,000

 

(38,000

)

27,100,000

 

Commercial paper

 

2,400,000

 

 

 

2,400,000

 

Total

 

$

50,253,000

 

$

13,000

 

$

(45,000

)

$

50,221,000

 

 

9



Table of Contents

 

As of December 31, 2009, certain investments with a total estimated fair value of $976,000 had maturity dates of greater than one year. As of September 30, 2010, there were no investments that had maturity dates of greater than one year.

 

Investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy when they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments that are generally classified within Level 1 of the fair value hierarchy include money market securities, U.S. government and agency securities and commercial paper. The types of investments that are generally classified within Level 2 of the fair value hierarchy include certificates of deposit. The Company classifies items in Level 2 if the investments are valued using observable inputs to quoted market prices, or other inputs that are observable or can be corroborated by observable market data. Investments are held by a custodian who obtains investment prices from a third party pricing provider that uses standard inputs to models which vary by asset class.

 

In accordance with Topic 820—Fair Value Measurements and Disclosures, the following table represents the Company’s fair value hierarchy for its financial assets:

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Aggregate

 

 

 

 

 

Aggregate

 

 

 

 

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Fair Value

 

Level 1

 

Level 2

 

U.S. government and agency securities

 

$

5,558,000

 

$

5,558,000

 

$

 

$

20,721,000

 

$

20,721,000

 

$

 

Certificates of deposit

 

8,046,000

 

 

8,046,000

 

27,100,000

 

 

27,100,000

 

Commercial paper

 

 

 

 

2,400,000

 

2,400,000

 

 

Total short-term investments

 

$

13,604,000

 

$

5,558,000

 

$

8,046,000

 

$

50,221,000

 

$

23,121,000

 

$

27,100,000

 

 

The Company chose not to elect the fair value option as prescribed by Topic 825—Financial Instruments (Statement of Financial Accounting Standards (“SFAS”) No. 159) for its financial assets and liabilities that had not been previously carried at fair value. Therefore, financial assets and liabilities not carried at fair value, such as accounts payable, are still reported at their carrying values.

 

4. Acquired Intangible Assets

 

As of September 30, 2010, intangible assets included customer relationships of $684,000 (net of accumulated amortization of $163,000), developed technology of $250,000 (net of accumulated amortization of $125,000) and trademarks of $120,000 (net of accumulated amortization of $13,000). As of December 31, 2009, intangible assets included customer relationships of $637,000 (net of accumulated amortization of $40,000), developed technology of $344,000 (net of accumulated amortization of $30,000) and trademarks of $11,000 (net of accumulated amortization of $4,000). Intangible assets are amortized on a straight-line basis over the estimated useful lives which range from one to four years. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the remainder of this year and the succeeding four years is as follows: 2010 (remainder): $91,000; 2011: $351,000; 2012: $320,000; 2013: $226,000; 2014: $66,000.

 

5. Commitments and Contingencies

 

The Company leases its facilities under operating leases. Leases expire at various dates through April 2016. The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period.

 

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Litigation

 

On May 12, 2009, a patent infringement lawsuit was filed against the Company by Mount Hamilton Partners, LLC (“Mount Hamilton”) in the United States District Court for the Northern District of California, seeking, among other things, a judgment that the Company has infringed a certain patent held by Mount Hamilton, an injunctive order against the alleged infringing activities and an award for damages. If an injunction is granted, it could force the Company to stop or alter certain of its business activities, such as certain aspects of the OpenTable Dining Rewards Program. The Company has denied Mount Hamilton’s allegations and asserted counterclaims seeking judicial declarations that the Mount Hamilton patent is not infringed, is unenforceable and is invalid. On October 6, 2009, the Company filed a petition for re-examination with the U.S. Patent and Trademark Office (“PTO”), asking the PTO to re-examine the patent in question and requesting that the claims of the Mount Hamilton patent be rejected. In addition, on October 21, 2009, the Company filed a motion in the district court asking the court to stay the current litigation pending the outcome of the requested re-examination proceeding. On December 7, 2009, the PTO granted the Company’s petition for re-examination, and in its first non-final office action, rejected all of the claims of the patent at issue. In addition, the district court has stayed all proceedings pending re-examination of the patent, which is currently ongoing. The Company is not currently able to estimate the potential loss, if any, that may result from this claim.

