form10q032008.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
________________
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(Mark
One)
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|
R
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2008
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from/to
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000-50327
(Commission
File Number)
________________
iPass
Inc.
(Exact
name of Registrant as specified in its charter)
________________
|
Delaware
|
93-1214598
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
3800
Bridge Parkway
Redwood
Shores, California 94065
(Address
of principal executive offices, including zip code)
(650)
232-4100
(Registrant’s
telephone number, including area code)
________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer. or a non-accelerated filer. See the definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act).
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Large
Accelerated filer o
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Accelerated
filer R
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
The
number of shares outstanding of the Registrant’s Common Stock, $0.001 par value,
as of April 30, 2008 was 61,810,202.
iPASS INC. AND
SUBSIDIARIES
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2008
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
iPASS
INC. AND SUBSIDIARIES
(Unaudited,
in thousands)
|
|
|
March
31,
2008
|
|
|
December
31, 2007
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|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
67,416 |
|
|
$ |
70,907 |
|
|
|
|
|
2,537 |
|
|
|
4,258 |
|
Accounts
receivable, net of allowance for doubtful accounts of $1,462 and $2,792,
respectively
|
|
|
36,562 |
|
|
|
35,938 |
|
Prepaid
expenses and other current assets
|
|
|
6,720 |
|
|
|
7,116 |
|
Short-term
deferred income tax assets
|
|
|
575 |
|
|
|
575 |
|
|
|
|
|
113,810 |
|
|
|
118,794 |
|
Property
and equipment, net of accumulated depreciation of $42,860 and $41,435,
respectively
|
|
|
10,424 |
|
|
|
9,272 |
|
|
|
|
|
5,741 |
|
|
|
4,876 |
|
Acquired
intangible assets, net
|
|
|
8,454 |
|
|
|
9,504 |
|
|
|
|
|
79,543 |
|
|
|
79,543 |
|
|
|
|
$ |
217,972 |
|
|
$ |
221,989 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
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$ |
17,470 |
|
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$ |
15,923 |
|
|
|
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|
13,972 |
|
|
|
15,788 |
|
Deferred
revenue — short-term
|
|
|
5,415 |
|
|
|
6,606 |
|
Total
current liabilities
|
|
|
36,857 |
|
|
|
38,317 |
|
Deferred
tax liability — long-term
|
|
|
575 |
|
|
|
575 |
|
Deferred
revenue — long-term
|
|
|
1,722 |
|
|
|
949 |
|
Other
long-term liabilities
|
|
|
845 |
|
|
|
1,040 |
|
|
|
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|
39,999 |
|
|
|
40,881 |
|
|
|
|
|
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|
61 |
|
|
|
62 |
|
Additional
paid-in capital
|
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239,952 |
|
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241,703 |
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Accumulated
other comprehensive income (loss)
|
|
|
5 |
|
|
|
15 |
|
|
|
|
|
(62,045
|
) |
|
|
(60,672
|
) |
Total
stockholders’ equity
|
|
|
177,973 |
|
|
|
181,108 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
217,972 |
|
|
$ |
221,989 |
|
See
Accompanying Notes to the Condensed Consolidated Financial
Statements
iPASS
INC. AND SUBSIDIARIES
(Unaudited,
in thousands, except share and per share amounts)
|
|
|
Three
Months Ended March 31,
|
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2008
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2007
|
|
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$ |
48,112 |
|
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$ |
46,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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20,500 |
|
|
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16,270 |
|
|
|
|
|
8,674 |
|
|
|
8,198 |
|
|
|
|
|
4,456 |
|
|
|
5,456 |
|
|
|
|
|
10,309 |
|
|
|
13,426 |
|
General
and administrative
|
|
|
5,319 |
|
|
|
5,744 |
|
|
|
|
|
4 |
|
|
|
32 |
|
Amortization
of intangibles
|
|
|
1,050 |
|
|
|
1,050 |
|
|
|
|
|
50,312 |
|
|
|
50,176 |
|
|
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(2,200
|
) |
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|
(3,288
|
) |
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|
589 |
|
|
|
739 |
|
|
|
|
|
(1,611
|
) |
|
|
(2,549
|
) |
Benefit
from income taxes
|
|
|
(238
|
) |
|
|
(2,081
|
) |
|
|
|
$ |
(1,373 |
) |
|
$ |
(468 |
) |
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Number
of shares used in per share calculations:
|
|
|
61,615,143 |
|
|
|
62,932,111 |
|
____________
|
(1)Stock-based compensation is included in the
following expense line items:
|
|
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|
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$ |
273 |
|
|
$ |
135 |
|
|
|
|
|
189 |
|
|
|
274 |
|
|
|
|
|
337 |
|
|
|
242 |
|
General
and administrative
|
|
|
546 |
|
|
|
546 |
|
See
Accompanying Notes to the Condensed Consolidated Financial
Statements
iPASS
INC. AND SUBSIDIARIES
(Unaudited,
in thousands)
|
|
|
Three
Months Ended March 31,
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|
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2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
$ |
(1,373 |
) |
|
$ |
(468 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of stock-based compensation for employees
|
|
|
1,345 |
|
|
|
1,197 |
|
Amortization
of acquired intangibles
|
|
|
1,050 |
|
|
|
1,050 |
|
Depreciation
and amortization
|
|
|
1,360 |
|
|
|
1,317 |
|
|
|
|
|
— |
|
|
|
(1,893
|
) |
Provision
for doubtful accounts
|
|
|
53 |
|
|
|
229 |
|
Realized
gain on investments
|
|
|
(29
|
) |
|
|
— |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(677 |
) |
|
|
(3,614
|
) |
Prepaid
expenses and other current assets
|
|
|
396 |
|
|
|
(1,003
|
) |
|
|
|
|
(865 |
) |
|
|
502 |
|
|
|
|
|
1,547 |
|
|
|
224 |
|
|
|
|
|
(1,816 |
) |
|
|
30 |
|
|
|
|
|
(418
|
) |
|
|
(102
|
) |
|
|
|
|
(195
|
) |
|
|
(318
|
) |
Net
cash provided by (used in) operating activities
|
|
|
378 |
|
|
|
(2,849
|
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(71,613
|
) |
|
|
(75,416
|
) |
Sales
and maturities of short-term investments
|
|
|
73,438 |
|
|
|
113,022 |
|
Purchases
of property and equipment
|
|
|
(2,597
|
) |
|
|
(949
|
) |
Net
cash provided by (used in) investing activities
|
|
|
(772
|
) |
|
|
36,657 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
75 |
|
|
|
204 |
|
Cash
used in repurchase of common stock
|
|
|
(3,172
|
) |
|
|
(7,020
|
) |
Net
cash used in financing activities
|
|
|
(3,097
|
) |
|
|
(6,816
|
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,491
|
) |
|
|
26,992 |
|
Cash
and cash equivalents at beginning of period
|
|
|
70,907 |
|
|
|
15,492 |
|
Cash
and cash equivalents at end of period
|
|
$ |
67,416 |
|
|
$ |
42,484 |
|
See
Accompanying Notes to the Condensed Consolidated Financial
Statements
iPASS
INC. AND SUBSIDIARIES
(Unaudited)
Note 1. Basis of
Presentation
The
accompanying financial data has been prepared by iPass Inc. (the “Company” or
“iPass”), without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The December 31, 2007 Condensed Consolidated Balance Sheet was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading.
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include normal recurring
adjustments, except as disclosed herein) necessary to present fairly the
Company’s financial position, results of operations, and cash flows for the
interim periods presented. The results of operations for the three months ended
March 31, 2008 are not necessarily indicative of the operating results for the
full fiscal year or any future periods.
Note 2. Summary of Significant
Accounting Policies
The
Company’s significant accounting policies were described in Note 2 of the
Company’s audited Consolidated Financial Statements for the fiscal year ended
December 31, 2007, included in the Annual Report on Form 10-K. These accounting
policies have not significantly changed except as noted below.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157
("SFAS 157"), Fair Value
Measurements, which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements.
SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements and is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which
delays the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. These nonfinancial items include assets and
liabilities such as reporting units measured at fair value in a goodwill
impairment test and nonfinancial assets acquired and liabilities assumed in a
business combination. Effective January 1, 2008, the Company adopted
SFAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for financial assets and
liabilities did not have a material impact on the condensed consolidated balance
sheet, statement of operations or statement of cash flows. See Note 3 for information and
related disclosures regarding fair value measurements.
Since
adoption of SFAS No. 123 (revised 2004) (“SFAS 123(R)”), Share-Based Payment, the
Company has elected to use the simplified method to estimate the expected term
as permitted by Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin 107 (“SAB 107”) due to the unknown effect on option holder behavior of
the increased liquidity of the underlying options following the Company’s IPO.
In December 2007, the SEC released Staff Accounting Bulletin No. 110
(“SAB 110”). SAB 110 amends SAB 107 to allow for the continued use, under
certain circumstances, of the “simplified” method in developing an estimate of
the expected term of “plain vanilla” stock options accounted for under SFAS
123(R). As a result, the Company will continue to use the simplified method
until it has sufficient historical data to provide a reasonable basis to
estimate the expected term.
Recent
Accounting Pronouncements
With the
exception of the financial accounting standards board statement defined below,
there have been no significant changes in recent accounting pronouncements
during the three months ended March 31, 2008 as compared to the recent
accounting pronouncements described in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133.
Statement 161 requires disclosures of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. Statement
161 is effective for fiscal years beginning after November 15, 2008, with
early adoption permitted. The Company is currently evaluating
the impact of the pending adoption of Statement 161 on its consolidated
financial statements.
Note
3. Financial Instruments
SFAS 157,
Fair Value
Measurements,
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
which prioritizes the inputs used in measuring fair value as follows: (Level 1)
observable inputs such as quoted prices in active markets; (Level 2) inputs
other than the quoted prices in active markets that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is
little or no market data, which require us to develop our own assumptions. This
hierarchy requires the use of observable market data, when available, and the
minimization of the use of unobservable inputs when determining fair
value.
