UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

      

FORM 10-Q

      

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2013

Commission File No. 1-33762

      

   

LOGO

inContact, Inc.

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

87-0528557

(State or other jurisdiction of

incorporation or organization)

   

(IRS Employer

Identification No.)

7730 S. Union Park Avenue, Suite 500, Salt Lake City, UT 84047

(Address of principal executive offices and Zip Code)

(801) 320-3200

(Registrant’s telephone number, including area code)

      

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

   

 

¨ Large accelerated filer

   

x Accelerated filer

   

¨ Non-accelerated filer

   

¨ Smaller reporting company

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

   

 

Class

      

Outstanding as of July 22, 2013

Common Stock, $0.0001 par value

      

54,660,323 shares

   

      

      

   

   

   

   


   

TABLE OF CONTENTS

ITEM NUMBER AND CAPTION

   

 

PART I – FINANCIAL INFORMATION

   

   

Page

   

   

   

   

Item 1. Financial Statements

   

   

   

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (unaudited)  

3

   

   

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)  

4

   

   

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2013 (unaudited)  

5

   

   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)  

6

   

   

Notes to Condensed Consolidated Financial Statements (unaudited)  

7

   

   

   

   

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

14

   

   

   

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

22

   

   

   

   

Item 4. Controls and Procedures  

23

   

   

   

   

PART II – OTHER INFORMATION

   

   

   

   

   

Item 1. Legal Proceedings  

24

   

   

   

   

Item 1A. Risk Factors  

24

   

   

   

   

Item 5. Other Information  

 

 24

   

   

   

   

Item 6. Exhibits  

24

   

   

   

   

Signatures  

25

   

   

       

 

 2 

   


   

INCONTACT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS—(Unaudited)

(in thousands, except per share data)

   

 

   

June 30,
2013

   

      

December 31,
2012

   

ASSETS

   

   

   

      

   

   

   

Current assets:

   

   

   

      

   

   

   

Cash and cash equivalents

$

51,069

      

      

$

48,836

      

Restricted cash

   

81

      

      

   

81

      

Accounts and other receivables, net of allowance for uncollectible accounts of $ 1,161 and $831, respectively

   

18,128

      

      

   

18,043

      

Other current assets

   

3,426

      

      

   

3,278

      

Total current assets

   

72,704

      

      

   

70,238

      

Property and equipment, net

   

23,221

      

      

   

19,862

      

Intangible assets, net

   

1,051

      

      

   

1,156

      

Goodwill

   

4,086

      

      

   

4,086

      

Other assets

   

1,355

      

      

   

1,005

      

Total assets

$

102,417

      

      

$

96,347

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

      

   

   

   

Current liabilities:

   

   

   

      

   

   

   

Trade accounts payable

$

8,482

      

      

$

7,247

      

Accrued liabilities

   

5,278

      

      

   

5,638

      

Accrued commissions

   

2,030

      

      

   

1,610

      

Current portion of deferred revenue

   

3,018

      

      

   

1,973

      

Current portion of debt and capital lease obligations

   

3,606

      

      

   

2,691

      

Total current liabilities

   

22,414

      

      

   

19,159

      

Long-term portion of debt and capital lease obligations

   

3,434

      

      

   

2,859

      

Deferred rent

   

405

      

      

   

383

      

Deferred revenue

   

3,292

      

      

   

1,958

      

Total liabilities

   

29,545

      

      

   

24,359

      

Commitments and contingencies

   

   

   

      

   

   

   

Stockholders’ equity:

   

   

   

      

   

   

   

Common stock, $0.0001 par value; 100,000 shares authorized; 54,148 and 52,886 shares issued and 54,148 and 52,886 outstanding as of June 30, 2013 and December 31, 2012, respectively

   

5

      

      

   

5

      

Additional paid-in capital

   

159,373

      

      

   

154,184

      

Accumulated deficit

   

(86,506

)  

      

   

(82,201

Total stockholders’ equity

   

72,872

      

      

   

71,988

      

Total liabilities and stockholders’ equity

$

102,417

      

      

$

96,347

      

See accompanying notes to condensed consolidated financial statements.

 

 3 

   


   

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS—(Unaudited)

(in thousands, except per share data)

   

 

   

Three months
ended June 30,

   

   

Six months
ended June 30,

   

   

2013

   

      

2012

   

   

2013

   

      

2012

   

Net revenue:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Software

$

16,185

      

      

$

12,828

      

   

$

32,357

      

      

$

25,130

      

Telecom

   

14,898

      

      

   

13,312

      

   

   

30,371

      

      

   

26,566

      

Total net revenue

   

31,083

      

      

   

26,140

      

   

   

62,728

      

      

   

51,696

      

Costs of revenue:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Software

   

6,344

      

      

   

5,259

      

   

   

12,779

      

      

   

10,349

      

Telecom

   

9,610

      

      

   

9,196

      

   

   

19,643

      

      

   

18,423

      

Total costs of revenue

   

15,954

      

      

   

14,455

      

   

   

32,422

      

      

   

28,772

      

Gross profit

   

15,129

      

      

   

11,685

      

   

   

30,306

      

      

   

22,924

      

Operating expenses:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Selling and marketing

   

9,008

      

      

   

6,898

      

   

   

17,430

      

      

   

13,918

      

Research and development

   

2,964

      

      

   

2,279

      

   

   

5,735

      

      

   

4,116

      

General and administrative

   

4,811

      

      

   

4,049

      

   

   

9,856

      

      

   

8,143

      

Total operating expenses

   

16,783

      

      

   

13,226

      

   

   

33,021

      

      

   

26,177

      

Loss from operations

   

(1,654

)  

      

   

(1,541

   

   

(2,715

)  

      

   

(3,253

Other income (expense):

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Interest income

   

—  

      

      

   

3

      

   

   

—  

      

      

   

3

      

Interest expense

   

(90

)  

      

   

(108

   

   

(150

)  

      

   

(202

Other expense

   

—  

      

      

   

(99

   

   

(25

)  

      

   

(146

Total other expense

   

(90

)  

      

   

(204

   

   

(175

)  

      

   

(345

Loss before income taxes

   

(1,744

)  

      

   

(1,745

   

   

(2,890

)  

      

   

(3,598

Income tax expense

   

(32

)  

      

   

(15

   

   

(49

)  

      

   

(30

Net loss and comprehensive loss

$

(1,776

)  

      

$

(1,760

   

$

(2,939

)  

      

$

(3,628

Net loss per common share:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic and diluted

$  

(0.03

)  

      

$

(0.04

   

$  

(0.05

)  

      

$

(0.08

Weighted average common shares outstanding:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic and diluted

   

54,196

      

      

   

44,561

      

   

   

53,897

      

      

   

44,374

      

See accompanying notes to condensed consolidated financial statements.