 

The Company is also subject to various other legal proceedings and claims arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, management believes there is no litigation pending that could, individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

 

6. Stockholders’ Equity

 

Common Stock

 

On May 21, 2009, the Company completed its initial public offering whereby the Company sold 2,022,684 shares of common stock for a price of $20.00 per share. As part of the offering 1,427,316 shares were also sold by existing stockholders at a price of $20.00 per share. Approximately $5.8 million in offering costs were incurred and have been deducted from additional paid-in capital.

 

Preferred Stock

 

Prior to the initial public offering, the Company had outstanding 6,898,187 shares of Series A convertible preferred stock and 2,177,550 shares of Series B convertible preferred stock. Each share of preferred stock was convertible into one share of common stock. The conversion of all shares of preferred stock into 9,075,737 shares of common stock occurred automatically upon the completion of the Company’s initial public offering on May 21, 2009.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation under Topic 718—Stock Compensation (SFAS No. 123R), which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value.

 

Under Topic 718—Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.

 

The Company determined weighted average valuation assumptions as follows:

 

·                  Volatility—As the Company does not have an extensive trading history for its common stock, the expected stock price volatility for the Company’s common stock was estimated by taking the median historic price volatility for industry peers based on daily price observations over a

 

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period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the technology industry similar in size, stage of life cycle and financial leverage. The Company did not rely on implied volatilities of traded options in its industry peers’ common stock because the volume of activity was relatively low.

 

·                  Expected term—The expected term was estimated using the simplified method allowed under Topic 718 (Securities and Exchange Commission Staff Accounting Bulletin No. 110, Share-Based Payment).

 

·                  Risk-free rate—The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

·                  Forfeiture rate—The Company estimated the forfeiture rate based on its historical experience with forfeitures. The Company reviews the estimated forfeiture rates each period end and makes changes as factors affecting the forfeiture rate calculations and assumptions change.

 

·                  Dividend yield—The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

 

The following table summarizes the assumptions relating to the Company’s stock options for the three and nine months ended September 30, 2010 and 2009, respectively:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Dividend yield

 

0%

 

0%

 

0%

 

0%

 

Volatility

 

52%

 

53%

 

52%-53%

 

53%

 

Risk-free interest rate

 

1.66%-1.68%

 

2.63%-2.65%

 

1.66%-2.95%

 

2.63%-2.65%

 

Expected term, in years

 

6.02-6.08

 

6.02-6.08

 

5.50-6.56

 

6.02-6.08

 

 

The Company granted 47,780 stock options during the three months ended September 30, 2010 and 945,210 stock options during the nine months ended September 30, 2010. The Company granted 53,487 stock options during the three and nine months ended September 30, 2009. The Company recorded stock-based compensation expense of $2,027,000 and $647,000 for three months ended September 30, 2010 and 2009, respectively, and $5,361,000 and $2,330,000 for the nine months ended September 30, 2010 and 2009, respectively.

 

Topic 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows. For the three and nine months ended September 30, 2010, the Company recorded $1,620,000 and $4,354,000, respectively, of excess tax benefits from stock-based compensation and none for the three and nine months ended September 30, 2009.

 

7. Net Income Per Share

 

The Company calculates net income per share in accordance with Topic 260 — Earnings per Share (SFAS No. 128, Earnings Per Share). Basic and diluted net income per share attributable to common stockholders are presented in conformity with the “two-class method” required for participating securities.

 

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The Company’s weighted average unvested shares subject to repurchase and settlement in shares of common stock upon vesting have the non-forfeitable right to receive dividends on an equal basis with common stock and therefore are considered participating securities that must be included in the calculation of net income per share using the two-class method.

 

Performance-Based Awards

 

Non-vested performance-based awards are included in the diluted shares outstanding each period if established performance criteria have been met at the end of the respective periods. 220,000 and 281,000 shares were excluded from the dilutive shares outstanding for the three and nine months ended September 30, 2010 and 2009, respectively, as the performance criteria had not been met as of the respective dates. Anti-dilutive shares in the amounts of 111,000 and 15,000 were excluded from the dilutive shares outstanding for the three months ended September 30, 2010 and 2009, respectively. Anti-dilutive shares in the amounts of 71,000 and 355,000 were excluded from the dilutive shares outstanding for the nine months ended September 30, 2010 and 2009, respectively.