Certain
financial assets and liabilities are measured at fair value on a recurring
basis, including available-for-sale fixed income and equity securities. Cash and
investment instruments are classified within Level 1 or Level 2 of the fair
value hierarchy because they are valued using quoted market prices, broker or
dealer quotations, or alternative pricing sources with reasonable levels of
price transparency. The types of instruments valued based on quoted market
prices in active markets include most U.S. government and agency securities,
sovereign government obligations, and money market securities. Such instruments
are generally classified within Level 1 of the fair value
hierarchy. The types of instruments valued based on other observable
inputs include investment-grade corporate bonds, mortgage-backed and
asset-backed products, state, municipal and provincial obligations. Such
instruments are generally classified within Level 2 of the fair value hierarchy.
The fair
value of these financial assets was determined using the following inputs at
March 31, 2008 (in thousands):
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
Total
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
Money
market funds (1)
|
|
$ |
9,336 |
|
|
$ |
9,336 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Fixed
income available-for-sale securities (2)
|
|
$ |
51,609 |
|
|
$ |
— |
|
|
$ |
51,609 |
|
|
$ |
— |
|
|
Total
|
|
$ |
60,945 |
|
|
$ |
9,336 |
|
|
$ |
51,609 |
|
|
$ |
— |
|
|
(1)
|
Included
in cash and cash equivalents on the Company’s consolidated balance
sheet.
|
|
(2)
|
Fixed
income available-for-sale securities include commercial paper (85% of
total) and bonds of government agencies (15% of total). Included in fixed
income available-for-sale securities is approximately $49.0 million
of cash equivalents. Cash equivalents consist of instruments with
remaining maturities of three months or less at the date of purchase. The
remaining balance of cash equivalents consists primarily of money market
funds, for which the carrying amount is a reasonable estimate of fair
value.
|
Note 4. Goodwill and
Intangibles
The
following table represents a rollforward of goodwill and acquired intangible
assets, net (in thousands):
|
|
|
December
31, 2007 Balance
|
|
|
Amortization
|
|
|
March
31,
2008
Balance
|
|
|
|
|
$ |
79,543 |
|
|
$ |
— |
|
|
$ |
79,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,749 |
|
|
|
(403
|
) |
|
|
2,346 |
|
|
|
|
|
1,001 |
|
|
|
(141
|
) |
|
|
860 |
|
Maintenance
agreements and certain relationships
|
|
|
189 |
|
|
|
(17
|
) |
|
|
172 |
|
|
|
|
|
4,805 |
|
|
|
(418
|
) |
|
|
4,387 |
|
|
|
|
|
504 |
|
|
|
(59
|
) |
|
|
445 |
|
Internally
developed software
|
|
|
256 |
|
|
|
(12
|
) |
|
|
244 |
|
|
|
|
$ |
89,047 |
|
|
$ |
(1,050 |
) |
|
$ |
87,997 |
|
Total
amortization expense related to acquired intangible assets is set forth in the
table below (in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
|
$ |
(403 |
) |
|
$ |
(403 |
) |
|
|
|
|
(141
|
) |
|
|
(141
|
) |
Maintenance
agreements and certain relationships
|
|
|
(17
|
) |
|
|
(17
|
) |
|
|
|
|
(418
|
) |
|
|
(418
|
) |
|
|
|
|
(59
|
) |
|
|
(59
|
) |
Internally
developed software
|
|
|
(12
|
) |
|
|
(12
|
) |
|
|
|
$ |
(1,050 |
) |
|
$ |
(1,050 |
) |
The
following tables set forth the carrying amount of other intangible assets that
will continue to be amortized (in thousands):
|
|
March
31, 2008
|
|
|
|
Amortization
Life
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,900 |
|
|
$ |
(5,554 |
) |
|
$ |
2,346 |
|
|
|
|
|
|
2,800 |
|
|
|
(1,940
|
) |
|
|
860 |
|
Maintenance
agreements and certain relationships
|
|
|
|
400 |
|
|
|
(228
|
) |
|
|
172 |
|
|
|
|
|
|
8,100 |
|
|
|
(3,713
|
) |
|
|
4,387 |
|
|
|
|
|
|
950 |
|
|
|
(505
|
) |
|
|
445 |
|
Internally
developed software
|
|
|
|
350 |
|
|
|
(106
|
) |
|
|
244 |
|
|
|
|
|
$ |
20,500 |
|
|
$ |
(12,046 |
) |
|
$ |
8,454 |
|
|
|
December
31, 2007
|
|
|
|
Amortization
Life
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,900 |
|
|
$ |
(5,151 |
) |
|
$ |
2,749 |
|
|
|
|
|
|
2,800 |
|
|
|
(1,799
|
) |
|
|
1,001 |
|
Maintenance
agreements and certain relationships
|
|
|
|
400 |
|
|
|
(211
|
) |
|
|
189 |
|
|
|
|
|
|
8,100 |
|
|
|
(3,295
|
) |
|
|
4,805 |
|
|
|
|
|
|
950 |
|
|
|
(446
|
) |
|
|
504 |
|
Internally
developed software
|
|
|
|
350 |
|
|
|
(94
|
) |
|
|
256 |
|
|
|
|
|
$ |
20,500 |
|
|
$ |
(10,996 |
) |
|
$ |
9,504 |
|
The
following table presents the estimated future amortization of intangible assets
(in thousands):
Note
5. Accrued Restructuring
In June
and September 2006, the Company recorded a restructuring charge totaling
approximately $1.7 million related to the workforce reduction of 58 iPass
employees, across all functions. In November 2006, the Company recorded an
additional restructuring charge of $3.0 million related to excess iPass
facilities. The severance costs were recorded pursuant to SFAS No. 112, Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No.
5 and 43,
and the excess facility costs were recorded pursuant to SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No.
146").
By June
2007, the Company finalized the aforementioned terminations, settled all
negotiations and paid out the remaining severance. As a result
of finalizing all such terminations, the Company adjusted the accrual for the
difference between initial estimates of severance liability and the final
payments ultimately made. This adjustment of approximately $179,000
was credited to the restructuring expense in the second quarter of
2007. SFAS No. 146 requires that the excess facilities liabilities be
recorded at fair value. The difference between the fair value of the
liability at the time it was recorded and the total cash liability is
accreted ratably over the expected term. This accretion is reported
in the restructuring expense line on the condensed consolidated statements of
operations.
In
November 2007, the Company recorded an additional restructuring charge of
approximately $3.2 million related to (i) a workforce reduction of 72 employees
spread across all functions though focused on sales and marketing, (ii) the
abandonment of certain facilities and (iii) abandonment of certain
capitalized assets totaling $900,000. As of December 31, 2007, the
Company finalized approximately 56 of the aforementioned terminations and had
fully vacated the abandoned facilities.
By
February 2008, the Company finalized the aforementioned terminations, settled
all negotiations and paid out the remaining severance. As a
result of finalizing all such terminations as well as some additional charges
related to abandoned facilities, the Company adjusted the accrual for the
difference between initial estimates of severance and facility liability and the
final payments ultimately made. This adjustment of approximately
$17,000 was credited to the restructuring expense in the first quarter of
2008.
The
following is a summary of restructuring activities for the quarter ended March
31, 2008 (in thousands):
|
|
|
Excess
Facility Costs
|
|
|
Severance
Costs
|
|
|
Total
Restructuring Accrual
|
|
Balance
as of December 31, 2007
|
|
$ |
1,966 |
|
|
$ |
768 |
|
|
$ |
2,734 |
|
|
|
|
|
(320
|
) |
|
|
(743
|
) |
|
|
(1,063
|
) |
|
|
|
|
8 |
|
|
|
(25
|
) |
|
|
(17 |
) |
|
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
Balance
as of March 31, 2008
|
|
$ |
1,675 |
|
|
$ |
— |
|
|
$ |
1,675 |
|
In
February 2006, in connection with the acquisition of GoRemote, the Company
recorded an accrual of $1.2 million for the lease costs associated with the
acquired GoRemote corporate facilities that were expected to be abandoned. The
accrual was recognized as part of the purchase price allocation pursuant to
Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. The Company completed
the relocation of employees and vacated facilities by April 2006. The accrued
costs were fully utilized by the first quarter of 2008. The following is a
summary of the acquisition-related restructuring activities for the quarter
ended March 31, 2008 (in thousands):
|
|
|
Excess
Facility Costs
|
|
Balance
as of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2008
|
|
|
|
|
As of
March 31, 2008, the Company has classified $831,000 of the restructuring
liability in accrued liabilities and remaining $844,000 in long-term liabilities
based on the Company’s expectation that the remaining lease payments will be
paid over the remaining term of the related leases (net of expected sublease
income).
Note
6. Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as income in the period that includes the enactment date. A
valuation allowance is recorded against deferred tax assets if it is more likely
than not that all or a portion of the deferred tax assets will not be
realized.
The
Company recorded net deferred tax assets to the extent management believes these
assets will more likely than not be realized. In making such determination,
management considers all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial operations. In the fourth
quarter of 2007, the Company recorded the impact of a full valuation allowance
on the remaining net balance of deferred income tax assets. In the
event management were to determine that the Company would be able to realize the
deferred income tax assets in the future in excess of their net recorded amount,
the Company would make an adjustment to the valuation allowance which would
reduce the provision for income taxes. To the extent the valuation allowance
relates to acquired entities, the recognition of any future tax benefits would
first reduce goodwill and then reduce the provision for income
taxes.