   

 

 4 

   


   

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY—(Unaudited)

(in thousands)

   

 

   


Common Stock

   

   

Additional
Paid-in

Capital

   

   


Treasury Stock

   

   

Accumulated

Deficit

   

   

Total

   

   

Shares

   

   

Amount

   

   

   

Shares

   

   

Amount

   

   

   

Balance at December 31, 2012

   

52,886

   

   

$

5

   

   

$

154,184

   

   

   

—  

   

   

$

—  

   

   

$

(82,201

)

   

$

71,988

   

Common stock issued for options exercised

   

1,246

   

   

   

—  

   

   

   

3,575

   

   

   

406

   

   

   

2,253

   

   

   

(979

)

   

   

4,849

   

Common stock issued under the employee stock purchase plan

   

16

   

   

   

—  

   

   

   

103

   

   

   

19

   

   

   

108

   

   

   

(17

   

)

   

   

194

   

Issuance of restricted stock

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

67

   

   

   

370

   

   

   

(370

)

   

   

—  

   

Common stock received for settlement of receivables

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(492

)

   

   

(2,731

)

   

   

—  

   

   

   

(2,731

)

Stock-based compensation

   

—  

   

   

   

—  

   

   

   

1,511

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

1,511

   

Net loss

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(2,939

)

   

   

(2,939

)

Balance at June 30, 2013

   

54,148

   

   

$

5

   

   

$

159,373

   

   

   

—  

   

   

$

—  

   

   

$

(86,506

)

   

$

72,872

   

See accompanying notes to condensed consolidated financial statements.

 

 5 

   


   

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

   

 

   

Six months ended June 30,

   

2013

   

   

2012

   

Cash flows from operating activities:

   

   

   

   

   

   

   

Net loss

$

(2,939

)

   

$

(3,628

)

Adjustments to reconcile net loss to net cash from operating activities:

   

   

   

   

   

   

   

Depreciation of property and equipment

   

2,929

   

   

   

2,382

   

Amortization of software development costs

   

2,312

   

   

   

1,961

   

Amortization of intangible assets

   

105

   

   

   

133

   

Amortization of note financing costs

   

9

   

   

   

18

   

Interest accretion

   

3

   

   

   

8

   

Stock-based compensation

   

1,511

   

   

   

850

   

Loss on disposal of property and equipment

   

87

   

   

   

146

   

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

Accounts and other receivables, net

   

(2,816

)

   

   

(766

)

Other current assets

   

(148

)

   

   

(616

)

Other non-current assets

   

(339

)

   

   

(147

)

Trade accounts payable

   

741

   

   

   

494

   

Accrued liabilities

   

(366

)

   

   

426

   

Accrued commissions

   

420

   

   

   

247

   

Deferred rent

   

28

   

   

   

40

   

Deferred revenue

   

2,379

   

   

   

1,182

   

Net cash provided by operating activities

   

3,916

   

   

   

2,730

   

Cash flows used in investing activities:

   

   

   

   

   

   

   

Gross decrease in restricted cash

   

—  

   

   

   

165

   

Purchase of intangible assets

   

—  

   

   

   

(125

)

Payments made for deposits

   

(11

)

   

   

(19

)

Acquisition of assets

   

(2,296

)

   

   

—  

   

Capitalized software development costs

   

(2,880

)

   

   

(2,760

)

Purchases of property and equipment

   

(3,017

)

   

   

(2,473

)

Net cash used in investing activities

   

(8,204

)

   

   

(5,212

)

Cash flows from financing activities:

   

   

   

   

   

   

   

Proceeds from exercise of options

   

4,849

   

   

   

2,078

   

Proceeds from sale of stock under employee stock purchase plan

   

194

   

   

   

121

   

Borrowings under term loan

   

4,000

   

   

   

—  

   

Payment of debt financing fees

   

(43

)

   

   

(29

)

Principal payments under debt and capital lease obligations

   

(1,479

)

   

   

(1,417

)

Borrowings under the revolving credit notes

   

—  

   

   

   

6,000

   

Payments under the revolving credit notes

   

(1,000

)

   

   

(5,500

)

Net cash provided by financing activities

   

6,521

   

   

   

1,253

   

Net increase (decrease) in cash and cash equivalents

   

2,233

   

   

   

(1,229

)

Cash and cash equivalents at beginning of period

   

48,836

   

   

   

17,724

   

Cash and cash equivalents at end of period

$

51,069

   

   

$

16,495

   

Supplemental schedule of non-cash investing and financing activities:

   

   

   

   

   

   

   

Payments due for property and equipment included in trade accounts payable

$

116

   

   

$

112

   

Property and equipment and other assets financed through capital leases

$

—  

   

   

$

1,284

   

Common stock received for settlement of accounts receivable

$

2,731

   

   

$

—  

   

Acquisitions of assets included in accounts payable

$

450

   

   

$

—  

   

See accompanying notes to condensed consolidated financial statements.

