UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 11, 2013
Date of Report (Date of earliest event reported)
SALESFORCE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 001-32224 | 94-3320693 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I. R. S. Employer Identification No.) |
The Landmark @ One Market, Suite 300
San Francisco, CA 94105
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (415) 901-7000
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Amendment No. 1
This Form 8-K/A is filed as an amendment (Amendment No. 1) to the Current Report on Form 8-K filed by salesforce.com on July 15, 2013. Amendment No. 1 is being filed to include the financial statements and financial information required under Item 9.01.
Item 9.01 Financial Statements and Exhibits |
SIGNATURE |
EXHIBIT LIST |
EXHIBIT 23.1 |
EXHIBIT 99.1 |
EXHIBIT 99.2 |
EXHIBIT 99.3 |
Section 9Financial Statements and Exhibits.
Item 9.01 Financial Statements and Exhibits.
(a) | Financial Statements of Business Acquired. |
The unaudited condensed consolidated financial statements of ExactTarget, Inc. as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 and the notes related thereto are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated herein by reference.
The audited consolidated financial statements of ExactTarget, Inc. as of and for the years ended December 31, 2012 and 2011 and the notes related thereto are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated herein by reference.
(b) | Pro Forma Financial Information. |
The unaudited pro forma condensed combined financial information of salesforce.com, inc. and ExactTarget, Inc. for the year ended January 31, 2013 and for the six months ended July 31, 2013 and the notes related thereto are filed as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated herein by reference.
(d) | Exhibits. |
Exhibit Number |
Description of Exhibit | |
23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm of ExactTarget, Inc. | |
99.1 | Unaudited condensed consolidated financial statements of ExactTarget, Inc. as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 and the notes related thereto | |
99.2 | Audited consolidated financial statements of ExactTarget, Inc. as of and for the years ended December 31, 2012 and 2011 and the notes related thereto | |
99.3 | Unaudited pro forma condensed combined financial information of salesforce.com, inc. and ExactTarget, Inc. for the year ended January 31, 2013 and for the six months ended July 31, 2013 and the notes related thereto |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: August 30, 2013 | salesforce.com, inc. | |
/s/ Burke F. Norton | ||
Name: Burke F. Norton Title: Executive Vice President and Chief Legal Officer |
Exhibit No. |
Description of Exhibit | |
23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm of ExactTarget, Inc. | |
99.1 | Unaudited condensed consolidated financial statements of ExactTarget, Inc. as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 and the notes related thereto | |
99.2 | Audited consolidated financial statements of ExactTarget, Inc. as of and for the years ended December 31, 2012 and 2011 and the notes related thereto | |
99.3 | Unaudited pro forma condensed combined financial information of salesforce.com, inc. and ExactTarget, Inc. for the year ended January 31, 2013 and for the six months ended July 31, 2013 and the notes related thereto |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
| Registration statement on Form S-8 (No. 333-117860) pertaining to the salesforce.com, inc. 1999 Stock Option Plan, 2004 Equity Incentive Plan, 2004 Outside Directors Stock Plan and 2004 Employee Stock Purchase Plan, |
| Registration statement on Form S-8 (No. 333-123656) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-134467) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan and 2006 Inducement Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-143161) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-151180) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-159554) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan and 2006 Inducement Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-167190) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-174209) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan, 2006 Inducement Equity Incentive Plan and Radian6 Technologies Inc. Third Amended and Restated Stock Option Plan, |
| Registration statement on Form S-3 (No. 333-174541) and related prospectus for the registration of 436,167 shares of common stock, |
| Registration statement on Form S-8 (No. 333-177018) pertaining to the salesforce.com, inc. 2006 Inducement Equity Incentive Plan and Assistly, Inc. 2009 Stock Plan, |
| Registration statement on Form S-8 (No. 333-178606) pertaining to the Model Metrics, Inc. 2008 Stock Plan, |
| Registration statement on Form S-8 (No. 333-179317) pertaining to the 2Catalyze, Inc. Second Amended 2008 Stock Option Plan, |
| Registration statement on Form S-8 (No. 333-181698) pertaining to the salesforce.com, inc. 2004 Equity Incentive Plan and 2004 Employee Stock Purchase Plan, |
| Registration statement on Form S-3 (No 333-183581) and related prospectus for the registration of 1,680,195 shares of common stock, |
| Registration statement on Form S-8 (No. 333-183580) pertaining to the salesforce.com, inc. 2006 Inducement Equity Incentive Plan and Buddy Media, Inc. 2007 Equity Incentive Plan, and |
| Registration statement on Form S-8 (No. 333-183885) pertaining to the Goinstant, Inc. Stock Option Plan, |
| Registration statement on Form S-8 (No. 333-188850) pertaining to the salesforce.com, 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan, |
| Registration statement on Form S-8 (No. 333-189249) pertaining to the EdgeSpring, Inc. 2010 Equity Incentive Plan, |
| Registration statement on Form S-3 (No 333-189248) and related prospectus for the registration of 2,090,499 shares of common stock, |
| Registration statement on Form S-8 (No. 333-189801) pertaining to the salesforce.com, Inc. 2013 Equity Incentive Plan, |
| Registration statement on Form S-8 (No. 333-189980) pertaining to the ExactTarget, Inc. 2004 Stock Option Plan, and 2008 Equity Incentive Plan; |
of salesforce.com, inc. of our report dated February 22, 2013, with respect to the consolidated balance sheets of ExactTarget, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, redeemable and convertible preferred stock and stockholders equity, and cash flows for each of the years in the two-year period ended December 31, 2012, which report appears in the Form 8-K, of salesforce.com, inc. dated August 30, 2013.
/s/ KPMG LLP
Indianapolis, Indiana
August 30, 2013
Unaudited Condensed Consolidated Financial Statements
As of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 and the notes related thereto
Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 |
1 | |||
2 | ||||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 |
3 | |||
4 |
Condensed Consolidated Balance Sheets
(in thousands, except share data)
As of June 30, 2013 |
As of December 31, 2012 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 55,361 | $ | 69,192 | ||||
Short-term investments |
50,486 | 40,217 | ||||||
Accounts receivable, net of allowances of $1,351 and $943 as of June 30, 2013 and December 31, 2012, respectively |
58,251 | 55,911 | ||||||
Prepaid expenses and other current assets |
17,789 | 14,597 | ||||||
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|
|
|||||
Total current assets |
181,887 | 179,917 | ||||||
Property and equipment, net |
65,021 | 67,944 | ||||||
Goodwill and intangible assets, net |
132,651 | 135,574 | ||||||
Other non-current assets |
3,551 | 3,631 | ||||||
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|
|||||
Total assets |
$ | 383,110 | $ | 387,066 | ||||
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|
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Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 9,590 | $ | 9,070 | ||||
Accrued liabilities |
16,779 | 14,338 | ||||||
Accrued compensation and related expenses |
18,599 | 18,503 | ||||||
Deferred revenue |
56,673 | 57,592 | ||||||
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|
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Total current liabilities |
101,641 | 99,503 | ||||||
Other non-current liabilities |
6,212 | 5,946 | ||||||
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|
|||||
Total liabilities |
$ | 107,853 | $ | 105,449 | ||||
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Redeemable convertible preferred stock: |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.0005 par value. Authorized 300,000,000 shares; Issued and outstanding 71,455,647 and 68,544,290 shares at June 30, 2013 and December 31, 2012, respectively; |
36 | 34 | ||||||
Additional paid in capital |
473,698 | 449,801 | ||||||
Accumulated other comprehensive loss |
(2,948 | ) | (1,122 | ) | ||||
Accumulated deficit |
(195,529 | ) | (167,096 | ) | ||||
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|
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Total stockholders equity |
275,257 | 281,617 | ||||||
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|
|
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Total liabilities and stockholders equity |
$ | 383,110 | $ | 387,066 | ||||
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|
See accompanying notes to condensed consolidated financial statements.
1
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited; in thousands, except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenue: |
||||||||||||||||
Subscription |
$ | 75,032 | $ | 55,103 | $ | 146,661 | $ | 106,250 | ||||||||
Professional services |
19,395 | 14,215 | 36,649 | 27,125 | ||||||||||||
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|
|||||||||
Total revenue |
94,427 | 69,318 | 183,310 | 133,375 | ||||||||||||
Cost of revenue: |
||||||||||||||||
Subscription |
19,322 | 12,720 | 37,825 | 25,430 | ||||||||||||
Professional services |
14,505 | 11,088 | 28,222 | 22,219 | ||||||||||||
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|
|||||||||
Total cost of revenues |
33,827 | 23,808 | 66,047 | 47,649 | ||||||||||||
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|||||||||
Gross profit |
60,600 | 45,510 | 117,263 | 85,726 | ||||||||||||
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Operating expenses: |
||||||||||||||||
Sales and marketing |
39,259 | 27,365 | 77,524 | 52,580 | ||||||||||||
Research and development |
19,250 | 11,673 | 37,244 | 22,833 | ||||||||||||
General and administrative |
18,714 | 8,976 | 30,819 | 17,246 | ||||||||||||
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|
|||||||||
Total operating expenses |
77,223 | 48,014 | 145,587 | 92,659 | ||||||||||||
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|||||||||
Operating loss |
(16,623 | ) | (2,504 | ) | (28,324 | ) | (6,933 | ) | ||||||||
Other expense, net |
(206 | ) | (98 | ) | (109 | ) | (352 | ) | ||||||||
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|||||||||
Loss before taxes |
(16,829 | ) | (2,602 | ) | (28,433 | ) | (7,285 | ) | ||||||||
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|||||||||
Net loss |
$ | (16,829 | ) | $ | (2,602 | ) | $ | (28,433 | ) | $ | (7,285 | ) | ||||
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Other comprehensive loss: |
||||||||||||||||
Foreign currency translation adjustment, net of tax - zero |
(1,399 | ) | (620 | ) | (1,787 | ) | (362 | ) | ||||||||
Net unrealized loss on marketable securities, net of tax - zero |
(58 | ) | | (39 | ) | | ||||||||||
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Comprehensive loss |
$ | (18,286 | ) | $ | (3,222 | ) | $ | (30,259 | ) | $ | (7,647 | ) | ||||
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Net loss per common share - basic and diluted |
$ | (0.24 | ) | $ | (0.04 | ) | $ | (0.41 | ) | $ | (0.18 | ) | ||||
Weighted average number of common shares outstanding - basic and diluted |
69,831,685 | 65,958,805 | 69,317,303 | 40,345,884 |
See accompanying notes to condensed consolidated financial statements.
2
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands)
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (28,433 | ) | $ | (7,285 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
15,997 | 10,499 | ||||||
Provision for / (recovery of) bad debt and credit allowances |
1,494 | 1,233 | ||||||
Stock-based compensation |
8,233 | 4,953 | ||||||
Other |
523 | 172 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(5,031 | ) | 146 | |||||
Prepaid expenses and other assets |
(3,097 | ) | (2,550 | ) | ||||
Accounts payable and accrued liabilities |
5,115 | (1,753 | ) | |||||
Accrued compensation and related expenses |
383 | (1,930 | ) | |||||
Deferred revenue |
221 | 4,470 | ||||||
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|
|||||
Net cash provided by (used in) operating activities |
(4,595 | ) | 7,955 | |||||
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Cash flows from investing activities: |
||||||||
Business combination |
(92 | ) | (806 | ) | ||||
Intangible asset additions |
(658 | ) | | |||||
Purchases of property and equipment |
(11,895 | ) | (9,119 | ) | ||||
Purchases of marketable securities |
(20,354 | ) | | |||||
Sales / maturities of marketable securities |
9,507 | | ||||||
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Net cash used in investing activities |
(23,492 | ) | (9,925 | ) | ||||
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Cash flows from financing activities: |
||||||||
Repayments on capital leases |
(386 | ) | (388 | ) | ||||
Net payments on term loan and revolving line of credit |
| (16,667 | ) | |||||
Proceeds from issuance of common stock from option exercises |
15,667 | 820 | ||||||
Payments of contingent consideration |
| (456 | ) | |||||
Proceeds from issuance of common stock, net of issuance costs |
| 169,709 | ||||||
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Net cash provided by financing activities |
15,281 | 153,018 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(1,025 | ) | (198 | ) | ||||
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Increase / (decrease) in cash and cash equivalents |
(13,831 | ) | 150,850 | |||||
Cash and cash equivalents, beginning of the period |
69,192 | 60,705 | ||||||
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Cash and cash equivalents, end of the period |
$ | 55,361 | $ | 211,555 | ||||
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Supplemental Disclosures: |
||||||||
Net cash paid for interest |
$ | | $ | 288 | ||||
Supplemental disclosure of noncash investing activities: |
||||||||
Change in payables for purchases of property and equipment |
$ | (1,817 | ) | $ | 2,698 | |||
Capital lease obligation entered into for property and equipment |
$ | 388 | $ | 383 |
See accompanying notes to condensed consolidated financial statements.
3
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
(1) Summary of Significant Accounting Policies
(a) Description of Business
ExactTarget, Inc. (ExactTarget or the Company) is a leading global provider of cross-channel, digital marketing software-as-a-service (SaaS) solutions that empower organizations of all sizes to communicate with their customers through a suite of applications, including email, mobile, social media and websites, marketing automation and data management. ExactTargets suite of integrated applications enables both business-to-business and business-to-consumer marketers to plan, automate, deliver and optimize data-driven digital marketing and real-time communications to drive customer engagement, increase sales and improve return on marketing investment. The Company is headquartered in Indianapolis, Indiana with offices across North America and in Europe, South America, Australia and Asia Pacific.
(b) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Interim results are not necessarily indicative of results for a full year. The information included in these condensed consolidated financial statements should be read in conjunction with the 2012 consolidated financial statements as of and for the year ended December 31, 2012.
(c) Use of Estimates
The preparation of financial statements requires the Companys management to make a number of estimates and assumptions related to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts receivable, allowance for future credits, revenue recognition, valuation of deferred tax assets, valuation of intangible assets acquired through business combinations, and the valuation of share-based payments. Actual results could differ from these estimates.
(d) Segments
The Company manages its operations as a single segment for purposes of assessing performance and making operating decisions. Revenue is generated predominately in the United States, and all significant assets are held in the United States.
Revenue by geographic region, based on the billing address of the clients, was as follows for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
United States |
$ | 76,767 | $ | 56,816 | $ | 148,743 | $ | 109,953 | ||||||||
International |
17,660 | 12,502 | 34,567 | 23,422 | ||||||||||||
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Total revenue |
$ | 94,427 | $ | 69,318 | $ | 183,310 | $ | 133,375 | ||||||||
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Percentage of revenue generated outside the United States |
19 | % | 18 | % | 19 | % | 18 | % |
No single country outside the United States represented more than 10% of revenue during any period reported.
(e) Foreign Currency Translation
The U.S. dollar is the reporting currency for all periods presented. The financial information for entities outside the United States is measured using the local currency as the functional currency. All assets and liabilities denominated in foreign currency are translated to U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historic exchange rates.