On July
13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes, and
prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the benefit of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position is not recognized if it has less
than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of
FIN 48 did not require a change in the Company’s liability for unrecognized
tax benefits. The total amount of unrecognized tax benefits at March 31, 2008
and December 31, 2007 was $3.8 million. If any of these tax benefits that are
unrecognized should become recognizable at a future time, the Company would
reverse the associated liability resulting in a change in the Company’s annual
effective tax rate.
The
Company recognizes accrued interest related to unrecognized tax benefits in the
tax provision. At March 31, 2008, the Company’s liability for unrecognized tax
benefits includes an accrual for interest in the amount of $330,000, and at
December 31, 2007 was $290,000.
The
Company is subject to taxation in the United States and various other foreign
jurisdictions. The Company records accruals for the estimated outcomes of these
audits, and the accruals may change in the future due to new developments in
each matter. Fiscal years 2004 to 2007 remain open to examination by
the major taxing jurisdictions to which the Company are subject, with the
exception of California which is open from 2003 to 2007. The Company
has not been audited for U.S. federal income tax matters, but was recently
notified by the IRS that years 2004 to 2006 will be subject to examination
beginning in May, 2008. The Company has income tax audits in progress in India
and the State of California. The years under examination by the Indian taxing
authorities are 2005 to 2006. The years under examination by the State of
California are 2002 to 2005. The Indian tax audit is considered a routine audit
relating to transfer pricing calculations. Management does not believe the
examination in India will result in material payments due to the availability of
tax holidays, which effectively reduce the tax rate in India to 0% for tax years
ending before March 31, 2007.
As
mentioned above, the Company is currently under examination by the State of
California, which is challenging various tax issues for the years 2002 to 2005.
Management has reviewed proposed adjustments and recorded reserves for the
estimated liability related to these tax issues. During 2007, the Company
reached a tentative settlement with the State of California and paid
$510,000. The Company anticipates that this matter will
be settled with the State of California during the next twelve
months. Additionally, the Company believes that it is reasonably
possible that unrecognized tax benefits of up to $1.9 million may be settled in
the next twelve months.
Note 7. Stock Repurchase
Program
In
February 2008, the Company's Board of Directors approved a two-year stock
repurchase program which authorizes the Company to repurchase up to $30 million
of outstanding common stock from time to time on the open market or through
privately negotiated transactions. The timing and amount of any
repurchases will depend upon market conditions and other corporate
considerations.
Through
March 31, 2008, the Company repurchased a total of approximately 1.1 million
shares of common stock for an aggregate purchase price of $3.2 million. Of
the shares repurchased during the quarter, 1.1 million shares will be
retired by the end of the second quarter of fiscal 2008.
Note
8. Comprehensive Loss
Comprehensive
loss is a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with stockholders. Comprehensive loss is the total of net loss and all other
non-owner changes in equity. Comprehensive loss includes net income and
unrealized losses on available-for-sale securities.
Comprehensive
loss is comprised of the following (in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
$ |
(1,373 |
) |
|
$ |
(468 |
) |
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
Net
change in accumulated unrealized income (loss) on available-for- sale
securities
|
|
|
(10 |
) |
|
|
21 |
|
|
|
|
$ |
(1,383 |
) |
|
$ |
(447 |
) |
Note 9. Net Loss Per
Share
In
accordance with SFAS 128, Earnings Per Share, basic net
loss per share is computed by dividing net loss by the weighted daily average
number of shares of common stock outstanding during the period. Diluted net loss
per share is based upon the weighted daily average number of shares of common
stock outstanding for the period plus dilutive potential common shares from the
issuance of stock options and awards using the treasury-stock
method.
The
following table sets forth the computation of basic and diluted net loss per
share (in thousands, except share and per share amounts):
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
$ |
(1,373 |
) |
|
$ |
(468 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net loss per common share weighted average shares
outstanding
|
|
|
61,615,143 |
|
|
|
62,932,111 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
Denominator
for diluted net loss per common share — adjusted weighted average shares
outstanding
|
|
|
61,615,143 |
|
|
|
62,932,111 |
|
Basic
net loss per common share
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Diluted
net loss per common share
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
The
following potential shares of common stock have been excluded from the
computation of diluted net income (loss) per share because the effect of
including these shares would have been anti-dilutive:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Options
to purchase common stock
|
|
|
7,346,313 |
|
|
|
9,782,393 |
|
|
|
|
|
1,502,480 |
|
|
|
891,446 |
|
|
|
|
|
8,848,793 |
|
|
|
10,673,839 |
|
Note
10. Commitments
The
Company has contracts with certain network service providers which have minimum
purchase commitments that expire on various dates through December
2010. In connection with a mobile data provider contract signed in
August 2007, the Company agreed to significant annual usage minimum commitments
over the term of three years. The additional commitments are
reflected in the future minimum purchase commitments table below.
Future
minimum purchase commitments under these agreements as of March 31, 2008 are as
follows (in thousands):
|
Year
ending December 31:
|
|
|
|
|
Remaining
2008
|
|
|
3,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,371
|
|
The
Company leases facilities under non-cancelable operating leases that expire at
various dates through October 2016. Future minimum lease payments under these
operating leases as of March 31, 2008 are as follows (in
thousands):
At March
31, 2008, the Company had no material commitments for capital
expenditures.
Note 11. Segment
Information
SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards
for the reporting by business enterprises of information about operating
segments, products and services, geographic areas, and major customers. The
method for determining what information is reported is based on the way that
management organizes the operating segments within the Company for making
operational decisions and assessments of financial performance. The Company’s
chief executive officer (CEO) is considered to be the Company’s chief operating
decision maker. The CEO reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing
financial performance. The consolidated financial information reviewed by the
CEO is similar to the information presented in the accompanying condensed
consolidated financial statements. Therefore, the Company has determined that it
operates in a single reportable segment.
No
individual customer represented 10% or more of total revenues for the three
months ended March 31, 2008 or 2007. The only individual country,
outside the United States, to account for 10% or more of total revenues for the
periods presented was the United Kingdom, which represented approximately 10%
and 13% of total revenues for the three months ended March 31, 2008 and 2007,
respectively.
Note
12. Legal Contingencies
On
November 22, 2006, Blue Waters Management, L.L.C., a former iPass reseller,
filed a claim against Carlson Companies, Inc. alleging breach of contract and
conversion based upon the iPass services and software provided by Blue Waters to
Carlson. Blue Waters has alleged damages of approximately $9
million. On July 23, 2007, Carlson Companies filed a counter-claim
against Blue Waters seeking damages for breach of contract, fraud and unjust
enrichment. Carlson Companies had been a customer of Blue Waters from
about December 2002 through September 2006, after which Carlson Companies
entered into a contract with iPass in order to continue to use the iPass
services and software. At the same time, Carlson terminated its
agreement with Blue Waters. Blue Waters has claimed that
Carlson’s continued use of the iPass software after September 2006 is a
violation of Carlson’s agreement with Blue Waters. Blue Waters
has not alleged a specific amount of damages with this portion of its
complaint. In the counterclaim filed by Carlson, Carlson has claimed
that iPass is required to indemnify Carlson to the extent Carlson is required to
pay any damages to Blue Waters as a result of Carlson’s continued use of the
iPass software. On August 14, 2007, iPass filed a response
to Carlson’s claim denying any liability to Carlson. The Court
has ordered the parties to participate in mediation and conclude such mediation
by July 1, 2008. The Court has scheduled a trial on the issues for
August 11, 2008. No
loss has been accrued as a loss is not probable or estimable as of March 31,
2008.
In 2001,
GoRemote Internet Communications, Inc. (formerly known as GRIC Communications,
Inc., hereinafter, "GoRemote") and certain of its officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York, now consolidated as
In re GRIC Communications, Inc. Initial Public Offering Securities Litigation,
Case No. 6771. In the amended complaint, the plaintiffs allege that GoRemote,
certain of its officers and directors and the underwriters of its initial public
offering ("IPO") violated section 11 of the Securities Act of 1933 based on
allegations that GoRemote's registration statement and prospectus failed to
disclose material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The complaint also contains
a claim for violation of section 10(b) of the Securities Exchange Act of 1934
based on allegations that this omission constituted a deceit on investors. The
plaintiffs seek unspecified monetary damages and other relief. Similar
complaints were filed in the same court against hundreds of other public
companies ("Issuers") that conducted IPOs of their common stock in the late
1990s and 2000 (the "IPO Lawsuits").
In
October 2002, GoRemote's officers and directors were dismissed without prejudice
pursuant to a stipulated dismissal and tolling agreement with the plaintiffs. In
February 2003, the court dismissed the section 10(b) claim against GoRemote
without leave to amend, but declined to dismiss the section 11 claim. In
June 2004, GoRemote and almost all of the other Issuers executed a settlement
agreement with the plaintiffs. In February 2005, the court certified
the litigation as a class action for settlement purposes and granted preliminary
approval of the settlement, subject to modification of certain bar orders
contemplated by the settlement. In August 2005, the court reaffirmed
class certification and preliminary approval of the modified
settlement. On February 24, 2006, the Court dismissed litigation
filed against certain underwriters in connection with the claims to be assigned
to the plaintiffs under the settlement. On April 24, 2006, the Court
held a Final Fairness Hearing to determine whether to grant final approval of
the settlement. On December 5, 2006, the Second Circuit Court of
Appeals vacated an earlier decision by the district
court certifying as class actions the six IPO Lawsuits designated as
"focus cases." Thereafter, the district court ordered a stay of all
proceedings in all of the IPO Cases pending the outcome of plaintiffs’ petition
to the Second Circuit for rehearing en banc. On April 6, 2007,
the Second Circuit denied plaintiffs' rehearing petition, but clarified that the
plaintiffs may seek to certify a more limited class in the District Court.