   

 

 6 

   


   

INCONTACT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

inContact, Inc. (“inContact,” “we,” “us,” “our,” or the “Company”) is incorporated in the state of Delaware. We provide cloud contact center software solutions through our inContact® portfolio, an advanced contact handling and performance management software application. Our services provide a variety of connectivity options for carrying inbound calls to our inContact portfolio or linking agents to our inContact applications. We provide customers the ability to monitor agent effectiveness through our user survey tools and the ability to efficiently monitor their agent needs. We are also an aggregator and provider of telecommunications services. We contract with a number of third party providers for the right to resell the various telecommunication services and products they provide, and then offer all of these services to the customers. These services and products allow customers to buy only the telecommunications services they need, combine those services in a customized enhanced contact center package, receive one bill for those services, and call a single point of contact if a service problem or billing issue arises.

Basis of Presentation

These unaudited condensed consolidated financial statements of inContact and its subsidiaries have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, so long as the statements are not misleading. In the opinion of management, these financial statements and accompanying notes contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 18, 2013. The results of operations for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013. Our significant accounting policies are set forth in Note 1 to the consolidated financial statements in the 2012 Annual Report on Form 10-K.

Revenue Recognition

Revenue is recognized when all of the following four criteria are met: (1) persuasive evidence of an arrangement exists, (2) the fee is fixed or determinable, (3) collection is reasonably assured, and (4) delivery has occurred or services have been rendered.

Revenue is determined and recognized based on the type of service provided for the customer as follows:

 

·   inContact portfolio of services. Revenue is derived from the delivery of any of our software services within the inContact portfolio which are provided on a monthly recurring subscription basis. Because customers do not have the right to take possession of the software, these arrangements are considered service contracts and are not within the scope of Industry Topic 985, Software. Monthly recurring subscription charges are generally billed in arrears and recognized for the period in which they are earned. For subscription contracts with multiple elements (hosted software, training, installation and long distance services), we follow the guidance provided in Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition for Multiple-Element Arrangement. In addition to the monthly recurring subscription revenue, revenue is also derived on a non-recurring basis for professional services included in implementing or improving a customer’s inContact portfolio experience. Because our professional services, such as training and installation, are not considered to have standalone value, we defer revenue for upfront fees received for professional services in multiple element arrangements and recognize such fees as revenue over the estimated life of the customer. Professional services sold separately (i.e. not sold contemporaneously with the negotiation of a subscription contract) are recognized as revenue over the period that services are provided. Fees for telecommunications services in multiple element arrangements within the inContact portfolio are based on usage and are recognized as revenue in the same manner as fees for telecommunications services discussed in the following paragraph. Also included is revenue related to the quarterly minimum purchase commitments from a related party reseller (Note 12).

 

 

 7 

   


   

   

 

·   Telecommunications services. Revenue is derived from telecommunications services, such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party telecommunications providers. Our network is the backbone of our inContact portfolio and allows us to provide the all-in-one inContact solution. Revenue for the telecommunications usage is derived based on customer specific rate plans and the customer’s call usage and is recognized in the period the call is initiated. Customers are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date.

Internal Use Software

Certain costs incurred for the development of internal use software are capitalized and are included as internal use software in property and equipment in the consolidated balance sheets. These costs include the costs associated with coding, software configuration, upgrades and enhancements that are incurred during the application development stage.

   

NOTE 2. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

Subsequent to the issuance of our third quarter 2012 Condensed Consolidated Financial Statements, we determined that errors existed in our previously issued Condensed Consolidated Financial Statements. As a result, the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss and Cash Flows for the three and six months ended June 30, 2012, included in this Condensed Consolidated Financial Statements, have been restated to correct for such errors, as described below.

Management’s decision to restate the aforementioned financial statements was made as a result of the identification of billing errors related to the accounting for amounts of Federal Universal Service Fund (“USF”) surcharges recovered in excess of amounts allowed under Federal Communications Commission (“FCC”) rules.

The principal effect of the restatement adjustment increased our net loss by $75,000 and $194,000 (including reducing Telecom segment revenue by the same amount) for the three and six months ended June 30, 2012, respectively, and increased accrued liabilities by $194,000 for the six months ended June 30, 2012. Management has concluded that these corrections are immaterial.

The impact of the restatement adjustments on specific line items on our previously issued Condensed Consolidated Statements of Operations and Comprehensive Loss and Cash Flows for the three and six months ended June 30, 2012, are presented below (in thousands, except per share amounts):

   

 

   

Three Months Ended June 30, 2012

   

   

Six Months Ended June 30, 2012

   

   

As Previously
Reported

   

   

Restatement
Adjustments

   

   

As Restated

   

   

As Previously
Reported

   

   

Restatement
Adjustments

   

   

As Restated

   

Statements of Operations and Comprehensive Loss Items:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Telecom net revenue

$

13,387

      

   

$

(75

   

$

13,312

      

   

$

26,760

      

   

$

(194

   

$

26,566

      

Total net revenue

   

26,215

      

   

   

(75

   

   

26,140

      

   

   

51,890

      

   

   

(194

   

   

51,696

      

Gross profit

   

11,760

      

   

   

(75

   

   

11,685

      

   

   

23,118

      

   

   

(194

   

   

22,924

      

Loss from operations

   

(1,466

   

   

(75

   

   

(1,541

   

   

(3,059

   

   

(194

   

   

(3,253

Loss before income taxes

   

(1,670

   

   

(75

   

   

(1,745

   

   

(3,404

   

   

(194

   

   

(3,598

Net loss and comprehensive loss

$

(1,685

   

$

(75

   

$

(1,760

   

$

(3,434

   

$

(194

   

$

(3,628

Net loss per common share:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic and diluted

$

(0.04

   

$

—  

      

   

$

(0.04

   

$

(0.08

   

$

—  

      

   

$

(0.08

   

   

 

   

   

 

   

Six Months Ended June 30, 2012

   

   

As Previously
Reported

   

   

Restatement
Adjustments

   

   

As Restated

   

Statements of Cash Flows Items:

   

   

   

   

   

   

   

   

   

   

   

Net loss

$

(3,434

   

$

(194

   

$

(3,628

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

   

   

   

   

Accrued liabilities

$

232

      

   

$

194

      

   

$

426

      

   

   

 

 

 8 

   


   

NOTE 3. ASSET ACQUISITION

In March 2013, we acquired technology for $1.9 million in cash, which we plan to use to add mobile and social features in our existing applications. In April and June 2013 development earnout measures were achieved resulting in additional payments totaling $800,000.  The value of the assets acquired was recorded as in process technology and is included in capitalized software.