4
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
(f) Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding and any potentially dilutive common equivalents for the period.
The numbers of preferred stock, stock options, restricted stock awards and restricted stock units that could potentially dilute net loss per basic share in the future, but have not been included in the computation of net loss per diluted share because to do so would have been anti-dilutive, were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Anti-dilutive shares |
7,515,897 | 5,541,443 | 7,428,574 | 27,387,230 |
(2) Short-Term Investments
The following tables summarize the Companys investments in available-for-sale securities for the periods stated below:
As of June 30, 2013 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Corporate Notes / Bonds |
$ | 41,870 | $ | 5 | $ | (42 | ) | $ | 41,833 | |||||||
Certificates of Deposit |
6,260 | | (4 | ) | 6,256 | |||||||||||
Commercial Paper |
2,395 | 2 | | 2,397 | ||||||||||||
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Total available-for-sale securities |
$ | 50,525 | $ | 7 | $ | (46 | ) | $ | 50,486 | |||||||
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As of December 31, 2012 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Corporate Notes / Bonds |
$ | 32,330 | $ | | $ | (23 | ) | $ | 32,307 | |||||||
Certificates of Deposit |
6,920 | | (6 | ) | 6,914 | |||||||||||
Commercial Paper |
998 | | (2 | ) | 996 | |||||||||||
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|||||||||
Total available-for-sale securities |
$ | 40,248 | $ | | $ | (31 | ) | $ | 40,217 | |||||||
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|
All available-for-sale securities had maturities within one year with the exception of corporate notes/bonds and certificates of deposit with a fair value of $28.4 million and $20.4 million, as of June 30, 2013 and December 31, 2012, respectively, which had maturities within two years. Available-for-sale securities are reported at fair value as described below, with unrealized gains and losses, net of tax, included as a separate component of stockholders equity within accumulated other comprehensive loss. Realized gains and losses on available-for-sale securities, of which none were significant as of June 30, 2013 and 2012, are included in other income / (expense), net in the Companys consolidated statements of operations and comprehensive loss.
5
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
The assets measured at fair value on a recurring basis and the input categories associated with those assets were as follows:
As of June 30, 2013 | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Other Unobservable Inputs (Level 3) |
|||||||||||||
Short-term investments: |
||||||||||||||||
Corporate Notes / Bonds |
$ | 41,833 | $ | | $ | 41,833 | $ | | ||||||||
Certificates of Deposit |
6,256 | | 6,256 | | ||||||||||||
Commercial Paper |
2,397 | | 2,397 | | ||||||||||||
As of December 31, 2012 | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Other Unobservable Inputs (Level 3) |
|||||||||||||
Short-term investments: |
||||||||||||||||
Corporate Notes / Bonds |
$ | 32,307 | $ | | $ | 32,307 | $ | | ||||||||
Certificates of Deposit |
6,914 | | 6,914 | | ||||||||||||
Commercial Paper |
996 | | 996 | |
The available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. The Company values these securities based on pricing from pricing vendors, who may use inputs other than quoted prices that are observable either directly or indirectly in determining fair value. The Company classifies all available-for-sale securities as having Level 2 inputs. The Companys valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques.
(3) Property and Equipment
Property and equipment, including assets held under capital leases, are summarized as follows as of June 30, 2013 and December 31, 2012. Construction in progress represents costs associated with new equipment, office leasehold improvements, and software not yet placed in service as of June 30, 2013 and December 31, 2012.
As of June 30, 2013 |
As of December 31, 2012 |
Estimated Useful Life (in Years) | ||||||||
Furniture and equipment |
$ | 78,620 | $ | 69,326 | 2 - 7 | |||||
Software |
29,271 | 30,055 | 5 | |||||||
Leasehold improvements |
13,823 | 13,968 | * | |||||||
Construction in progress |
4,452 | 7,596 | ||||||||
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Total property and equipment |
$ | 126,166 | $ | 120,945 | ||||||
Less accumulated depreciation and amortization |
(61,145 | ) | (53,001 | ) | ||||||
|
|
|
|
|||||||
Total property and equipment, net |
$ | 65,021 | $ | 67,944 | ||||||
|
|
|
|
* | Shorter of lease term or estimated useful life |
6
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
Depreciation and amortization of property and equipment were as follows for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Depreciation and amortization of property and equipment |
$ | 6,524 | $ | 4,978 | $ | 12,700 | $ | 9,873 |
(4) Goodwill and Intangible Assets
The following table presents the change in the carrying amount of goodwill:
Goodwill as of December 31, 2012 |
$ | 108,222 | ||
Additions from acquisitions |
| |||
Purchase price adjustments and other |
(155 | ) | ||
|
|
|||
Goodwill as of June 30, 2013 |
$ | 108,067 | ||
|
|
Intangible assets with finite lives are amortized over their estimated useful lives between two and six years as shown in the table below. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed.
As of June 30, |
As of December 31, |
Economic Useful Life (in years) | ||||||||||||
2013 | Net Additions* |
2012 | ||||||||||||
Customer lists |
$ | 6,367 | $ | (81 | ) | $ | 6,448 | 4 - 5 | ||||||
Software technology |
21,913 | 658 | 21,255 | 4 - 6 | ||||||||||
Trademarks |
1,824 | | 1,824 | 3 | ||||||||||
Noncompete agreements |
904 | (48 | ) | 952 | 2 - 3 | |||||||||
|
|
|
|
|
|
|||||||||
Total gross intangible assets |
31,008 | 529 | 30,479 | |||||||||||
Less accumulated amortization |
(6,424 | ) | (3,297 | ) | (3,127 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Net intangible assets |
$ | 24,584 | $ | (2,768 | ) | $ | 27,352 | |||||||
|
|
|
|
|
|
* | Net additions consist of the addition of acquired technology and impact of foreign exchange on intangible assets recorded in foreign currency |
The estimated future amortization expense related to intangible assets as of June 30, 2013, is as follows:
Amortization | ||||
Expense | ||||
2013 |
$ | 3,286 | ||
2014 |
7,778 | |||
2015 |
6,522 | |||
2016 |
3,768 | |||
2017 |
2,617 | |||
Thereafter |
613 | |||
|
|
|||
Total amortization expense |
$ | 24,584 | ||
|
|
7
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
Amortization of intangible assets was as follows for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Amortization of intangible assets |
$ | 1,646 | $ | 306 | $ | 3,297 | $ | 626 |
(5) Acquisitions
(a) Pardot
In October 2012, the Company completed the acquisition of Pardot, LLC (Pardot) for $95.2 million to, among other things, extend the Companys marketing automation capabilities to serve both business-to-business and business-to-consumer marketers worldwide. As consideration for the Pardot acquisition, the Company paid $85.4 million in cash and issued 423,370 shares of its common stock valued at $10.0 million. The fair value of the common stock consideration was based on the closing price of $23.62 on the day prior to the closing of the acquisition. Of the total consideration paid, $7.6 million was deposited and held in escrow to secure indemnification obligations. In February 2013, the Company received payment for the net working capital settlement receivable of $0.2 million in connection with the Pardot acquisition.
(b) iGoDigital
Also in October 2012, the Company completed the acquisition of all of the membership interests and capital stock of iGoDigital Holdings, LLC and iGoDigital, Inc. (together, iGoDigital) for $21.2 million to, among other things, advance its website solutions and predictive analytics solutions. As consideration, the Company paid $14.8 million in cash and issued 263,268 shares of its common stock valued at $6.3 million. The fair value of the common stock consideration was based on the average closing price of the Companys common stock for the five trading days ending on October 5, 2012, which was $23.93. In April 2013, the Company paid an additional $0.1 million for the working capital settlement in connection with the iGoDigital acquisition.
(6) Income Taxes Valuation Allowance
The Company evaluates whether it will realize the benefits of its net deferred tax assets and establishes a valuation allowance to reduce the carrying value of its deferred tax assets to the amount considered more likely than not to be recognized. Deferred tax assets arise as a result of tax loss carry-forwards and various differences between the book basis and the tax basis of such assets. The Company has determined that it is more likely than not that deferred tax assets will not be recognized due to expected losses generated by the continued planned business investment and, as a result, maintains a valuation allowance for the full value of its deferred tax assets. During the three and six-month periods ended June 30, 2013, the valuation allowance increased by $5.8 million and $9.6 million, respectively, to $32.0 million due to additional losses incurred since December 31, 2012.
(7) Initial Public Offering
In March 2012, the Company completed the sale of 9,775,000 shares of common stock, including the underwriters exercise of an over-allotment option, at a price of $19.00 per share. A total of $185.7 million in gross proceeds was raised in the initial public offering. After deducting the underwriting discount of $13.0 million and offering expenses of $3.0 million, net proceeds were $169.7 million.
Upon the closing of the Companys initial public offering, the 23,467,219 shares of the Companys outstanding convertible preferred stock converted, on a two-for-one basis, into 46,934,438 shares of common stock.
(8) Stockholders Equity
In March 2012, the Companys board of directors approved an amendment to the Companys certificate of incorporation to increase the number of authorized shares of common stock to 74,000,000 shares, decrease the par value per share of common stock to $0.0005 and reclassify and subdivide each share of issued and outstanding common stock into two shares of common stock. The Companys certificate of incorporation was further amended by the Companys board of directors to increase the number of authorized shares of common stock to 300,000,000.
As of June 30, 2013, the Company was authorized to issue 300,000,000 shares of common stock with par value of $0.0005 per share and 10,000,000 shares of preferred stock with par value of $0.001 per share.
8
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
(9) Equity Plan Activity
(a) Stock-Based Compensation
The following table sets forth the total stock-based compensation expense resulting from stock awards included in the Companys condensed consolidated statements of operations and comprehensive loss:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Cost of revenue - subscription |
$ | 151 | $ | 107 | $ | 282 | $ | 205 | ||||||||
Cost of revenue - professional services |
323 | 244 | 598 | 467 | ||||||||||||
Sales and marketing |
1,213 | 836 | 2,211 | 1,548 | ||||||||||||
Research and development |
1,214 | 406 | 2,240 | 780 | ||||||||||||
General and administrative |
1,691 | 1,182 | 2,902 | 1,953 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation |
$ | 4,592 | $ | 2,775 | $ | 8,233 | $ | 4,953 | ||||||||
|
|
|
|
|
|
|
|
(b) Stock Option Awards
The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2013 | 2012 | 2013 | 2012 | |||||
Expected volatility |
52.99% - 53.22% | 54.88% - 55.29% | 52.99% - 53.68% | 54.88% - 55.54% | ||||
Risk free interest rate |
0.75% - 1.00% | 0.85% - 0.92% | 0.75% - 1.00% | 0.85% - 0.92% | ||||
Expected dividend yield |
| | | | ||||
Expected option term (in years) |
6.25 | 6.25 | 6.25 | 6.25 | ||||
Weighted averaged grant date fair value of options granted |
$11.92 | $12.55 | $11.51 | $8.15 |
The Company believes the historical volatility of a peer group of companies is representative of future stock price trends. Therefore, expected volatility is based on historical volatility of the publicly traded stock of a peer group of companies analyzed by the Company over the expected term of the options. The risk-free interest rate for periods within the contractual life of the Companys stock options is based on the U.S. Treasury yield curve in effect at the time of grant for time periods similar to the expected term of the award. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. The estimated forfeiture rate applied is based on historical forfeiture rates. The expected option term is based on the average of the vesting term and the 10-year contractual lives of all options awarded.
9
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
A summary of the Companys stock option activity under its equity incentive plan and related information is as follows:
Weighted | ||||||||||||||||
Weighted | average | |||||||||||||||
average | remaining | |||||||||||||||
exercise | contractual | Aggregate | ||||||||||||||
Shares | price | life | intrinsic value | |||||||||||||
Outstanding: |
||||||||||||||||
Balance at December 31, 2012 |
11,212,761 | $ | 7.8664 | 7.19 | $ | 136,051 | ||||||||||
Granted |
877,460 | 22.6000 | ||||||||||||||
Exercised |
(2,883,691 | ) | 5.4300 | |||||||||||||
Forfeited |
(80,781 | ) | 14.4000 | |||||||||||||
|
|
|||||||||||||||
Balance at June 30, 2013 |
9,125,749 | $ | 10.0000 | 7.27 | $ | 216,496 | ||||||||||
|
|
|||||||||||||||
Exercisable at June 30, 2013 |
4,684,912 | $ | 5.8362 | 6.04 | $ | 130,633 |
The aggregate intrinsic value represents the total pretax intrinsic value, based on a stock price of $33.72 and $20.00 per share at June 30, 2013 and December 31, 2012, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three and six-month periods ended June 30, 2013 was $58.8 million and $71.0 million, respectively.
(c) Restricted Stock
A summary of the Companys restricted stock award and restricted stock unit activity under its equity incentive plan and related information is as follows:
Shares | Weighted average exercise price |
Weighted average remaining contractual life |
||||||||||
Unvested restricted stock at December 31, 2012 |
966,467 | $ | 21.76 | 1.5 | ||||||||
Granted |
612,476 | 23.26 | ||||||||||
Vested |
(595,155 | ) | 23.69 | |||||||||
|
|
|||||||||||
Unvested restricted stock at June 30, 2013 |
983,788 | $ | 21.77 | 1.6 | ||||||||
|
|
(10) Commitments and Contingencies
(a) Notes Payable
As of December 31, 2011, the Company was party to a Loan and Security Agreement (Agreement) that provided the Company with a $10.0 million bank term loan and a $20.0 million revolving line of credit and was collateralized by a blanket lien on substantially all of the Companys personal property, including intellectual property.
In February 2012, the Company entered into a fourth loan modification agreement that set forth the criteria under the financial covenants in the Agreement for 2012. In March 2012, the Company repaid all outstanding amounts under the Agreement, and in April 2012, terminated the Agreement.
(b) Lease Commitments, Software Licensing and Hosting Agreements
The Company has non-cancelable operating leases, primarily for office space in Indianapolis, Indiana, San Francisco, California, Bellevue, Washington, New York, New York, Atlanta, Georgia, Canada, Australia, Brazil, France, Germany, Sweden, the United Kingdom and Singapore. Operating and capital lease obligations have not changed significantly from those at December 31, 2012.
The Company has multi-year license agreements with vendors for certain software product licenses and third-party hosting providers to provide data center capacity, including hardware and network infrastructure, to power its suite of cross-channel, digital marketing SaaS solutions. As of June 30, 2013, the Software Licensing and Hosting Agreements had not changed significantly since December 31, 2012.
