UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 000-54620
Marlborough Software Development Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware | 45-3751691 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
500 Nickerson Road, Marlborough, MA 01752-4695
(Address of principal executive offices)
Registrants telephone number, including area code: (617) 520-8400
(Registrants telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On August 12, 2013, there were 10,801,609 shares of Common Stock, par value $0.01 per share issued and outstanding.
PAGE NUMBERS | ||||
PART I. FINANCIAL INFORMATION | ||||
ITEM 1. |
FINANCIAL STATEMENTS | 2 | ||
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012 |
2 | |||
3 | ||||
4 | ||||
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
5 | |||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 | ||
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 20 | ||
ITEM 4. |
CONTROLS AND PROCEDURES | 21 | ||
PART II. OTHER INFORMATION | ||||
ITEM 1. |
LEGAL PROCEEDINGS | 21 | ||
ITEM 1A. |
RISK FACTORS | 21 | ||
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 21 | ||
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES | 21 | ||
ITEM 4. |
MINE SAFETY DISCLOSURES | 21 | ||
ITEM 5. |
OTHER INFORMATION | 22 | ||
ITEM 6. |
EXHIBITS | 22 | ||
23 |
1
PART I FINANCIAL INFORMATION
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2013 |
December 31, 2012 |
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(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 879 | $ | 2,018 | ||||
Accounts receivable, net of allowance of $49 and $41 at June 30, 2013 and December 31, 2012, respectively |
335 | 675 | ||||||
Prepaid expenses and other current assets |
261 | 420 | ||||||
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Total current assets |
1,475 | 3,113 | ||||||
Property and equipment, net |
1,448 | 1,722 | ||||||
Other assets |
416 | 413 | ||||||
Goodwill |
3,297 | 3,297 | ||||||
Intangible assets, net |
2,469 | 2,669 | ||||||
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Total assets |
$ | 9,105 | $ | 11,214 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
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Accounts payable |
$ | 499 | $ | 385 | ||||
Accrued payroll and other compensation |
421 | 491 | ||||||
Other accrued expenses |
679 | 723 | ||||||
Short-term deferred revenue |
2,363 | 2,345 | ||||||
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Total current liabilities |
3,962 | 3,944 | ||||||
Long-term deferred revenue |
585 | 574 | ||||||
Long-term deferred rent |
444 | 469 | ||||||
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Total liabilities |
4,991 | 4,987 | ||||||
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Commitments and contingencies |
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Series A 6.5% redeemable preferred stock, $0.01 par value: |
1,970 | 1,888 | ||||||
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Stockholders equity: |
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Preferred stock, $0.01 par value: |
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Common stock, $0.01 par value: |
108 | 108 | ||||||
Additional paid-in capital |
13,156 | 13,146 | ||||||
Accumulated deficit |
(11,120 | ) | (8,915 | ) | ||||
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Total stockholders equity |
2,144 | 4,339 | ||||||
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Total liabilities and stockholders equity |
$ | 9,105 | $ | 11,214 | ||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenue: |
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Software licenses |
$ | 356 | $ | 628 | $ | 890 | $ | 1,044 | ||||||||
Services |
1,294 | 1,337 | 2,663 | 2,689 | ||||||||||||
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Total revenue |
1,650 | 1,965 | 3,553 | 3,733 | ||||||||||||
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Cost of revenue: |
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Software licenses |
129 | 261 | 437 | 432 | ||||||||||||
Services |
631 | 688 | 1,031 | 1,243 | ||||||||||||
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Total cost of revenue |
760 | 949 | 1,468 | 1,675 | ||||||||||||
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Gross profit |
890 | 1,016 | 2,085 | 2,058 | ||||||||||||
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Operating expenses: |
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Marketing and selling |
516 | 1,169 | 1,233 | 2,236 | ||||||||||||
Research and development |
606 | 1,486 | 1,439 | 3,371 | ||||||||||||
General and administrative |
821 | 785 | 1,450 | 2,017 | ||||||||||||
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Total operating expenses |
1,943 | 3,440 | 4,122 | 7,624 | ||||||||||||
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Operating loss |
(1,053 | ) | (2,424 | ) | (2,037 | ) | (5,566 | ) | ||||||||
Interest and other (expense) income, net |
(4 | ) | (17 | ) | 2 | (43 | ) | |||||||||
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Loss before provision for income taxes |
(1,057 | ) | (2,441 | ) | (2,035 | ) | (5,609 | ) | ||||||||
Provision for income taxes |
30 | 59 | 89 | 111 | ||||||||||||
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Net loss |
(1,087 | ) | (2,500 | ) | (2,124 | ) | (5,720 | ) | ||||||||
Amortization of financing costs on redeemable preferred stock |
7 | | 14 | | ||||||||||||
Dividends on redeemable preferred stock |
34 | | 67 | | ||||||||||||
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Net loss allocable to common stockholders |
$ | (1,128 | ) | $ | (2,500 | ) | $ | (2,205 | ) | $ | (5,720 | ) | ||||
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Net loss per share allocable to common stockholders, basic and diluted |
$ | (0.10 | ) | $ | (0.23 | ) | $ | (0.20 | ) | $ | (0.53 | ) | ||||
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Shares used in calculating net loss per share allocable to common stockholders, basic and diluted |
10,802 | 10,752 | 10,802 | 10,752 | ||||||||||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ | (2,124 | ) | $ | (5,720 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation |
10 | | ||||||
Depreciation and amortization |
270 | 149 | ||||||
Net loss on disposal of property and equipment |
5 | 2 | ||||||
Amortization of intangible assets |
200 | 201 | ||||||
Changes in operating assets and liabilities, net of effects of acquisition: |
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Accounts receivable |
518 | 57 | ||||||
Prepaid expenses and other assets (long and short-term) |
156 | (184 | ) | |||||
Accounts payable |
113 | (306 | ) | |||||
Accrued payroll and other compensation |
(70 | ) | (126 | ) | ||||
Other accrued expenses |
(44 | ) | (123 | ) | ||||
Deferred revenue (long and short-term) |
(149 | ) | 79 | |||||
Deferred rent (long and short-term) |
(24 | ) | (17 | ) | ||||
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Net cash used in operating activities |
(1,139 | ) | (5,988 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment, including costs capitalized for development of internal-use software |
| (586 | ) | |||||
Increase in restricted cash |
| (70 | ) | |||||
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Net cash used in investing activities |
| (656 | ) | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Capital contributions from former Parent |
| 9,005 | ||||||
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Net cash provided by financing activities |
| 9,005 | ||||||
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Net (decrease) increase in cash |
(1,139 | ) | 2,361 | |||||
Cash, beginning of period |
2,018 | 551 | ||||||
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Cash, end of period |
$ | 879 | $ | 2,912 | ||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per-share amounts)
All references to MSDH, we, us, our, or Company refer to Marlborough Software Development Holdings Inc., a Delaware corporation. All references to Bitstream or Parent refer to Bitstream Inc., our former parent. Except as otherwise noted, all reported dollar and share amounts are in thousands.
(1) Background and Nature of Operations
MSDH was formed on July 18, 2011 in conjunction with our former Parents planned merger (the Bitstream Merger) with and acquisition by Monotype Imaging Holdings Inc., a Delaware corporation (Monotype), pursuant to an agreement and plan of merger (the Bitstream Merger Agreement) entered into by and between Bitstream and Monotype on November 10, 2011. On January 1, 2012, Bitstream transferred and assigned to MSDH all of the assets and liabilities relating to, arising from, or in connection with Bitstreams Pageflex and BOLT product lines (the Separation) pursuant to the terms and conditions of a Contribution Agreement dated November 10, 2011 by and between Bitstream and MSDH (the Contribution Agreement). On March 14, 2012, Bitstream distributed all of the shares of MSDH common stock to the stockholders of Bitstream on a pro rata basis (the Distribution) pursuant to the terms and conditions of the Distribution Agreement dated November 10, 2011 between Bitstream and MSDH (the Distribution Agreement). On March 19, 2012, Bitstream completed the Bitstream Merger with Monotype. MSDH and Bitstream have entered into certain ancillary agreements in connection with the Separation and Distribution that provide for indemnification of Bitstream with respect to certain liabilities of the Pageflex and BOLT products contributed to MSDH.
Pursuant to the Contribution Agreement on November 10, 2011, Bitstream transferred its 100% ownership in Bitstream Israel Ltd. to MSDH and on July 24, 2012 MSDH changed the name of this wholly-owned subsidiary to Pageflex Israel Ltd.
MSDH is a software development company focused on bringing innovative and proprietary software products to a wide variety of markets. Our core software products include mobile browsing technologies and variable data publishing, Web-to-print, and multi-channel communications technologies.
MSDH is subject to risks common to technology-based companies, including dependence on key personnel, rapid technological change, competition from alternative product offerings and larger companies, and challenges to the development and marketing of commercial products and services. MSDH has also experienced net losses and negative operating cash flows in the past and in the current year, and as of June 30, 2013 has an accumulated deficit of approximately $11,120.
The unaudited condensed consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. MSDH has suffered recurring losses from operations both before and after the Separation. For its liquidity, prior to Separation, the Company relied on contributions from Bitstream. As of March 19, 2012, MSDH had accumulated contributions of approximately $60,977 from its former Parent. During the six months ended June 30, 2013, the Company had a net loss of $2,124 and negative cash flows from operations of $1,139. The ability of the Company to satisfy its obligations and recover its costs will be primarily dependent upon the future financial and operating performance of the Company. Additionally, managements operating plans are designed to help control operating costs, to maintain or increase revenues and to obtain additional sources of capital until such time as the Company generates sufficient cash flows from operations. If there was a decrease in the demand for the Companys products due to either economic or competitive conditions, or management was unable to meet its plan, there could be a significant reduction in liquidity due to the possible inability of the Company to cut costs sufficiently.
On May 13, 2013, MSDH received a notice of default from Normandy Nickerson Road, LLC (Normandy), the landlord for MSDHs leased premises in Marlborough, Massachusetts. The notice stated that MSDH had failed to pay rent for the months of April and May 2013 and certain utility charges and failure to pay the amounts past due within five days would result in a default of the lease for the premises. MSDH paid amounts due for utilities prior to receiving the notice but did not voluntarily pay the outstanding rent nor rent for June or July 2013. The total outstanding rent for those four months was $178, of which $133 was due as of June 30, 2013. On July 23, 2013, the landlord issued a sight draft under the Companys Letter of Credit (LC) to the Companys bank for $260, the full amount of the LC, which exceeded the then outstanding four months rent. The Company had secured the LC with restricted cash classified as Other Assets on its consolidated balance sheets. On August 9, 2013, MSDH received a demand from Normandy to restore $226, the as applied portion of the security deposit, to the security deposit within five days after demand. The Company did not restore the security deposit within the five day demand period and remains in default on its lease with Normandy. The Company is currently negotiating with Normandy to resolve the lease issues and has engaged the services of a commercial real estate agent to assist in these discussions.