Accordingly, the settlement was terminated and will not receive final
approval. Plaintiffs filed amended complaints in the six focus cases on or
about August 14, 2007. GoRemote is not a focus case. In
September 2007, GoRemote's named officers and directors again extended the
tolling agreement with plaintiffs. On or about September 27, 2007,
plaintiffs moved to certify the classes alleged in the focus cases and to
appoint class representatives and class counsel in those cases. The “focus
case” issuers filed motions to dismiss the claims against them in November
2007. Both motions are pending. No loss has been accrued
as a loss is not probable or estimable as of March 31, 2008.
Forward-Looking
Statements
This
quarterly report on Form 10-Q, including this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements regarding future events and our future results that
are based on current expectations, estimates, forecasts, and projections about
the industries in which we operate and the beliefs and assumptions of our
management. Words such as “expects,” “anticipates,” “targets,” “goals,”
“projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of
these words, and similar expressions are intended to identify these
forward-looking statements. In addition, any statements which refer to
projections of our future financial performance, our anticipated growth and
trends in our business, and other characterizations of future events or
circumstances, are forward-looking statements. Readers are cautioned that these
forward-looking statements are only predictions based upon assumptions made that
we believed to be reasonable at the time, and are subject to risks and
uncertainties. Therefore, actual results may differ materially and adversely
from those expressed in any forward-looking statements. Readers are directed to
risks and uncertainties identified below under “Factors Affecting Operating
Results” and elsewhere in this quarterly report, for factors that may cause
actual results to be different than those expressed in these forward-looking
statements. Except as required by law, we undertake no obligation to revise or
update publicly any forward-looking statements.
Company
Overview
We
deliver simple, secure and manageable enterprise mobility services, maximizing
the productivity of workers as they move between office, home and remote
locations. Our device management services close the gaps in protecting
computers, network assets, user identities and data whenever users connect over
the Internet. Our connectivity services utilize the iPass global virtual
network, a unified network of 550 of dial-up, wireless, and broadband providers
in over 160 countries.
Overview
of the three months ended March 31, 2008
Our
overall revenues increased slightly for the three months ended March 31, 2008 as
compared to the same period in 2007. Increases in revenues from broadband,
software and services fees of $10.0 million were partially offset by an $8.8
million decline in dial-up revenue for the three months ended March 31, 2008.The
increase was driven primarily by increased revenues from minimum commitment
shortfalls as well as our customer’s migration from dial-up to broadband as the
preferred method of connecting to their corporate networks.
We
increased the number of broadband access points during the quarter, increasing
our global broadband footprint. We ended the quarter with approximately 94,000
Wi-Fi and wired hotspots worldwide, approximately 92,000 of which were Wi-Fi
hotspots and approximately 2,000 of which were wired hotspots. This enabled
our customers to access remotely their corporate networks from more locations,
at higher speeds driving the increases in broadband usage revenues in 2008 over
2007.
Going
forward, we will continue to focus on delivering innovative services and
solutions for our customers, increasing the number of end users of our services
for both dial-up and broadband access, as well as to continue to increase fee
revenues from device management and other fee based services. In
2008, we expect to see continued growth in our business. However, our
success could be limited by several factors, including the timely release
of new products, continued market acceptance of our products and the
introduction of new products by existing or new competitors. For a further
discussion of these and other risk factors, see the section below entitled
“Factors Affecting Operating Results.”
Sources
of Revenues
We derive
our revenues primarily from providing enterprise connectivity services through
our virtual network. We sell these services directly, as well as indirectly
through our channel partners. We bill substantially all customers on a time
basis for usage based on negotiated rates. We bill the remaining customers based
on a fixed charge per active user per month with additional charges for excess
time. Substantially all enterprise customers commit to a one to three
year contract term. Most of our contracts with enterprise customers
contain minimum usage levels. We bill customers for minimum commitments when
actual usage is less than their monthly minimum commitment
amount. The difference between the minimum commitment and actual
usage is recognized as fee revenue based on our estimate of cash that will
ultimately be collected related to the minimum commitment. Our
usage-based revenues, which consist of dial-up and broadband usage, represented
74% and 76% of our revenues for the three months ended March 31, 2008 and 2007,
respectively.
We have
incurred expenses to expand our broadband coverage and are seeking to generate
additional revenues from our broadband wired and wireless coverage. Revenues
from usage of our broadband services were 50% and 33% of our total revenues for
the three months ended March 31, 2008 and 2007, respectively.
We also
provide customers with deployment services and technical support throughout the
term of the contract. We typically charge fees for these services on a one-time
or annual basis, depending on the service provided and the nature of the
relationship. We also offer customers additional services for which we generally
bill on a monthly basis. In addition, we generate license and maintenance
revenue through software licensing agreements. Revenues generated from license
and maintenance fees, together with revenues generated from deployment services
and technical support, represented approximately 26% and 24% of our revenues for
the three months ended March 31, 2008 and 2007, respectively.
Critical
Accounting Policies and Estimates
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. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, income taxes,
impairment of short-term investments, impairment of goodwill and intangible
assets and allowance for doubtful accounts. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable,
the results of which form the basis of making judgments about the carrying
values of assets and liabilities.
There
have been no significant changes in our critical accounting estimates during the
three months ended March 31, 2008 as compared to the critical accounting
policies and estimates disclosed in Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2007.
RESULTS
OF OPERATIONS
Revenue
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
$
|
|
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
$ |
48,112 |
|
|
$ |
46,888 |
|
|
$ |
1,224 |
|
|
|
2.6
|
% |
Total
revenue increased in the three months ended March 31, 2008, as compared to the
same period in 2007, due the increase in service fees and other as a result of
increased revenue from minimum commitment shortfalls. The increase in
broadband revenues from the addition of new customers signed over the last year
and the increase in existing customers’ mobile broadband usage was offset by a
continued decline in dial-up revenue as customers migrated from dial-up to
broadband as the preferred method of connecting to their corporate
networks.
A
breakdown of revenue by type is as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
Change
|
|
|
|
|
2008
|
|
2007
|
|
$ |
|
%
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
$ |
24,074 |
|
|
$ |
15,435 |
|
|
$ |
8,639 |
|
|
56.0
|
% |
As
a percentage of revenue
|
|
|
50.0 |
% |
|
|
32.9 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
11,511 |
|
|
$ |
20,335 |
|
|
$ |
(8,824 |
) |
|
(43.4
|
%) |
As
a percentage of revenue
|
|
|
23.9 |
% |
|
|
43.4 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
12,527 |
|
|
$ |
11,118 |
|
|
$ |
1,409 |
|
|
12.7
|
% |
As
a percentage of revenue
|
|
|
26.0 |
% |
|
|
23.7 |
% |
|
|
|
|
|
|
|
We expect
revenue from dial-up usage to continue to decrease in absolute dollars as well
as a percentage of total revenue as we expect the use of dial-up as a
primary means of enterprise connectivity to continue to decline, but we cannot
reasonably estimate if the decline will be consistent with that seen from 2007
to 2008.
International
revenues accounted for approximately 38% of total revenues for each of the three
months ended March 31, 2008 and 2007, respectively. Substantially all of our
international revenues are generated in the EMEA (Europe, Middle East and
Africa) and Asia Pacific regions. Revenues in the EMEA region represented 27%
and 28% of total revenues for the three months ended March 31, 2008 and 2007,
respectively. Revenues in the Asia Pacific region represented 7% and 8% of total
revenues for the three months ended March 31, 2008 and 2007, respectively. The
only individual foreign country to account for 10% or more of total revenues for
the periods presented was the United Kingdom, which represented approximately
10% and 13% of total revenues for the three months ended March 31, 2008 and
2007, respectively. Substantially all of our revenues to date have been
denominated in U.S. dollars. In the future, some portion of revenues may be
denominated in foreign currencies. No individual customer accounted
for 10% or more of total revenues for the three months ended March 31, 2008 and
2007.
Operating
Expenses
Network
Access
Network
access expenses consist of charges for access, principally by the minute or
otherwise time-based, that we pay to our network service providers and are as
follows (in thousands, except percentages):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
$
|
|
|
|
% |
|
|
|
|
$ |
20,500 |
|
|
$ |
16,270 |
|
|
$ |
4,230 |
|
|
|
26.0 |
% |
|
|
|
|
42.6 |
% |
|
|
34.70 |
% |
|
|
|
|
|
|
|
|
The
growth in network access expenses in the three months ended March 31, 2008 as
compared to the same period in 2007 was primarily due to increased usage of our
virtual network with respect to our broadband services. Although network
access costs for broadband access are higher than those for dial, we expect that
as broadband revenues continue to increase we will have the ability to negotiate
lower rates for access to broadband networks. To the extent revenues
increase, we expect network access expenses to increase in absolute dollars and
remain relative constant as a percentage of revenues.
Network
Operations
Network
operations expenses consist of compensation and benefits for our network
engineering, customer support, network access quality and information technology
personnel, outside consultants, transaction center fees, depreciation of our
network equipment, and certain allocated overhead costs and are as follows (in
thousands, except percentages):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
$
|
|
|
|
% |
|
Network operations
expenses
|
|
$ |
8,674 |
|
|
$ |
8,198 |
|
|
$ |
476 |
|
|
|
5.8 |
% |
|
|
|
|
18.0 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
The
increase in network operations expenses for the three months ended March 31,
2008 from the same period of 2007 in absolute dollars was due primarily to
$308,000 in mobile data card subsidies. In the first quarter of 2007,
we began capitalizing the subsidy of mobile data card costs for cards sold to
customers with which we have a history of profitability. Those capitalized
costs will be amortized over the remaining contract term for each
customer. To the extent that we continue to increase mobile data card
sales, we expect that mobile data card subsidies and capitalized costs will
increase in absolute dollars. The remaining portion of the increase
was due to individually insignificant items. We expect that our
network operations expenses will remain relatively constant for the remainder of
the year.