   

NOTE 4. BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE

Basic earnings per common share is computed by dividing the net income or loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing the net income or loss by the sum of the weighted-average number of common shares outstanding plus the weighted average common stock equivalents, which would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, warrants and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury method.

As a result of incurring a net loss for the three and six months ended June 30, 2013 and 2012, no potentially dilutive securities are included in the calculation of diluted earnings per share because such effect would be anti-dilutive. We had potentially dilutive securities representing approximately 3.9 million and 4.5 million shares of common stock at June 30, 2013 and 2012, respectively.

   

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the term loans approximates fair value as the interest rates are based on market value.

   

NOTE 6. INTANGIBLES

Intangible assets consisted of the following (in thousands):

   

 

   

June 30, 2013

   

   

December 31, 2012

   

   

Gross
assets

   

   

Accumulated
amortization

   

   

Intangible
assets, net

   

   

Gross
assets

   

   

Accumulated
amortization

   

   

Intangible
assets, net

   

Customer lists acquired

$

16,495

      

      

$

(16,302

)  

      

$

193

      

      

$

16,495

      

      

$

(16,276

)  

      

$

219

      

Technology and patents

   

10,231

      

      

   

(10,110

)  

      

   

121

      

      

   

10,231

      

      

   

(10,070

)  

      

   

161

      

Trade names and trade marks

   

1,194

      

      

   

(511

)  

      

   

683

      

      

   

1,194

      

      

   

(472

)  

      

   

722

      

Domain name

   

54

      

      

   

—  

      

      

   

54

      

      

   

54

      

      

   

—  

      

      

   

54

      

Total

$

27,974

      

      

$

(26,923

)  

      

$

1,051

      

      

$

27,974

      

      

$

(26,818

)  

      

$

1,156

      

We recorded amortization expense as follows (in thousands):

   

 

Three months ended June 30,

   

   

Six months ended June 30,

   

2013

      

   

2012

      

   

2013

      

   

2012

   

$

52

   

   

$

53

   

   

$

105

   

   

$

133

   

Based on the recorded intangibles at June 30, 2013, estimated amortization expense is expected to be $105,000 during the remainder of 2013, $210,000 in 2014, $140,000 in 2015, $133,000 in 2016, $84,000 in 2017 and $324,000 thereafter.

   

NOTE 7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

   

 

   

June 30,
2013

   

      

December 31,
2012

   

Accrued payroll and other compensation

$

3,052

      

      

$

3,061

      

Excess recovery reserve

   

1,450

      

      

   

1,818

      

Accrued vendor charges

   

259

      

      

   

259

      

Other

   

517

      

      

   

500

      

Total accrued liabilities

$

5,278

      

      

$

5,638

      

   

 

 

 9 

   


   

   

NOTE 8. DEBT AND CAPITAL LEASE OBLIGATIONS

Revolving Credit

During the six months ended June 30, 2013, we paid $1.0 million on our revolving credit loan agreement (“Revolving Credit Agreement”) with Zions First National Bank (“Zions”) and did not draw from the Revolving Credit Agreement. We had no outstanding balance on our Revolving Credit Agreement at June 30, 2013.    

The Revolving Credit Agreement contains certain covenants, which were established by amendment to the Revolving Credit Agreement in April 2012. As of June 30, 2013, the most significant covenants require that the aggregate value of cash, cash equivalents and marketable securities shall not be less than the outstanding balance on the Revolving Credit Agreement plus $2.5 million, and if at any time the aggregate value is less than the minimum liquidity position, a minimum quarterly EBITDA of $2.5 million, calculated as of the last day of each calendar quarter, is required. We are in compliance with the covenants at June 30, 2013.

In June 2013, we amended certain terms of the Revolving Credit Agreement with Zions (“Amendment”).  The Amendment increased the allowable balance outstanding from $8.5 million to $15.0 million, decreased the interest rate from 4.5% to 4.0% per annum above the ninety day LIBOR, extended the term from July 2014 to July 2015 and the financial covenant of minimum quarterly EBITDA was changed from $1.8 million to $2.5 million. This financial covenant is only applicable if net cash is less the outstanding balance on the Revolving Credit Agreement plus $2.5 million.

Promissory Note

During the three and six months ended June 30, 2013, we paid $209,000 and $417,000, respectively, of the promissory note payable (“Promissory Note”) to Zions.  The Promissory Note balance was $1.1 million at June 30, 2013.

Term Loan

In April 2012, we entered into a term loan agreement (“2012 Term Loan”) with Zions for $4.0 million, which matures in May 2016. We drew $4.0 million on the 2012 Term Loan in April 2013. Interest, is paid monthly in arrears and the principal will be paid in 36 equal monthly installments commencing in September 2013. The interest rate under the 2012 Term Loan is 4.5% per annum above the ninety day London InterBank Offered Rate (“LIBOR”) rate, adjusted as of the date of any change in the ninety day LIBOR. The financial covenants are the same as the Revolving Credit Agreement.

In June 2013, we also entered into a term loan agreement (“2013 Term Loan”) with Zions for $4.0 million, which matures in June 2017.  We are allowed to draw on the 2013 Term Loan through June 2014 and the interest rate is 4.25% per annum above the ninety day LIBOR.  The principal will be paid in 36 equal monthly installments commencing in August 2014 and we may prepay any portion of the 2013 Term Loan without penalty or premium.  The 2013 Term Loan is collateralized by the same assets as the Revolving Credit Agreement.  We have not drawn from the 2013 Term Loan as of June 30, 2013.