MSDH had a cash balance of $879 as of June 30, 2013. Management has recently revised its operating plan to call for reduced expenses going forward, principally as a result of further reductions in force in May 2013. Management believes that with its current operating plan, cash, together with cash generated from expected future operations is, and will be, sufficient to meet the Companys working capital and capital expenditure requirements through at least the next twelve months.
5
(2) Basis of Presentation and Allocation Methodologies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of MSDH and its wholly-owned Israeli subsidiary. All material intercompany transactions and balances have been eliminated in consolidation. Our unaudited condensed consolidated financial statements presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (the SEC) for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by generally accepted accounting principles in the United States of America (GAAP). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012 included in our Annual Report on Form 10-K, which was filed with the SEC on March 29, 2013. The condensed consolidated balance sheets as of June 30, 2013, the condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, and the notes to each are unaudited, but in the opinion of management include all adjustments necessary for the fair presentation of the condensed consolidated financial position, results of operations, and cash flows of the Company as of and for these interim periods. The results of operations for the three and six months ended June 30, 2013 may not necessarily be indicative of the results to be expected for other interim periods and the year ending December 31, 2013. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates in these financial statements include MSDH allocation methodologies, revenue recognition, the valuation of acquired intangible assets and goodwill, share-based compensation, income taxes and the valuation of deferred tax assets, and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.
The Company evaluated subsequent events through August 14, 2013 to determine whether or not any such events required disclosure in this Form 10-Q, and determined that there were two such events occurring both related to Normandy, the Companys landlord: on July 23, 2013 Normandy issued a sight draft to the Companys bank for a draw on the Companys letter of credit and on August 9, 2013 Normandy issued a demand to the Company to restore the applied amount of the security deposit. These are more fully described in Footnote 10.
On March 14, 2012, as a wholly-owned subsidiary of the Parent, the Company completed its Separation from the Parent whereby each owner of Bitstream Class A Common Stock received a distribution of one share of MSDH Common Stock for each share of Bitstream Class A Common Stock that they owned as of the close of trading on March 8, 2012. On January 1, 2012, MSDH recorded a contribution adjustment of $(920) for the contribution of non-cash accounts comprised of various asset classifications of $231, various liability classifications of $(1,222) and equity related accounts of $71. The Company also recorded a cash contribution adjustment of $6,346 on January 1, 2012. Total capital contributions from the Parent during the first quarter of 2012 totaled $9,005, inclusive of the contribution adjustment of $6,346. There were no capital contributions from the Parent since the Separation and Merger were completed during the first quarter of 2012.
Reclassification
Certain accounts in the June 30, 2012 and December 31, 2012 consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the June 30, 2013 consolidated financial statements.
Change in Accounting Principle
The Company periodically reviews its accounting principles for adequacy and preferability of presentation. The Companys policy historically had been to exclude from deferred revenue any amounts that had not been collected by period end. During the first quarter of 2013, the Company determined it preferable to discontinue its policy of grossing down accounts receivable and deferred revenue in instances where the Company has a valid receivable. This change was made as it more accurately reflects the financial position of the Company. As a result, the Company has increased its accounts receivable and deferred revenue retrospectively.
Allocation Methodologies
Effective with the Separation on January 1, 2012, a management fee agreement between MSDH and Bitstream was executed, providing for the chargeback of certain costs incurred from January 1, 2012 through March 19, 2012, the effective date of the Bitstream Merger. These costs included all Separation, Distribution, and Merger costs directly associated with the transactions which amounted to $2,254, as well as a percentage ranging from 30% to 50% of general and administrative and manufacturing costs. The costs invoiced to Bitstream per this agreement are consistent with the allocation methodologies utilized for the Companys 2011 consolidated financial statements.
6
The following table presents the allocable expense amounts allocated to the Companys former Parent during the three months ended March 31, 2012:
Category |
Three months ended March 31, 2012 |
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Cost of revenue |
$ | 11 | ||
General and administrative |
807 | |||
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Total |
$ | 818 | ||
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There were no expense allocations to the Companys former Parent during the three and six month periods ended June 30, 2013, or the three months ended June 30, 2012.
There is significant judgment in determining the allocation of income, expense, and attribution of assets and liabilities. Management believes that the methodologies used in the allocation are reasonable.
Revenue Recognition
We derive revenue from the license of our software products, and from consulting and support and maintenance services. Primarily, we recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered or services have been provided, the fee is fixed or determinable, and collection of the fee is probable.
Multiple-element arrangements
We recognize revenue under multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for all of the undelivered elements under the arrangement. Under the residual method, the arrangement consideration is first allocated to undelivered elements based on vendor-specific objective evidence of the fair value for each element and the residual amount is allocated to the delivered elements. Arrangement consideration allocated to undelivered elements is deferred and recognized as revenue when the elements are delivered, if all other revenue recognition criteria are met. We have established sufficient vendor-specific objective evidence for the value of our training and maintenance services, based on the price charged when these elements are sold separately. VSOE of the fair value of maintenance services is supported by substantive renewal rates within customer contracts.
License Revenue
We receive and recognize licensing fees and royalty revenue from: (1) Original Equipment Manufacturer (OEM) customers for page composition technologies; (2) direct and indirect licenses of software publishing applications for the creation, enhancement, management, transport, viewing and printing of electronic information; (3) direct sales of custom design and consulting services to end users such as graphic artists, desktop publishers, corporations and resellers; and (4) sales of publishing applications to foreign customers primarily through distributors and resellers.
We recognize license revenue from the resale of our products through various resellers. Resellers may sell our products in either an electronic format or CD format. Revenue is recognized if collection is probable, upon notification from the reseller that it has sold the product, or for a CD product, upon delivery of the software.
Revenue from end user product sales is recognized upon delivery of the software, net of estimated returns and allowances, and when collection is probable.
Services Revenue
Professional services include custom design and development, and training. We recognize professional services revenue under software development contracts as services are provided for per diem contracts or by using the percentage-of-completion method of accounting for long-term fixed price contracts. Provisions for any estimated losses on contracts are made in the period in which such losses become probable. There are no amounts accrued at the balance sheet dates presented.
We recognize revenue from support and maintenance agreements ratably over the term of the agreement.
Deferred revenue includes unearned software support and maintenance revenue, and advanced billings for unrecognized revenue from contracts.
7
Cost of revenue from software licenses consists primarily of hosting costs, amortization of intangibles related to the iWay product, amortization of internally-developed capitalized software related to the Pageflex Storefront products, and costs to distribute the product, including the cost of the media on which it is delivered. Cost of revenue from services consists primarily of costs associated with customer support, consulting and custom product development services.
We generally warrant that our products will function substantially in accordance with documentation provided to customers for approximately 90 days following initial delivery. We have not incurred any material expenses related to warranty claims.
Subscription-Based Revenue
Subscription-based revenue primarily consists of revenues derived from software as a service (SaaS) arrangements, which utilize the Pageflex Storefront and iWay software solutions. Subscription-based revenue is recorded as license revenue.
We recognize revenue for SaaS arrangements ratably over the period of the applicable agreement as services are provided. Contract terms for SaaS arrangements range from a minimum period of six months to one year and are renewable on a month to month basis thereafter. The majority of our SaaS arrangements also include professional services and maintenance and support services, which are classified as services revenue.
For SaaS arrangements, the customer does not have the contractual right to take possession of our software at any time during the hosting period without significant penalty and the customer cannot feasibly maintain the software on the customers hardware or enter into another arrangement with a third party to host the software. Therefore, we account for the elements under ASC 605-25, Multiple Element Arrangements using all applicable facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. We allocate contract value to each element of the arrangement that qualifies for treatment as a separate element based on VSOE, and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with SaaS arrangements that we determine do not have stand-alone value to the customer or are contingent on delivery of other elements (e.g. hosting), we recognize the services revenue ratably over the remaining contractual period, or the client relationship, whichever is longer, once hosting has gone live and we may begin billing for the hosting services. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.
Transaction fees primarily pertain to the number of jobs generated by the customers deployment. The elements for these arrangements are accounted for under ASC 605-25. In cases where our customer is utilizing our Pageflex Connect or Dynamic Video SaaS services we also pay a transaction fee to our third party partner. We record as revenue the transaction fee billed to our customer, while the portion of the transaction fee remitted to the third party is recorded as cost of sales as we are acting as a principal in the arrangement.
Costs of performing services under subscription-based arrangements are expensed as incurred.
(3) Relationship with our Former Parent
In connection with the Separation, we entered into a series of agreements, in addition to the Contribution and Distribution Agreements, with our former Parent. These agreements include a tax indemnification agreement and intellectual property assignment and license agreements with our former Parent, as well as a transition services agreement with Monotype. The net expense to MSDH related to these agreements was not material for the three and six month periods ended June 30, 2013 and 2012.
(4) Off-Balance Sheet Risk and Concentration of Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. We place a majority of our cash investments, which exceed federally insured limits, in one highly-rated financial institution. We have not experienced significant losses related to receivables from any individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by us to be inherent in our accounts receivable. As of June 30, 2013 and December 31, 2012, we did not have any off-balance sheet arrangements or unconsolidated special-purpose entities within the meaning of Item 303(a)(4) of Regulation S-K and therefore did not have any off-balance sheet risks as of such dates. At June 30, 2013, two customers accounted for 14% and 23% of our accounts receivable, respectively. At December 31, 2012, two customers accounted for 15% and 13% of our accounts receivable. For the three and six month periods ended June 30, 2013, one customer accounted for 16% and 14% of our revenue, respectively. For the three and six month periods ended June 30, 2012, one customer accounted for 16% and 17% of our revenue, respectively.
8
(5) Recently Issued Accounting Standards
Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued in July, 2013. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect adoption of this ASU to have a material impact on its financial statements.
(6) Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Property and equipment consist of the following:
June 30, 2013 |
December 31, 2012 |
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Computer equipment |
$ | 1,109 | $ | 1,131 | ||||
Capitalized software |
1,335 | 1,335 | ||||||
Purchased software |
253 | 252 | ||||||
Furniture and fixtures |
453 | 453 | ||||||
Leasehold improvements |
156 | 156 | ||||||
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|
|
|||||
3,306 | 3,327 | |||||||
Less Accumulated depreciation and amortization |
1,858 | 1,605 | ||||||
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|
|
|
|||||
Property and equipment, net |
$ | 1,448 | $ | 1,722 | ||||
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|
|
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
Asset Classification |
Estimated Useful Life | |
Computer equipment |
3 Years | |
Capitalized software |
5 Years | |
Purchased software |
3 Years | |
Furniture and fixtures |
5 Years | |
Leasehold improvements |
Estimated useful life, or the lease term, whichever is shorter |
Depreciation and amortization expense for the three months ended June 30, 2013 and 2012 was $133 and $78, respectively. Depreciation and amortization expense for the six months ended June 30, 2013 and 2012 was $270 and $149, respectively.