10
EXACTTARGET, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except share data or stated otherwise)
(c) Legal Proceedings
On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited (together, RPost) filed a lawsuit against the Company in the United States District Court for the Eastern District of Texas, alleging willful infringement of five patents and seeking injunctive relief, unspecified compensatory damages, enhanced damages, attorneys fees, costs, and expenses. RPost has also filed patent infringement actions against a number of other companies in the same industry as the Company. On March 11, 2013, RPost filed a First Amended Complaint, adding claims against eleven additional companies based at least in part on their use of the Companys accused electronic mail marketing services. On July 11, 2013, the Company and RPost entered into a Settlement of Claims Agreement (Settlement Agreement) pursuant to which the Company agreed to pay RPost approximately $0.9 million and RPost agreed to release the Company from any and all claims related to the Companys alleged infringement of the five RPost patents in question. RPost also agreed to release the eleven additional defendants from any claims for past infringement of RPosts five patents in question to the extent infringement related to such companies use of the Companys accused electronic mail and marketing products. RPost has agreed to dismiss the lawsuit with prejudice.
The Company is not currently, nor has it been in the past, subject to any other material legal proceedings. From time to time, however, the Company may become involved in various legal proceedings in the ordinary course of its business, and may be subject to third-party infringement claims. These claims, even those that lack merit, could result in the expenditure of significant financial and managerial resources.
(d) Indemnification Obligations
In the Companys subscription agreements with its clients, it agrees to indemnify its clients against any losses or costs incurred in connection with claims by a third party alleging that a clients use of its services infringes the intellectual property rights of the third party. Based on historical and other available information, the Company does not expect it will incur significant liabilities from these indemnification obligations, though there can be no assurance that future infringement claims and the Companys resulting indemnification obligations will not be material.
(11) Subsequent Events
On July 12, 2013, salesforce.com, inc., a Delaware Corporation, acquired all outstanding stock of the Company.
11
ExactTarget, Inc.
Financial Statements
December 31, 2012
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
2 | ||||
3 | ||||
Consolidated Statements of Operations and Comprehensive Loss |
4 | |||
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Equity |
5 | |||
7 | ||||
8 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ExactTarget, Inc.:
We have audited the accompanying consolidated balance sheets of ExactTarget, Inc. and Subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule II - valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ExactTarget, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Indianapolis, Indiana
February 22, 2013
2
Consolidated Balance Sheets
(in thousands, except share data)
As of December 31, | ||||||||
2012 | 2011 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 69,192 | $ | 60,705 | ||||
Short-term investments |
40,217 | | ||||||
Accounts receivable, net |
55,911 | 43,380 | ||||||
Prepaid expenses |
11,378 | 8,703 | ||||||
Other current assets |
3,219 | 2,483 | ||||||
|
|
|
|
|||||
Total current assets |
179,917 | 115,271 | ||||||
Property and equipment, net |
67,944 | 54,616 | ||||||
Goodwill |
108,222 | 18,447 | ||||||
Intangible assets, net |
27,352 | 3,286 | ||||||
Other assets |
3,631 | 1,664 | ||||||
|
|
|
|
|||||
Total assets |
$ | 387,066 | $ | 193,284 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 9,070 | $ | 8,124 | ||||
Accrued liabilities |
12,874 | 10,725 | ||||||
Accrued compensation and related expenses |
18,503 | 14,167 | ||||||
Current portion of long-term obligations and other |
1,464 | 4,787 | ||||||
Deferred revenue |
57,592 | 39,273 | ||||||
|
|
|
|
|||||
Total current liabilities |
99,503 | 77,076 | ||||||
Long-term obligations and other |
5,946 | 5,134 | ||||||
Long-term portion of debt |
| 13,333 | ||||||
|
|
|
|
|||||
Total liabilities |
105,449 | 95,543 | ||||||
|
|
|
|
|||||
Redeemable convertible preferred stock: |
||||||||
Series E, Series F and Series G redeemable convertible preferred stock, at respective redemption value. Authorized 4,912,646 shares, issued and outstanding no amounts and 4,912,646 shares at December 31, 2012 and December 31, 2011, respectively |
| 63,000 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.0005 par value. Authorized 300,000,000 and 74,000,000 and shares at December 31, 2012 and 2011, respectively; issued and outstanding 68,544,290 and 9,042,346 shares at December 31, 2012 and 2011, respectively |
34 | 5 | ||||||
Additional paid in capital |
449,801 | 17,031 | ||||||
Series A, Series B and Series D preferred stock, at respective issuance date fair value. Authorized 10,000,000 and 18,554,573 shares at December 31, 2012 and 2011, respectively; issued and outstanding no amounts and 18,554,573 shares at December 31, 2012 and 2011, respectively |
| 164,894 | ||||||
Accumulated other comprehensive loss |
(1,122 | ) | (1,051 | ) | ||||
Accumulated deficit |
(167,096 | ) | (146,138 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
281,617 | 34,741 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 387,066 | $ | 193,284 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
3
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenue: |
||||||||||||
Subscription |
$ | 234,222 | $ | 170,696 | $ | 115,553 | ||||||
Professional services |
58,050 | 36,797 | 18,714 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
292,272 | 207,493 | 134,267 | |||||||||
Cost of revenue: |
||||||||||||
Subscription |
56,770 | 40,333 | 25,882 | |||||||||
Professional services |
46,830 | 29,862 | 18,012 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenue |
103,600 | 70,195 | 43,894 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
188,672 | 137,298 | 90,373 | |||||||||
|
|
|
|
|
|
|||||||
Operating expenses: |
||||||||||||
Sales and marketing |
115,312 | 93,559 | 63,978 | |||||||||
Research and development |
54,022 | 41,390 | 27,400 | |||||||||
General and administrative |
39,725 | 25,985 | 17,159 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
209,059 | 160,934 | 108,537 | |||||||||
|
|
|
|
|
|
|||||||
Operating loss |
(20,387 | ) | (23,636 | ) | (18,164 | ) | ||||||
Other expense, net |
(571 | ) | (1,001 | ) | (53 | ) | ||||||
|
|
|
|
|
|
|||||||
Loss before taxes |
(20,958 | ) | (24,637 | ) | (18,217 | ) | ||||||
Income tax expense (benefit) |
| 10,798 | (6,127 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net loss |
(20,958 | ) | (35,435 | ) | (12,090 | ) | ||||||
Other comprehensive loss: |
||||||||||||
Foreign currency translation adjustment, net of tax - zero |
(40 | ) | (948 | ) | (17 | ) | ||||||
Net unrealized loss on marketable securities, net of tax - zero |
(31 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive loss |
$ | (21,029 | ) | $ | (36,383 | ) | $ | (12,107 | ) | |||
|
|
|
|
|
|
|||||||
Net loss per common share: |
||||||||||||
Basic |
$ | (0.39 | ) | $ | (4.05 | ) | $ | (1.52 | ) | |||
Diluted |
$ | (0.39 | ) | $ | (4.05 | ) | $ | (1.52 | ) | |||
Weighted average number of common shares outstandingbasic |
53,856,234 | 8,750,540 | 7,978,304 | |||||||||
Weighted average number of common shares outstandingdiluted |
53,856,234 | 8,750,540 | 7,978,304 |
See accompanying notes to consolidated financial statements.
4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Equity
(in thousands, except share data)
Redeemable convertible preferred stock |
Stockholders Equity | |||||||||||||||||||||||||||||||||||||||
Common stock | Preferred stock | Additional paid-in capital |
Accumulated deficit |
Accumulated comprehensive loss |
Total | |||||||||||||||||||||||||||||||||||
Share | Amount | Share | Amount | Share | Amount | |||||||||||||||||||||||||||||||||||
Stockholders equity at December 31, 2009 |
2,964,594 | $ | 33,038 | 7,571,496 | $ | 4 | 16,180,448 | $ | 120,727 | $ | | $ | (98,613 | ) | $ | (86 | ) | $ | 22,032 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net loss |
| | | | | | | (12,090 | ) | | (12,090 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment and other |
| | | | | | | | (17 | ) | (17 | ) | ||||||||||||||||||||||||||||
Exercise of employee stock options |
| | 625,734 | | | | 791 | | | 791 | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | | | 4,425 | | | 4,425 | ||||||||||||||||||||||||||||||
Vesting of restricted stock |
| | 259,284 | | | | | | | | ||||||||||||||||||||||||||||||
Issuance of common stock and Series D preferred stock in connection with acquisition of CoTweet, Inc. |
| | 3,974 | | 374,125 | 4,194 | 4,030 | | | 8,224 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Stockholders equity at December 31, 2010 |
2,964,594 | $ | 33,038 | 8,460,488 | $ | 4 | 16,554,573 | $ | 124,921 | $ | 9,246 | $ | (110,703 | ) | $ | (103 | ) | $ | 23,365 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net loss |
| | | | | | | (35,435 | ) | | (35,435 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment and other |
| | | | | | | | (948 | ) | (948 | ) | ||||||||||||||||||||||||||||
Exercise of employee stock options |
| | 135,712 | | | | 429 | | | 429 | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | | | 6,954 | | | 6,954 | ||||||||||||||||||||||||||||||
Vesting of restricted stock |
| | 446,146 | 1 | | | | | | 1 | ||||||||||||||||||||||||||||||
Issuance of Series D preferred stock |
| | | | 2,000,000 | 39,973 | | | | 39,973 | ||||||||||||||||||||||||||||||
Issuance of common stock and preferred stock in connection with acquisition of Frontier Tecnologia, Ltda. |
| | | | | | 402 | | | 402 | ||||||||||||||||||||||||||||||
Issuance of Series G preferred stock |
1,948,052 | 29,962 | | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Stockholders equity at December 31, 2011 |
4,912,646 | $ | 63,000 | 9,042,346 | $ | 5 | 18,554,573 | $ | 164,894 | $ | 17,031 | $ | (146,138 | ) | $ | (1,051 | ) | $ | 34,741 | |||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
5
EXACTTARGET, INC.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Equity (Continued)
(in thousands, except share data)
Redeemable convertible preferred stock |
Stockholders Equity | |||||||||||||||||||||||||||||||||||||||
Common stock | Preferred stock | Additional paid-in capital |
Accumulated deficit |
Accumulated comprehensive loss |
Total | |||||||||||||||||||||||||||||||||||
Share | Amount | Share | Amount | Share | Amount | |||||||||||||||||||||||||||||||||||
Stockholders equity at December 31, 2011 |
4,912,646 | $ | 63,000 | 9,042,346 | $ | 5 | 18,554,573 | $ | 164,894 | $ | 17,031 | $ | (146,138 | ) | $ | (1,051 | ) | $ | 34,741 | |||||||||||||||||||||
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Net loss |
| | | | | | | (20,958 | ) | | (20,958 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment and unrealized gain / (loss) on available for sale securities |
| | | | | | | | (71 | ) | (71 | ) | ||||||||||||||||||||||||||||
Exercise of employee stock options |
| | 2,002,624 | 1 | | | 7,717 | | | 7,718 | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | | | 11,182 | | | 11,182 | ||||||||||||||||||||||||||||||
Vesting of restricted stock |
| | 103,244 | | | | | | | | ||||||||||||||||||||||||||||||
Issuance of restricted stock in connection with acquisitions of Pardot LLC and iGoDigital, LLC |
| | 686,638 | | | | 16,296 | | 16,296 | |||||||||||||||||||||||||||||||
Issuance of common stock in connection with Initial Public Offering |
9,775,000 | 5 | | | 169,704 | | | 169,709 | ||||||||||||||||||||||||||||||||
Conversion of preferred stock |
(4,912,646 | ) | (63,000 | ) | 46,934,438 | 23 | (18,554,573 | ) | (164,894 | ) | 227,871 | | | 63,000 | ||||||||||||||||||||||||||
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Stockholders equity at December 31, 2012 |
| $ | | 68,544,290 | $ | 34 | | $ | | $ | 449,801 | $ | (167,096 | ) | $ | (1,122 | ) | $ | 281,617 | |||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
6
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (20,958 | ) | $ | (35,435 | ) | $ | (12,090 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
23,356 | 16,623 | 10,970 | |||||||||
Lease incentives received from lessor |
336 | 637 | 141 | |||||||||
Provision for / (recovery of) bad debt and credit allowances |
1,861 | 2,271 | 1,131 | |||||||||
Stock-based compensation |
11,182 | 6,954 | 4,425 | |||||||||
Change in deferred taxes |
| 10,540 | (6,952 | ) | ||||||||
Other |
204 | 87 | (4 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable, net |
(12,288 | ) | (17,260 | ) | (8,488 | ) | ||||||
Prepaid expenses and other assets |
(4,193 | ) | (6,007 | ) | 1,419 | |||||||
Accounts payable and accrued liabilities |
2,181 | 8,165 | 888 | |||||||||
Accrued compensation and related expenses |
4,310 | 3,838 | 3,957 | |||||||||
Deferred revenue |
16,736 | 6,827 | 8,227 | |||||||||
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Net cash provided by (used in) operating activities |
22,727 | (2,760 | ) | 3,624 | ||||||||
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Cash flows from investing activities: |
||||||||||||
Business combination, net of cash acquired |
(100,776 | ) | (2,710 | ) | (5,814 | ) | ||||||
Purchases of property and equipment |
(32,455 | ) | (31,161 | ) | (18,748 | ) | ||||||
Purchases of marketable securities |
(40,248 | ) | | (1,999 | ) | |||||||
Sales of marketable securities |
| | 2,000 | |||||||||
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Net cash used in investing activities |
(173,479 | ) | (33,871 | ) | (24,561 | ) | ||||||
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Cash flows from financing activities: |
||||||||||||
Repayments on capital leases and notes payable |
(770 | ) | (952 | ) | (517 | ) | ||||||
Net proceeds from (payments on) term loan |
(9,967 | ) | (3,333 | ) | 9,918 | |||||||
Net proceeds from (payments on) on revolving line of credit |
(6,700 | ) | 9,804 | | ||||||||
Proceeds from issuance of stock from option exercises |
7,718 | 429 | 791 | |||||||||
Payments of contingent consideration |
(858 | ) | (1,394 | ) | (719 | ) | ||||||
Proceeds from issuance of preferred stock, net of issuance costs |
| 69,935 | | |||||||||
Proceeds from issuance of common stock, net of issuance costs |
169,709 | | | |||||||||
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Net cash provided by financing activities |
159,132 | 74,489 | 9,473 | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
107 | 43 | (74 | ) | ||||||||
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Increase (decrease) in cash and cash equivalents |
8,487 | 37,901 | (11,538 | ) | ||||||||
Cash and cash equivalents, beginning of the period |
60,705 | 22,804 | 34,342 | |||||||||
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Cash and cash equivalents, end of the period |
$ | 69,192 | $ | 60,705 | $ | 22,804 | ||||||
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Supplemental disclosures: |
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Net cash paid for interest |
$ | 288 | $ | 532 | $ | 9 | ||||||
Net cash paid (received) for income taxes |
26 | 28 | (2,269 | ) | ||||||||
Supplemental disclosure of noncash investing activities: |
||||||||||||
Change in payables for purchases of property and equipment |
$ | 1,306 | $ | 1,118 | $ | 724 | ||||||
Capital lease obligations entered into for property and equipment |
1,007 | 767 | 742 |
See accompanying notes to consolidated financial statements
7
Notes to Consolidated Financial Statements
(in thousands except share data or stated otherwise)
(1) Summary of Significant Accounting Policies
(a) Description of Business
ExactTarget, Inc. (ExactTarget or the Company) is a leading global provider of cross-channel digital marketing software-as-a-service (SaaS) solutions that empower organizations of all sizes to communicate with their customers through a suite of applications, including email, mobile, social media, websites, marketing automation and data management. ExactTargets powerful suite of integrated applications enables both business-to-business and business-to-consumer marketers to plan, automate, deliver and optimize data-driven digital marketing and real-time communications to drive customer engagement, increase sales and improve return on marketing investment. The Company is headquartered in Indianapolis, Indiana with offices across North America and in Europe, South America and Australia.