Research
and Development
Research
and development expenses consist of compensation and benefits for our research
and development personnel, consulting, and certain allocated overhead costs and
are as follows (in thousands, except percentages):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
$
|
|
|
|
% |
|
Research
and development expenses
|
|
$ |
4,456 |
|
|
$ |
5,456 |
|
|
$ |
(1,000 |
) |
|
|
(18.3
|
)% |
|
|
|
|
9.3 |
% |
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
The
decrease in research and development expenses for the three months ended March
31, 2008 from the same period of 2007 in absolute dollars was primarily due to
transition of research and development work to India. This resulted
in a reduction in compensation expense of approximately $918,000 due to lower
compensation rates for India-based employees. The remaining portion
of the decrease was due to individually insignificant items. We
expect that our research and development expenses will remain relatively
constant for the remainder of the year, and to the extent revenues increase,
will decrease slightly as a percentage of revenues.
Sales
and Marketing
Sales and
marketing expenses consist of compensation, benefits, advertising, promotion
expenses, and certain allocated overhead costs and are as follows (in thousands,
except percentages).
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
$
|
|
|
|
% |
|
Sales
and marketing expenses
|
|
$ |
10,309 |
|
|
$ |
13,426 |
|
|
$ |
(3,117 |
) |
|
|
(23.2
|
)% |
|
|
|
|
21.4 |
% |
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
The
decrease in sales and marketing expenses for the three months ended March 31,
2008 as compared to the three months ended March 31, 2007 in absolute
dollars was due primarily to approximately $2.4 million decrease in commission,
compensation and benefits expenses resulting from sales personnel terminated as
part of our 2007 restructuring activities. The decreased sales
personnel also resulted in an additional $114,000 reduction in consulting
expense. Targeted reductions in specific marketing programs further
reduced sales and marketing expenses by approximately $460,000. The
remaining portion of the decrease was due to individually insignificant
items. We expect that our sales and marketing expenses will remain
relatively constant for the remainder of the year, and to the extent revenues
increase, will decrease slightly as a percentage of revenues.
General
and Administrative
General
and administrative expenses consist of compensation and benefits of general and
administrative personnel, legal and accounting expenses, bad debt expense, and
certain allocated overhead costs and are as follows (in thousands, except
percentages):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Change
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$ |
|
% |
General
and administrative expenses
|
|
$ |
5,319 |
|
|
$ |
5,744 |
|
|
$ |
(425 |
) |
|
|
(7.4
|
%) |
|
|
|
|
11.1 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
The
decrease in general and administrative expenses for the three months ended March
31, 2008 as compared to the three months ended March 31, 2007 was primarily
driven by a reduction of bad debt expense of approximately $282,000 and
reduction of rent expense of approximately $240,000 due to facilities abandoned
as part of our restructuring activities in 2007. This decrease is
offset in part by various individually insignificant items. We expect that
our general and administrative expenses will remain relatively constant and
decrease as a percentage of revenue to the extent that revenues
increase.
Restructuring
Charges
By
February 2008, we finalized the aforementioned terminations, settled all
negotiations and paid out the remaining severance related to the
restructuring charge recorded in November 2007. As a result of
finalizing all such terminations as well as some additional charges related to
abandoned facilities, we adjusted the accrual for the difference between initial
estimates of severance and facility liabilities and the final payments
ultimately made. This adjustment of approximately $17,000 was
credited to the restructuring expense in the first quarter of
2008. SFAS No. 146 requires that liabilities recorded related to
abandoned facilities be recorded at fair value. The difference
between the fair value of the liability at the time it was recorded and the
total cash liability is accreted ratably over the expected
term. The accretion of $21,000 and $32,000 for the three months ended
March 31, 2008 and 2007, respectively, is reported in the restructuring
expense line on the condensed consolidated statements of
operations.
Amortization
of Acquired Intangibles
Amortization
of acquired intangibles was approximately $1.1 million for each of the three
months ended March 31, 2008 and 2007, respectively, due to acquisitions
completed prior to 2007.
Non-Operating
Expenses
Interest
Income
Interest
income includes interest income on cash, cash equivalents, and short-term
investment balances. Interest income and other was $589,000 and $739,000 for the
three months ended March 31, 2008 and 2007, respectively. The decrease in
interest income compared to the same period in the prior year was due to the
reduction in cash, cash equivalents, and short-term investment balances as a
result of the repurchase of outstanding common stock and capital
expenditures.
Benefit
from Income Taxes
The
benefit from income taxes was $238,000 and $2.1 million for the three months
ended March 31, 2008 and 2007, respectively. The decrease in benefit from
income taxes is primarily due to the establishment of a valuation allowance
against net deferred tax assets in 2007 due to continued losses in the US
jurisdictions, as compared to the same periods in 2007. The
$238,000 benefit recorded in the three months ended March 31, 2008
primarily relates to the release of foreign tax reserves from prior periods, net
of foreign and minimum taxes in the current period. The effective
tax rate was (15)% and (82)% for the three months ended March 31, 2008 and 2007,
respectively.
Liquidity
and Capital Resources
Since our
initial public offering of common stock in July 2003, our principal source of
funding has been cash from operations. As of March 31, 2008, our principal
source of liquidity was $70.0 million of cash, cash equivalents and short-term
investments as compared to $75.2 million at December 31, 2007.
Net cash
provided by operating activities was $378,000 for the three months ended March
31, 2008, primarily due to the payout of year-end commission accruals offset by
slower payment of vendor invoices. Net cash used in operating activities
of $2.8 million for the three months ended March 31, 2007 was primarily due to
an increase in accounts receivable of $3.6 million resulting from the delayed
receipt of customer payments.
Net cash
used in investing activities was $772,000 for the three months ended March 31,
2008 which was primarily related to the purchases of property and equipment of
$2.6 million partially offset with net maturities of short-term investments of
$1.8 million. The cash provided by investing activities for the three
months ended March 31, 2007 of $36.7 million was primarily related to the sales
of investments for the repurchase of our common stock.
Net cash
used in financing activities for the three months ended March 31, 2008 was $3.1
million, as compared to $6.8 million of cash used in financing activities for
the three months ended March 31, 2007. Net cash used in financing activities for
the first three months of 2008 was primarily due to $3.2 million for the
repurchase of approximately 1.1 million shares of common stock. Net cash used in
financing activities in the first three months of 2007 was primarily due $7.0
million for the repurchase of approximately 1.3 million shares of common
stock.
Commitments
We have
signed contracts with some network service providers under which we have minimum
purchase commitments that expire on various dates through December 2010. Other
than in the approximately 24 countries in which our sole dial-up network service
provider is Equant, we have contracted with multiple network service providers
to provide alternative access points in a given geographic area. In those
geographic areas where we provide access through multiple providers, we are able
to direct users to the network of particular service providers.
In March
2008, we recorded a $323,000 liability for minimum purchase commitment shortfall
with a service provider. Future minimum purchase commitments under
these agreements as of March 31, 2008 are as follows (in
thousands):
|
Year
ending December 31:
|
|
|
|
|
Remaining
2008
|
|
|
3,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,371
|
|
We lease
our facilities under non-cancelable operating leases that expire at various
dates through October 2016. Future minimum lease payments under these operating
leases as of March 31, 2008 are as follows (in thousands):
In
addition, in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement
No. 109 (“FIN 48”), we have recorded a $3.8 million reserve as of
March 31, 2008. Included in these unrecognized tax benefits
is $330,000 for accrued interest. We believe that it is reasonably possible
that unrecognized tax benefits of up to $1.9 million may be settled in the next
twelve months.
FACTORS
AFFECTING OPERATING RESULTS
Set forth below and elsewhere in
this report are risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements
contained in this report.
Risks
Relating to Our Business
If
we are unable to meet the challenges posed by broadband access, our ability to
profitably grow our business will be impaired.
Historically,
we have generated the large majority of our revenues from the sale of enterprise
connectivity services using narrowband technologies such as modem dial-up. In
the United States as well as many other countries, the use of narrowband as a
primary means of enterprise connectivity has significantly declined and is
expected to continue to decline at an accelerated rate over time as broadband
access technologies, such as cable modem, DSL, Wi-Fi, 3G data, Wi-Max and other
wireless technologies, including 3G, become more broadly used. A substantial
portion of the growth of our business has depended on, and will continue to
depend, in part upon our ability to expand the broadband elements of our virtual
network to address these new technologies. Such an expansion may not result in
additional revenues to us. Key challenges in expanding the broadband elements of
our virtual network include:
The broadband access market
continues to develop at
a rapid pace. Although we derive revenues from wired and wireless
broadband “hotspots”, such as particular airports, hotels and convention
centers, the broadband access market, particularly for wireless access,
continues to develop and demand at levels we anticipate may not develop. In
particular, the market for enterprise connectivity services through broadband is
characterized by evolving industry standards and specifications and there is
currently no uniform standard for wireless access. Furthermore, although the use
of wireless frequencies generally does not require a license in the United
States and abroad, if Wi-Fi frequencies become subject to licensing
requirements, or are otherwise restricted, this would substantially impair the
growth of wireless access. Some large telecommunications providers and
other stakeholders that pay large sums of money to license other portions of the
wireless spectrum may seek to have the Wi-Fi spectrum become subject to
licensing restrictions. If the broadband wireless access market does not
develop, we will not be able to generate substantial revenues from broadband
wireless access.
The broadband service provider
market is highly fragmented. There are currently many wired and wireless
broadband service providers that provide coverage in only one or a small number
of hotspots. We have entered into contractual relationships with numerous
broadband service providers. These contracts generally have an initial term of
two years or less. We must continue to develop relationships with many providers
on terms commercially acceptable to us in order to provide adequate coverage for
our customers’ mobile workers and to expand our broadband coverage. We may
also be required to develop additional technologies in order to integrate new
broadband services into our service offering. If we are unable to develop these
relationships or technologies, our ability to grow our business could be
impaired. In addition, if broadband service providers consolidate, our
negotiating leverage with providers may decrease, resulting in increased rates
for access, which could harm our operating results.