During the three and six months ended June 30, 2013, we disposed of $22 of property and equipment with accumulated depreciation of $17, resulting in a net loss on disposal of $5 for each period. During the three and six months ended June 30, 2012, we disposed of $4 and $551 of property and equipment with accumulated depreciation of $4 and $549, respectively, resulting in a net loss on disposal of $0 and $2, respectively.
During the six months ended June 30, 2012, we capitalized software of $407. The software became available for general release during the quarter ended September 30, 2012 and no amounts were capitalized after that date. Amortization expense related to capitalized software for the three and six months ended June 30, 2013 was $67 and $133, respectively. There was no amortization expense during the three and six months ended June 30, 2012 as the developed software was not yet ready for its intended use. The net book value of internally developed software at June 30, 2013 and December 31, 2012 was $1,112 and $1,246, respectively.
(7) Loss Per Share
The Company calculates net income (loss) per share in accordance with authoritative guidance and has determined that its Series A Preferred Stock is considered a participating security for purposes of computing earnings per share and that it is appropriate to employ the two-class method for computing basic earnings per share. Under the two-class method, basic net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding for the fiscal period. The Company allocates net income first to preferred stockholders based on dividend rights under the Companys certificate of incorporation and then to common stockholders based on ownership interests. Net losses are not allocated to preferred stockholders.
9
The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share under the two class method (in thousands, except per share data):
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net loss |
$ | (1,087 | ) | $ | (2,500 | ) | $ | (2,124 | ) | $ | (5,720 | ) | ||||
Amortization of financing costs on redeemable preferred stock |
7 | | 14 | | ||||||||||||
Accrued dividends on redeemable preferred stock |
34 | | 67 | | ||||||||||||
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Net loss allocable to common stockholders |
$ | (1,128 | ) | $ | (2,500 | ) | $ | (2,205 | ) | $ | (5,720 | ) | ||||
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MSDH had 5 authorized shares of common stock, par value $0.001 per share at the date of incorporation. On November 10, 2011, the Company amended its authorized shares to be 30,500 shares of common stock, par value of $0.01 and 10,000 shares of preferred stock, par value $0.01 per share. On March 19, 2012, MSDH issued 10,752 shares of MSDH stock on a one for one basis to holders of Bitstream stock. On October 9, 2012, the Company established a 6.5% Series A Redeemable Preferred Stock with the authorized number of shares of 1,940. These shares were created from the 10,000 shares of authorized preferred stock.
Basic net loss per share of MSDH for the three and six months ended June 30, 2013 is determined by dividing the net loss allocable to common stockholders of MSDH by MSDHs weighted average number of shares of common stock outstanding during the periods. MSDHs outstanding shares from January 1, 2011 to March 19, 2012 were determined to be 10,752 for purposes of calculating Basic net loss per share with no common stock equivalents considered outstanding. Diluted earnings per share does not include the effect of common stock equivalents as MSDH has incurred a net loss for the periods presented, and therefore common stock equivalents are considered anti-dilutive. As a result, there is no difference between MSDHs basic and diluted loss per share for the three and six months ended June 30, 2013 and 2012.
If MSDH had reported a profit for the periods, the potential common shares would have increased the weighted average shares outstanding by 0 and 56 for the three months ended June 30, 2013 and 2012, respectively, and 0 and 62 for the six months ended June 30, 2013 and 2012, respectively, based on the weighted average number of common stock equivalents outstanding. Additionally, there were warrants and options outstanding to purchase 4,234 and 264 shares for the three and six month periods ended June 30, 2013 and 2012, respectively, that were not included in the potential common share computations because their exercise prices were greater than the average market price of MSDHs common stock. These common stock equivalents are anti-dilutive even when a profit is reported in the numerator.
(8) Income Taxes
Presentation
For purposes of MSDHs consolidated financial statements, income tax expense and deferred tax balances, for the short period through the Separation date, have been recorded as if the Company had filed tax returns on a separate return basis from Bitstream. The calculation of income taxes for the Company on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. In most cases, the tax losses and tax credits of Bitstream that are included in these financial statements of MSDH have either been utilized by Bitstreams other businesses or remained with Bitstream post-separation. Balances at December 31, 2012 include preliminary amounts available to the Company as of the Separation Date and have been derived from preliminary data from the consolidated Bitstream tax returns which have not been filed as of the date of this report.
Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various state jurisdictions in which we operate. An estimated effective tax rate for a year is applied to our quarterly operating results, adjusted for losses in tax jurisdictions where the losses cannot be tax benefited due to valuation allowances. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in our quarterly operating results, including the resolution of prior-year tax matters, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. Significant judgment is required in determining our effective tax rate and in evaluating its tax positions. We establish reserves when it is deemed more likely than not that we will not realize the full tax benefit of the position. We periodically adjust these reserves in light of changing facts and circumstances.
Tax regulations may require items of income and expense to be included in a tax return in different periods than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the consolidated financial statements. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for which payment has been deferred or expense for which we have already taken a deduction on an income tax return, but has not yet been recognized in the consolidated financial statements.
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We account for income taxes in accordance with authoritative guidance, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of the temporary differences between the book and tax basis of recorded assets and liabilities. We make estimates and judgments with regard to the calculation of certain income tax assets and liabilities. This guidance requires that deferred tax assets be reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified.
We evaluate deferred income taxes on a quarterly basis to determine whether valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and feasible. As of December 31, 2012, our U.S. operations had generated four consecutive years of pre-tax losses. Because of our recent history of losses, we believe that the weight of negative historic evidence precludes us from considering any forecasted income from our analysis of the recoverability of its U.S. deferred tax assets. We also considered in our analysis tax planning strategies that are prudent and can be reasonably implemented. Based on all available positive and negative evidence, we concluded that a full valuation allowance should be recorded against the net deferred tax assets of our U.S. operations.
The tax loss and credit carry forwards reflected in our consolidated financial statements, represent $2,741 of deferred tax assets. The tax carry forwards include U.S. tax carry forwards for federal and state net operating losses, general business credits and state tax credits. As the Company continues to incur cumulative taxable losses in the United States, the Company recorded a full valuation allowance against the Companys U.S. deferred tax assets, net of reversing taxable temporary differences.
Components of earnings (loss) before income taxes are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Foreign income |
$ | 58 | $ | 81 | $ | 114 | $ | 183 | ||||||||
Domestic loss |
(1,115 | ) | (2,522 | ) | (2,149 | ) | (5,792 | ) | ||||||||
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Total pretax loss |
$ | (1,057 | ) | $ | (2,441 | ) | $ | (2,035 | ) | $ | (5,609 | ) | ||||
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We have made an indefinite reinvestment of earnings in our foreign Israeli subsidiary and, therefore, we do not provide for U.S. income taxes applicable to its undistributed earnings.
We have recorded a deferred tax liability and related income tax expense for the naked credit resulting from the amortization of goodwill for tax purposes. The total deferred liability at June 30, 2013 and December 31, 2012 was $230 and $192, respectively.
(9) Stock-based Compensation Plans and Stock-based Compensation Expense
(a) General
On January 25, 2012, the Board of Directors of MSDH, and the Board of Directors of Bitstream acting in its capacity as sole stockholder of MSDH, adopted the MSDH Incentive Compensation Plan (the Plan) under which 1,724 shares of MSDH common stock were authorized for issuance under the Plan. The Plan provides for the grant of awards in the form of options (which may be incentive stock options or non-qualified options), stock appreciation rights, restricted stock and restricted stock units, stock granted as a bonus or in lieu of another award, other stock-based awards, performance awards or annual incentive awards. Each stock option granted will have an exercise price of no less than 100% of the fair market value of the common stock on the date of grant. The awards will generally have a contractual life of ten years and will generally vest over four to ten years. The maximum number of shares of stock with respect to which awards can be granted will be 1,073 shares, plus the number of shares subject to the New MSDH Options, subject to adjustment as provided in the Plan to reflect the effect of mergers, recapitalizations, stock splits and reverse splits, extraordinary dividends, and similar transactions. On March 8, 2012, in connection with the Bitstream Merger Agreement, all outstanding former Parent stock option awards for the Companys employees were replaced with awards in the Company using a formula designed to preserve the intrinsic value and fair value of the award immediately prior to Separation. There was no incremental compensation expense to the Company related to the replacement of the former Parent stock-based compensation awards. The vesting of all outstanding options was accelerated and restrictions from restricted stock awards were removed as part of the Separation and Merger of the former Parent and thus no unrecognized compensation expense existed for the replaced awards. Accordingly, on March 8, 2012, 651 fully vested new MSDH options with a weighted average exercise price of $1.493 were granted to holders of the Bitstream options. On September 10, 2012, the Company granted a total of 1,199 options to purchase the Companys Common Stock at an exercise price of $0.67 per share and a total of 50 shares that vested immediately to employees, consultants and non-employee directors under the Companys incentive plan. Each stock option granted had an exercise price in excess of the $0.40 fair market value of the common stock on the date of grant. The stock option awards have a contractual life of ten years and vest over four years.
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We account for stock-based compensation in accordance with authoritative guidance. Under the fair value recognition provisions of this guidance, stock-based compensation expense is measured at the grant date based on the fair value of the award, net of an estimated forfeiture rate, and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.
(b) Stock-based Compensation Expense
We currently estimate the fair value of MSDH stock options using the Black-Scholes valuation model. Key input assumptions to be used to estimate the fair value of stock options will include the exercise price of the award, the expected option term, the expected volatility of our stock over the options expected term, the risk-free interest rate over the options expected term, and our expected annual dividend yield, which will all be based on the historical information of Bitstream. The expected term of options granted will be estimated by calculating the average term from our historical stock option exercise experience. Estimated volatility of our common stock will be based on Bitstreams historical volatility. The risk-free interest rate used in the option pricing model will be based on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term of the options. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data for Bitstream will be used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. These amounts, and the amounts applicable to future quarters, are also subject to future quarterly adjustments based upon a variety of factors, which include but are not limited to, the issuance of new options. Stock awards are valued at the fair market value at the grant date.
No stock options were granted during the three and six month periods ended June 30, 2013. No stock awards were granted during the three and six month periods ended June 30, 2013 and 2012.