(b) Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents, which include cash in bank accounts, money market accounts and bank certificates of deposit, are recorded at cost, which approximates fair value.
(c) Short-term Investments
Short-term investments consist of marketable securities such as corporate notes and bonds, certificates of deposit and commercial paper that are classified as available-for-sale and recorded at fair value. The determination of fair value is further detailed in the short-term investment footnote below. Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment.
(d) Common Stock Split
In March 2012, the Companys board of directors approved a two-for-one forward stock split of the Companys outstanding common stock, with a corresponding change in par value, which became effective on March 20, 2012. All common share numbers and per common share amounts for all periods presented have been adjusted retroactively to reflect the two-for-one forward stock split.
(e) Segments
The Company manages its operations as a single segment for purposes of assessing performance and making operating decisions. Revenue is generated predominately in the United States, and all significant assets are held in the United States.
(f) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries located in the United States (Pardot LLC, iGoDigital, Inc. and iGoDigital Holdings, LLC), United Kingdom (ExactTarget Limited), Australia (ExactTarget Pty Ltd), Brazil (ExactTarget Tecnologia Ltda.), Germany (ExactTarget GmbH), France (ExactTarget SAS), and Sweden (ExactTarget AB), after elimination of all significant intercompany accounts and transactions.
(g) Revenue Recognition
The Company recognizes revenue for subscriptions to its SaaS solutions ratably over the term of the subscription agreement, which is typically one year in length but can range up to three years, commencing upon the later of the agreement start date or such time as there is persuasive evidence of an arrangement, access to its SaaS solutions has been granted to the client, the collection of the fee is reasonably assured and the amount of the fees to be paid by the client are fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue until revenue recognition criteria have been met. The Companys subscription agreements generally contain multiple elements including software access, contracted utilization volume and professional services. In addition, the Company charges fees for utilization above the contracted level which are recognized in the period in which the utilization occurs. The Companys subscription agreements do not provide clients the right to take possession of the software supporting the SaaS solution at any time.
The Company also derives revenue from professional services. Professional services revenue consists primarily of fees associated with training, implementation, integration, deliverability, campaign services and strategic consulting. The Companys professional services are not required for clients to utilize its SaaS solutions. Depending upon the nature of the engagement, the Company may provide professional services over the term of the SaaS subscription or in connection with discrete projects. Revenue from professional services is recognized using a proportional performance model based on services performed. Professional services, when sold with the Companys subscriptions, are accounted for separately when these services have value to the client on a standalone basis.
8
In October 2009, the FASB amended the accounting standards for multiple deliverable revenue arrangements to:
| provide updated guidance regarding how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
| require an entity to allocate revenue in an arrangement using its best estimate of selling price, or BESP, of deliverables if a vendor does not first have vendor-specific objective evidence, or VSOE, of selling price or does not have third-party evidence, or TPE, of selling price; and |
| eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The Company elected to adopt this accounting guidance on a prospective basis as of January 1, 2011. The Companys consolidated financial statements and the notes to its consolidated financial statements presented herein reflect the prospective adoption of the new accounting principle. Prior to the adoption of ASU 2009-13, the Company was not able to establish VSOE or TPE for all undelivered elements. As a result, the Company typically recognized subscription and professional services revenue ratably over the contract period as a single element and allocated subscription and professional services revenue based on the contract price.
A multiple-element arrangement includes the sale of a subscription to the Companys SaaS solutions with one or more associated professional services offerings, each of which is considered a separate unit of accounting. In determining whether professional services represent a separate unit of accounting, the Company considers the availability of the services from other vendors. The Company allocates revenue to each element in a multiple-element arrangement based upon the BESP of each deliverable.
The Company is not able to demonstrate VSOE or TPE of selling price with respect to sales of subscriptions to its SaaS solutions. The Company does not have sufficient instances of separate sales of subscriptions nor is it able to demonstrate sufficient pricing consistency with respect to such sales. The Company also considered that no other vendor sells similar subscriptions given the unique nature and functionality of its SaaS solutions, and therefore has determined that it is not able to establish TPE of selling price. Therefore, the Company has determined the BESP of subscriptions to its SaaS solution based on the following:
| the list price, which represents a component of the Companys current go-to-market strategy, as established by senior management taking into consideration factors such as the competitive and economic environment; and |
| an analysis of the historical pricing with respect to both the Companys bundled and standalone arrangements for its SaaS solutions. |
The Company has established VSOE of selling price of professional services based on an analysis of separate sales of such professional services. For any professional service revenue to be recognized, all of the following criteria must be met:
| persuasive evidence of an arrangement exists, |
| the fee is fixed or determinable, |
| collection is probable, and |
| service has been provided. |
Sales tax collected from clients and remitted to governmental authorities is accounted for on a net basis and therefore is not included in revenues or cost of revenues in the Companys statements of operations and comprehensive loss.
(h) Deferred Revenue
Deferred revenue represents the amount billed to clients that has not yet been earned or recognized as revenue, pursuant to agreements entered into in current and prior periods, and does not reflect that portion of subscriptions and professional services to be invoiced to clients on a periodic basis for which payment is not yet due. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue until revenue recognition criteria have been met. The Company generally invoices its clients in advance on an annual, quarterly or monthly basis with payment due upon receipt of the invoice. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as long-term obligations and other.
(i) Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in existing accounts receivable based on a detailed monthly analysis. In estimating the allowance for doubtful accounts, the Company considers the age of the receivable, creditworthiness of the client,
9
general economic conditions and any other relevant factors. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company also establishes an allowance for future credits, which is determined based on historical credit activity related primarily to billing discrepancies.
The combined allowance for doubtful accounts and future credits was $1.8 million and $3.0 million at December 31, 2012 and 2011, respectively. Write offs against the allowance for doubtful accounts for the years ended December 31, 2012 and 2011 were $0.9 million and $0.6 million, respectively. The Company does not have any off-balance sheet credit exposure related to its clients.
(j) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short term investments and accounts receivable. These instruments are generally unsecured and uninsured. The Company maintains the majority of its cash balances with a few financial institutions. Accounts receivable are typically unsecured and are from revenues earned from clients across different geographic areas, primarily located in the United States, and operating in a wide variety of industries. No client represented greater than 5% of outstanding accounts receivable as of December 31, 2012 or 2011, or greater than 5% of revenue for the years then ended. The Company does not typically require collateral or other security to support credit sales but provides allowances for sales and doubtful accounts based on historical experience and specific identification. A portion of the Companys revenue and expenses is generated in foreign currencies and, as a result, the Company is exposed to market risks from changes in foreign currency exchange rates.
Revenue by geographic region, based on the billing address of the clients, was as follows for the periods presented:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
United States |
$ | 239,148 | $ | 178,623 | $ | 124,167 | ||||||
International |
53,124 | 28,870 | 10,100 | |||||||||
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Total revenue |
$ | 292,272 | $ | 207,493 | $ | 134,267 | ||||||
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Percentage of revenue generated outside the United States |
18 | % | 14 | % | 8 | % |
No single country outside the United States represented more than 10% of revenue during any period reported.
(k) Use of Estimates
The preparation of financial statements requires the Companys management to make a number of estimates and assumptions related to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts receivable, allowance for future credits, revenue recognition, valuation of deferred tax assets, valuation of intangible assets acquired through business combinations, and the valuation of share-based payments. Actual results could differ from these estimates.
(l) Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases are stated at the lesser of the present value of minimum lease payments or the fair value of the asset.
Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally between two and ten years. Property and equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.
(m) Goodwill and Other Intangible Assets
The Company conducts a test for the impairment of goodwill at least annually and more frequently upon the occurrence of certain events. The annual goodwill impairment test begins with an assessment of qualitative factors including macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events, to determine if further impairment testing is necessary. If necessary, the Company will first compare the fair value of its reporting unit to the carrying amount, including goodwill, to assess whether an impairment indicator is present. If the Company determines that an impairment indicator may be present, then the implied fair value of the goodwill is compared to its carrying amount to determine if there is an impairment loss. The Company performed the impairment test as of October 31, 2012, and concluded that no impairment existed.
Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, recoverability is assessed by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets. The Company identified no impairment indicators during the year ended December 31, 2012.
10
(n) Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever a triggering event indicates that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value, less costs to sell, and no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company did not identify any triggering events during any of the periods reported.
(o) Advertising
The Company expenses all advertising costs as incurred. Total advertising expense for the years ended December 31, 2012, 2011 and 2010 was $5.4 million, $5.5 million and $4.8 million, respectively.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entitys financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact the Companys financial position, results of operations or cash flows.
The Company evaluates whether it will realize the benefits of its net deferred tax assets and establishes a valuation allowance to reduce the carrying value of its deferred tax assets to the amount considered more likely than not. Deferred tax assets arise as a result of tax loss carry-forwards and various differences between the book basis of assets and the tax basis. The Company determined that it was no longer more likely than not that our deferred tax assets will be recognized due to continued planned business investment and, as a result, noncash charges from continuing operations of $17.6 million were recorded as a valuation allowance for the full value of its deferred tax assets as of September 30, 2011. As of December 31, 2012 and 2011, the valuation allowance increased by $7.2 million to $26.4 million and $1.6 million to $19.2 million, respectively, due to additional losses incurred in the twelve month period ended December 31, 2012 and the fourth quarter of 2011. The Company had previously overcome the negative evidence provided by its recent losses by demonstrating that it had generated income in 2007, 2008 and 2009 and using that to show the ability to generate taxable income from existing client contracts if the planned investments were not made.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs through income tax expense which would include related interest expense and penalties.
(q) Equity Incentive Plan
The Company recognizes the fair value of its stock option awards as compensation expense on a straight-line basis over the requisite service period of each award, generally four years. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. If the Companys actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
(r) Accrued Straight-Line Rent
The Company recognizes rental expense for minimum lease payments from operating leases on a straight-line basis. The current portion of accrued straight-line rent, which is included in accounts payable and accrued liabilities, and the noncurrent portion, reported in long-term liabilities on the balance sheets, totaled $3.5 million and $3.1 million at December 31, 2012 and 2011, respectively.
(s) Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the sum of net loss by the sum of the weighted average number of common shares outstanding and any dilutive potential common stock equivalents for the period.
11
The following table reconciles the components of basic and diluted net loss per common share:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net loss - basic and diluted |
$ | (20,958 | ) | $ | (35,435 | ) | $ | (12,090 | ) | |||
Weighted average number of common shares outstanding- basic and diluted |
53,856,234 | 8,750,540 | 7,978,304 |
The numbers of preferred stock (once converted), stock options and restricted stock awards that could potentially dilute net loss per basic share in the future, but have not been included in the computation of net loss per diluted share because to do so would have been antidilutive, were as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Anti-dilutive shares |
15,783,765 | 47,917,586 | 43,937,180 |
(t) Fair Value of Financial Instruments
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value of financial instruments as follows:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities |
| Level 2Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying value of the Companys financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, debt and accounts payable, approximate fair value for all periods.
(u) Foreign Currency Translation
The U.S. dollar is the reporting currency for all periods presented. The financial information for entities outside the United States is measured using the local currency as the functional currency. Assets and liabilities for foreign entities are translated into U.S. dollars at the exchange rate in effect on the respective balance sheet dates. Revenues and expenses are translated into U.S. dollars based on the average rate of exchange for the corresponding period. Exchange rate differences resulting from translation adjustments are accounted for as a component of accumulated comprehensive loss. Gains or losses from foreign currency transactions are reflected in the consolidated statements of operations under the line item other expense, net.
(2) Property and Equipment
Property and equipment, including assets held under capital leases, are summarized as follows. Construction in progress represents costs associated with new equipment, office leasehold improvements, and software not yet placed in service.
As of December 31, | Estimated Useful Life (in years) | |||||||||
2012 | 2011 | |||||||||
Furniture and equipment |
$ | 69,326 | $ | 55,581 | 2 -7 | |||||
Software |
30,055 | 23,217 | 5 | |||||||
Leasehold improvements |
13,968 | 10,881 | * | |||||||
Construction in progress |
7,596 | 1,508 | ||||||||
|
|
|
|
|||||||
Total property and equipment, gross |
120,945 | 91,187 | ||||||||
Less accumulated depreciation and amortization |
(53,001 | ) | (36,571 | ) | ||||||
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|
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Total property and equipment, net |
$ | 67,944 | $ | 54,616 | ||||||
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|
|
* | Shorter of lease term or estimated useful life |
Depreciation expense on property and equipment totaled $21.3 million, $15.5 million and $10.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.
12
Furniture and equipment includes assets under capital leases in the amount of $2.9 million and $2.3 million at December 31, 2012 and 2011, respectively. Accumulated amortization on these assets under capital leases, which is included in accumulated depreciation and amortization, was $1.7 million, $1.6 million and $0.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(3) Goodwill and Intangible Assets
The following table presents the changes in the carrying amount of goodwill:
Goodwill as of December 31, 2010 |
$ | 15,868 | ||
Additions from acquisitions |
3,008 | |||
Purchase price adjustments and other |
(429 | ) | ||
|
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Goodwill as of December 31, 2011 |
18,447 | |||
Additions from acquisitions |
89,968 | |||
Purchase price adjustments and other |
(193 | ) | ||
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|
|||
Goodwill as of December 31, 2012 |
$ | 108,222 | ||
|
|
Intangible assets with finite lives are amortized over their estimated useful lives between two and six years as shown in the table below. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed.
As of December 31, | Economic Useful Life (in Years) | |||||||||||||||||||||
2012 | Net Additions* | 2011 | Net Additions* | 2010 | ||||||||||||||||||
Customer lists |
$ | 6,448 | $ | 3,948 | $ | 2,501 | $ | 1,196 | $ | 1,305 | 4 - 5 | |||||||||||
Software technology |
21,255 | 20,055 | 1,200 | | 1,200 | 4 - 6 | ||||||||||||||||
Trademarks |
1,824 | 1,824 | | | | 3 | ||||||||||||||||
Noncompete agreements |
952 | (721 | ) | 1,673 | 641 | 1,032 | 2 - 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total gross intangible assets |
30,479 | 25,106 | 5,374 | 1,837 | 3,537 | |||||||||||||||||
Less accumulated amortization |
(3,127 | ) | (1,039 | ) | (2,088 | ) | (1,113 | ) | (975 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net intangible assets |
$ | 27,352 | $ | 24,067 | $ | 3,286 | $ | 724 | $ | 2,562 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
* | Net additions consist of intangible assets acquired through acquisition, the impact of foreign exchange on intangible assets recorded in foreign currency, and the write off of a fully amortized non-compete agreement in 2012. |
The total amount of amortization expense relating to defined lived intangibles was $2.1 million, $1.1 million, and $0.8 million, for the years ended December 31, 2012, 2011 and 2010, respectively.