During the three and six months ended June 30, 2013, we paid $111,000 of the term loans to Zions. The term loans balance was $3.9 million at June 30, 2013.

Capital Leases

We paid $951,000 of capital lease obligations during the six months ended June 30, 2013. The balance of the capital lease obligations was $2.1 million at June 30, 2013.

   

NOTE 9. CAPITAL TRANSACTIONS

We received proceeds of $4.8 million from the exercise of 1.7 million options, of which 406,000 were issued from treasury stock, during the six months ended June 30, 2013. We issued 35,000 shares of common stock, of which 19,000 shares were issued from treasury stock, for proceeds of $211,000 under the employee stock purchase plan during the six month period ended June 30, 2013.

We received 492,000 shares of our common stock for payment of $2.7 million in receivables from a related party reseller (Note 12), which was included in treasury stock at cost.

   

NOTE 10. COMMITMENTS AND CONTINGENCIES

In May 2009, we were served in a lawsuit titled California College, Inc., et al., v. UCN, Inc., et al. In the lawsuit, California College alleges that (1) we made intentional and/or negligent misrepresentations in connection with the sale of our services from

 

 

 10 

   


   

Insidesales.com, Inc., another defendant in the lawsuit, (2) that we breached its service contract with California College and the contract between California College and Insidesales.com by failing to deliver contracted services and product and failing to abide by implied covenants of good faith and fair dealing, and (3) the conduct of the Company interfered with prospective economic business relations of California College with respect to enrolling students. California College is seeking damages, in an amount to be proven at trial, in excess of $20.0 million. Pursuant to a motion filed by Insidesales.com, California College filed an amended complaint that has been answered by Insidesales.com and us. Furthermore, Insidesales.com and inContact filed cross-claims against one another, which they subsequently agreed to dismiss with prejudice. In October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been disclosed and remain confidential. In June of 2013, California College amended its damages claim to $14.4 million, of which approximately $5.0 million was alleged pre-judgment interest. In July of 2013, the court issued an oral ruling on inContact’s Motion for Partial Summary Judgment.  The court determined that factual disputes exist as to several of the claims, but dismissed California College’s cause of action for intentional interference with prospective economic relations and the claim for prejudgment interest.  Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9 million.  We have denied all of the substantive allegations of the complaint and cross-claim and intends to defend the claims vigorously. Management believes the claims against inContact are without merit and no liability has been recorded.

We are the subject of certain other legal matters considered incidental to our business activities. It is the opinion of management that the ultimate disposition of these matters will not have a material impact on our financial position, liquidity or results of operations.

   

NOTE 11. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as expense using the graded-vesting method over the period in which the award is expected to vest. Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the results for the year is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

We recorded stock-based compensation expense (including stock options, warrants, restricted stock, restricted stock units and employee stock purchase plan) to the same departments where cash compensation was recorded as follows (in thousands):

   

 

   

Three months ended June 30,

   

      

Six months ended June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Costs of revenue

$

103

      

      

$

78

      

      

$

252

      

      

$

208

      

Selling and marketing

   

242

      

      

   

88

      

      

   

458

      

      

   

170

      

Research and development

   

139

      

      

   

112

      

      

   

270

      

      

   

235

      

General and administrative

   

252

      

      

   

63

      

      

   

531

      

      

   

237

      

Total stock-based compensation expense

$

736

      

      

$

341

      

      

$

1,511

      

      

$

850

      

We utilize the Black-Scholes model to determine the estimated fair value for grants of stock options and warrants. The Black-Scholes model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the option’s expected term, expected dividend yield, the risk-free interest rate and the price volatility of the underlying stock. The expected dividend yield is based on our historical dividend rates. Risk-free interest rates are based on U.S. treasury rates. Volatility is based on historical stock prices over a period equal to the estimated life of the option.

The grant date fair value of the restricted stock and restricted stock unit awards was calculated using the closing market price of the Company’s common stock on the grant date, with the compensation expense amortized over the vesting period of the restricted stock awards, net of estimated forfeitures.

We estimated the fair value of options granted under our employee stock-based compensation arrangements at the date of grant using the Black-Scholes model using the following weighted-average assumptions as follows:

   

   

 

   

Six months ended June 30,

   

   

2013

   

   

2012

   

Dividend yield

   

None

      

   

   

None

      

Volatility

   

53

   

   

71

Risk-free interest rate

   

0.69

   

   

0.60

Expected life (years)

   

4.1

      

   

   

4.1

      

 

 

 11 

   


   

During the six months ended June 30, 2013, we granted 232,000 stock options with exercise prices ranging from $4.83 to $8.62 and a weighted-average fair value of $2.93 and 81,000 restricted stock awards with a weighted-average fair value of $7.51. During the six months ended June 30, 2012, we granted 144,000 stock options with exercise prices ranging from $4.44 to $5.87 and a weighted-average fair value of $2.69.

As of June 30, 2013, there was $2.7 million of unrecognized compensation cost related to non-vested stock-based compensation awards granted under our stock-based compensation plans. The compensation cost is expected to be recognized over a weighted average period of 0.9 years.

   

NOTE 12. RELATED PARTY TRANSACTIONS

On February 13, 2013, we amended the Siemens Enterprise Communications (“SEN”) reseller agreement which modified SEN’s minimum purchase commitments to be $4.5 million for 2012, $7.0 million for 2013 and extended the minimum purchase commitment obligation into 2014 in the amount of up to $5.0 million, which may be credited up to $1.0 million in 2014 in consideration for up to a $1.0 million investment by SEN in sales and marketing of our cloud contact center software solutions. Under the amendment SEN relinquished exclusivity in Europe, the Middle East and Asia (“EMEA”). Additionally, sales made by other resellers in EMEA will go toward satisfying SEN’s minimum purchase commitment obligation.