The stock-based compensation expense of $1,420 for the period of January 1, 2012 through March 14, 2012 was recorded through an intercompany transaction with our former Parent and is included as Bitstreams stockholders equity, as it relates exclusively to Bitstream stock. Therefore, this stock-based compensation is not included in the Companys condensed consolidated statements of stockholders equity for 2012. A portion of the adjustments for the Separation from the Parent was directly related to the $1,420 of stock-based compensation and the amount was therefore netted against stock-based compensation for presentation purposes on the condensed consolidated statements of cash flows for the three months ended March 31, 2012 resulting in no stock-based compensation reflected for the period. Stock-based compensation expense for MSDH stock is derived from the awards granted on September 10, 2012, discussed above.
Our results for the three months ended June 30, 2013 and 2012 include $4 and $0, respectively, and for the six months ended June 30, 2013 and 2012 include $12 and $1,420, respectively, of stock-based compensation within the applicable expense classification where we report the option holders compensation cost. The expense includes stock option expense associated with the MSDH awards on September 10, 2012 and for the Bitstream options granted to those employees specifically assigned to MSDH as well as an allocation of the stock option expense for options granted to executives and other general shared personnel.
The following table presents stock-based compensation expense for the three and six months ended June 30, 2013 and 2012 by category:
Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Cost of revenuesoftware licenses |
$ | | $ | | $ | | $ | | ||||||||
Cost of revenueservices |
| | 1 | 2 | ||||||||||||
Marketing and selling |
| | 1 | (5 | ) | |||||||||||
Research and development |
1 | | 3 | 324 | ||||||||||||
General and administrative |
3 | | 7 | 1,099 | ||||||||||||
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Stock-based compensation expense |
$ | 4 | $ | | $ | 12 | $ | 1,420 | ||||||||
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Stock-based compensation expense for 2012 is prior to Parent allocation.
12
(10) Subsequent Event
On July 23, 2013, Normandy, the landlord for the Companys headquarters, issued a sight draft under the Companys Letter of Credit (LC) to the Companys bank for $260, the full amount of the LC, which exceeded the outstanding four months rent totaling $178 for April through July 2013. The Company had previously been notified it was in default on its lease due to lease payments that the Company was not paying. The Company had secured the LC with restricted cash classified as Other Assets on its consolidated balance sheets. The Companys commitments under the current lease are discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 in Note 6(a) to the consolidated financial statements included therein, and such information is incorporated herein by reference.
On August 9, 2013, MSDH received a demand from Normandy to restore $226, the as applied portion of the security deposit, to the security deposit within five days after demand. The Company did not restore the security deposit within the five day demand period and remains in default on its lease with Normandy. The Company is currently negotiating with Normandy to resolve the lease issues and has engaged the services of a commercial real estate agent to assist in these discussions.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margin and anticipated expense levels, as well as other statements, including words such as may, anticipate, believe, plan, estimate, expect, and intend and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Item 1A Risk Factors in our Annual Report on Form 10-K, as may be supplemented from time to time in our quarterly reports on Form 10-Q, as well as other risks and uncertainties referenced in this report.
EXECUTIVE OVERVIEW
Marlborough Software Development Holdings Inc. (MSDH or We or the Company) was formed on July 18, 2011 in conjunction with our former parent companys, Bitstream Inc.s (Bitstreams), planned merger (the Bitstream Merger) with and acquisition by Monotype Imaging Holdings Inc., a Delaware corporation (Monotype) pursuant to an agreement and plan of merger (the Bitstream Merger Agreement) entered into by and between Bitstream and Monotype on November 10, 2011 (the Separation Date). On the Separation Date, Bitstream transferred and assigned to MSDH all of the assets and liabilities relating to, arising from or in connection with Bitstreams Pageflex and BOLT product lines (the Separation) pursuant to the terms and conditions of a Contribution Agreement dated November 10, 2011 by and between Bitstream and MSDH (the Contribution Agreement). As part of the Bitstream Merger Agreement, Bitstream entered into a transition services agreement with Monotype covering the provision of various transitional services, including information technology, data migration, finance, accounting and financial reporting services by MSDH to Bitstream and product support services to be provided by Bitstream to MSDH. On March 14, 2012, Bitstream distributed all of the shares of MSDH common stock to the stockholders of Bitstream on a pro rata basis (the Distribution) pursuant to the terms and conditions of the Distribution Agreement dated November 10, 2011 between Bitstream and MSDH (the Distribution Agreement). On March 19, 2012, Bitstream completed the Bitstream Merger with Monotype. MSDH and Bitstream have entered into certain ancillary agreements in connection with the Separation and Distribution (Separation and Distribution) that provide for indemnification of Bitstream with respect to certain liabilities of the Pageflex and BOLT products contributed to MSDH.
MSDH is a software development company focused on bringing innovative and proprietary software products to a wide variety of markets. Our core software products include mobile browsing technologies and variable data publishing, Web-to-print, and multi-channel communications technologies.
Automated Marketing Communication and Print Production Technologies. The Pageflex product line enables companies across the globe to communicate their marketing messages more easily and effectively. It is the advanced technology for brand management, web-to-print applications, and sophisticated personalized communications based on customer information. We pioneered flexible variable data software in 1997 and have been a technology innovator in the document customization arena ever since. The platform produces rich, creative, award-winning document designs that look like they were given the individual attention of a graphic designer but were, in reality, created on-the-fly with Pageflex variable publishing technology. Print service providers, marketing service providers, corporate marketers, and publishers use Pageflex products to ensure design integrity and brand control while empowering local users to customize and personalize print collateral, email campaigns, and 1-to-1 marketing Web sites.
Pageflex products enable companies worldwide to manage, streamline, and automate their document production processes, communicate more personally with their customers, and control their brand and market messaging while enabling their remote employees, franchises, and consumers to use a self-serve model to order customized communications. Pageflex products are purchased by both corporations and the printing companies that support them, who also use the software to control and track production processes in order to improve their business ROI.
Mobile Browsing Technologies. BOLT provides a consistent, full desktop-style browsing experience on almost any handset. The BOLT mobile browser offers faithful rendering of Web pages and supports streaming video from popular media sharing sites such as YouTube and MySpace for mobile phones of all types. Compatible with most handsets that support the J2ME or BREW/BMP operating systems, BOLTs advanced features include video support, W3C based widget support, direct Facebook and Twitter integration, six levels of magnification, international localization, copy/paste, FOTA updates, and additional usability features such as auto-complete url, save page, secure browsing, patented split-screen minimap, password manager, rss subscriptions, automatic socket support, history and keypad shortcuts. BOLT is a WebKit-based cloud computing mobile browser. This cloud computing architecture is the key to BOLTs capabilities. Web pages are first loaded by the BOLT servers, then transcoded and sent to the BOLT mobile browser client on handsets. This client/server approach maintains the integrity of Web page layouts, reduces packet consumption on data networks, dramatically improves page load speeds, and enables advanced features such as video streaming. At present, BOLT does not provide revenue and we do not make significant expenditures in regard to BOLT.
14
Certain Financial and Operating Metrics
In connection with the ongoing operation of our business, our management regularly reviews key financial and operating metrics, such as revenue, gross margin, expenses, and capital expenditures, among others. Management considers these financial and operating metrics critical to understanding and improving our business, reviewing our historical performance, comparing our performance versus other companies and identifying current and future trends, and for planning purposes.
Certain Trends and Uncertainties
The following represents a summary of known trends and uncertainties which could have a significant impact on our financial condition and results of operations. This summary should be considered along with the factors discussed under the headings Risk Factors and Forward-Looking Statements elsewhere in our Form 10-K filed with the SEC on March 29, 2013.
| The Pageflex and Bolt product activities were conducted by Bitstream as a whole and integrated with the Fonts products activities. Our historical financial information may not be representative of our results as a separate company. |
| We continue to closely monitor current economic conditions, particularly as they impact our customers. We believe that our customers continue to experience some amount of economic hardship. If this economic hardship continues or worsens, our financial results could be adversely impacted. |
| We continue to develop new products and new versions of our existing product offerings. However, we have recently reduced our R&D investment and our current focus is on supporting our existing products with reduced staffing levels. Failure to develop and launch new products and versions could negatively impact our financial results. |
| On October 31, 2012, the Company signed an engagement letter with a financial advisory firm that continues to advise the Company with respect to its strategic alternatives. |
| The Company is currently in default under its real estate lease for its sole US office space as noted elsewhere herein and in footnote 10 to the Companys Notes to Unaudited Condensed Consolidated Financial Statements. At this time the Company is unable to predict how and where it will be able to secure suitable operating space should it be unable to remain in its current location. |
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America consistently applied. The preparation of these unaudited condensed consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our unaudited condensed consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.
While all of our accounting policies impact the unaudited condensed consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require managements most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results:
| Allocation Methodologies |
| Revenue Recognition |
| Stock-based Compensation |
| Impairment of Goodwill and Other Long-Lived Assets |
| Accounts Receivable |
| Software Development Costs |
| Income Taxes |
Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K as of and for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or the SEC, on March 29, 2013, for a description of all critical accounting policies.
Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued in July, 2013. The
15
amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect adoption of this ASU to have a material impact on its financial statements.