Broadband service provider actions
may restrict our ability to sell our services. Some network
providers restrict our ability to sell access to their networks to iPass
resellers whom they consider competitive with them. This can reduce
our revenue by limiting the footprint our partners can make available to their
customers. In addition in some geographies the conventional practice
is for a mobile data (3G) carrier to provide a device on a subsidized
basis. This device cannot easily be used with any network besides
that of the carrier who provides it, which makes it difficult for iPass to
replace that carrier in the account and thus may negatively impact our ability
to sign new enterprise customers to our Mobile Data service.
If demand
for broadband access continues to increase but we do not meet the challenges
outlined above, our ability to grow our business may suffer.
If
we do not accurately predict usage for our Enterprise Flat Rate price plan, our
costs could increase without a corresponding increase in revenue.
We have
transitioned a number of our customers to our Enterprise Flat Rate price plan,
and are signing new customers to this plan. In this plan, our
customers pay a flat rate price to access our services. However, we
continue to pay our providers based on usage. The rate we charge in
our Enterprise Flat Rate price plan is based on statistical predictions of usage
across a pool of users within an enterprise. If actual usage is
higher than expected our profitability will be negatively impacted.
If
we do not deliver valuable services for smart-phones and other
Internet-connected handheld devices our ability to profitably grow our business
may be impaired.
A variety
of smart-phone devices are available in the marketplace enabling individuals to,
among other things, check email and access the Internet. There are a
number of competing operating systems in use on these
smart-phones. Most of these smart-phones are distributed by mobile
operators to their customers for use over their 3G mobile data networks, and the
mobile operators subsidize the purchase price of the devices in exchange for a
commitment to a long-term service contract.
If the
capabilities of smart-phones cause our users to stop using laptops while
traveling, or to use them less often, then our operating results may be
harmed. Further, if we do not develop valuable services for these
smart-phones in a timely fashion, these devices may access the internet and or
be managed without our services, impairing our ability to grow
profitably.
Our
customers require a high degree of reliability in our services, and if we cannot
meet their expectations, demand for our services will decline.
Any
failure to provide reliable network access, uninterrupted operation of our
network and software infrastructure, or a satisfactory experience for our
customers and their mobile workers, whether or not caused by our own failure,
could reduce demand for our services. If outages occur, or if we experience
hardware or software problems, our business could be harmed.
We face strong
competition in our market, which could make it difficult for us to
succeed.
We
compete primarily with facilities-based carriers as well as with other
non-facilities-based network operators. Some of our competitors have
substantially greater resources, larger customer bases, longer operating
histories or greater name recognition than we have. Our device management
services face additional competition from companies that provide security and
policy-based services and software. In addition, we face the
following challenges:
Many of our competitors can compete
on price. Because many of our facilities-based competitors own and
operate physical networks, there may be little incremental cost for them to
provide additional hotspot or telephone connections. As a result, they may offer
remote access services at little additional cost, and may be willing to discount
or subsidize remote access services to capture other sources of revenue. In
contrast, we have traditionally purchased network access from facilities-based
network service providers to enable our remote access service. As a result,
large carriers may sell their remote access services at a lower price. In
addition, new non-facilities-based carriers may enter our market and compete on
price. In either case, we may lose business or be forced to lower our prices to
compete, which could reduce our revenues.
Many of our competitors offer additional services that we
do not, which enables them to compete favorably against us. Some of our
competitors provide services that we do not, such as local exchange and long
distance services, voicemail and digital subscriber line, or DSL, services.
Potential customers that desire these services on a bundled basis may choose to
obtain remote access and device management services from the competitor that
provides these additional services.
Our potential customers may have
other business relationships with our competitors and
consider those relationships when deciding between our services and those of our
competitors. Many of our competitors are large facilities-based carriers
that purchase substantial amounts of products and services, or provide other
services or goods unrelated to remote access services. As a result, if a
potential customer is also a supplier to one of our large competitors, or
purchases unrelated services or goods from our competitor, the potential
customer may be motivated to purchase its remote access services from our
competitor in order to maintain or enhance its business relationship with that
competitor. In addition, telecommunications providers may also offer
Wi-Fi for free as part of a home broadband or other service contract, which also
may force down the prices which the market will bear for our
services.
Users may adopt free Wi-Fi networks
for internet and corporate access. Some venues such as cafes
and hotels offer Wi-Fi internet access as a free amenity for their
customers. Use at these venues may replace iPass “for charge”
sessions and put downward pressure on flat rate prices iPass charges
enterprises for its Wi-Fi remote access services. In addition, if
home users allow others to use their Wi-Fi networks in exchange for free access
to other home networks, this may force down the prices which the market will
bear for our services.
If
our security measures are breached and unauthorized access is obtained to a
customer’s internal network, our virtual network may be perceived as not being
secure and enterprises may curtail or stop using our services.
It is
imperative for our customers that access to their mission critical data is
secure. A key component of our ability to attract and retain customers is the
security measures that we have engineered into our network for the
authentication of the end user’s credentials. These measures are designed to
protect against unauthorized access to our customers’ networks. Because
techniques used to obtain unauthorized access or to sabotage networks change
frequently and generally are not recognized until launched against a target, we
may be unable to anticipate these techniques or to implement adequate
preventative measures against unauthorized access or sabotage. If an actual or
perceived breach of network security occurs, regardless of whether the breach is
attributable to our services, the market perception of the effectiveness of our
security measures could be harmed. To date, we have not experienced any
significant security breaches to our network.
If
our channel partners do not successfully market our services to their customers
or corporate end users, then our revenues and business may be adversely
affected.
We sell
our services directly through our sales force and indirectly through our channel
partners, which include network service providers, systems integrators and value
added resellers. Our business model has changed to rely more on our channel
partners. Our business depends on the efforts and the success of
these channel partners in marketing our services to their customers. Our own
ability to promote our services directly to their customers is often limited.
Many of our channel partners may offer services to their customers that may be
similar to, or competitive with, our services. Therefore, these channel partners
may be reluctant to promote our services. If our channel partners fail
to market our services effectively, our ability to grow our revenue would
be reduced and our business will be impaired.
If
demand for
enterprise remote and mobile connectivity does not continue to expand, we may
experience a shortfall in revenues or earnings or otherwise fail to meet public
market expectations.
The
growth of our business is dependent, in part, upon the increased use of
enterprise connectivity services and our ability to capture a higher proportion
of this market. If the demand for enterprise connectivity services does not
continue to grow, or grows in ways that do not use our services, then we may not
be able to grow our business, maintain profitability or meet public market
expectations. Increased usage of enterprise connectivity services depends on
numerous factors, including:
|
|
•
|
the
willingness of enterprises to make additional information technology
expenditures;
|
|
|
•
|
the
availability of security products necessary to ensure data privacy over
the public networks;
|
|
|
•
|
the
quality, cost and functionality of these services and competing
services;
|
|
|
•
|
the
increased adoption of wired and wireless broadband access methods;
and
|
|
|
•
|
the
proliferation of electronic devices such as handhelds and smartphones and
related applications.
|
If
we are unable to meet the challenges related to the market acceptance and
provision of our device management services, our ability to grow the business
may be harmed.
We expect
that the growth of our business may depend in part upon whether our device
management services will achieve and sustain expected levels of demand and
market acceptance. If enterprises do not perceive the benefits of our device
management services, then the market for these services may not develop at all,
or it may develop more slowly than we expect, either of which could
significantly and adversely affect our growth. Key challenges that we face
related to our provision of these services include the risk that we may
encounter unexpected technical and other difficulties in developing our device
management services which could delay or prevent the development of these
services or certain features of these services; the risk that the rate of
adoption by enterprises of network security software or integrated secure
connectivity solutions will not be as we anticipate, which if slow would reduce
or eliminate the purchase of these services; and the risk that security breaches
may occur, notwithstanding the use of our device management services, by hackers
that develop new methods of avoiding security software. If we do not adequately
address these challenges, our growth and operating results may be negatively
impacted.
There
are approximately 24 countries in which we provide dial-up access only through
Equant. The loss of Equant as a dial-up network service provider would
substantially diminish our ability to deliver global network
access.
In
approximately 24 countries, our sole dial-up network service provider is Equant.
Network usage from access within these countries accounted for less than 1% of
our revenues in the years ended December 31, 2007, 2006 and 2005. If
we lose access to Equant’s network and are unable to replace this access in some
or all of these countries, our revenues would decline. In addition, our ability
to market our services as being global would be impaired, which could cause us
to lose customers. Our agreement with Equant expires in February 2009, but
Equant may terminate the agreement earlier if we materially breach the contract
and fail to cure the breach, or if we become insolvent. In addition, Equant
has no obligation to continue to provide us with access to its network after
February 2009. If Equant were to cease operations or terminate its
arrangements with us, we would be required to enter into arrangements with other
dial-up network service providers, which may not be available. This process
could be costly and time consuming, and we may not be able to enter into these
arrangements on terms acceptable to us.
The
telecommunications industry has experienced a decline, which has caused further
consolidation among network service providers and which may impair our ability
to provide reliable, redundant service coverage and negotiate favorable network
access terms.
The
telecommunications industry has experienced significant technological change and
increased competition that have led to significant declines in network access
pricing. In addition, the revenues of network service providers have declined as
a result of the general economic slowdown. As a result, network service
providers have experienced operating difficulties in the last several years,
resulting in poor operating results and a number of these providers declaring
bankruptcy. As these conditions have continued, some of these service providers
have consolidated and are working to consolidate or otherwise cease operations,
which would reduce the number of network service providers from which we are
able to obtain network access. As this occurs, while we expect that we will
still be able to maintain operations and provide enterprise connectivity
services with a small number of network service providers, we would potentially
not be able to provide sufficient redundant access points in some geographic
areas, which could diminish our ability to provide broad, reliable, redundant
coverage. Further, our ability to negotiate favorable access rates from network
service providers could be impaired, which could increase our network
access expenses and harm our operating results.