 

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share calculation:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,835,000

 

$

896,000

 

$

8,943,000

 

$

1,954,000

 

Less: Undistributed earnings allocated to participating securities

 

(33,000

)

(20,000

)

(105,000

)

(70,000

)

Net income attributable to common shares - basic

 

3,802,000

 

876,000

 

8,838,000

 

1,884,000

 

Basic weighted average common shares outstanding

 

22,706,000

 

21,640,000

 

22,471,000

 

15,791,000

 

Basic net income per share

 

$

0.17

 

$

0.04

 

$

0.39

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share calculation:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,835,000

 

$

896,000

 

$

8,943,000

 

$

1,954,000

 

Less: Undistributed earnings allocated to participating securities

 

 

(20,000

)

 

(13,000

)

 

(68,000

)

 

(37,000

)

Net income attributable to common shares - diluted

 

3,815,000

 

883,000

 

8,875,000

 

1,917,000

 

Weighted average shares used to compute basic net income per share

 

22,706,000

 

21,640,000

 

22,471,000

 

15,791,000

 

Effect of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Unvested common shares subject to repurchase

 

126,000

 

352,000

 

181,000

 

424,000

 

Warrants to purchase convertible preferred stock

 

 

86,000

 

 

84,000

 

Employee stock options

 

1,270,000

 

1,635,000

 

1,214,000

 

1,390,000

 

Convertible preferred stock

 

 

 

 

4,671,000

 

Weighted average shares used to compute diluted net income per share

 

24,102,000

 

23,713,000

 

23,866,000

 

22,360,000

 

Diluted net income per share

 

$

0.16

 

$

0.04

 

$

0.37

 

$

0.09

 

 

8. Income Taxes

 

During the three and nine months ended September 30, 2010, the Company recorded income tax expense of $786,000 and $3,770,000, respectively, which resulted in an effective tax rate of 17% and 30%, respectively. During the three and nine months ended September 30, 2009, the Company recorded income tax expense of $1,578,000 and $2,872,000, respectively, which resulted in an effective tax rate of 64% and 60%, respectively. The tax provisions and the effective tax rates for the three and nine months ended September 30, 2010 differed from those of the same periods ended September 30, 2009, primarily due to the increase in income before taxes, a reduction in compensation expense related to non-deductible share-

 

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based payments in the current year and the recognition of certain pre-2010 Federal and California research and development tax credit benefits during the three months ended September 30, 2010. The expected tax provision derived from applying the federal statutory rate to the Company’s income before taxes for the three and nine months ended September 30, 2010 differed from the Company’s recorded income tax provision primarily due to compensation expense related to non-deductible share-based payments offset by the benefits of the recognition of current year state research and development credits and the recognition of certain pre-2010 Federal and California research and development tax credit benefits during the three months ended September 30, 2010. The Company’s effective tax rate for the three and nine months ended September 30, 2010 is not necessarily indicative of the effective tax rate that may be expected for fiscal year 2010.

 

Topic 740—Income Taxes (SFAS No. 109) prescribes that a tax position is required to meet a minimum recognition threshold before being recognized in the financial statements. The Company’s gross unrecognized tax benefits as of September 30, 2010 and December 31, 2009 were $17,400,000 and $15,000,000, respectively. As of September 30, 2010 and December 31, 2009, the Company recorded $173,000 and $32,000, respectively, of accrued interest. No significant penalties have been recorded to date.

 

9. Comprehensive Income (Loss)

 

In accordance with Topic 220 — Comprehensive Income (SFAS No. 130, Reporting Comprehensive Income), the Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive income (loss) consists of net income and accumulated other comprehensive income (loss), which includes certain changes in equity that are excluded from net income. Specifically, it includes cumulative foreign currency translation and the unrealized gain (loss) from investments. Comprehensive income for the three months ended September 30, 2010 and 2009 was $3,973,000 and $893,000, respectively.

 

Accumulated other comprehensive loss of $105,000 as of September 30, 2010 was comprised of $4,000 of unrealized gain on investments and $109,000 of foreign currency translation losses. Accumulated other comprehensive loss of $128,000 as of December 31, 2009 was comprised of $32,000 of unrealized loss on investments and $96,000 of foreign currency translation losses.