OVERVIEW
RESULTS OF OPERATIONS (in thousands, except percentages and per share amounts)
Revenue and Gross Profit:
Three Months Ended June 30, | Change | |||||||||||||||||||||||
2013 | % of Revenue |
2012 | % of Revenue |
Dollars | Percent | |||||||||||||||||||
Revenue |
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Software licenses |
$ | 356 | 21.6 | % | $ | 628 | 32.0 | % | $ | (272 | ) | (43.3 | )% | |||||||||||
Services |
1,294 | 78.4 | 1,337 | 68.0 | (43 | ) | (3.2 | ) | ||||||||||||||||
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Total revenue |
1,650 | 100.0 | 1,965 | 100.0 | (315 | ) | (16.0 | ) | ||||||||||||||||
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Cost of Revenue |
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Software licenses |
129 | 36.2 | 261 | 41.6 | (132 | ) | (50.6 | ) | ||||||||||||||||
Services |
631 | 48.8 | 688 | 51.5 | (57 | ) | (8.3 | ) | ||||||||||||||||
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Total cost of revenue |
760 | 46.1 | 949 | 48.3 | (189 | ) | (19.9 | ) | ||||||||||||||||
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Gross Profit |
$ | 890 | 53.9 | % | $ | 1,016 | 51.7 | % | $ | (126 | ) | (12.4 | )% | |||||||||||
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Six Months Ended June 30, | Change | |||||||||||||||||||||||
2013 | % of Revenue |
2012 | % of Revenue |
Dollars | Percent | |||||||||||||||||||
Revenue |
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Software licenses |
$ | 890 | 25.0 | % | $ | 1,044 | 28.0 | % | $ | (154 | ) | (14.8 | )% | |||||||||||
Services |
2,663 | 75.0 | 2,689 | 72.0 | (26 | ) | (1.0 | ) | ||||||||||||||||
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Total revenue |
3,553 | 100.0 | 3,733 | 100.0 | (180 | ) | (4.8 | ) | ||||||||||||||||
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Cost of Revenue |
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Software licenses |
437 | 49.1 | 432 | 41.4 | 5 | 1.2 | ||||||||||||||||||
Services |
1,031 | 38.7 | 1,243 | 46.2 | (212 | ) | (17.1 | ) | ||||||||||||||||
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Total cost of revenue |
1,468 | 41.3 | 1,675 | 44.9 | (207 | ) | (12.4 | ) | ||||||||||||||||
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Gross Profit |
$ | 2,085 | 58.7 | % | $ | 2,058 | 55.1 | % | $ | 27 | 1.3 | % | ||||||||||||
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Software License Revenue
We recognize software license revenue from direct sales and licensing agreements of our products and products from third parties, licensing agreements with OEMs, and from the resale of our products through various resellers. We recognize reseller revenue on a sell-in basis and bear no obligation after the license has been delivered to the reseller. The decrease in revenue from software licenses for the three month period ended June 30, 2013 as compared to the three month period ended June 30, 2012 was due primarily to decreases in direct sales and timing of sales commitments with certain of our OEM and reseller customers. The decrease in revenue from software licenses for the six month period ended June 30, 2013 as compared to the six month period ended June 30, 2012 was due primarily to the discontinued sales of our BOLT browser product and decreases in direct sales, partially offset by sales commitments with certain of our OEM and reseller customers. Our license revenue for OEM and reseller customers is reported to us only after the sale is made and we have no visibility into their sales pipeline. Our license revenue from direct and reseller sales may be affected by decreases in sales and marketing resources including a reduction in force in May 2013 and may vary quarter to quarter, and the effect on revenue for the remainder of the 2013 year is not determinable as of the date of this report.
Service Revenue
Services revenue decreased for the three and six months ended June 30, 2013 as compared to the three months and six months ended June 30, 2012 due primarily to a decrease resulting from an end-of-life support contract in the three and six month periods ended June 30, 2012 which resulted in non-recurring support revenue for the three and six month periods ended June 30, 2013. This decrease was partially offset by an increase in services revenue from consulting projects completed during the three and six month periods ended June 30, 2013. Other product services revenue for customer support and training services were generally consistent period over period. Consulting and training services vary with specific requirements of customers and may be affected more by economic concerns as customers may delay custom development and training.
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Cost of Revenue
Cost of revenue includes hosting costs, royalties and fees paid to third parties for the license of rights to technology, costs incurred in the fulfillment of custom orders, costs incurred in providing customer support, maintenance and training, and costs associated with the duplication, packaging and shipping of products. Cost of revenue also includes amortization of acquired-technology from the acquisition of assets from Press-Sense Ltd. and the amortization of capitalized internally developed software related to the translation of our products into multiple languages.
Cost of Software License Revenue
The decrease in cost of software license revenue for the three months ended June 30, 2013 as compared to the same period ended June 30, 2012 was primarily related to a decrease in third party royalties and decreases in in resource related costs, partially offset by an increase in the amortization of internally developed software related to the translation of Pageflex products into multiple languages. The increase in cost of software license revenue for the six months ended June 30, 2013 as compared to the same period ended June 30, 2012 was primarily related to an increase in the amortization of internally developed software which began in late 2012, partially offset by a decrease in third party royalties and decreases in resource related costs.
Cost of Service Revenue
The decrease in cost of services revenue for the three and six months ended June 30, 2013, as compared to the same periods in 2012 was primarily due to decreases in salary and related expenses related to workforce reductions, partially offset by professional fees associated with consulting projects delivered during the three and six months ended June 30, 2013. Our cost of services infrastructure decreased during the first six months of 2013 and we expect these costs to remain lower throughout the rest of this year as compared to last year.
Operating Expenses:
Three Months Ended June 30, | Change | |||||||||||||||||||||||
2013 | % of Revenue |
2012 | % of Revenue |
Dollars | Percent | |||||||||||||||||||
Marketing and selling |
$ | 516 | 31.3 | % | $ | 1,169 | 59.5 | % | $ | (653 | ) | (55.9 | )% | |||||||||||
Research and development |
606 | 36.7 | 1,486 | 75.6 | (880 | ) | (59.2 | ) | ||||||||||||||||
General and administrative |
821 | 49.8 | 785 | 40.0 | 36 | 4.6 | ||||||||||||||||||
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Total operating expenses |
$ | 1,943 | 117.8 | % | $ | 3,440 | 175.1 | % | $ | (1,497 | ) | (43.5 | )% | |||||||||||
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Six Months Ended June 30, | Change | |||||||||||||||||||||||
2013 | % of Revenue |
2012 | % of Revenue |
Dollars | Percent | |||||||||||||||||||
Marketing and selling |
$ | 1,233 | 34.7 | % | $ | 2,236 | 59.9 | % | $ | (1,003 | ) | (44.9 | )% | |||||||||||
Research and development |
1,439 | 40.5 | 3,371 | 90.3 | (1,932 | ) | (57.3 | ) | ||||||||||||||||
General and administrative |
1,450 | 40.8 | 2,017 | 54.0 | (567 | ) | (28.1 | ) | ||||||||||||||||
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Total operating expenses |
$ | 4,122 | 116.0 | % | $ | 7,624 | 204.2 | % | $ | (3,502 | ) | (45.9 | )% | |||||||||||
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Marketing and Selling (M&S) Expense
Marketing and selling (M&S) expense consists primarily of salaries and benefits, commissions, travel expense and facilities costs related to sales and marketing personnel, as well as marketing program-related costs. The decrease in M&S for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 related primarily to decreases in salaries and benefits, as well as reduced participation in marketing programs. We expect that our M&S expense will remain below the levels of the prior year due to these decreases in M&S resources and marketing activities.
Research and Development (R&D) Expense
Research and development (R&D) expense consists primarily of salary and benefit costs, contracted third-party development costs, and facility costs related to software developers and management. R&D expense decreased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 primarily due to the reduction in R&D resources related to both the BOLT browser product development and the publishing products. R&D expense for the six months ended June 30, 2013 also decreased as a result of stock compensation expense from the acceleration of Bitstream options and restricted stock awards caused by the merger of Bitstream on March 19, 2012 which was included in the six months ended June 30, 2012. We expect our R&D costs to remain below the levels of the prior year due to the reductions in workforce.
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General and Administrative (G&A) Expense
G&A expense consists primarily of salaries, benefits, and other related costs including travel and facility expenses for finance, human resource, legal and executive personnel, legal and accounting professional services, provision for bad debts, directors fees and director and officer insurance. G&A expense increased for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, consisting primarily of increases in professional services costs and facilities allocations, partially offset by decreases in salaries and benefits due to the reduction in workforce. G&A expense decreased for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, primarily resulting from decreases in salaries and benefits related to a reduction in resources.
The G&A expense decreases also include the non-recurrence of Bitstream stock compensation expense and G&A bonus and related tax expense, both related to the Bitstream merger with Monotype during the first quarter of 2012, which were partially offset by a management fee allocation to Bitstream in accordance with the management fee agreement between MSDH and Bitstream during the first quarter of 2012. In addition, the first quarter of 2012 included $2,250 of transaction costs related to the spinout of MSDH from Bitstream Inc. and the merger of Bitstream into Monotype Imaging Inc., which were fully allocated to Bitstream during the first quarter, resulting in a net effect of zero. We expect MSDH G&A expense to remain below the levels reported in the prior year during the remainder of the year ended December 31, 2013 when compared to 2012.
Interest and Other Income (Expense), Net:
Interest and other income expense, net consists primarily of foreign currency transactions gains or losses.
Provision for Income Taxes:
The provision for income taxes consists of foreign taxes in Israel and U.S. federal tax expense related to the deferred tax liability created by the taxable amortization of Goodwill. There was no significant change in the provision for taxes for the three and six month periods ended June 30, 2013 and 2012.
For purposes of MSDHs consolidated financial statements, income tax expense and deferred tax balances, for the short period through the Separation date, have been recorded as if the Company had filed tax returns on a separate return basis from Bitstream. The calculation of income taxes for the Company on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. In most cases, the tax losses and tax credits of Bitstream that are included in these financial statements of MSDH have either been utilized by Bitstreams other businesses or remained with Bitstream post-separation. Balances at December 31, 2012 include preliminary amounts available to the Company as of the Separation Date and have been derived from preliminary data from the consolidated Bitstream tax returns which have not been filed as of the date of this report.
At December 31, 2012, the Companys deferred tax assets, net of deferred tax liabilities, but before consideration of valuation allowances, was $3,396 and its valuation allowances were $3,585. The Company has estimated the net deferred tax assets available post-separation from preliminary consolidated tax returns of Bitstream Inc. as discussed above. The tax loss and credit carry forwards at December 31, 2012 represent $3,681 of deferred tax assets. The tax carry forwards include U.S. tax carry forwards for federal and state net operating losses, general business credits and state tax credits.
Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various state jurisdictions in which we operate. An estimated effective tax rate for a year is applied to our quarterly operating results, adjusted for losses in tax jurisdictions where the losses cannot be tax benefited due to valuation allowances. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in our quarterly operating results, including the resolution of prior-year tax matters, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. Significant judgment is required in determining our effective tax rate and in evaluating its tax positions. We establish reserves when it is deemed more likely than not that we will not realize the full tax benefit of the position. We periodically adjust these reserves in light of changing facts and circumstances.
Tax regulations may require items of income and expense to be included in a tax return in different periods than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred or expense for which we have already taken a deduction on an income tax return, but has not yet been recognized in the consolidated financial statements.
We account for income taxes in accordance with authoritative guidance, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of the temporary differences between the book and tax basis of recorded assets and liabilities. We make estimates and judgments with regard to the calculation of certain income tax assets and liabilities. This guidance requires that deferred tax assets be reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified.
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We evaluate deferred income taxes on a quarterly basis to determine whether valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and feasible. As of June 30, 2013, our U.S. operations had generated four consecutive years of pre-tax losses. Because of our recent history of losses, we believe that the weight of negative historic evidence precludes us from considering any forecasted income from our analysis of the recoverability of its U.S. deferred tax assets. We also considered in our analysis tax planning strategies that are prudent and can be reasonably implemented. Based on all available positive and negative evidence, we concluded that a full valuation allowance should be recorded against the net deferred tax assets of our U.S. operations.