Future amortization expense relating to intangibles is as follows:
Amortization Expense |
||||
2013 |
$ | 6,562 | ||
2014 |
7,656 | |||
2015 |
6,444 | |||
2016 |
3,735 | |||
2017 |
2,507 | |||
Thereafter |
448 | |||
|
|
|||
Total amortization expense |
$ | 27,352 | ||
|
|
(4) Acquisitions
The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed,
13
based upon their estimated fair values at the acquisition date. The Company uses all available information to estimate fair values. The Company may engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as trademarks, customer lists and acquired technology or any other significant assets or liabilities. The Company may adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as more information is obtained regarding asset valuations and liabilities assumed.
Pardot
In October 2012, the Company completed the acquisition of Pardot LLC (Pardot) for $95.2 million to, among other things, extend the Companys marketing automation capabilities to serve both business-to-business and business-to-consumer marketers worldwide. As consideration for the Pardot acquisition, the Company paid $85.4 million in cash, issued 423,370 shares of its common stock valued at $10.0 million and has a net working capital settlement receivable of $0.2 million. The fair value of the common stock consideration was based on the closing price of $23.62 on the day of the acquisition. Of the total consideration paid, $7.6 million was deposited and held in escrow to secure indemnification obligations.
The table below represents the allocation of the purchase price for the acquired net assets of Pardot based on their estimated fair values as of October 9, 2012. The allocation of the purchase price was based upon estimates of fair value of the corresponding assets and liabilities.
Tangible assets |
$ | 1,580 | ||
Software technology |
14,693 | |||
Customer lists |
1,375 | |||
Trademark |
1,653 | |||
Goodwill |
77,511 | |||
Current liabilities |
(707 | ) | ||
Deferred revenue |
(900 | ) | ||
|
|
|||
Purchase price allocation |
$ | 95,205 | ||
|
|
Software technology represents the estimated fair value of Pardots marketing automation software. Customer lists represent the fair values of the underlying relationships and agreements with Pardot customers. The trademark represents the Pardot trademark and tradenames that the Company intends to use for a given period of time. The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $77.5 million was recorded as goodwill. The fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed are based on managements estimates and assumptions. The goodwill balance is attributed to the assembled workforce and expanded market opportunities when integrating Pardots marketing automation software with the Companys suite of marketing software solutions. The goodwill balance is deductible for U.S. income tax purposes.
Acquisition-related costs included transaction costs such as legal and accounting fees, which were expensed as incurred. Acquisition-related costs totaled $0.4 million and are included in general and administrative expenses in the consolidated statements of operations.
iGoDigital
Also in October 2012, the Company completed the acquisition of all of the membership interests and capital stock of iGoDigital Holdings, LLC and iGoDigital, Inc. (together, iGoDigital) for $21.1 million to, among other things, advance its website solutions and predictive analytics solutions. As consideration, the Company paid $14.8 million in cash and issued 263,268 shares of its common stock valued at $6.3 million. The fair value of the common stock consideration of $23.93 was based on the average closing price of the common stock for the five trading days ending on October 5, 2012.
The table below represents the allocation of the preliminary purchase price for the acquired net assets of iGoDigital based on their estimated fair values as of October 9, 2012. The allocation of the purchase price was based upon estimates of fair value of the corresponding assets and liabilities.
Tangible assets |
$ | 1,079 | ||
Software technology |
5,362 | |||
Customer lists |
2,638 | |||
Trademark |
171 | |||
Noncompete agreement |
366 | |||
Goodwill |
12,457 | |||
Current liabilities |
(341 | ) | ||
Deferred revenue |
(664 | ) | ||
|
|
|||
Purchase price allocation |
$ | 21,068 | ||
|
|
14
Software technology represents the preliminary estimated fair value of iGoDigitals web analytic software. Customer lists represent the preliminary fair values of the underlying relationships and agreements with iGoDigital customers. The trademark represents the iGoDigital trademark that the Company intends to use for a given period of time. The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $12.5 million was recorded as goodwill. The goodwill balance is attributed to the assembled workforce and expanded market opportunities when integrating iGoDigitals software with the Companys suite of marketing software solutions. The goodwill balance is deductible for U.S. income tax purposes.
Acquisition-related costs included transaction costs such as legal and accounting fees, which were expensed as incurred. Acquisition-related costs totaled $0.1 million and are included in general and administrative expenses in the consolidated statements of operations.
Frontier
In August 2011, the Company acquired all outstanding shares of Frontier Tecnologia, Ltda. (Frontier) for $5.4 million in stock and cash consideration, net of cash acquired. The Company funded the purchase price with cash available from operations and from the issuance of 41,966 shares of restricted common stock at $9.59 per share. The restricted common stock vested on the one year anniversary of the acquisition date.
The purchase price was comprised of the following:
Cash consideration, net of cash acquired |
$ | 2,710 | ||
Escrow payable |
806 | |||
Accounts payable settlement |
104 | |||
Equity consideration |
402 | |||
Estimated fair value of contingent consideration |
1,408 | |||
|
|
|||
Total purchase price |
$ | 5,430 | ||
|
|
As of December 31, 2012, $0.4 million of cash contingent consideration had been earned and paid. The estimated fair value of the contingent consideration in excess of the actual amount earned was recognized as a gain in the period the liability was settled.
The table below represents the allocation of the purchase price for the acquired net assets of Frontier based on their estimated fair values as of August 24, 2011. The allocation of the purchase price was based upon estimates of fair value of the corresponding assets and liabilities.
Other assets and liabilities, net |
$ | 264 | ||
Customer list |
1,408 | |||
Noncompete agreements |
750 | |||
Goodwill |
3,008 | |||
|
|
|||
Purchase price allocation |
$ | 5,430 | ||
|
|
The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to expected synergies from Frontiers geographic market location and existing customer base.
Acquisition-related costs included transaction costs such as legal and accounting fees, which were expensed as incurred. Acquisition-related costs totaled $0.1 million and are included in general and administrative expenses in the consolidated statements of operations.
(5) Short-Term Investments
The following table summarizes the Companys investments in available-for-sale securities:
As of December 31, 2012 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Corporate Notes / Bonds |
$ | 32,330 | $ | | $ | (23 | ) | $ | 32,307 | |||||||
Certificates of Deposit |
6,920 | | (6 | ) | 6,914 | |||||||||||
Commercial Paper |
998 | | (2 | ) | 996 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 40,248 | $ | | $ | (31 | ) | $ | 40,217 | |||||||
|
|
|
|
|
|
|
|
15
At December 31, 2012, all available-for-sale securities mature within one year with the exception of corporate notes / bonds with a fair value of $20.4 million, which have maturities within two years. Available-for-sale securities are reported at fair value as described below, with unrealized gains and losses, net of tax, included as a separate component of stockholders equity within accumulated other comprehensive loss. Realized gains and losses on available-for-sale securities, of which there are none as of December 31, 2012, are included in other expense, net in the Companys consolidated statements of operations.
The assets measured at fair value on a recurring basis and the input categories associated with those assets were as follows:
As of December 31, 2012 | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
|||||||||||||
Short-term investments: |
||||||||||||||||
Corporate Notes / Bonds |
$ | 32,307 | $ | | $ | 32,307 | $ | | ||||||||
Certificates of Deposit |
6,914 | | 6,914 | | ||||||||||||
Commercial Paper |
996 | | 996 | |
The available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, the Company classifies all available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. The Companys procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.
(6) Commitments and Contingencies
(a) Notes Payable
In November 2010, the Company entered into a Loan and Security Agreement (Agreement) which provided the Company with a $10.0 million bank term loan (Term Loan) and a $7.0 million revolving line of credit (Revolving Line) and was collateralized by a blanket lien on substantially all of the Companys personal property, including intellectual property.
In March 2011, the Agreement was modified to increase the total size of the Revolving Line from $7.0 million to $10.0 million. Interest at a variable rate equal to the lenders most recently announced prime rate plus one percent was in place for both the Term Loan and the Revolving Line. This rate was 5.0% as of December 31, 2011. The Term Loan and Revolving Line were to mature on December 1, 2013, and the Term Loan was payable in 36 equal installments. The Agreement included certain covenants related to recurring revenue, capital expenditures and adjusted EBITDA. In September 2011, the Company entered into a second loan modification agreement to increase the total size of the Revolving Line from $10.0 million to $20.0 million. In October 2011, the Company entered into a third loan modification agreement which increased the capital expenditure financial covenant and set forth the criteria under the financial covenants for the remainder of 2011. As of December 31, 2011, $6.7 million was outstanding under the Term Loan and $10.0 million was outstanding under the Revolving Line.
In February 2012, the Company entered into a fourth loan modification agreement that set forth the criteria under the financial covenants in the Agreement for 2012. In March 2012, the Company repaid all outstanding amounts under, and in April 2012 terminated the Agreement.
(b) Lease Agreements
The Company is obligated under capital leases covering certain equipment that expire at various dates during the next three years. The Company also has noncancelable operating leases, primarily for office space in Indianapolis, IN, San Francisco, CA, Bellevue, WA, Atlanta, GA, New York, NY, Australia, Brazil, Germany, Sweden, France and the United Kingdom.
16
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and capital leases as of December 31, 2012 are as follows:
Capital Leases |
Operating Leases |
|||||||
2013 |
$ | 739 | $ | 5,103 | ||||
2014 |
396 | 5,029 | ||||||
2015 |
110 | 4,827 | ||||||
2016 |
| 3,728 | ||||||
2017 |
| 2,246 | ||||||
Thereafter |
| 4,633 | ||||||
|
|
|
|
|||||
Total minimum lease payments |
$ | 1,245 | $ | 25,566 | ||||
|
|
|||||||
Less amounts representing interest |
(69 | ) | ||||||
|
|
|||||||
Present value of minimum lease payments |
1,176 | |||||||
Less current portion |
(612 | ) | ||||||
|
|
|||||||
Noncurrent portion |
$ | 564 | ||||||
|
|
Rent expense was $5.3 million, $4.2 million and $2.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(c) Software Licensing and Hosting Services Agreements
The Company has multi-year license agreements with vendors for certain software product licenses and third-party hosting providers to provide data center capacity, including hardware and network infrastructure, to power its suite of cross-channel, digital marketing SaaS solutions. As of December 31, 2012, the agreements requiring future minimum payments are as follows:
Software Licensing | Hosting Services | |||||||
2013 |
$ | 7,415 | $ | 4,696 | ||||
2014 |
2,175 | 4,519 | ||||||
2015 |
| 3,550 | ||||||
2016 |
| 3,550 | ||||||
2017 |
| 3,550 | ||||||
Thereafter |
| 1,775 | ||||||
|
|
|
|
|||||
Total software and hosting service agreements |
$ | 9,590 | $ | 21,640 | ||||
|
|
|
|
(d) Deferred Revenue
Deferred revenue that will not be recognized during the succeeding twelve month period is recorded as long-term obligations and other and totaled $1.4 million and $1.1 million at December 31, 2012 and 2011, respectively.
(e) Indemnification Obligations
In the Companys subscription agreements with its clients, it agrees to indemnify its clients against any losses or costs incurred in connection with claims by a third party alleging that a clients use of its services infringes the intellectual property rights of the third party. Based on historical information and other available information as of December 31, 2012, the Company does not expect it will incur any significant liabilities from these indemnification obligations.
(7) Income Taxes
For financial reporting purposes, loss before income taxes includes the following components:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Domestic |
$ | (596 | ) | $ | (10,302 | ) | $ | (8,755 | ) | |||
Foreign |
(20,362 | ) | (14,335 | ) | (9,462 | ) | ||||||
|
|
|
|
|
|
|||||||
Loss before income tax expense (benefit) |
$ | (20,958 | ) | $ | (24,637 | ) | $ | (18,217 | ) | |||
|
|
|
|
|
|
17
Income tax expense (benefit) attributable to loss from continuing operations consists of the following:
Current | Deferred | Total | ||||||||||
December 31, 2012: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State and local |
| | | |||||||||
Foreign |
| | | |||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) |
$ | | $ | | $ | | ||||||
|
|
|
|
|
|
|||||||
December 31, 2011: |
||||||||||||
Federal |
$ | | $ | 9,198 | $ | 9,198 | ||||||
State and local |
39 | 1,342 | 1,381 | |||||||||
Foreign |
219 | | 219 | |||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) |
$ | 258 | $ | 10,540 | $ | 10,798 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2010: |
||||||||||||
Federal |
$ | | $ | (5,625 | ) | $ | (5,625 | ) | ||||
State and local |
825 | (1,327 | ) | (502 | ) | |||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) |
$ | 825 | $ | (6,952 | ) | $ | (6,127 | ) | ||||
|
|
|
|
|
|
The difference between actual income taxes and expected federal income taxes using a statutory rate of 34% was as follows:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Federal income tax at statutory rate |
$ | (6,862 | ) | $ | (8,377 | ) | $ | (6,194 | ) | |||
Meals and entertainment |
641 | 554 | 364 | |||||||||
State income tax, net of federal benefit |
(886 | ) | (984 | ) | (333 | ) | ||||||
Change in valuation allowance |
7,165 | 19,188 | | |||||||||
Foreign income tax expense rate difference |
| 219 | | |||||||||
Other |
(58 | ) | 198 | 36 | ||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) |
$ | | $ | 10,798 | $ | (6,127 | ) | |||||
|
|
|
|
|
|
The Company receives an income tax benefit calculated as the difference between the fair market value of the Companys common stock at the time of exercise and the option price, tax effected. The Company did not recognize an excess tax benefit from employee stock option transactions during the years ended December 31, 2012, 2011, and 2010 as the deduction has not reduced taxes payable.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
As of December 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets attributable to: |
||||||||
Accounts receivable allowances |
$ | 695 | $ | 1,165 | ||||
Accrued liability |
1,446 | 1,749 | ||||||
Intangible assets |
1,434 | 1,788 | ||||||
Stock compensation |
7,530 | 5,189 | ||||||
Deferred revenue |
537 | 451 | ||||||
Net operating losses |
29,183 | 24,256 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
40,825 | 34,598 | ||||||
Deferred tax liabilities attributable to: |
||||||||
Property and equipment |
$ | 14,425 | $ | 15,410 | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
14,425 | 15,410 | ||||||
|
|
|
|
|||||
Less valuation allowance |
(26,400 | ) | (19,188 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | | $ | | ||||
|
|
|
|
As of December 31, 2012, the Company had recorded a full valuation allowance of $26.4 million on its net deferred tax assets. In the third quarter of 2011, the Company decided to explore the opportunity of launching an initial public offering and, as a result, the Company determined it was no longer more likely than not that its deferred tax assets would be realized due to continued planned business investment. The Company previously overcame the negative evidence provided by its recent losses by demonstrating that it had generated income in 2008, 2007 and 2006 and using that information to show the ability to generate taxable income from existing client contracts if the planned business investments were not made. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
18
Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry-forward periods), projected future taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax asset relating to net operating loss carry-forwards, the Company will need to generate future taxable income of approximately $119.6 million prior to the expiration of the net operating loss carry-forwards in 2032. Net operating losses recognized for financial reporting purposes, which do not include tax deductible compensation deductions from stock option exercises, were $12.1 million, $34.0 million and $24.5 million, for the years ended December 31, 2012, 2011 and 2010, respectively.