In February 2013, we agreed that through 2013, SEN could make payment of its obligations with shares of our common stock held by SEN’s parent company at a price per share, discounted 9.0% from the volume weighted average price, averaged over a specified period of five trading days prior to the payment date. $2.7 million in revenue earned from SEN during 2012 was paid by the delivery of 492,000 shares of our common stock by SEN in 2013. In May 2013, the parent company of SEN sold its remaining 6.4 million shares of our common stock in the open market.  Accordingly, future payments by SEN under the reseller agreement will be in cash.  In that regard, SEN paid to inContact a total of $3.5 million in May 2013, which will be applied to future minimum commitment payment obligations of SEN under the reseller agreement.  Of the $3.5 million, $1.7 million was applied to the receivable related to the March 31, 2013 minimum commitment and $583,000 to the receivable related to the June 30, 2013 minimum commitment.

We recognized, under this arrangement, software revenue of $1.7 million and $3.4 million during the three and six months ended June 30, 2013 and $1.0 million and $1.8 million during three and six months ended June 30, 2012, respectively, which included revenue from resold software services and amounts up to the quarterly minimum revenue purchase commitments. Under the arrangement, revenue from resold software services reduces the reseller’s obligation up to the amount of the quarterly minimum purchase commitments.

We paid the Chairman of the Board of Directors (the “Chairman”) $7,000 per month during the six months ended June 30, 2013 and 2012 for consulting, marketing and capital raising activities. We owed the Chairman $7,000 at June 30, 2013 and December 31, 2012.

   

NOTE 13. SEGMENTS

We operate under two business segments: Software and Telecom. The Software segment includes all monthly recurring revenue related to the delivery of our software applications, plus the associated professional services and setup fees, and revenue related to quarterly minimum purchase commitments, from a related party reseller (Note 12). The Telecom segment includes all voice and data long distance services provided to customers.

Management evaluates segment performance based on operating data (revenue, costs of revenue, and other operating expenses). Management does not evaluate and manage segment performance based on assets.

For segment reporting, we classify operating expenses as either “direct” or “indirect.” Direct expense refers to costs attributable solely to either selling and marketing efforts or research and development efforts. Indirect expense refers to costs that management considers to be overhead in running the business. In evaluating segment performance, management evaluates expenditures for both selling and marketing and research and development efforts at the segment level without the allocation of overhead expenses, such as rent, utilities and depreciation on property and equipment.

 

 

 12 

   


   

Operating segment revenues and profitability for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):

   

 

   

Three months ended June 30, 2013

   

      

Three months ended June 30, 2012

   

   

Software

   

      

Telecom

   

      

Consolidated

   

      

Software

   

      

Telecom

   

      

Consolidated

   

Net revenue

$

16,185

      

      

$

14,898

      

      

$

31,083

      

      

$

12,828

      

   

$

13,312

      

   

$

26,140

      

Costs of revenue

   

6,344

      

      

   

9,610

      

      

   

15,954

      

      

   

5,259

      

   

   

9,196

      

   

   

14,455

      

Gross profit

   

9,841

      

      

   

5,288

      

      

   

15,129

      

      

   

7,569

      

   

   

4,116

      

   

   

11,685

      

Gross margin

   

61

%

      

   

35

%

      

   

49

%

      

   

59

   

   

31

   

   

45

Operating expenses:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Direct selling and marketing

   

7,560

      

      

   

947

      

      

   

8,507

      

      

   

5,718

      

   

   

767

      

   

   

6,485

      

Direct research and development

   

2,714

      

      

   

—  

      

      

   

2,714

      

      

   

2,048

      

   

   

—  

      

   

   

2,048

      

Indirect

   

4,708

      

      

   

854

      

      

   

5,562

      

      

   

3,995

      

   

   

698

      

   

   

4,693

      

Total operating expenses

   

14,982

      

      

   

1,801

      

      

   

16,783

      

      

   

11,761

      

   

   

1,465

      

   

   

13,226

      

(Loss) income from operations

$

(5,141

)  

      

$

3,487

      

      

$

(1,654

)  

      

$

(4,192

   

$

2,651

      

   

$

(1,541

   

 

   

Six months ended June 30, 2013

   

      

Six months ended June 30, 2012

   

   

Software

   

      

Telecom

   

      

Consolidated

   

      

Software

   

      

Telecom

   

      

Consolidated

   

Net revenue

$

32,357

      

   

$

30,371

      

   

$

62,728

      

   

$

25,130

      

   

$

26,566

      

   

$

51,696

      

Costs of revenue

   

12,779

   

   

   

19,643

   

   

   

32,422

   

   

   

10,349

   

   

   

18,423

      

   

   

28,772

      

Gross profit

   

19,578

   

   

   

10,728

   

   

   

30,306

   

   

   

14,781

   

   

   

8,143

      

   

   

22,924

      

Gross margin

   

61

%

   

   

35

%

   

   

48

%

   

   

59

   

   

31

   

   

44

Operating expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Direct selling and marketing

   

14,523

      

   

   

1,938

      

   

   

16,461

      

   

   

11,523

      

   

   

1,610

      

   

   

13,133

      

Direct research and development

   

5,253

      

   

   

—  

      

   

   

5,253

      

   

   

3,702

      

   

   

—  

      

   

   

3,702

      

Indirect

   

9,454

      

   

   

1,853

      

   

   

11,307

      

   

   

7,828

      

   

   

1,514

      

   

   

9,342

      

Total operating expenses

   

29,230

      

   

   

3,791

      

   

   

33,021

      

   

   

23,053

      

   

   

3,124

      

   

   

26,177

      

(Loss) income from operations

$

(9,652

)  

   

$

6,937

      

   

$

(2,715

)  

   

$

(8,272

   

$

5,019

      

   

$

(3,253

   

   

NOTE 14. SUBSEQUENT EVENTS

In December 2012, we entered into an exclusive option and purchase agreement with Transcend Products LLC (“Transcend”) pertaining to the development and potential acquisition of certain assets consisting primarily of software that enables enhanced functionality for our existing service offerings.  The option to purchase certain assets of Transcend was exercised and the purchase closed in July 2013 for $3.0 million in cash and 376,000 shares of our common stock valued at $3.0 million.  Furthermore, if the functionality generates certain levels of revenue during the two-year period beginning in August 2013, we will pay to Transcend an additional earnout payment of $1.0 million.