LIQUIDITY AND CAPITAL RESOURCES (dollar amounts in thousands)
At June 30, 2013, our primary source of liquidity comes from our cash of $879. Our cash at June 30, 2013 of $879 includes $224 held by our Israeli subsidiary that is not available to fund domestic operations unless these funds were repatriated. We do not intend to repatriate funds and, if we do, we will accrue and pay any applicable taxes on the repatriated funds, as required. The Pageflex and BOLT products historically were funded directly through the conduct of our operations as a component of Bitstream. For the six months ended June 30, 2013 and 2012, we incurred net losses of $2,124 and $5,720, respectively. Our former parent, Bitstream, contributed capital of $0 and $9,005 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we had a working capital deficit of $2,487.
Our operating activities used cash during the six months ended June 30, 2013 and 2012 of $1,139 and $5,988, respectively. The decreased usage of cash during the six months ended June 30, 2013 as compared to the same period in the prior year resulted primarily from a decreased net loss of $3,596, an increase in contributions from operating assets and liabilities of $1,120, and an increase in add-backs of non-cash expense items of $133. Cash used in operating activities has historically been affected by the amount of net loss, changes in operating assets and liabilities and add-backs of non-cash expense items such as depreciation and amortization and the expense associated with stock-based awards.
Cash used in investing activities during the six months ended June 30, 2012 was $656. Cash used in investing activities during the six months ended June 30, 2012 consisted of increases in restricted cash, the capitalization of internally developed software, and purchases of property and equipment. There was no cash used in investing activities during the six months ended June 30, 2013.
Our financing activities for the six months ended June 30, 2012 provided cash of $9,005 which consisted entirely of contributions from Bitstream in connection with the Separation. There was no cash provided by financing activities for the six months ended June 30, 2013.
The unaudited condensed consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. MSDHs long-term viability is dependent on its ability to generate sufficient product revenue, net income and cash flows from operations to support its business as well as its ability to obtain additional financing. Managements plans also include reducing operating costs and delaying certain expenditures, if necessary, to maintain the Companys liquidity. The Company is also exploring its strategic alternatives, including possible sales of assets and/or other transactions. MSDH has suffered recurring losses from operations, both before and after the Separation. For its liquidity, prior to Separation, the Company relied on contributions from Bitstream. As of March 19, 2012, MSDH had accumulated contributions of approximately $60,977 from its former Parent. After Separation, the Company has sought third party investors to reduce the Companys liquidity risks.
MSDH received an equity commitment from two investors on October 10, 2012, originally scheduled to occur in two tranches. The first tranche in the aggregate amount of $2,000 in exchange for 597 shares of 6.5% redeemable preferred stock and 2,985 common stock warrants closed on October 11, 2012. The Company did not satisfy the performance criteria required to complete the second tranche of funding and no additional securities will be issued or sold pursuant to the current investment agreements with these two investors. The Company received commitments from certain customers with terms including the prepayment of software licenses in the aggregate amount of $850, with $425 payable in the fourth quarter of 2012 and $425 payable in the first and second quarters of 2013, subject in each case to the Company continuing to provide service and support to these customers. The prepayments were received by the Company in the periods specified. Additionally, management has restructured its global workforce in August 2012 and recently revised its operating plan to call for reduced expenses going forward, principally as a result of further reductions in force in May 2013.
On July 23, 2013, the Companys landlord for its Marlborough, MA offices issued a sight draft under the Companys Letter of Credit (LC) to the Companys bank for $260, the full amount of the LC, which exceeded the then outstanding four months rent
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totaling $178 for April through July 2013. The Company had secured the LC with restricted cash classified as Other Assets on its consolidated balance sheets. On August 9, 2013, MSDH received a demand from Normandy to restore $226, the as applied portion of the security deposit, to the security deposit within five days after demand. The Company did not restore the security deposit within the five day demand period and remains in default on its lease with Normandy. The Company is currently negotiating with Normandy to resolve the lease issues and has engaged the services of a commercial real estate agent to assist in these discussions.
MSDH had a cash balance of $879 as of June 30, 2013. Management has recently revised its operating plan to call for reduced expenses going forward, principally as a result of further reductions in force in May 2013. Management believes that with its current operating plan, cash, together with cash generated from expected future operations is, and will be, sufficient to meet the Companys working capital and capital expenditure requirements through at least the next twelve months. The ability of the Company to satisfy its obligations and recover its costs will be primarily dependent upon the future financial and operating performance of the Company. Additionally, managements operating plans are designed to help control operating costs, to increase revenues and to raise additional capital until such time as the Company generates sufficient cash flows from operations. If there was a further decrease in the demand for the Companys products due to either economic or competitive conditions, or management was unable to meet its plan, there could be a significant reduction in liquidity due to the possible inability of the Company to cut costs sufficiently.
Potential Indemnification Obligations
We enter into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal, but we can provide no assurance that payments will not be required under these agreements in the future.
In connection with the Separation of MSDH from Bitstream and the Merger of Bitstream with Monotype, the Company entered into certain indemnification agreements with Monotype. A detailed discussion of these agreements is included in our Form 10-K filed with the SEC on March 29, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements or unconsolidated special-purpose entities within the meaning of Item 303(a)(4) of Regulation S-K.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements Not Yet Adopted
Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued in July, 2013. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect adoption of this ASU to have a material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Primary Market Risk Exposures. Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalent and short-term investments is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments.
Foreign Currency Exchange Risk. Our exposure to currency exchange rate fluctuations has been, and is expected to continue to be, modest due to the fact that the operations of our Israeli subsidiary are conducted partially in Israels local currency. Currently, we do not engage in foreign currency hedging activities.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2013. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2013, these disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us, including our consolidated subsidiaries, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
From time to time we are subject to legal proceedings and claims in the ordinary course of business, including claims of infringement of third-party patents and other intellectual property rights, and claims involving commercial, employment and other matters. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. This provision is reviewed at least quarterly. As of June 30, 2013, there are no material pending legal proceedings to which we are a party, and no liability was recorded. Litigation is inherently unpredictable and it is possible that our financial position, cash flows, or results of operations could be materially affected in any particular period by the resolution of any such contingencies or the costs involved in seeking the resolution of any such contingencies.
We incorporate herein by reference the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K as of and for the fiscal year ended December 31, 2012. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | None. |
(b) | Not applicable. |
(c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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(a) | On July 23, 2013, Normandy Nickerson Road, LLC, the landlord for the Companys headquarters, issued a sight draft under the Companys Letter of Credit (LC) to the Companys bank for $260, the full amount of the LC, which exceeded the then outstanding four months rent totaling $178 for April through July 2013. The Company had previously been notified it was in default on its lease due to lease payments that the Company was not paying. The Company had secured the LC with restricted cash classified as Other Assets on its consolidated balance sheets. On August 9, 2013, MSDH received a demand from Normandy to restore $226, the as applied portion of the security deposit, to the security deposit within five days after demand. The Company did not restore the security deposit within the five day demand period and remains in default on its lease with Normandy. The Company is currently negotiating with Normandy to resolve the lease issues and has engaged the services of a commercial real estate agent to assist in these discussions. The Companys commitments under the current lease are discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 in Note 6(a) to the consolidated financial statements included therein, and such information is incorporated herein by reference. The foregoing information regarding the Companys lease is disclosed in this Part II, Item 5 of Form 10-Q in lieu of disclosure under Item 2.04 of Form 8-K. |
(b) | None. |
(a) | Exhibits. |
Certain of the exhibits listed hereunder have been previously filed with the SEC as exhibits to certain registration statements and periodic reports as indicated in the footnotes below and are incorporated herein by reference pursuant to Rule 411 promulgated under the Securities Act and Rule 24 of the SECs Rules of Practice. The location of each document so incorporated by reference is indicated in parentheses.
EXHIBIT NO. |
DESCRIPTION | |
10.1* |
Severance Agreement, dated as of January 25, 2012, by and between Bitstream Inc. and Pinhas Romik | |
18.1 |
Letter re Change in Accounting Principles (furnished as Exhibit 18.1 to the Companys Quarterly Report on Form 10-Q, as filed with the SEC on May 15, 2013). | |
31.1* |
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* |
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*** |
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS** |
XBRL Instance Document | |
101.SCH** |
XBRL Taxonomy Extension Schema Document | |
101.CAL** |
XBRL Calculation Linkbase Document | |
101.DEF** |
XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB** |
XBRL Label Linkbase Document | |
101.PRE** |
XBRL Taxonomy Presentation Linkbase Document |
* | Filed herewith. |
** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
*** | Furnished herewith. |
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Pursuant to the requirements of Section 13 or 15(d) 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 thereunto duly authorized, in Marlborough, Commonwealth of Massachusetts on this 14th day of August, 2013.
SIGNATURE |
TITLE |
DATE | ||
/s/ PINHAS ROMIK Pinhas Romik |
President and Chief Executive Officer | August 14, 2013 | ||
/s/ JAMES P. DORE James P. Dore |
Executive Vice President and Chief Financial Officer | August 14, 2013 |
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Exhibit 10.1
SEVERANCE AND INCENTIVE AGREEMENT
THIS SEVERANCE AND INCENTIVE AGREEMENT (the Agreement) made and entered into in the United States of America as of January 25, 2012 (the Effective Date), by and between Bitstream Inc., a Delaware corporation, with its principal office located at 500 Nickerson Road, Marlborough, MA 01752 (hereinafter the Company) and Pinhas Romik who resides at [Intentionally omitted], Israel, hereinafter referred to as the Executive.
WITNESSETH:
WHEREAS, the Executive is employed by the Company as General Manager of the Pageflex Division, and
WHEREAS, the Executive is a valuable member of the management team of the Company; and
WHEREAS, the Board of Directors of Bitstream Inc. (the Board) has determined that it is appropriate to reinforce and secure the continued services of the Executive with respect to his assigned duties:
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. During the term of this Agreement, it is expected that the Executive shall remain in the employ of the Company (except as may be permitted hereunder) and shall continue to perform his duties as a management employee of the Company. Notwithstanding the above, the Executive understands and affirms that he is an at will employee of the Company under all applicable laws and regulations of the United States of America and the State of Delaware.
1.1 For purposes of this Agreement, Cause shall mean (i) the willful and continued failure by the Executive to substantially perform the Executives duties (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance has been delivered to the Executive by the Company, which demand specifically identifies the manner in which it is believed that the Executive has not substantially performed the Executives duties; or (ii) conviction of a felony or acts of dishonesty resulting in gain or personal enrichment at the expense of the Company; or (iii) the Executives willful misconduct or insubordination which is materially injurious to the Company. For purposes of this paragraph, no act or failure to act on the Executives part shall be considered as willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interests of the Company.