Management believes they have not taken any tax positions that, if challenged, more likely than not would have a material effect on the financial statements or the effective tax rates as of December 31, 2012, and 2011 Tax years 2012, 2011 and 2010 remain open for federal audit purposes and certain tax years for various states remained open as of December 31, 2012.
In 2012, the Company was awarded an economic incentive package from the State of Indiana totaling $10.2 million. The incentive package consists of a training grant and job credits that start in 2013 and expire in 2024.
In 2011, the Company was awarded an economic incentive package from the State of Indiana and the City of Indianapolis totaling $15.9 million. The incentive package consists of a training grant, local tax abatements and job credits that expire in 2020. The financial statements reflect state and local payroll, training grants and property tax credits of $1.8 million, $1.1 million and $0.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(8) Initial Public Offering
In March 2012, the Company completed the sale of 9,775,000 shares of common stock, including the underwriters exercise of an over-allotment option, at a price of $19.00 per share. A total of $185.7 million in gross proceeds was raised in the initial public offering. After deducting the underwriting discount of $13.0 million and offering expenses of $3.0 million, net proceeds were $169.7 million.
Upon the closing of the Companys initial public offering, 23,467,219 shares consisting of 18,554,573 shares of convertible preferred stock and 4,912,646 shares of convertible redeemable preferred stock, converted, on a two-for-one basis, into 46,934,438 shares of common stock.
(9) Stockholders Equity
In March 2012, the Companys board of directors approved an amendment to the Companys certificate of incorporation to increase the number of authorized shares of common stock to 74,000,000 shares, decrease the par value per share of common stock to $0.0005 and reclassify and subdivide each share of issued and outstanding common stock into two shares of common stock. The Companys certificate of incorporation was further amended by the Companys board of directors to increase the number of authorized shares of common stock to 300,000,000.
As of December 31, 2012, the Company was authorized to issue 300,000,000 shares of common stock with par value of $0.0005 per share and 10,000,000 shares of preferred stock with par value of $0.001 per share.
Prior to the Companys initial public offering in March 2012, the Companys preferred stock was divided into seven separate series, designated as Series A, Series B, Series C, Series D, Series E, Series F and Series G preferred stock, all of which were convertible to common stock. Series C, Series E, Series F and Series G were redeemable convertible preferred stock and are discussed in the next footnote. The preferred stock classes that were not classified as redeemable preferred stock were designated prior to the Companys initial public offering as summarized below.
As of December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Shares | Amounts | Shares | Amounts | Shares | Amounts | |||||||||||||||||||
Series A |
| $ | | 2,554,747 | $ | 767 | 2,554,747 | $ | 767 | |||||||||||||||
Series B |
| | 729,980 | 309 | 729,980 | 309 | ||||||||||||||||||
Series D |
| | 15,269,846 | 163,818 | 13,269,846 | 123,845 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Preferred Stock |
| $ | | 18,554,573 | $ | 164,894 | 16,554,573 | $ | 124,921 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the Companys initial public offering, the 18,554,573 shares of the Companys outstanding convertible preferred stock converted, on a two-for-one basis, into shares of common stock.
In November 2011, the Company issued 2,000,000 shares of Series D preferred stock at $20.00 per share for total proceeds of $40.0 million. These shares were sold to existing Series D preferred stockholders and their affiliates and had the same liquidation and other preferences as the other shares of the Companys Series D preferred stock.
19
Each share of Series A, Series B and Series D preferred stock was convertible into common stock at any time at the option of the holder. Upon the effectiveness of the two-for-one forward stock split of the Companys outstanding common stock described in note 1(d), pursuant to the provisions of the Companys certificate of incorporation then in effect, the conversion price of each series of preferred stock was appropriately decreased so that two shares of common stock were issuable upon conversion of each share of preferred stock of such series. Each share of Series A and Series B preferred stock would have automatically converted to common stock upon the earlier to occur of a qualified public offering, as defined in the Companys certificate of incorporation then in effect, or such date as holders of at least 75% of the then-outstanding Series A and Series B preferred stock, voting together as a single class and on an as-converted-to-common stock basis, requested such conversion. Each share of Series D preferred stock would have automatically converted to common stock upon the earlier to occur of (a) the Companys initial public offering with at least $75 million aggregate proceeds to the Company (net of underwriting discounts and commissions) and a per share price of not less than $14.01, (b) such date as holders of at least a majority of the shares of the then-outstanding Series D preferred stock requested such conversion, or (c) the conversion of all of the shares of Series E, Series F and Series G preferred stock to common stock. Each share of Series A, Series B and Series D preferred stock was convertible into two shares of common stock upon a conversion described above. The redemption price would have been sum of the applicable liquidation preference, plus an amount per share based on the appraised value of the Company and the applicable conversion rate.
(10) Redeemable Convertible Preferred Stock
As of December 31, 2012, the Company was authorized to issue 10,000,000 shares of preferred stock and no preferred stock was issued and outstanding.
Prior to the Companys initial public offering in March 2012, the Company had outstanding 23,467,219 shares of preferred stock, of which 4,912,646 share were designated redeemable convertible preferred stock. The redeemable convertible preferred stock was divided into three separate series, designated as Series E, Series F and Series G as summarized below.
As of December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Shares | Amounts | Shares | Amounts | Shares | Amounts | |||||||||||||||||||
Series E |
| $ | | 1,947,419 | $ | 19,980 | 1,947,419 | $ | 19,980 | |||||||||||||||
Series F |
| | 1,017,175 | 13,058 | 1,017,175 | 13,058 | ||||||||||||||||||
Series G |
| | 1,948,052 | 29,962 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total redeemable convertible preferred stock |
| $ | | 4,912,646 | $ | 63,000 | 2,964,594 | $ | 33,038 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Upon the closing of the Companys initial public offering, the 4,912,646 shares of redeemable convertible preferred stock converted, on a two-for-one basis, into 9,825,292 shares of common stock.
In March 2011, the Company issued 1,948,052 shares of Series G preferred stock at $15.40 per share for total proceeds of $30.0 million.
Each share of Series E, Series F and Series G preferred stock was convertible at any time, at the option of the holder, into shares of common stock determined by dividing the original issuance price by the conversion price. Upon the effectiveness of the two-for-one forward stock split of the Companys outstanding common stock described in note 1(d), pursuant to the provisions of the Companys certificate of incorporation then in effect, the conversion price of each series of preferred stock was appropriately decreased so that two shares of common stock were issuable upon conversion of each share of preferred stock of such series. Each share of Series E and Series F preferred stock would have automatically converted to common stock upon the earlier of (a) the Companys initial public offering with at least $75 million aggregate proceeds to the Company (net of underwriting discounts and commissions) and a per share price of not less than $10.27 or (b) such date as holders of at least a majority of the shares of the then-outstanding Series E and Series F preferred stock, voting together as a single class and on an as converted to common stock basis, requested such conversion. Each share of Series G preferred stock would have automatically converted to common stock upon the earlier of (a) the Companys initial public offering with at least $75 million aggregate proceeds to the Company (net of underwriting discounts and commissions) and a per share price of not less than $10.27 or (b) such date as holders of at least a majority of the shares of the then-outstanding Series G preferred stock requested such conversion. In the event that the initial public offering price of the common stock issued in the Companys initial public offering were less than $7.70 per share, the conversion price of the Series G preferred stock would have been adjusted to equal to the initial public offering price. In such event, more than two shares of common stock would have been issued in exchange for each share of Series G preferred stock upon conversion. In the event that the initial public offering price of the common stock issued in the Companys initial public offering were equal to or greater than $7.70 per share, each share of Series G preferred stock would have converted into two shares of common stock.
20
After May 1, 2016, the holders of a majority of the shares of Series G preferred stock then outstanding would have been able to demand that the Company redeem all or any portion of each holders Series G preferred stock for cash equal to $15.40 per share plus any declared and unpaid dividends thereon. If the requisite holders of the Series G preferred stock demanded a redemption and more than six months had passed and not all Series G preferred stock had been redeemed, such holders of Series G preferred stock would have been entitled to remove directors and/or appoint more directors in order to give them control of the board. In the event of a liquidation event, excluding an initial public offering, holders of the Series G preferred stock would have received the greater of (a) the original issuance price ($15.40 per share) plus any declared and unpaid dividends or (b) the amount such holders would have received if all shares of Series G preferred stock had been converted into common stock immediately prior to such liquidation event, prior to any distribution to holders of any other series of preferred stock or common stock.
At any time after all shares of Series G preferred stock had been redeemed in full, the holders of each of a majority of the shares of Series E preferred stock then outstanding, voting as a single class, and a majority of the shares of Series F preferred stock then-outstanding, voting as a single class, would have been entitled to collectively demand that the Company redeem all or any portion of each holders Series E and Series F preferred stock for cash equal to $10.27 per share plus any declared and unpaid dividends thereon, in the case of the Series E preferred stock, and $12.8375 per share plus any declared and unpaid dividends thereon, in the case of the Series F preferred stock. If the requisite holders of the Series E preferred stock and Series F preferred stock had demanded a redemption and more than six months had passed and not all Series E and Series F preferred stock had been redeemed, such holders of Series E and Series F preferred stock would have been entitled to remove directors and/or appoint more directors in order to give them control of the board. Once fully redeemed, those directors would have resigned and the composition of the board would have been determined in accordance with the stockholders agreement.
The holders of Series E, Series F and Series G preferred stock were not entitled to receive any dividends unless otherwise declared by the Companys board of directors. No dividends were declared by the Companys board of directors related to the Series E, Series F or Series G preferred stock.
(11) Equity Incentive Plans
(a) ExactTarget, Inc. 2004 Stock Option Plan, as Amended
In 2004, the stockholders and the board of directors approved the ExactTarget, Inc. 2004 Stock Option Plan (2004 Plan). Under the 2004 Plan, a maximum of 9,615,248 shares of common stock are authorized for issuance to provide a continuing long-term incentive to key employees, provide a means of rewarding outstanding performance and enhance the Companys ability to recruit and retain key employees. Options granted vest over four years. For options issued prior to July 14, 2004, vesting commences one year from the grant date at 25% and continues to vest at 25% per year for the three years thereafter on the anniversary date of the grant date. For options issued on or after July 14, 2004, 25% of the options granted are exercisable one year from the grant date and the remaining 75% are exercisable ratably over the remaining 36 months. Options expire ten years from the grant date and are forfeited if not exercised within 30 days of an employee leaving the Company. The fair value of the common stock was determined by the Companys board of directors after considering a broad range of factors, including peer group trading multiples, the illiquid nature of an investment in the Companys common stock, the Companys historical financial performance and financial position, the Companys future prospects and opportunity for liquidity events, and sale and offer prices of preferred stock in private transactions negotiated at arms length. The Company ceased granting options under the 2004 Plan in January 2008.
(b) ExactTarget, Inc. 2008 Equity Incentive Plan
The 2008 Equity Incentive Plan (2008 Plan), became effective on February 1, 2008 and was approved by the board of directors on January 23, 2008 and by stockholders on March 28, 2008. The 2008 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, and restricted stock, collectively awards. Employees and directors, and any subsidiary corporations employees and directors, are eligible to receive awards under the 2008 Plan. However, incentive stock options may only be granted to employees or any subsidiary corporations employees. The Compensation Committee has the power to determine the terms of the awards, including the employees and directors who will receive awards, the exercise price of options, which must be no lower than the fair market value of the shares, the fair market value of the shares subject to each award, the number of shares subject to each award, the vesting schedule and exercisability of awards, and the form of consideration payable upon exercise or purchase, as applicable. At the beginning of each calendar year, an additional 1,000,000 shares are added to the awards available for future grants up to 4% of the total number of shares outstanding.
In January 2011, the board of directors approved an additional 2,341,170 shares, to be added to the awards available for future grants under the 2008 Plan. Effective November 2011, the 2008 Plan was amended to (i) increase the number of shares available for grant under the plan by an additional 7,852,566 shares, and (ii) provide that the number of shares reserved for issuance under the plan will be increased automatically on the first day of January in each of the years 2013 through 2017 by a number of shares equal to the lesser of (1) 5% of the total number of the Companys shares outstanding as of the immediately preceding December 31, or (2) such maximum amount, if any, determined by the Companys board of directors. During 2011, the board of directors approved a total of 10,193,736 shares to be added to the awards available for future grants under the 2008 Plan.
Shares available for future grants under the 2008 Plan at December 31, 2012 and 2011 were 6,321,935 and 8,213,830 shares, respectively.
21
(c) Equity Plan Activity
Stock-Based Compensation
The following table sets forth the total stock-based compensation expense resulting from stock awards included in the Companys consolidated statements of operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of revenue - subscription |
$ | 345 | $ | 351 | $ | 218 | ||||||
Cost of revenue - professional services |
1,033 | 704 | 446 | |||||||||
Sales and marketing |
3,179 | 2,265 | 1,413 | |||||||||
Research and development |
2,183 | 1,511 | 1,147 | |||||||||
General and administrative |
4,442 | 2,123 | 1,201 | |||||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation expense |
$ | 11,182 | $ | 6,954 | $ | 4,425 | ||||||
|
|
|
|
|
|
As of December 31, 2012, 2011 and 2010, $36.0 million, $17.1 million, and $13.0 million, respectively, of total unrecognized stock-based compensation expense related to nonvested shares was expected to be recognized over the respective vesting terms of each award through 2016. The weighted average term of the unrecognized stock-based compensation expense is 3.0 years, 2.7 years and 2.8 years for the years ended December 31, 2012, 2011 and 2010, respectively.
Stock Option Awards
The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Year ended December 31, | ||||||
2012 |
2011 |
2010 | ||||
Expected volatility |
53.84% - 55.54% | 54.99% - 57.78% | 59.07% - 62.07% | |||
Risk free interest rate |
0.65% - 0.92% | 0.95% - 2.12% | 1.50% - 2.43% | |||
Expected dividend yield |
% | % | % | |||
Expected option term (in years) |
6.25 | 6.25 | 6.25 | |||
Fair value of options granted |
$8.83 | $4.56 | $3.02 |
The Company believes the historical volatility of a peer group of companies is representative of future stock price trends. Therefore, expected volatility is based on historical volatility of the publicly traded stock of a peer group of companies analyzed by the Company over the expected term of the options.