If
we fail to address evolving standards and technological changes in the
enterprise connectivity and device management services industry, our business
could be harmed.
The
market for enterprise connectivity, devices (laptops, handhelds, smart-phones)
and device management services is characterized by evolving industry standards
and specifications and rapid technological change, including new access methods,
devices, applications and operating systems. In developing and introducing our
services, we have made, and will continue to make, assumptions with respect to
which features, security standards, performance criteria, access methods,
devices, applications and operating systems will be required or desired by
enterprises and their mobile workers. If we implement technological changes or
specifications that are different from those required or desired, or if we are
unable to successfully integrate required or desired technological changes or
specifications into our wired or wireless services, market acceptance of our
services may be significantly reduced or delayed and our business could be
harmed.
Our
software is complex and may contain errors that could damage our reputation and
decrease usage of our services.
Our
software may contain errors that interrupt network access or have other
unintended consequences. If network access is disrupted due to a software error,
or if any other unintended negative results occur, such as the loss of billing
information, a security breach or unauthorized access to our virtual network,
our reputation could be harmed and our business may suffer. Although we
generally attempt by contract to limit our exposure to incidental and
consequential damages, if these contract provisions are not enforced or
enforceable for any reason, or if liabilities arise that are not effectively
limited, our operating results could be harmed.
Because
much of our business is international, we encounter additional risks, which may
reduce our profitability.
We
generate a substantial portion of our revenues from business conducted
internationally. Revenues from customers domiciled outside of the United
States were both 38% of our revenues in 2007 and in the first three months of
2008, of which approximately 27% and 7% were generated in our EMEA (Europe,
Middle East and Africa) and Asia Pacific regions,
respectively. Although we currently bill for our services in U.S.
dollars, our international operations subject our business to specific risks.
These risks include:
|
|
•
|
longer
payment cycles for foreign customers, including delays due to currency
controls and fluctuations;
|
|
|
•
|
the
impact of changes in foreign currency exchange rates on the attractiveness
of our pricing;
|
|
|
•
|
high
taxes in some foreign jurisdictions;
|
|
|
•
|
difficulty
in complying with Internet-related regulations in foreign
jurisdictions;
|
|
|
•
|
difficulty
in staffing and managing foreign operations; and
|
|
|
•
|
difficulty
in enforcing intellectual property rights and weaker laws protecting these
rights.
|
Any of
these factors could negatively impact our business.
Our
long sales and service deployment cycles require us to incur substantial sales
costs that may not result in related revenues.
Our
business is characterized by a long sales cycle between the time a potential
customer is contacted and a customer contract is signed. Once a customer
contract is signed, if the contract is not a flat-rate contract there is
typically an extended period before the customer’s end users actually begin to
use our services, which is when we begin to realize revenues. As a result,
we may invest a significant amount of time and effort in attempting to secure a
customer which may not result in any revenues. Even if we enter into a
contract, we may have incurred substantial sales-related expenses well before we
recognize any related revenues. If the expenses associated with sales increase,
we are not successful in our sales efforts, or we are unable to generate
associated offsetting revenues in a timely manner, our operating results will be
harmed.
Completed or
future acquisitions or investments could dilute the ownership of our existing
stockholders, cause us to incur significant expenses or harm our operating
results.
Integrating
any newly acquired businesses, technologies or services may be expensive and
time-consuming. For example, we completed the acquisitions of Safe3w, Inc. in
September 2004, Mobile Automation, Inc. in October 2004 and GoRemote in February
2006. To finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings. Additional funds may not
be available on terms that are favorable to us and, in the case of equity
financings, would result in dilution to our stockholders. In the case of
completed or future acquisitions, we may be unable to operate any acquired
businesses profitably or otherwise implement our strategy successfully. If we
are unable to integrate any newly acquired entities, such as GoRemote, or
technologies effectively, our operating results could suffer. Completed
acquisitions by us, such as the aforementioned Safe3w, Inc., Mobile Automation,
Inc. and GoRemote transactions, or future acquisitions by us could also result
in large and immediate write-offs or assumption of debt and contingent
liabilities, either of which could harm our operating results.
If
we are unable to effectively manage future expansion, our business may be
adversely impacted.
We have
experienced, and in the future may continue to experience, rapid growth in
operations which has placed and could continue to place, a significant strain on
our network operations, development of services, internal controls and other
managerial, operating, and financial resources. If we do not manage future
expansion effectively, our business will be harmed. To effectively manage any
future expansion, we will need to improve our operational and financial systems
and managerial controls and procedures, which include the
following:
|
|
•
|
managing
our research and development efforts for new and evolving
technologies;
|
|
|
•
|
expanding
the capacity and performance of our network and software
infrastructure;
|
|
|
•
|
developing
our administrative, accounting and management information systems and
controls; and
|
|
|
•
|
effectively
maintaining coordination among our various departments, particularly as we
expand internationally.
|
If we are unable
to effectively manage our India-based research and development operation, our
business may be adversely impacted. Much of our research and
development activity occurs in India. The remoteness of our India
operation to corporate headquarters, as well as difficulty of acquiring and
retaining talent in India, could impact our ability to release planned new
products on time, which could adversely impact our business.
We
currently are, and in the future may be, subject to securities class action
lawsuits due to decreases in our stock price.
We are at
risk of being subject to securities class action lawsuits if our stock price
declines substantially. Securities class action litigation has often been
brought against a company following a decline in the market price of its
securities. For example, in June 2004, we announced that we would not meet
market expectations regarding our financial performance in the second quarter,
and our stock price declined. Beginning on January 14, 2005, three purported
class action complaints, which were subsequently consolidated, were filed
against iPass and certain of our executive officers, purportedly on behalf of a
class of investors who purchased iPass stock between April 22, 2004 and June 30,
2004. If our stock price declines substantially in the future, we may
be the target of similar litigation. The current, and any future,
securities litigation could result in substantial costs and divert management’s
attention and resources, and could seriously harm our business.
Litigation
arising from disputes involving third parties could disrupt the conduct of our
business.
Because
we rely on third parties to help us develop, market and support our service
offerings, from time to time we have been, and we may continue to be, involved
in disputes with these third parties. If we are unable to resolve these disputes
favorably, our development, marketing or support of our services could be
delayed or limited, which could materially and adversely affect our
business.
If
licenses to third party technologies, including our license with RSA Security,
do not continue to be available to us at a reasonable cost, or at all, our
business and operations may be adversely affected.
We
license technologies from several software providers that are incorporated in
our services. We anticipate that we will continue to license technology from
third parties in the future. In particular, we license encryption technology
from RSA Security. Our license agreement with RSA Security expired in February
2006 and automatically renewed for an additional three-year period. This license
will continue to automatically renew for additional three-year periods upon
expiration, unless terminated by us or by RSA Security. Licenses from third
party technologies, including our license with RSA Security, may not continue to
be available to us at a reasonable cost, or at all. The loss of these
technologies or other technologies that we license could have an adverse effect
on our services and increase our costs or cause interruptions or delays in our
services until substitute technologies, if available, are developed or
identified, licensed and successfully integrated into our services.
Litigation
arising out of intellectual property infringement could be expensive and disrupt
our business.
We cannot
be certain that our products do not, or will not, infringe upon patents,
trademarks, copyrights or other intellectual property rights held by third
parties, or that other parties will not assert infringement claims against us.
From time to time we have been, and we may continue to be, involved in disputes
with these third parties. Any claim of infringement of proprietary rights of
others, even if ultimately decided in our favor, could result in substantial
costs and diversion of our resources. Successful claims against us may result in
an injunction or substantial monetary liability, in either case which could
significantly impact our results of operations or materially disrupt the
conduct of our business. If we are enjoined from using a technology, we will
need to obtain a license to use the technology, but licenses to third-party
technology may not be available to us at a reasonable cost, or at
all.
Risks
Relating to Our Industry
Security
concerns may delay the widespread adoption of the Internet for enterprise
communications, or limit usage of Internet-based services, which would reduce
demand for our products and services.
The
secure transmission of confidential information over public networks is a
significant barrier to further adoption of the Internet as a business medium.
The Internet is a public network and information is sent over this network from
many sources. Advances in computer capabilities, new discoveries in the
field of code breaking or other developments could result in compromised
security on our network or the networks of others. Security and authentication
concerns with respect to the transmission over the Internet of confidential
information, such as corporate access passwords and the ability of hackers to
penetrate online security systems may reduce the demand for our services.
Further, new access methods, devices, applications and operating systems have
also introduced additional vulnerabilities which have been actively exploited by
hackers. Internet-based worms and viruses, computer programs that are
created to slow Internet traffic or disrupt computer networks or files by
replicating through software or operating systems, are examples of events or
computer programs that can disrupt users from using our Internet-based services
and reduce demand for our services, potentially affecting our business and
financial performance. In particular, certain Internet worms and viruses
affected some of our customers and their mobile users, which may have negatively
impacted our revenues. Furthermore, any well-publicized compromises of
confidential information may reduce demand for Internet-based communications,
including our services.
Financial,
political or economic conditions could adversely affect our
revenues.
Our
revenues and profitability depend on the overall demand for enterprise
connectivity services. The weakening of the global economy may lead to decreased
trade and corporate spending on Internet infrastructure. In addition, in the
past, terrorist attacks, including the attacks on the United States and
internationally, have had a significant impact on global economic conditions and
our operations. If there are further acts of terrorism, if hostilities involving
the United States and other countries continue or escalate, or if other future
financial, political, economic and other uncertainties or natural disasters
arise, this could lead to a reduction in travel, including by business travelers
who are substantial users of our services, and continue to contribute to a
climate of economic and political uncertainty that could adversely affect our
revenue growth and financial results.