 

10. Segment Information

 

The Company operates in one industry—online reservations and guest management solutions. The Company has two reportable segments: North America and International, as defined by Topic 280—Segment Reporting (SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information). Reportable segments have been identified based on how management makes operating decisions, assesses performance and allocates resources. The Chief Executive Officer acts as the chief operating decision maker on behalf of both segments. The Company does not allocate assets discretely by reportable segments, and reviews asset information on a global basis, not by segment.

 

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Summarized financial information concerning the reportable segments is as follows:

 

 

 

North America
Segment(1)

 

International
Segment

 

Total
Consolidated

 

Three months ended September 30, 2010

 

 

 

 

 

 

 

Revenues—subscription

 

$

9,868,000

 

$

1,146,000

 

$

11,014,000

 

Revenues—reservations

 

11,059,000

 

323,000

 

11,382,000

 

Revenues—installation and other

 

2,101,000

 

23,000

 

2,124,000

 

Income (loss) from operations

 

6,646,000

 

(2,092,000

)

4,554,000

 

Interest income

 

59,000

 

 

59,000

 

Depreciation and amortization expense

 

1,546,000

 

163,000

 

1,709,000

 

Purchases of property, equipment and software

 

1,601,000

 

153,000

 

1,754,000

 

Three months ended September 30, 2009

 

 

 

 

 

 

 

Revenues—subscription

 

$

8,321,000

 

$

820,000

 

$

9,141,000

 

Revenues—reservations

 

6,932,000

 

143,000

 

7,075,000

 

Revenues—installation and other

 

797,000

 

29,000

 

826,000

 

Income (loss) from operations

 

3,972,000

 

(1,609,000

)

2,363,000

 

Interest income

 

100,000

 

 

100,000

 

Depreciation and amortization expense

 

1,138,000

 

124,000

 

1,262,000

 

Purchases of property, equipment and software

 

1,302,000

 

185,000

 

1,487,000

 

Nine months ended September 30, 2010

 

 

 

 

 

 

 

Revenues—subscription

 

$

28,409,000

 

$

3,118,000

 

$

31,527,000

 

Revenues—reservations

 

31,325,000

 

825,000

 

32,150,000

 

Revenues—installation and other

 

4,474,000

 

73,000

 

4,547,000

 

Income (loss) from operations

 

17,592,000

 

(5,088,000

)

12,504,000

 

Interest income

 

196,000

 

 

196,000

 

Depreciation and amortization expense

 

4,444,000

 

436,000

 

4,880,000

 

Purchases of property, equipment and software

 

6,161,000

 

576,000

 

6,737,000

 

Nine months ended September 30, 2009

 

 

 

 

 

 

 

Revenues—subscription

 

$

24,048,000

 

$

2,182,000

 

$

26,230,000

 

Revenues—reservations

 

20,522,000

 

386,000

 

20,908,000

 

Revenues—installation and other

 

2,205,000

 

84,000

 

2,289,000

 

Income (loss) from operations

 

9,256,000

 

(4,686,000

)

4,570,000

 

Interest income

 

267,000

 

 

267,000

 

Depreciation and amortization expense

 

3,457,000

 

339,000

 

3,796,000

 

Purchases of property, equipment and software

 

3,896,000

 

324,000

 

4,220,000

 

 


(1)

 

A significant majority of the Company’s “Technology” costs are incurred in the United States and as such are allocated to the North America segment. There are no internal revenue transactions between the Company’s reporting segments.

 

Geographical Information

 

The Company is domiciled in the United States and has international operations in Canada, Germany, Japan, Mexico and the United Kingdom. Information regarding the Company’s operations by geographic area is presented below:

 

 

 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues:

 

 

 

 

 

 

 

 

 

United States

 

$

21,693,000

 

$

15,162,000

 

$

60,413,000

 

$

44,338,000

 

International—all others

 

2,827,000

 

1,880,000

 

7,811,000

 

5,089,000

 

Total revenues

 

$

24,520,000

 

$

17,042,000

 

$

68,224,000

 

$

49,427,000

 

 

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As of

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Long-lived assets(1):

 

 

 

 

 

United States

 

$

11,915,000

 

$

9,872,000

 

International—all others

 

2,193,000

 

2,022,000

 

Total long-lived assets

 

$

14,108,000

 

$

11,894,000

 

 


(1)                                 Includes all non-current assets except deferred tax assets, goodwill and intangible assets.