The risk-free interest rate for periods within the contractual life of the Companys stock options is based on the U.S. Treasury yield curve in effect at the time of grant for time periods similar to the expected term of the award. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. The estimated forfeiture rate applied is based on historical forfeiture rates. The expected option term is based on the average of the vesting term and the 10-year contractual lives of all options awarded.
22
Stock option activity in the equity incentive plans for 2012 and 2011 was as follows:
Options | Weighted average exercise price |
Weighted average remaining contractual life |
Aggregate intrinsic value |
|||||||||||||
Outstanding: |
||||||||||||||||
Balance at December 31, 2010 |
9,166,318 | $ | 4.4018 | 7.54 | $ | 21,983 | ||||||||||
|
|
|||||||||||||||
Granted |
2,819,668 | 7.9893 | ||||||||||||||
Exercised |
(135,712 | ) | 3.1747 | |||||||||||||
Forfeited |
(526,782 | ) | 6.0964 | |||||||||||||
|
|
|||||||||||||||
Balance at December 31, 2011 |
11,323,492 | $ | 5.2309 | 7.37 | $ | 54,003 | ||||||||||
|
|
|||||||||||||||
Granted |
2,396,360 | 16.8965 | ||||||||||||||
Exercised |
(2,002,626 | ) | 3.8510 | |||||||||||||
Forfeited |
(504,465 | ) | 7.3414 | |||||||||||||
|
|
|||||||||||||||
Balance at December 31, 2012 |
11,212,761 | $ | 7.8664 | 7.19 | $ | 136,051 | ||||||||||
|
|
|||||||||||||||
Exercisable at December 31, 2012 |
6,294,169 | $ | 4.7857 | 6.06 | $ | 95,761 |
The aggregate intrinsic value represents the total pretax intrinsic value, based on a stock price of $20.00, $10.00 and $6.80 per share at December 31, 2012, 2011 and 2010, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. This amount changes based on the current price of the stock. The total intrinsic value of options exercised was $35.2 million, $0.8 million, and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Restricted Stock Awards
During the year ended December 31, 2012, the Company granted 279,829 shares of restricted stock to non-employee directors and as part of employment agreements for certain employees. These shares of restricted stock were granted with a weighted average fair value of $21.76 per share, have a weighted average remaining life of 1.49 years. The Company also granted 686,638 shares of restricted stock as part of the consideration paid for the acquisitions of Pardot and iGoDigital further described in the Acquisitions footnote.
During the year ended December 31, 2011, the Company granted 32,464 shares of restricted stock to non-employee directors with a weighted average fair value of $7.70 per share, which vested in 2012. The Company also granted 41,966 shares of restricted stock as part of the consideration paid for the acquisition of Frontier Tecnologia, Ltda. further described in the Acquisitions footnote.
There were 966,467 shares and 103,244 shares of unvested restricted stock outstanding at December 31, 2012 and 2011, respectively.
(12) 401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pretax basis. Contributions to the plan may be made at the discretion of the board of directors. There were contributions of $1.0 million, $1.0 million and $0.6 million made for the years ended December 31, 2012, 2011, and 2010, respectively.
(13) Related Party Transactions
Matthew W. Ferguson, a member of the board of directors, is the President and Chief Executive Officer of CareerBuilder, LLC, a position he has held since 2003. CareerBuilder, LLC has been a client of the Company for several years. During the years ended December 31, 2012, 2011 and 2010, the aggregate amount of revenue recognized by the Company from CareerBuilder, LLC was $1.1 million, $0.9 million, and $0.8 million, respectively. During the years ended December 31, 2012, 2011 and 2010, the Company made immaterial payments to CareerBuilder of less than $50,000, related to services received from CareerBuilder, LLC. Accounts receivable from CareerBuilder, LLC were $0.2 million and $0.1 million as of December 31, 2012 and 2011, respectively. And, there were no amounts due to CareerBuilder, LLC at December 31, 2012 and 2011, respectively.
Julie M.B. Bradley was named as a member of the board of directors in 2012 and is the Chief Financial Officer of TripAdvisor, LLC, a position she has held since 2011. During the years ended December 31, 2012, 2011 and 2010, the aggregate amount of revenue recognized by the Company from TripAdvisor, LLC was $1.3 million, $1.1 million, $1.0 million, respectively. During the years ended December 31, 2012, 2011 and 2010, the Company did not make a payment to TripAdvisor, LLC. Accounts receivable from TripAdvisor, LLC were not a material amount as of December 31, 2012 and there were no amounts due to TripAdvisor, LLC as of December 31, 2012.
All transactions with the related parties noted above were conducted at fair market value with no favorable terms or conditions that are not available to unrelated parties.
(14) Legal Proceedings
On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited filed a lawsuit against the Company in the District Court for the Eastern District of Texas alleging willful infringement of five patents and seeking injunctive relief and unspecified damages. On the same date, the plaintiff filed seven other patent infringement actions against seven other companies in the same industry as the Company. The Company has reviewed the patents asserted in the lawsuit and believes there are valid defenses against the claims. However, the outcome of any litigation is inherently uncertain and there can be no assurance as to the ultimate outcome of such matter, especially given the very early stage of the action. As a result, although the Company is vigorously defending against the asserted claims, neither the ultimate outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses can be assessed at this time.
The Company is not currently, nor has it been in the past, subject to any other material legal proceedings. From time to time, however, the Company may become involved in various legal proceedings in the ordinary course of its business, and may be subject to third-party infringement claims. These claims, even those that lack merit, could result in the expenditure of significant financial and managerial resources.
23
(15) Selected Quarterly Financial Data (unaudited)
The following table sets forth selected unaudited consolidated statements of operations data. This information was derived from our unaudited consolidated financial statements, which in the opinion of management contain all adjustments necessary for a fair presentation of such financial data in accordance with GAAP.
Three Months Ended | ||||||||||||||||||||||||||||||||
Dec. 31, 2012 |
Sept. 30, 2012 |
June 30, 2012 |
Mar. 31, 2012 |
Dec. 31, 2011 |
Sept. 30, 2011 |
June 30, 2011 |
Mar. 31, 2011 |
|||||||||||||||||||||||||
Revenue |
$ | 84,242 | $ | 74,655 | $ | 69,318 | $ | 64,057 | $ | 59,508 | $ | 55,123 | $ | 48,836 | $ | 44,026 | ||||||||||||||||
Cost of revenue |
31,224 | 24,727 | 23,808 | 23,841 | 20,600 | 18,311 | 16,618 | 14,666 | ||||||||||||||||||||||||
Gross profit |
53,018 | 49,928 | 45,510 | 40,216 | 38,908 | 36,812 | 32,218 | 29,360 | ||||||||||||||||||||||||
Net loss before taxes |
(12,952 | ) | (721 | ) | (2,602 | ) | (4,683 | ) | (5,887 | ) | (7,580 | ) | (5,963 | ) | (5,207 | ) | ||||||||||||||||
Net loss |
(12,952 | ) | (721 | ) | (2,602 | ) | (4,683 | ) | (6,145 | ) | (22,322 | ) | (3,706 | ) | (3,262 | ) | ||||||||||||||||
Net loss per common share: |
||||||||||||||||||||||||||||||||
Basic |
$ | (0.19 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.32 | ) | $ | (0.68 | ) | $ | (2.55 | ) | $ | (0.43 | ) | $ | (0.38 | ) | ||||||||
Diluted |
$ | (0.19 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.32 | ) | $ | (0.68 | ) | $ | (2.55 | ) | $ | (0.43 | ) | $ | (0.38 | ) |
24
Exhibit 99.3
salesforce.com, inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information are based on the historical financial statements of salesforce.com, inc. (the Company) and ExactTarget, Inc. (ET) after giving effect to the Companys acquisition of ET on July 12, 2013 and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined statements of operations for the six months ended July 31, 2013, and year ended January 31, 2013, are presented as if the acquisition of ET had occurred on February 1, 2012 and were carried forward through each of the aforementioned periods presented.
A pro forma condensed combined balance sheet as of July 31, 2013 is not required as the Companys balance sheet as of July 31, 2013 included in the Form 10-Q as of and for the three and six months ended July 31, 2013 reflects the impact of the acquisition.
The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based upon preliminary estimates. These preliminary estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition of ET.
The unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the Companys consolidated results of operations or financial position that the Company would have reported had the ET acquisition been completed as of the dates presented, and should not be taken as a representation of the Companys future consolidated results of operations or financial position.
The unaudited pro forma condensed combined financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies.
The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of the Company included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2013 and the Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2013 and of ETs financial statements included in Form 8-K/A for the year ended December 31, 2012 and the six months ended June 30, 2013.
salesforce.com, inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended July 31, 2013
Historical | ||||||||||||||||
Six Months Ended | ||||||||||||||||
July 31, 2013 | June 30, 2013 | Pro Forma | ||||||||||||||
ExactTarget | Adjustments | Pro Forma | ||||||||||||||
(in thousands) |
salesforce.com | (Note 1) | (Note 3) | Combined | ||||||||||||
Revenues: |
||||||||||||||||
Subscription and support |
$ | 1,745,065 | $ | 146,661 | $ | (22,403 | )(A)(G)(I) | $ | 1,869,323 | |||||||
Professional services and other |
104,662 | 36,649 | (4,177 | )(A)(I) | 137,134 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
1,849,727 | 183,310 | (26,580 | ) | 2,006,457 | |||||||||||
Cost of revenues: |
||||||||||||||||
Subscription and support |
314,458 | 37,825 | 16,806 | (B)(C)(I) | 369,089 | |||||||||||
Professional services and other |
112,253 | 28,222 | (2,514 | )(B)(I) | 137,961 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenues |
426,711 | 66,047 | 14,292 | 507,050 | ||||||||||||
Gross profit |
1,423,016 | 117,263 | (40,872 | ) | 1,499,407 | |||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
280,018 | 37,244 | (3,415 | )(B)(I) | 313,847 | |||||||||||
Marketing and sales |
947,111 | 77,524 | 15,752 | (B)(C)(G)(I) | 1,040,387 | |||||||||||
General and administrative |
280,284 | 30,819 | (22,648 | )(B)(C)(D)(E)(H)(I) | 288,455 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
1,507,413 | 145,587 | (10,311 | ) | 1,642,689 | |||||||||||
Loss from operations |
(84,397 | ) | (28,324 | ) | (30,561 | ) | (143,282 | ) | ||||||||
Investment income |
7,741 | 0 | 0 | 7,741 | ||||||||||||
Interest expense |
(31,539 | ) | 0 | (2,681 | )(F) | (34,220 | ) | |||||||||
Other expense |
(2,552 | ) | (109 | ) | 0 | (2,661 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before benefit from income taxes |
(110,747 | ) | (28,433 | ) | (33,242 | ) | (172,422 | ) | ||||||||
Benefit from income taxes |
119,629 | 0 | (116,759 | )(J) | 2,870 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 8,882 | $ | (28,433 | ) | $ | (150,001 | ) | $ | (169,552 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income (loss) per share |
$ | 0.02 | $ | (0.41 | ) | $ | (0.29 | ) | ||||||||
Diluted net income (loss) per share |
$ | 0.01 | $ | (0.41 | ) | $ | (0.29 | ) | ||||||||
Shares used in computing basic net income (loss) per share (Note 5) |
591,210 | 69,317 | 591,210 | |||||||||||||
Shares used in computing diluted net income (loss) per share (Note 5) |
623,865 | 69,317 | 591,210 | |||||||||||||
Amounts include amortization of purchased intangibles from business combinations, as follows (C)(I): |
| |||||||||||||||
Cost of revenues |
43,856 | 2,166 | 21,052 | 67,074 | ||||||||||||
Marketing and sales |
6,936 | 1,001 | 22,016 | 29,953 | ||||||||||||
General and administrative |
0 | 130 | (130 | ) | 0 | |||||||||||
Amounts include stock-based expenses, as follows (B)(I): |
| |||||||||||||||
Cost of revenues |
20,659 | 880 | 658 | 22,197 | ||||||||||||
Research and development |
50,461 | 2,240 | 222 | 52,923 | ||||||||||||
Marketing and sales |
115,935 | 2,211 | 1,662 | 119,808 | ||||||||||||
General and administrative |
38,150 | 2,902 | 39 | 41,091 |
salesforce.com, inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended January 31, 2013
Historical | ||||||||||||||||
Year Ended | ||||||||||||||||
January 31, 2013 | December 31, 2012 | Pro Forma | ||||||||||||||
ExactTarget | Adjustments | Pro Forma | ||||||||||||||
(in thousands) |
salesforce.com | (Note 1) | (Note 3) | Combined | ||||||||||||
Revenues: |
||||||||||||||||
Subscription and support |
$ | 2,868,808 | $ | 234,222 | $ | (64,750 | )(A)(G) | $ | 3,038,280 | |||||||
Professional services and other |
181,387 | 58,050 | 1,704 | (A) | 241,141 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
3,050,195 | 292,272 | (63,046 | ) | 3,279,421 | |||||||||||
Cost of revenues: |
||||||||||||||||
Subscription and support |
494,187 | 56,770 | 50,958 | (B)(C) | 601,915 | |||||||||||
Professional services and other |
189,392 | 46,830 | 2,025 | (B) | 238,247 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenues |
683,579 | 103,600 | 52,983 | 840,162 | ||||||||||||
Gross profit |
2,366,616 | 188,672 | (116,029 | ) | 2,439,259 | |||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
429,479 | 54,022 | 6,898 | (B) | 490,399 | |||||||||||
Marketing and sales |
1,614,026 | 115,312 | 58,442 | (B)(C)(G) | 1,787,780 | |||||||||||
General and administrative |
433,821 | 39,725 | 10,261 | (B)(C)(E)(H) | 483,807 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
2,477,326 | 209,059 | 75,601 | 2,761,986 | ||||||||||||
Loss from operations |
(110,710 | ) | (20,387 | ) | (191,630 | ) | (322,727 | ) | ||||||||
Investment income |
19,562 | 0 | 0 | 19,562 | ||||||||||||
Interest expense |
(30,948 | ) | 0 | (6,254 | )(F) | (37,202 | ) | |||||||||
Other expense |
(5,698 | ) | (571 | ) | 0 | (6,269 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before benefit from income taxes |
(127,794 | ) | (20,958 | ) | (197,884 | ) | (346,636 | ) | ||||||||
Benefit from income taxes |
(142,651 | ) | 0 | 115,207 | (J) | (27,444 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (270,445 | ) | $ | (20,958 | ) | $ | (82,677 | ) | $ | (374,080 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income (loss) per share |
$ | (0.48 | ) | $ | (0.39 | ) | $ | (0.66 | ) | |||||||
Diluted net income (loss) per share |
$ | (0.48 | ) | $ | (0.39 | ) | $ | (0.66 | ) | |||||||
Shares used in computing basic net income (loss) per share (Note 5) |
564,896 | 53,856 | 564,896 | |||||||||||||
Shares used in computing diluted net income (loss) per share (Note 5) |
564,896 | 53,856 | 564,896 | |||||||||||||
Amounts include amortization of purchased intangibles from business combinations, as follows (C): |
| |||||||||||||||
Cost of revenues |
77,249 | 1,024 | 49,634 | 127,907 | ||||||||||||
Marketing and sales |
10,922 | 704 | 49,695 | 61,321 | ||||||||||||
General and administrative |
0 | 354 | (354 | ) | 0 | |||||||||||
Amounts include stock-based expenses, as follows (B): |
| |||||||||||||||
Cost of revenues |
33,757 | 1,378 | 3,349 | 38,484 | ||||||||||||
Research and development |
76,333 | 2,183 | 6,898 | 85,414 | ||||||||||||
Marketing and sales |
199,284 | 3,179 | 10,357 | 212,820 | ||||||||||||
General and administrative |
69,976 | 4,442 | 8,639 | 83,057 |
salesforce.com, inc.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma condensed combined statements of operations for the six months ended July 31, 2013, and for the year ended January 31, 2013, are based on the historical financial statements of salesforce.com, inc. (the Company) and ExactTarget, Inc. (ET) after giving effect to the Companys acquisition of ET on July 12, 2013 and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
The Company accounts for business combinations pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805). In accordance with ASC 805, the Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed.