1.2 For purposes of this Agreement, Disability shall mean the illness, or mental or physical disability, of the Executive as determined by a physician acceptable to the Company and the Executive, resulting in the Executives failure to perform substantially all of his applicable material duties for a period of six consecutive months, and the Executives failure to return to the performance of such duties within 30 days after receiving written notice of termination of employment due to such Disability.
1.3 For purposes of this Agreement, Good Reason shall mean (i) reduction in the Executives (then) current base salary; (ii) elimination or reduction of any incentive compensation opportunity available to the Executive; (iii) the Companys failure to pay the Executive any amounts otherwise earned, vested or due under any compensation plan or human resources policy of the Company; (iv) diminution of the Executives title, position, authority or responsibility; (v) assignment to the Executive of duties incompatible with the position currently held by the Executive; or (vi) relocation of the Executives position to a location more than 35 miles from the location to which the Executive was previously assigned.
2. CERTAIN SEVERANCE BENEFITS UPON TERMINATION OF EMPLOYMENT. If the Executives employment shall be terminated either (i) by the Company other than for death, Disability or Cause, or (ii) by the Executive for Good Reason, the Executive shall be entitled to certain severance benefits (hereinafter the Severance Benefits) as provided below:
2.1 The Company shall pay the Executives monthly base salary and applicable allowances through the date of termination (prorated as necessary to reflect any partial months employment). The Company shall also pay the Executive the amount, if any, of any unpaid earned annual bonus for the preceding fiscal year. In addition, the Company shall continue in full force and effect through the date of termination the Executives participation in all stock ownership, stock purchase, stock option and restricted stock plans; all health and welfare benefit plans; and all insurance and disability plans as may be in effect at the date of termination.
2.2 The Company shall pay as Severance Benefits to the Executive on or before the fifth (5th) day following the date of termination of employment, a lump sum payment (the lump sum payment) in an amount equal to the Executives (then) current monthly pre-tax (i.e., gross) base salary multiplied by the number six (6). For the purposes of this Section 2.2, the Executives base salary used in the calculation of the Severance Benefits shall not include any monthly allowances or other payments. Should the Executives tenure with the Company exceed six years, such lump sum payment shall include an additional months base salary for each full year of employment beyond six years up to a maximum of twelve years. Such lump sum payment shall be subject to all applicable U.S. Federal, state and local income and FICA taxes including all required withholding amounts.
2.3 The Executive shall not be required to mitigate or offset the amount of any Severance Benefits or other benefits provided hereunder by seeking employment or otherwise, nor shall the amount of any payment provided hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer after his date of termination from the Company.
3. CERTAIN INCENTIVE PAYMENTS UPON SALE OF THE PAGEFLEX DIVISION. Upon the closing of a Board-approved sale of the Pageflex Division of the Company to a qualified third-party buyer (specifically excluding a management buyout of the Pageflex Division or acquisition thereof by a current member of the Board), the Executive shall be entitled to certain payments (hereinafter the Incentive Payments) as provided below:
3.1 The Company shall pay as Incentive Payment to the Executive on or before the fifth (5th) day following the closing of a Board-approved sale of the Pageflex Division as a going-concern business to a qualified third-party buyer an amount equal to $100,000 USD.
3.2 Based on the timing and value of the transaction in which the Pageflex Division is sold as a going-concern business to a qualified third-party buyer, the Board reserves the right to provide the Executive with an additional Incentive Payment in an amount not to exceed $100,000 USD. The decision to provide (or not to provide) an additional Incentive Payment (and the amount of any such payment) shall be made exclusively by the Board of Directors of the Company in its sole discretion.
4. TERM OF AGREEMENT. This Agreement shall have an original term expiring on August 31, 2012, and shall thereafter be automatically renewed for successive one-year terms unless the Company has notified the Executive of its election not to renew this Agreement not less than 120 days before the expiration of the (then) current term.
5. SUCCESSORS; BINDING AGREEMENT. The Company shall require any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business, equity and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as that which the Executive would be entitled to hereunder as if the Executives employment by the Company were immediately terminated without Cause. As referred to in this Agreement, Company shall mean the Bitstream Inc. as herein defined and any successor to its business, equity and/or assets that becomes bound by the terms and conditions of this Agreement by operation of law. This Agreement shall inure to the benefit and be enforceable by the Executives personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable hereunder, all such amounts shall be paid in accordance with the terms of this Agreement to the Executives estate.
6. NOTICES. Any and all notices that may be given hereunder by either party to the other shall be sufficient if in writing and sent by registered mail to the respective party at its or their last known address.
7. MODIFICATIONS AND WAIVERS; ENTIRE AGREEMENT. No agreements or representations, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by the Executive and the Chief Executive Officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or any prior or subsequent time. This Agreement shall not be construed as an employment agreement and shall not limit the Companys right to terminate the employment (with or without Cause) of the Executive.
8. GOVERNING LAW. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware and the United States of America without reference to principles of conflict of laws.
9. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
10. DISPUTES. Any dispute or controversy arising under, or of, or in connection with this Agreement may be resolved in any court of competent jurisdiction. Should the Executive prevail in any litigation or court action to obtain the Severance Benefits and/or Incentive Payments hereof, or to otherwise enforce any provision of this Agreement, the Company shall timely reimburse to the Executive the entire amount of legal fees and court costs incurred in connection with such litigation or court action. Notwithstanding the provision above, either party to this Agreement may require (and the other party shall accept without objection) that any dispute or controversy arising hereunder be submitted to the American Arbitration Association for binding arbitration in accordance with the rules and procedures thereof. The Company shall pay for the costs and fees associated with any such binding arbitration hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as the day and year first written above.
BITSTREAM INC.: | ||
By: | /s/ AMOS KAMINSKI | |
Amos Kaminski | ||
Chairman and Chief Executive Officer |
BY THE EXECUTIVE: | WITNESS | |||||||||
Signature: | /s/ P. ROMIK |
Signature: |
|
Name: Pinhas Romik | Name: |
|
||||
General Manager, Pageflex |
Exhibit 31.1
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
Certification
I, Pinhas Romik, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Marlborough Software Development Holdings Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2013 | By: | /s/ PINHAS ROMIK | ||||
Pinhas Romik | ||||||
President and Chief Executive Officer |
Exhibit 31.2
MARLBOROUGH SOFTWARE DEVELOPMENT HOLDINGS INC.
Certification
I, James P. Dore, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Marlborough Software Development Holdings Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2013 | By: | /s/ JAMES P. DORE | ||||
James P. Dore | ||||||
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Marlborough Software Development Holdings Inc. (the Company) on Form 10-Q for the quarterly period ended June 30, 2013 as filed with the Securities and Exchange Commission (the SEC) on the date hereof (the Report), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act); and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
Signature |
Title |
Date | ||
/s/ PINHAS ROMIK |
President and Chief Executive Officer | August 14, 2013 | ||
Pinhas Romik | (Principal Executive Officer) | |||
/s/ JAMES P. DORE |
Executive Vice President and Chief Financial | August 14, 2013 | ||
James P. Dore | Officer (Principal Financial Officer) |
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section. This certification shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form with the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.
Basis of Presentation and Allocation Methodologies (Tables)
|
6 Months Ended | |||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Summary of expenses allocated to Parent Company | The following table presents the allocable expense amounts allocated to the Company’s former Parent during the three months ended March 31, 2012:
|
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Revenue: | ||||
Software licenses | $ 356 | $ 628 | $ 890 | $ 1,044 |
Services | 1,294 | 1,337 | 2,663 | 2,689 |
Total revenue | 1,650 | 1,965 | 3,553 | 3,733 |
Cost of revenue: | ||||
Software licenses | 129 | 261 | 437 | 432 |
Services | 631 | 688 | 1,031 | 1,243 |
Total cost of revenue | 760 | 949 | 1,468 | 1,675 |
Gross profit | 890 | 1,016 | 2,085 | 2,058 |
Operating expenses: | ||||
Marketing and selling | 516 | 1,169 | 1,233 | 2,236 |
Research and development | 606 | 1,486 | 1,439 | 3,371 |
General and administrative | 821 | 785 | 1,450 | 2,017 |
Total operating expenses | 1,943 | 3,440 | 4,122 | 7,624 |
Operating loss | (1,053) | (2,424) | (2,037) | (5,566) |
Interest and other (expense) income, net | (4) | (17) | 2 | (43) |
Loss before provision for income taxes | (1,057) | (2,441) | (2,035) | (5,609) |
Provision for income taxes | 30 | 59 | 89 | 111 |
Net loss | (1,087) | (2,500) | (2,124) | (5,720) |
Amortization of financing costs on redeemable preferred stock | 7 | 14 | ||
Dividends on redeemable preferred stock | 34 | 67 | ||
Net loss allocable to common stockholders | $ (1,128) | $ (2,500) | $ (2,205) | $ (5,720) |
Net loss per share allocable to common stockholders, basic and diluted | $ (0.10) | $ (0.23) | $ (0.20) | $ (0.53) |
Shares used in calculating net loss per share allocable to common stockholders, basic and diluted | 10,802 | 10,752 | 10,802 | 10,752 |
Recently Issued Accounting Standards
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Recently Issued Accounting Standards | (5) Recently Issued Accounting Standards Accounting Standards Update (ASU) 2013-11, “Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued in July, 2013. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect adoption of this ASU to have a material impact on its financial statements. |
Summary of Expenses Allocated to Parent Company (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | 3 Months Ended | ||
---|---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
Mar. 31, 2012
MSDH
|
|
Condensed Financial Statements, Captions [Line Items] | |||||
Cost of revenue | $ 11 | ||||
General and administrative | 807 | ||||
Total operating expenses | $ 1,943 | $ 3,440 | $ 4,122 | $ 7,624 | $ 818 |
Property and Equipment (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Summary of Property and Equipment | Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Property and equipment consist of the following:
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Estimated Useful Lives of Assets | Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
|
Estimated Useful Lives of Assets (Detail)
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Computer equipment
|
|
Property, Plant and Equipment [Line Items] | |
Estimated Useful Life | 3 years |
Capitalized software
|
|
Property, Plant and Equipment [Line Items] | |
Estimated Useful Life | 5 years |
Purchased software
|
|
Property, Plant and Equipment [Line Items] | |
Estimated Useful Life | 3 years |
Furniture and fixtures
|
|
Property, Plant and Equipment [Line Items] | |
Estimated Useful Life | 5 years |
Leasehold improvements
|
|
Property, Plant and Equipment [Line Items] | |
Estimated Useful Life | Estimated useful life, or the lease term, whichever is shorter |