 

The Company has no customers that individually, or in the aggregate, exceed 10% of revenues or accounts receivable as of and for any of the period presented above.

 

11. Subsequent Events

 

On September 15, 2010, the Company announced that it had agreed to acquire all of the issued and outstanding share capital of toptable.com, a leading restaurant reservation site in the United Kingdom, for approximately $55.0 million in cash. The transaction closed on October 1, 2010.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

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 2009 Annual Report.

 

This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would”  and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included below and in our 2009 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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Overview

 

We provide solutions that form an online network connecting reservation-taking restaurants and people who dine at those restaurants. Our solutions include our proprietary ERB and Connect for restaurant customers and www.opentable.com, a popular restaurant reservation website for diners. The OpenTable network includes approximately 15,000 OpenTable restaurant customers spanning all 50 states as well as select markets outside of the United States. Since our inception in 1998, we have seated approximately 175 million diners through OpenTable reservations. Restaurants that use our ERB pay us a one-time installation fee for onsite installation and training, a monthly subscription fee for the use of our software and hardware and a fee for each restaurant guest seated through online reservations. Restaurants that use Connect pay us a monthly subscription fee for the use of our service and a fee for each restaurant guest seated through online reservations. Our online restaurant reservation service is free to diners. For the three months ended September 30, 2010 and 2009, our net revenues were $24.5 million and $17.0 million, respectively. For the nine months ended September 30, 2010 and 2009, our net revenues were $68.2 million and $49.4 million, respectively. For the three months ended September 30, 2010 and 2009, our subscription revenues accounted for 45% and 54% of our total revenues, respectively, and 46% and 53% of total revenues for the nine months ended September 30, 2010 and 2009, respectively. For the three months ended September 30, 2010 and 2009, our reservation revenues accounted for 46% and 41% of our total revenues, respectively, and 47% and 42% of total revenues for the nine months ended September 30, 2010 and 2009, respectively.

 

In 2004, we began to selectively expand outside of North America into countries that are characterized by large numbers of online consumer transactions and reservation-taking restaurants. To date, we have concentrated our international efforts in Germany, Japan and the United Kingdom. Our revenues outside of North America for the three months ended September 30, 2010 and 2009 represented 6% and 6% of our total revenues, respectively, and 6% and 5% of total revenues for the nine months ended September 30, 2010 and 2009, respectively. We intend to continue to incur substantial expenses in advance of recognizing material related revenues as we attempt to further penetrate our existing international markets and selectively enter new markets. Some international markets may fail to meet our expectations, and we may decide to realign our focus, as we did when we closed our offices in Spain and France in the fourth quarter of 2008.

 

Basis of Presentation

 

General

 

We report consolidated operations in U.S. dollars and operate in two geographic segments: North America and International. The North America segment is comprised of all of our operations in the United States, Canada and Mexico, and the International segment is comprised of all non-North America operations, which includes operations in Europe and Asia.

 

Revenues

 

We generate substantially all of our revenues from our restaurant customers; we do not charge any fees to diners. Our revenues include installation fees for our ERB (including training), monthly subscription fees for our ERB and Connect and a fee for each restaurant guest seated through online reservations. Installation fees are recognized on a straight-line basis over an estimated customer life of approximately six years. Subscription revenues are recognized on a straight-line basis during the contractual period over which the service is delivered to our restaurant customers. Revenues from online reservations are recognized on a transaction basis as the diners are seated by the restaurant. Revenues are shown net of redeemable Dining Points issued to diners. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Dining Rewards Loyalty Program” in our 2009 Annual Report.

 

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Costs and Expenses

 

Operations and support.    Our operations and support expenses consist primarily of payroll and related costs, including bonuses and stock-based compensation, for those employees associated with installation, support and maintenance for our restaurant customers, as well as costs related to our outsourced call center. Operations and support expenses also include restaurant equipment costs, such as depreciation on restaurant-related hardware, shipping costs related to restaurant equipment, restaurant equipment costs that do not meet the capitalization threshold, referral payments and website connectivity costs. Operations and support expenses also include amortization of capitalized website and internal use software development costs (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Website and Software Development Costs” in our 2009 Annual Report). Also included in operations and support expenses are travel and related expenses incurred by the employees providing installation and support services for our restaurant customers, plus allocated facilities costs.