The fair values assigned to ETs tangible and intangible assets acquired and liabilities assumed are based on managements estimates and assumptions. The estimated fair values of these assets acquired and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns finalized. Thus the provisional measurements of fair value are subject to change. The Company expects to finalize the valuation of the tangible and intangible assets acquired and liabilities assumed as soon as practicable, but not later than one-year from the acquisition date.
The unaudited pro forma condensed combined financial information is not intended to represent or be indicative of the Companys consolidated results of operations or financial position that would have been reported had the ET acquisition been completed as of the dates presented, and should not be taken as a representation of the Companys future consolidated results of operations or financial position. The unaudited pro forma condensed combined financial information does not reflect any operating efficiencies, cost savings that the Company may achieve and/or changes in significant accounting policies with respect to the combined companies.
The unaudited pro forma condensed combined financial information should be read in conjunction with the Companys historical consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2013 and Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2013 and ETs historical consolidated financial statements and accompanying notes included in the Form 8-K/A for the year ended December 31, 2012 and the six months ended June 30, 2013.
Accounting Periods Presented
ETs historical fiscal year ended on December 31 and, for purposes of the unaudited pro forma condensed combined financial information, its historical results have been aligned to more closely conform to the Companys January 31 fiscal year end as explained below.
The unaudited pro forma condensed combined statements of operations of the Company and ET for the six months ended July 31, 2013 and year ended January 31, 2013 are presented as if the ET acquisition had taken place on February 1, 2012. Due to different fiscal period ends, the pro forma statement of operations for the six months ended July 31, 2013 combines the historical results of the Company for the six months ended July 31, 2013 and the historical results of ET for the six months ended June 30, 2013. The pro forma statement of operations of the Company and ET for the year ended January 31, 2013, due to different fiscal period ends, combines the historical results of the Company for the year ended January 31, 2013 and the historical results of ET for the year ended December 31, 2012.
A pro forma condensed combined balance sheet as of July 31, 2013 is not required as the Companys balance sheet as of July 31, 2013 included in the Form 10-Q as of and for the three and six months ended July 31, 2013 reflects the impact of the acquisition.
Reclassifications
No reclassifications were required to the presentation of ETs historical financial statements in order to conform to the Companys presentation.
2. ACQUISITION OF EXACTTARGET, INC.
On July 12, 2013, the Company acquired for cash the outstanding stock of ET, a leading global provider of cross-channel, digital marketing solutions that empower organizations of all sizes to communicate with their customers through the digital channels they use most. The Company acquired ET to, among other things, create a world-class marketing platform across the channels of email, social, mobile and the web. The Company has included the financial results of ET in the consolidated financial statements from the date of acquisition. The preliminary acquisition date fair value of the consideration transferred for ET was approximately $2.6 billion, including the proceeds from the term loan of $300.0 million, which consisted of the following (in thousands):
Fair Value | ||||
Cash |
$ | 2,567,098 | ||
Fair value of equity awards assumed |
40,067 | |||
|
|
|||
Total |
$ | 2,607,165 | ||
|
|
The preliminary estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.84 was applied to convert ETs outstanding equity awards for ETs common stock into equity awards for shares of the Companys common stock.
The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Fair Value | ||||
Cash, cash equivalents and marketable securities |
$ | 91,549 | ||
Accounts receivable |
63,320 | |||
Other current assets |
20,965 | |||
Customer contract asset, current and noncurrent |
201,161 | |||
Property and equipment |
64,782 | |||
Other noncurrent assets |
4,379 | |||
Intangible assets |
708,260 | |||
Goodwill |
1,852,852 | |||
Accounts payable, accrued expenses and other liabilities |
(66,346 | ) | ||
Deferred revenue, current and noncurrent |
(46,525 | ) | ||
Customer liability, current and noncurrent |
(141,783 | ) | ||
Other liabilities, noncurrent |
(1,825 | ) | ||
Deferred tax liability |
(143,624 | ) | ||
|
|
|||
Net assets acquired |
$ | 2,607,165 | ||
|
|
The excess of preliminary purchase consideration over the preliminary fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The preliminary fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on managements estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The preliminary estimated fair values of assets acquired and liabilities assumed, including current and noncurrent income taxes payable and deferred taxes, and identifiable intangible assets may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one-year from the acquisition date.
The following table sets forth the components of identifiable intangible assets acquired and their preliminary estimated useful lives as of the date of acquisition (in thousands):
Fair Value | Useful Life | |||||||
Developed technology |
$ | 307,200 | 4-7 years | |||||
Customer relationships |
362,200 | 6-8 years | ||||||
Trade name and trademark |
29,400 | 10 years | ||||||
Other purchased intangible assets |
9,460 | 3-4 years | ||||||
|
|
|||||||
Total intangible assets subject to amortization |
$ | 708,260 | ||||||
|
|
Developed technology represents the preliminary estimated fair value of ETs digital marketing technology. Customer relationships represent the preliminary estimated fair values of the underlying relationships with ET customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating ETs digital marketing technology with the Companys other offerings. The goodwill balance is not deductible for U.S. income tax purposes.
The Company assumed unvested options and restricted stock with a preliminary estimated fair value of $101.6 million. Of the total consideration, a portion was preliminarily allocated to the purchase consideration and the remainder of the preliminary estimated fair value was preliminarily allocated to future services and will be expensed over the remaining service periods on a straight-line basis.
3. TERM LOAN
On July 11, 2013, the Company entered into a credit agreement (the Credit Agreement) with Bank of America, N.A. and certain other lenders. The Credit Agreement provides for a $300.0 million term loan (the Term Loan) maturing on July 11, 2016 (the Maturity Date) and bears interest at the Companys option at either a base rate plus a spread of 0.50% to 1.00% or an adjusted LIBOR rate as defined in the Credit Agreement plus a spread of 1.50% to 2.00%.
The Company entered into the Term Loan in conjunction with and for purposes of funding the acquisition of ET.
Interest is due and payable in arrears quarterly for the loan bearing interest at the base rate and at the end of an interest period in the case of the loan bearing interest at the adjusted LIBOR rate. The Term Loan is payable in quarterly installments equal to $7.5 million beginning on September 30, 2013, with the remaining outstanding principal amount of the term loan being due and payable on the Maturity Date. The Company may prepay the Term Loan, in whole or in part at anytime during the term of the Term Loan. Amounts repaid or prepaid may not be reborrowed under the terms of the Credit Agreement. The Term Loan is secured by a pledge of 100 percent of the equity securities of the Companys direct domestic subsidiaries and 65 percent of the equity securities of the Companys foreign subsidiaries.
The Credit Agreement contains certain customary affirmative and negative covenants, including a consolidated leverage ratio covenant, a consolidated interest coverage ratio covenant, a limit on the Companys ability to incur additional indebtedness, issue preferred stock or pay dividends, and certain other restrictions on the Companys activities each defined specifically in the Credit Agreement. The Company was in compliance with the Credit Agreements covenants as of July 31, 2013.
The weighted average interest rate on the Term Loan was 2.3% as of July 31, 2013. Accrued interest on the Term Loan was $0.4 million as of July 31, 2013. As of July 31, 2013, the current portion outstanding under the Term Loan was $30.0 million and the noncurrent outstanding portion was $270.0 million.
4. PRO FORMA ADJUSTMENTS
The following pro forma adjustments are included in the Companys unaudited pro forma condensed combined financial information:
(A) To record a reduction in revenues related to the estimated fair value of the acquired deferred revenue and the customer liability. The difference between the preliminary fair values of acquired deferred revenues, representing amounts equivalent to the estimated costs plus an appropriate profit margin to fulfill the obligations assumed, and the historical carrying amounts of ETs deferred revenues results in a discount to the recorded deferred revenue and is therefore subsequently recognized as a reduction to revenues.
in thousands |
Six Months Ended July 31, 2013 |
Year Ended January 31, 2013 |
||||||
Subscription and support |
$ | 9,570 | $ | 63,140 | ||||
Professional services and other |
(154 | ) | (1,704 | ) | ||||
|
|
|
|
|||||
Total reduction to revenue |
$ | 9,416 | $ | 61,436 | ||||
|
|
|
|
(B) To record the estimated stock-based compensation expense related to the unvested portion of ET stock options and restricted stock-based awards assumed in connection with the acquisition using the straight-line amortization method over the remaining vesting periods.
Six Months Ended July 31, 2013 | ||||||||||||
(in thousands) |
ET Historical Stock- Based Compensation |
Stock-Based Compensation Expense Based Upon Preliminary Fair Values |
Increase in Stock-Based Compensation Expense |
|||||||||
Cost of revenues - subscriptions |
$ | 282 | $ | 567 | $ | 285 | ||||||
Cost of revenues - services |
598 | 1,208 | 610 | |||||||||
Research and development |
2,240 | 3,132 | 892 | |||||||||
Marketing and sales |
2,211 | 4,622 | 2,411 | |||||||||
General and administrative |
2,902 | 3,275 | 373 | |||||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation |
$ | 8,233 | $ | 12,804 | $ | 4,571 | ||||||
|
|
|
|
|
|
Year Ended January 31, 2013 | ||||||||||||
(in thousands) |
ET Historical Stock- Based Compensation |
Stock-Based Compensation Expense Based Upon Preliminary Fair Values |
Increase in Stock-Based Compensation Expense |
|||||||||
Cost of revenues - subscriptions |
$ | 345 | $ | 1,669 | $ | 1,324 | ||||||
Cost of revenues - services |
1,033 | 3,058 | 2,025 | |||||||||
Research and development |
2,183 | 9,081 | 6,898 | |||||||||
Marketing and sales |
3,179 | 13,536 | 10,357 | |||||||||
General and administrative |
4,442 | 13,081 | 8,639 | |||||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation |
$ | 11,182 | $ | 40,425 | $ | 29,243 | ||||||
|
|
|
|
|
|
(C) To record the estimated amortization expense related to the intangible assets acquired in connection with the Companys acquisition of ET.
Six Months Ended July 31, 2013 | ||||||||||||
(in thousands) |
ET
Historical Amortization Expense |
Amortization Expense Based Upon Preliminary Fair Values |
Increase in Amortization Expense |
|||||||||
Cost of revenues subscription and support |
$ | 2,166 | $ | 25,329 | $ | 23,163 | ||||||
Marketing and sales |
1,001 | 25,199 | 24,198 | |||||||||
General and administrative |
130 | 0 | (130 | ) | ||||||||
|
|
|
|
|
|
|||||||
Amortization expense |
$ | 3,297 | $ | 50,528 | $ | 47,231 | ||||||
|
|
|
|
|
|
|||||||
Year Ended January 31, 2013 | ||||||||||||
(in thousands) |
ET
Historical Amortization Expense |
Amortization Expense Based Upon Preliminary Fair Values |
Increase in Amortization Expense |
|||||||||
Cost of revenues subscription and support |
$ | 1,024 | $ | 50,658 | $ | 49,634 | ||||||
Marketing and sales |
704 | 50,399 | 49,695 | |||||||||
General and administrative |
354 | 0 | (354 | ) | ||||||||
|
|
|
|
|
|
|||||||
Amortization expense |
$ | 2,082 | $ | 101,057 | $ | 98,975 | ||||||
|
|
|
|
|
|
(D) To eliminate acquisition related transaction costs of $5.5 million and $16.0 million that were incurred by ET and the Company in the six months ended June 30, 2013 and July 31, 2013, respectively.
(E) To record the increase in depreciation expense as a result of the increase in fair value of ETs property, plant and equipment, net. For presentation purposes, this amount is reflected in General and administrative and not allocated.
(in thousands) |
Total increase in Depreciation Expense |
Six Months Ended July 31, 2013 |
Year Ended January 31, 2013 |
|||||||||
Increase in depreciation expense |
$ | 2,405 | $ | 328 | $ | 655 |
(F) To record interest expense associated with the issuance of a Term Loan to finance a portion of the cash consideration exchanged using the effective interest rate at the time of acquisition. The expense reflects the quarterly interest and principal payments.
(in thousands) |
Par Value | Effective Annual Interest Rate |
Increase in Interest Expense for Six Months Ended July 31, 2013 |
Increase in Interest Expense for Year Ended January 31, 2013 |
||||||||||||
Three-year term loan |
$ | 300,000 | 3.25 | % | $ | 2,681 | $ | 6,254 |
(G) To eliminate revenues, and corresponding expenses between the Company and ET for the periods presented. The pro forma effects related to other expenses for the periods presented were not significant.
(H) To record the amortization of the favorable lease contract asset established upon purchase accounting. The asset represents the difference between the fair value and minimum lease obligations under outstanding leases acquired from ET.
(in thousands) |
Six Months Ended July 31, 2013 |
Year Ended January 31, 2013 |
||||||
Amortization of favorable lease contract |
$ | 652 | $ | 1,321 |
(I) To eliminate ETs results included in the Companys results for the period from the acquisition of July 12, 2013 to July 31, 2013.
(J) The following table presents pro forma income tax adjustments to the periods presented. The Company released a portion of its valuation allowance resulting from the acquisition of ExactTarget. The related tax benefit as well as other pro forma adjustments are reflected in the respective periods.
(Dollars in thousands) |
Six
Months Ended July 31, 2013 |
Year Ended January 31, 2013 |
||||||
Tax benefit related to valuation allowance change |
$ | (117,992 | ) | $ | 117,992 | |||
Other proforma income tax adjustments |
1,233 | (2,785 | ) | |||||
|
|
|
|
|||||
Pro forma adjustment to (increase)/decrease (provision)/benefit from income taxes |
$ | (116,759 | ) | $ | 115,207 | |||
|
|
|
|
5. PRO FORMA EARNINGS PER SHARE
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon the weighted average number of the Companys common shares outstanding. Our acquisition of ET had substantially no impact to our basic weighted average common shares outstanding calculations for the unaudited pro forma condensed combined statements of operations periods presented.