   

   

   

           

 

 

 13 

   


   

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited December 31, 2012 consolidated financial statements and notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Annual Report on Form 10-K, filed separately with the Securities and Exchange Commission.  The discussion and analysis gives effect to the restatement of prior period Condensed Consolidated Financial Statements referred to in Note 2 – “Restatement of Prior Year Financial Statements” to the Condensed Consolidated Financial Statements contained in Part I, Item 1.

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as expansion and growth of our operations and other such matters are forward-looking statements. Any one or a combination of factors could materially affect our operations and financial condition. These factors include competitive pressures, success or failure of marketing programs, changes in pricing and availability of services and products offered to customers, legal and regulatory initiatives affecting software or long distance service, and conditions in the capital markets. Forward-looking statements made by us are based on knowledge of our business and the environment in which we operate as of the date of this report. Because of the factors discussed in our 2012 Annual Report on Form 10-K under Item 1A “Risk Factors,” and factors disclosed in subsequent reports filed with the Securities and Exchange Commission, actual results may differ from those in the forward-looking statements.

OVERVIEW

inContact began in 1997 as a reseller of telecommunications services and has evolved to become a leading provider of cloud contact center software solutions. We help contact centers around the world create effective customer experiences through our powerful portfolio of cloud contact center contact routing, self-service and agent optimization software solutions. Our services and software solutions enable contact centers to operate more efficiently, optimize the cost and quality of every customer interaction, create new pathways to profit and ensure ongoing customer-centric business improvement and growth.

We began offering cloud solutions to the contact center market in 2005. Our dynamic technology platform provides our customers a pay-as-you-go solution without the costs and complexities of premise-based systems. Our proven cloud delivery model provides compelling total cost of ownership savings over premise-based technology by reducing upfront capital expenditures, eliminating the expense of system management and maintenance fees, while providing agility that enables businesses to scale their technology as they grow.

DEVELOPMENTS

In 2011, we entered into a reseller agreement for our cloud contact center software solutions with Siemens Enterprise Communications (“SEN”). During 2012, SEN resold substantially fewer software services than it had originally anticipated. In February 2013, we amended certain provisions of our reseller agreement with SEN, allowing SEN more time to implement a revised go to market sales plan, with the objective of increasing contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments. No assurances can be given that the plan will be fully implemented or be successful. The revised minimum purchase commitments total $4.5 million of net software revenue in 2012, $7.0 million in 2013 and up to $5.0 million in 2014, which may be credited up to $1.0 million in 2014, in consideration for up to a $1.0 million investment by SEN in sales and marketing of our cloud contact center software solutions.  Under the amendment SEN relinquished exclusivity in Europe, the Middle East and Asia (“EMEA”). Additionally, sales made by other resellers in EMEA will go toward satisfying SEN’s minimum purchase commitment obligation.

In February 2013, we agreed that through 2013, SEN could make payment of its obligations with shares of our common stock held by SEN’s parent company at a price per share, discounted 9.0% from the volume weighted average price, averaged over a specified period of five trading days prior to the payment date. $2.7 million in revenue earned from SEN during 2012 was paid by the delivery of 492,000 shares of our common stock by SEN in 2013. In May 2013, the parent company of SEN sold its remaining 6.4 million shares of our common stock in the open market. Accordingly, future payments by SEN under the reseller agreement will be in cash. In that regard, SEN paid to inContact a total of $3.5 million in May 2013, which will be applied to future minimum commitment payment obligations of SEN under the reseller agreement.  Of the $3.5 million, $1.7 million was applied to the receivable related to the March 31, 2013 minimum commitment and $583,000 to the receivable related to the June 30, 2013 minimum commitment.  

Our primary financial objective is to generate recurring cloud software revenue from sustainable sources by investing in various cloud software growth initiatives, as we believe we are in the early stages of a large, long-term market. We continue to invest in sales and marketing initiatives, which resulted in our largest quarterly sales and marketing expenditures of $9.0 million during the second quarter of 2013.

 

 

 14 

   


   

SOURCES OF REVENUE

We derive our revenues from two major business activities: (1) delivery and support of our inContact portfolio of software solutions and associated professional services and (2) reselling telecommunication services. Our primary business focus is marketing and selling our inContact portfolio.

Software

Software delivery and support of our inContact portfolio is provided on a monthly recurring subscription basis. Monthly recurring charges are billed in arrears and recognized for the period in which they are earned. In addition to the monthly recurring revenue, revenue is also received on a non-recurring basis for professional implementation services or on a recurring basis related to improving a customer’s contact center efficiency and effectiveness metrics, as it relates to utilization of the inContact portfolio. Customers access cloud software and data through a secure Internet connection. Support services include technical assistance for our software products and product upgrades and enhancements on a when and if available basis. Our telecommunications and data network is fundamental to our inContact portfolio and allows us to provide the all-in-one inContact solution. Software service revenue also includes revenue related to minimum purchase commitments through July 2014, from a related party reseller.

Telecom

We derive revenue from telecommunications services such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party telecommunications providers. Revenue for transactional long distance usage is derived based on customer specific rate plans and the customer’s call usage and is recognized in the period the call is initiated. Customers are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date.

COSTS OF REVENUE AND OPERATING EXPENSES

Costs of Revenue

Costs of revenue consist primarily of payments to third party long distance service providers for resold telecommunication services to our customers. Costs of revenue also include salaries (including stock-based compensation) and related expenses for our software services delivery, support and professional services organizations, equipment depreciation relating to our services, amortization of acquired intangible assets, amortization of capitalized internal use software development costs, and allocated overhead, such as rent, utilities and depreciation on property and equipment. As a result, overhead expenses are included in costs of revenue and each operating expense category. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services. We anticipate that we will incur additional costs for long distance service providers, hosting, support, employee salaries and related expenses, to support delivery of our software solutions in the future.