Government
regulation of, and legal uncertainties regarding, the Internet could harm our
business.
Internet-based
communication services generally are not subject to federal fees or taxes
imposed to support programs such as universal telephone service. Changes in the
rules or regulations of the U.S. Federal Communications Commission or in
applicable federal communications laws relating to the imposition of these fees
or taxes could result in significant new operating expenses for us, and could
negatively impact our business. Any new law or regulation, U.S. or foreign,
pertaining to Internet-based communications services, or changes to the
application or interpretation of existing laws, could decrease the demand for
our services, increase our cost of doing business or otherwise harm our
business. There are an increasing number of laws and regulations pertaining to
the Internet. These laws or regulations may relate to taxation and the quality
of products and services. Furthermore, the applicability to the Internet of
existing laws governing intellectual property ownership and infringement,
taxation, encryption, obscenity, libel, employment, personal privacy, export or
import matters and other issues is uncertain and developing and we are not
certain how the possible application of these laws may affect us. Some of these
laws may not contemplate or address the unique issues of the Internet and
related technologies. Changes in laws intended to address these issues could
create uncertainty in the Internet market, which could reduce demand for our
services, increase our operating expenses or increase our litigation
costs.
Foreign
Currency
Although
we currently bill substantially all of our services in U.S. dollars, our
financial results could be affected by factors such as changes in foreign
currency rates or weak economic conditions in foreign markets. A strengthening
of the dollar could make our services less competitive in foreign markets and
therefore could reduce our revenues. We are billed by and pay the majority of
our network service providers in U.S. dollars. In the future, some portion of
our revenues and costs may be denominated in foreign currencies. To date,
exchange rate fluctuations have had little impact on our operating
results.
Interest
Rate Sensitivity
As of
March 31, 2008, we had cash, cash equivalents, and short-term investments
totaling $70.0 million, as compared to $75.2 million as of December 31, 2007
which decreased primarily due to cash outlays to repurchase shares of our
outstanding common stock. Our investment portfolio consists of money market
funds and securities, asset backed securities, corporate securities, and
government securities, generally due within one to two years. All of our
instruments are held other than for trading purposes. We place investments with
high quality issuers and limit the amount of credit exposure to any one issuer.
These securities are subject to interest rate risks. Based on our portfolio
content and our ability to hold investments to maturity, we believe that a
hypothetical 10% increase or decrease in current interest rates would not
materially affect our interest income.
The
following compares the principal amounts of short-term investments by expected
maturity as of March 31, 2008 (in thousands):
|
|
|
Expected
Maturity Date for Par Value Amounts for the Year Ended December
31,
|
|
|
As
of March 31, 2008
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Total
Cost Value
|
|
|
Total
Fair Value
|
|
|
Government
agencies
|
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
2,511
|
|
|
$
|
2,508
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
2,511
|
|
|
$
|
2,508
|
|
The
following compares the principal amounts of short-term investments by expected
maturity as of December 31, 2007 (in thousands):
|
|
|
Expected
Maturity Date for Par Value Amounts for the Year Ended December
31,
|
|
|
As
of December 31, 2007
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Total
Cost Value
|
|
|
Total
Fair Value
|
|
|
Government
agencies
|
|
$
|
4,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,256
|
|
|
$
|
4,258
|
|
|
Total
|
|
$
|
4,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,256
|
|
|
$
|
4,258
|
|
Our
general policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk. We consider all investments
to be short-term investments, which are classified in the balance sheet as
current assets, because (1) the investments can be readily converted at any time
into cash or into securities with a shorter remaining time to maturity and (2)
the investments are selected for yield management purposes only and we are not
committed to holding the investments until maturity. We determine the
appropriate classification of our investments at the time of purchase and
re-evaluate such designations as of each balance sheet date. All short-term
investments and cash equivalents in our portfolio are classified as
“available-for-sale” and are stated at fair market value, with the unrealized
gains and losses reported as a component of accumulated other comprehensive
income (loss). The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of unrealized discounts to maturity. Such
amortization and accretion is included in interest income and other, net. The
cost of securities sold is based on the specific identification
method.
Limitations of Disclosure Controls
and Procedures and Internal Control Over Financial
Reporting
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within iPass have been
detected.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) that are designed to provide reasonable assurance that information
required to be disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Our
management evaluated (with the participation of our chief executive officer and
chief financial officer) our disclosure controls and procedures, and concluded
that our disclosure controls and procedures were effective as of March 31, 2008,
to provide reasonable assurance that the information required to be disclosed by
us in reports that we file or submit under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
quarter ended March 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Not
applicable.
We
include in Part I, Item 2. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors Affecting Operating Results” a
description of risk factors related to our business in order to enable readers
to assess, and be appropriately apprised of, many of the risks and
uncertainties applicable to the forward-looking statements made in this
Quarterly Report on Form 10-Q. We do not claim that the risks and uncertainties
set forth in that section are all of the risks and uncertainties facing our
business, but do believe that they reflect the more important ones.
The risk
factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2007, as filed with the SEC on March 17, 2008, have not
substantively changed.
On
February 12, 2008, iPass announced that its Board of Directors approved a
two-year stock repurchase program which authorizes iPass to repurchase up to
$30.0 million of its outstanding common stock. A total of $3.2 million of
stock was repurchased in the first quarter of 2008, leaving approximately $26.8
million that may be used for future repurchases, as set forth in the table
below:
Issuer
Purchases of Equity Securities(1)
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased under the
Program
|
|
January
1, 2008 to January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
February
1, 2008 to February 28, 2008
|
|
|
|
|
|
|
|
|
|
|
March
1, 2008 to March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See
first paragraph of this section for the information required to be described in
the footnote to this table.
|
Exhibit
Number
|
|
Description
|
| |
2.1 |
|
Agreement
of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
Internet Communications, Inc. dated December 9, 2005.
(3)
|
| |
3.1 |
|
Amended
and Restated Certificate of Incorporation (1)
|
| |
3.2 |
|
Bylaws,
as amended (4)
|
| |
4.1 |
|
Reference
is made to Exhibits 3.1 and 3.2
|
| |
4.2 |
|
Specimen
stock certificate (2)
|
| |
10.1 |
|
iPass
2008 Annual Executive Management Bonus Plan(5)
|
| |
10.2 |
|
Bonus
arrangement with Anurag Lal(6)
|
| |
31.1 |
|
Certification of the Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| |
31.2 |
|
Certification of the Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| |
32.1 |
|
Certification of the Chief
Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
32.2 |
|
Certification of the Chief
Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
____________
(1) Filed
as an exhibit to iPass’ Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 (Commission No. 000- 50327), filed November 13, 2003, and
incorporated herein by reference.
(2) Filed
as an exhibit to iPass’ Registration Statement on Form S-1 (No. 333-102715) and
incorporated herein by reference.
(3) Filed
as an exhibit to the Current Report on Form 8-K filed with the SEC on December
12, 2005, and incorporated by reference here. All schedules and exhibits (other
than Exhibit A) to the Agreement of Merger have been omitted. Copies of such
schedules and exhibits will be furnished supplementally to the SEC upon
request.
(4) Filed
as exhibit 3.1 to iPass’ Current Report on Form 8-K (Commission No. 000- 50327),
filed November 9, 2007, and incorporated herein by reference.
(5) Incorporated
by reference from the description in Item 5.02 of iPass’ Current Reports on Form
8-K (Commission No. 000- 50327), filed February 15, 2008 and March 27,
2008.
(6) Incorporated
by reference from the description in Item 5.02 of iPass’ Current Report on
Form 8-K (Commission No. 000- 50327), filed February 22, 2008.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
iPass
Inc.
|
|
|
|
|
|
Date: May
9, 2008
|
|
/s/ Frank
E. Verdecanna
|
|
|
Vice
President and Chief Financial Officer (duly authorized officer and
principal financial officer)
|
|
Exhibit
Number
|
|
Description
|
| |
2.1 |
|
Agreement
of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
Internet Communications, Inc. dated December 9, 2005.
(3)
|
| |
3.1 |
|
Amended
and Restated Certificate of Incorporation (1)
|
| |
3.2 |
|
Bylaws,
as amended (4)
|
| |
4.1 |
|
Reference
is made to Exhibits 3.1 and 3.2
|
| |
4.2 |
|
Specimen
stock certificate (2)
|
| |
10.1 |
|
iPass
2008 Annual Executive Management Bonus Plan(5)
|
| |
10.2 |
|
Bonus
arrangement with Anurag Lal(6)
|
| |
31.1 |
|
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| |
31.2 |
|
Certification of the Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
| |
32.1 |
|
Certification of the Chief
Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
32.2 |
|
Certification of the Chief
Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
____________
(1) Filed
as an exhibit to iPass’ Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 (Commission No. 000- 50327), filed November 13, 2003, and
incorporated herein by reference.
(2) Filed
as an exhibit to iPass’ Registration Statement on Form S-1 (No. 333-102715) and
incorporated herein by reference.
(3) Filed
as an exhibit to the Current Report on Form 8-K filed with the SEC on December
12, 2005, and incorporated by reference here. All schedules and exhibits (other
than Exhibit A) to the Agreement of Merger have been omitted. Copies of such
schedules and exhibits will be furnished supplementally to the SEC upon
request.
(4) Filed
as exhibit 3.1 to iPass’ Current Report on Form 8-K (Commission No. 000- 50327),
filed November 9, 2007, and incorporated herein by reference.
(5) Incorporated
by reference from the description in Item 5.02 of iPass’ Current Reports on Form
8-K (Commission No. 000- 50327), filed February 15, 2008 and March 27,
2008.
(6) Incorporated by reference from
the description in Item 5.02 of iPass’ Current Report on Form 8-K
(Commission No. 000-
50327), filed February 22, 2008.