 

Sales and marketing.    Our sales and marketing expenses consist primarily of salaries, benefits and incentive compensation for sales and marketing employees, including stock-based compensation. Also included are expenses for trade shows, public relations and other promotional and marketing activities, travel and entertainment expenses and allocated facilities costs.

 

Technology.    Our technology expenses consist primarily of salaries and benefits, including bonuses and stock-based compensation, for employees and contractors engaged in the development and ongoing maintenance of our website, infrastructure and software, as well as allocated facilities costs.

 

General and administrative.    Our general and administrative costs consist primarily of salaries and benefits, including stock-based compensation, for general and administrative employees and contractors involved in executive, finance, accounting, risk management, human resources and legal roles. In addition, general and administrative costs include consulting, legal, accounting and other professional fees. Bad debt, third party payment processor, credit card, bank processing fees and allocated facilities costs are also included in general and administrative expenses.

 

Headcount consists of full-time equivalent employees, as well as full-time equivalent contractors, in all of the sections noted below.

 

Other Income, Net

 

Other income, net consists primarily of the interest income earned on our cash accounts. Foreign exchange gains and losses are also included in other income, net.

 

Income Taxes

 

We are subject to income tax in the United States as well as other foreign tax jurisdictions in which we conduct business. Earnings from our foreign operations are subject to local jurisdictional income tax and may also be subject to current U.S. income tax.

 

During the three and nine months ended September 30, 2010, we recorded income tax expense of $0.8 million and $3.8 million, respectively, which resulted in an effective tax rate of 17% and 30%, respectively. During the three and nine months ended September 30, 2009, we recorded income tax expense of $1.6 million and $2.9 million, respectively, which resulted in an effective tax rate of 64% and 60%, respectively. The tax provisions and the effective tax rates for the three and nine months ended September 30, 2010 differed from those of the same periods ended September 30, 2009, primarily due to the increase in income before taxes, a reduction in compensation expense related to non-deductible share-based payments in the current year and the recognition of certain pre-2010 Federal and California research

 

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Table of Contents

 

development tax credit benefits during the three months ended September 30, 2010. The expected tax provision derived from applying the federal statutory rate to our income before taxes for the three and nine months ended September 30, 2010 differed from our recorded income tax provision primarily due to compensation expense related to non-deductible share-based payments offset by the benefits of the recognition of current year state research and development credits and the recognition of certain pre-2010 Federal and California research and development tax credit benefits during the three months ended September 30, 2010. Our effective tax rate for the three and nine months ended September 30, 2010 is not necessarily indicative of the effective tax rate that may be expected for fiscal year 2010.

 

Factors that impact our income tax provision include, but are not limited to, the compensation expense related to non-deductible share-based payments, recognition of research and development tax benefits and discrete tax benefits arising from the disqualified disposition of certain stock-based compensation awards.

 

Critical Accounting Policies and Estimates

 

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

 

Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Our future estimates may change if the underlying assumptions change. Actual results may differ significantly from these estimates.

 

There have been no material changes to our critical accounting policies. For further information on our critical and other significant accounting policies, see our 2009 Annual Report.

 

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements:

 

·                  Revenue Recognition;

·                  Dining Rewards Loyalty Program;

·                  Website and Software Development Costs;

·                  Income Taxes; and

·                  Stock-Based Compensation.

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented and as a percentage of our revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

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Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

24,520

 

$

17,042

 

$

68,224

 

$

49,427

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Operations and support (1)

 

6,769

 

5,077

 

19,095

 

15,195

 

Sales and marketing (1)

 

5,185

 

3,845

 

14,971

 

11,652

 

Technology (1)

 

2,967

 

2,378

 

8,707

 

7,689

 

General and administrative (1)

 

5,045

 

3,379

 

12,947

 

10,321

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

19,966

 

14,679

 

55,720

 

44,857

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

4,554

 

2,363

 

12,504

 

4,570

 

Other income, net

 

67

 

111

 

209

 

256

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

4,621

 

2,474

 

12,713

 

4,826

 

Income tax expense

 