Summary of Property and Equipment (Detail) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | $ 3,306 | $ 3,327 |
Less - Accumulated depreciation and amortization | 1,858 | 1,605 |
Property and equipment, net | 1,448 | 1,722 |
Computer equipment
|
||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | 1,109 | 1,131 |
Capitalized software
|
||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | 1,335 | 1,335 |
Purchased software
|
||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | 253 | 252 |
Furniture and fixtures
|
||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | 453 | 453 |
Leasehold improvements
|
||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, Gross | $ 156 | $ 156 |
Summary of Stock Based Compensation Expense by Category (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 6 Months Ended | ||||||||||
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Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
Parent
|
Mar. 31, 2012
Parent
|
Jun. 30, 2013
Parent
|
Jun. 30, 2012
Parent
|
Jun. 30, 2013
Cost of revenue--services
Parent
|
Jun. 30, 2012
Cost of revenue--services
Parent
|
Jun. 30, 2013
Marketing and selling
Parent
|
Jun. 30, 2012
Marketing and selling
Parent
|
Jun. 30, 2013
Research and development
Parent
|
Jun. 30, 2013
Research and development
Parent
|
Jun. 30, 2012
Research and development
Parent
|
Jun. 30, 2013
General and administrative
Parent
|
Jun. 30, 2013
General and administrative
Parent
|
Jun. 30, 2012
General and administrative
Parent
|
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||||||||
Share-based compensation expense | $ 4 | $ 0 | $ 12 | $ 1,420 | $ 4 | $ 1,420 | $ 12 | $ 1,420 | $ 1 | $ 2 | $ 1 | $ (5) | $ 1 | $ 3 | $ 324 | $ 3 | $ 7 | $ 1,099 |
Income Taxes - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Income Taxes [Line Items] | ||
Tax credit carry forwards | $ 2,741 | |
Deferred tax liability | $ 230 | $ 192 |
Off-Balance Sheet Risk and Concentration of Credit Risk - Additional Information (Detail)
|
6 Months Ended | 12 Months Ended | 3 Months Ended | 6 Months Ended | 12 Months Ended | |||
---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
Customer One
|
Dec. 31, 2012
Customer One
|
Jun. 30, 2013
Customer One
Sales
|
Jun. 30, 2012
Customer One
Sales
|
Jun. 30, 2013
Customer One
Sales
|
Jun. 30, 2012
Customer One
Sales
|
Jun. 30, 2013
Customer Two
|
Dec. 31, 2012
Customer Two
|
|
Revenue, Major Customer [Line Items] | ||||||||
Percentage of accounts receivable | 14.00% | 15.00% | 23.00% | 13.00% | ||||
Percentage of revenue earned | 16.00% | 16.00% | 14.00% | 17.00% |
Background and Nature of Operations
|
6 Months Ended |
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Jun. 30, 2013
|
|
Background and Nature of Operations | (1) Background and Nature of Operations MSDH was formed on July 18, 2011 in conjunction with our former Parent’s planned merger (the “Bitstream Merger”) with and acquisition by Monotype Imaging Holdings Inc., a Delaware corporation (“Monotype”), pursuant to an agreement and plan of merger (the “Bitstream Merger Agreement”) entered into by and between Bitstream and Monotype on November 10, 2011. On January 1, 2012, Bitstream transferred and assigned to MSDH all of the assets and liabilities relating to, arising from, or in connection with Bitstream’s Pageflex and BOLT product lines (the “Separation”) pursuant to the terms and conditions of a Contribution Agreement dated November 10, 2011 by and between Bitstream and MSDH (the “Contribution Agreement”). On March 14, 2012, Bitstream distributed all of the shares of MSDH common stock to the stockholders of Bitstream on a pro rata basis (the “Distribution”) pursuant to the terms and conditions of the Distribution Agreement dated November 10, 2011 between Bitstream and MSDH (the “Distribution Agreement”). On March 19, 2012, Bitstream completed the Bitstream Merger with Monotype. MSDH and Bitstream have entered into certain ancillary agreements in connection with the Separation and Distribution that provide for indemnification of Bitstream with respect to certain liabilities of the Pageflex and BOLT products contributed to MSDH. Pursuant to the Contribution Agreement on November 10, 2011, Bitstream transferred its 100% ownership in Bitstream Israel Ltd. to MSDH and on July 24, 2012 MSDH changed the name of this wholly-owned subsidiary to Pageflex Israel Ltd. MSDH is a software development company focused on bringing innovative and proprietary software products to a wide variety of markets. Our core software products include mobile browsing technologies and variable data publishing, Web-to-print, and multi-channel communications technologies. MSDH is subject to risks common to technology-based companies, including dependence on key personnel, rapid technological change, competition from alternative product offerings and larger companies, and challenges to the development and marketing of commercial products and services. MSDH has also experienced net losses and negative operating cash flows in the past and in the current year, and as of June 30, 2013 has an accumulated deficit of approximately $11,120. The unaudited condensed consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. MSDH has suffered recurring losses from operations both before and after the Separation. For its liquidity, prior to Separation, the Company relied on contributions from Bitstream. As of March 19, 2012, MSDH had accumulated contributions of approximately $60,977 from its former Parent. During the six months ended June 30, 2013, the Company had a net loss of $2,124 and negative cash flows from operations of $1,139. The ability of the Company to satisfy its obligations and recover its costs will be primarily dependent upon the future financial and operating performance of the Company. Additionally, management’s operating plans are designed to help control operating costs, to maintain or increase revenues and to obtain additional sources of capital until such time as the Company generates sufficient cash flows from operations. If there was a decrease in the demand for the Company’s products due to either economic or competitive conditions, or management was unable to meet its plan, there could be a significant reduction in liquidity due to the possible inability of the Company to cut costs sufficiently. On May 13, 2013, MSDH received a notice of default from Normandy Nickerson Road, LLC (“Normandy”), the landlord for MSDH’s leased premises in Marlborough, Massachusetts. The notice stated that MSDH had failed to pay rent for the months of April and May 2013 and certain utility charges and failure to pay the amounts past due within five days would result in a default of the lease for the premises. MSDH paid amounts due for utilities prior to receiving the notice but did not voluntarily pay the outstanding rent nor rent for June or July 2013. The total outstanding rent for those four months was $178, of which $133 was due as of June 30, 2013. On July 23, 2013, the landlord issued a sight draft under the Company’s Letter of Credit (“LC”) to the Company’s bank for $260, the full amount of the LC, which exceeded the then outstanding four months’ rent. The Company had secured the LC with restricted cash classified as Other Assets on its consolidated balance sheets. On August 9, 2013, MSDH received a demand from Normandy to restore $226, the as applied portion of the security deposit, to the security deposit within five days after demand. The Company did not restore the security deposit within the five day demand period and remains in default on its lease with Normandy. The Company is currently negotiating with Normandy to resolve the lease issues and has engaged the services of a commercial real estate agent to assist in these discussions. MSDH had a cash balance of $879 as of June 30, 2013. Management has recently revised its operating plan to call for reduced expenses going forward, principally as a result of further reductions in force in May 2013. Management believes that with its current operating plan, cash, together with cash generated from expected future operations is, and will be, sufficient to meet the Company’s working capital and capital expenditure requirements through at least the next twelve months. |
Relationship with our Former Parent
|
6 Months Ended |
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Jun. 30, 2013
|
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Relationship with our Former Parent | (3) Relationship with our Former Parent In connection with the Separation, we entered into a series of agreements, in addition to the Contribution and Distribution Agreements, with our former Parent. These agreements include a tax indemnification agreement and intellectual property assignment and license agreements with our former Parent, as well as a transition services agreement with Monotype. The net expense to MSDH related to these agreements was not material for the three and six month periods ended June 30, 2013 and 2012. |
Property and Equipment
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6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Property and Equipment | (6) Property and Equipment Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Property and equipment consist of the following:
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
Depreciation and amortization expense for the three months ended June 30, 2013 and 2012 was $133 and $78, respectively. Depreciation and amortization expense for the six months ended June 30, 2013 and 2012 was $270 and $149, respectively. During the three and six months ended June 30, 2013, we disposed of $22 of property and equipment with accumulated depreciation of $17, resulting in a net loss on disposal of $5 for each period. During the three and six months ended June 30, 2012, we disposed of $4 and $551 of property and equipment with accumulated depreciation of $4 and $549, respectively, resulting in a net loss on disposal of $0 and $2, respectively. During the six months ended June 30, 2012, we capitalized software of $407. The software became available for general release during the quarter ended September 30, 2012 and no amounts were capitalized after that date. Amortization expense related to capitalized software for the three and six months ended June 30, 2013 was $67 and $133, respectively. There was no amortization expense during the three and six months ended June 30, 2012 as the developed software was not yet ready for its intended use. The net book value of internally developed software at June 30, 2013 and December 31, 2012 was $1,112 and $1,246, respectively. |
Off-Balance Sheet Risk and Concentration of Credit Risk
|
6 Months Ended |
---|---|
Jun. 30, 2013
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Off-Balance Sheet Risk and Concentration of Credit Risk | (4) Off-Balance Sheet Risk and Concentration of Credit Risk Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. We place a majority of our cash investments, which exceed federally insured limits, in one highly-rated financial institution. We have not experienced significant losses related to receivables from any individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by us to be inherent in our accounts receivable. As of June 30, 2013 and December 31, 2012, we did not have any off-balance sheet arrangements or unconsolidated special-purpose entities within the meaning of Item 303(a)(4) of Regulation S-K and therefore did not have any off-balance sheet risks as of such dates. At June 30, 2013, two customers accounted for 14% and 23% of our accounts receivable, respectively. At December 31, 2012, two customers accounted for 15% and 13% of our accounts receivable. For the three and six month periods ended June 30, 2013, one customer accounted for 16% and 14% of our revenue, respectively. For the three and six month periods ended June 30, 2012, one customer accounted for 16% and 17% of our revenue, respectively. |
Property and Equipment - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Dec. 31, 2012
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Summary Of Significant Accounting Policies [Line Items] | |||||
Depreciation expense | $ 133 | $ 78 | $ 270 | $ 149 | |
Property and equipment disposed | 22 | 4 | 22 | 551 | |
Accumulated depreciation of property and equipment disposed | 17 | 4 | 17 | 549 | |
Net loss on disposition | (5) | 0 | (5) | (2) | |
Capitalized software increase during the period | 407 | ||||
Amortization expense related to capitalized software | 67 | 133 | |||
Book value of internally developed software | $ 1,112 | $ 1,112 | $ 1,246 |
Components of Earnings (Loss) Before Income Taxes (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Components Of Earnings Loss Before Income Taxes [Line Items] | ||||
Foreign income | $ 58 | $ 81 | $ 114 | $ 183 |
Domestic loss | (1,115) | (2,522) | (2,149) | (5,792) |
Loss before provision for income taxes | $ (1,057) | $ (2,441) | $ (2,035) | $ (5,609) |