786

 

1,578

 

3,770

 

2,872

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,835

 

$

896

 

$

8,943

 

$

1,954

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.04

 

$

0.39

 

$

0.12

 

Diluted

 

$

0.16

 

$

0.04

 

$

0.37

 

$

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

22,706

 

21,640

 

22,471

 

15,791

 

Diluted

 

24,102

 

23,713

 

23,866

 

22,360

 

 


(1) Stock-based compensation included in above line items:

 

 

 

 

 

 

 

 

 

Operations and support

 

$

229

 

$

79

 

$

648

 

$

232

 

Sales and marketing

 

494

 

180

 

1,359

 

588

 

Technology

 

416

 

91

 

1,059

 

382

 

General and administrative

 

888

 

297

 

2,295

 

1,128

 

 

 

$

2,027

 

$

647

 

$

5,361

 

$

2,330

 

 

 

 

 

 

 

 

 

 

 

Other Operational Data:

 

 

 

 

 

 

 

 

 

Installed restaurants (at period end):

 

 

 

 

 

 

 

 

 

North America

 

13,025

 

10,338

 

13,025

 

10,338

 

International

 

2,221

 

1,337

 

2,221

 

1,337

 

Total

 

15,246

 

11,675

 

15,246

 

11,675

 

 

 

 

 

 

 

 

 

 

 

Seated diners (in thousands):

 

 

 

 

 

 

 

 

 

North America

 

15,368

 

10,114

 

44,591

 

30,106

 

International

 

531

 

227

 

1,403

 

620

 

Total

 

15,899

 

10,341

 

45,994

 

30,726

 

 

 

 

 

 

 

 

 

 

 

Headcount (at period end):

 

 

 

 

 

 

 

 

 

North America

 

302

 

247

 

302

 

247

 

International

 

74

 

63

 

74

 

63

 

Total

 

376

 

310

 

376

 

310

 

 

 

 

 

 

 

 

 

 

 

Additional Financial Data:

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

North America

 

$

23,028

 

$

16,050

 

$

64,208

 

$

46,775

 

International

 

1,492

 

992

 

4,016

 

2,652

 

Total

 

$

24,520

 

$

17,042

 

$

68,224

 

$

49,427

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

North America

 

$

6,646

 

$

3,972

 

$

17,592

 

$

9,256

 

International

 

(2,092

)

(1,609

)

(5,088

)

(4,686

)

Total

 

$

4,554

 

$

2,363

 

$

12,504

 

$

4,570

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

North America

 

$

1,546

 

$

1,138

 

$

4,444

 

$

3,457

 

International

 

163

 

124

 

436

 

339

 

Total

 

$

1,709

 

$

1,262

 

$

4,880

 

$

3,796

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

North America

 

$

1,932

 

$

559

 

$

5,100

 

$

2,049

 

International

 

95

 

88

 

261

 

281

 

Total

 

$

2,027

 

$

647

 

$

5,361

 

$

2,330

 

 

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Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

(as a percentage of revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

100

%

100

%

100

%

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

28

 

30

 

28

 

31

 

 

 

 

 

Sales and marketing

 

21

 

22

 

22

 

24

 

 

 

 

 

Technology

 

12

 

14

 

13

 

15

 

 

 

 

 

General and administrative

 

20

 

20

 

19

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

81

 

86

 

82

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

19

 

14

 

18

 

9

 

 

 

 

 

Other income, net

 

0

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

19

 

14

 

18

 

9

 

 

 

 

 

Income tax expense

 

3

 

9

 

5

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

16

%

5

%

13

%

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

September 30,

 

Three Month

 

Nine Month

 

 

 

2010

 

2009

 

2010

 

2009

 

% Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues by Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

$

11,014

 

$

9,141

 

$

31,527

 

$

26,230

 

20

%

20

%

Reservation

 

11,382

 

7,075

 

32,150

 

20,908

 

61

%

54

%

Installation and other

 

2,124

 

826

 

4,547

 

2,289

 

157

%

99

%

Total

 

$

24,520

 

$

17,042

 

$

68,224

 

$

49,427

 

44

%

38

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of Revenues by Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

45

%

54

%

46

%

53

%

 

 

 

 

Reservation

 

46

%

41

%

47

%

42

%

 

 

 

 

Installation and other