Selling and Marketing

Selling and marketing expenses consist primarily of salaries (including stock-based compensation) and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, expenses, travel costs and allocated overhead. Since our Software segment revenue is delivered and therefore recognized over time, we have experienced a delay between increasing sales and marketing expenses and the recognition of the corresponding revenue. We believe it is important to continue investing in selling and marketing to create brand awareness and lead generation opportunities, to increase market share and to support the resellers. Accordingly, we expect selling and marketing expenses to increase in absolute dollars as we continue to support growth initiatives.

Research and Development

Research and development expenses consist primarily of the non-capitalized portion of salary (including stock-based compensation) and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, quality assurance, market research, testing, product management and allocated overhead. We expect research and development expenses to increase in absolute dollars in the future as we intend to release new features and functionality on a frequent basis, expand our content offerings, upgrade and extend our service offerings and develop new technologies.

General and Administrative

General and administrative expenses consist primarily of salary (including stock-based compensation) and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate

 

 

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expenses and allocated overhead. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and other corporate expenses related to the growth of our business and operations in the future. As such, we expect general and administrative expenses to increase in absolute dollars.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 and 2012

The following is a tabular presentation of our condensed consolidated operating results for the three months ended June 30, 2013 compared to our condensed consolidated operating results for the three months ended June 30, 2012 (in thousands):

   

 

   

2013

   

      

2012

   

   

$  Change

   

   

% Change

   

Net revenue

$

31,083

      

      

$

26,140

      

   

$

4,943

   

   

   

19

Costs of revenue

   

15,954

      

      

   

14,455

      

   

   

1,499

   

   

   

10

Gross profit

   

15,129

      

      

   

11,685

      

   

   

3,444

   

   

   

   

   

Gross margin

   

49

      

   

45

   

   

   

   

   

   

   

   

Operating expenses:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Selling and marketing

   

9,008

      

      

   

6,898

      

   

   

2,110

   

   

   

31

Research and development

   

2,964

      

      

   

2,279

      

   

   

685

   

   

   

30

General and administrative

   

4,811

      

      

   

4,049

      

   

   

762

   

   

   

19

Total operating expenses

   

16,783

      

      

   

13,226

      

   

   

3,557

   

   

   

   

   

Loss from operations

   

(1,654

      

   

(1,541

   

   

(113

   

   

   

   

Other expense

   

(90

      

   

(204

   

   

114

   

   

   

(56

%)

Loss before income taxes

   

(1,744

      

   

(1,745

   

   

1

   

   

   

   

   

Income tax expense

   

(32

      

   

(15

   

   

(17

   

   

   

   

Net loss

$

(1,776

      

$

(1,760

   

$

(16

   

   

   

   

Revenue

Total revenues increased $4.9 million or 19% to $31.1 million during the three months ended June 30, 2013 compared to revenues of $26.1 million during the same period in 2012. The increase relates to an increase of $3.4 million in Software segment revenue is primarily a result of the selling and marketing efforts we have undertaken to expand the inContact portfolio of software services and revenue related to minimum purchase commitments from a reseller.  Telecom segment revenue increased $1.6 million as the increase of Telecom revenue associated with our inContact portfolio customers exceeded the attrition of our Telecom only customers.

We recognized $1.7 million of software revenue during the three months ended June 30, 2013 compared to $1.0 million during the same period in 2012, under our reseller agreement with SEN, which principally represent revenue from SEN’s minimum purchase commitments. Under the arrangement, revenue from resold software services reduces SEN’s obligation up to the amount of the quarterly minimum purchase commitments. These minimum purchase commitments were negotiated, in part to mitigate the risks associated with the investment in infrastructure to support our expanded reseller sales and marketing efforts initiated in 2011 and expire at the end of July 2014. If revenue from resold software services does not meet the minimum purchase commitment at the end of July 2014, there will be a reduction in software revenue from that reseller beginning in August 2014 to the extent the revenue from resold software services is less than the minimum purchase commitment at the end of July 2014.

During 2012 and the first half of 2013, the amount of software services resold in EMEA was substantially less than SEN’s minimum purchase commitment.  In February 2013, we amended certain provisions of our reseller agreement with SEN, allowing SEN more time to implement a revised go to market sales plan, with the objective of increasing contract revenue progressively to a level commensurate with the amount of the quarterly minimum purchase commitments.  No assurances can be given that the plan will be fully implemented or be successful. The revised minimum purchase commitments total $4.5 million of net software revenue in 2012, $7.0 million in 2013 and up to $5.0 million in 2014, which may be credited up to $1.0 million in 2014, in consideration for up to a $1.0 million investment by SEN in sales and marketing of our cloud contact center software solutions.  Under the amendment SEN relinquished exclusivity in EMEA. Additionally, sales made by other resellers in EMEA will go toward satisfying SEN’s minimum purchase commitment obligation.

Costs of revenue and gross margin

Costs of revenue increased $1.5 million or 10% to $16.0 million during the three months ended June 30, 2013 compared to $14.5 million for the same period in 2012. Our gross margin increased four percentage points to 49% during the three months ended June 30, 2013 from 45% during the three months ended June 30, 2012.  The increase in revenue from our inContact portfolio and the minimum

 

 

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purchase commitment offset increased costs attributable to greater professional service and customer service personnel costs incurred to service larger mid-market and enterprise customers and to support resellers, international infrastructure investments initiated in 2011 and increased amortization of previously capitalized software development costs.  In addition, lower Telecom costs due to increased efficiencies in call routing related to an investment in technology and lower negotiated direct costs contributed to the gross margin increase.

Selling and marketing

Selling and marketing expenses increased $2.1 million or 31% to $9.0 million during the three months ended June 30, 2013 from $6.9 million for the same period in 2012. This increase is primarily a result of headcount additions for direct and channel sales employees, increased commissions as a result of increased revenue, and to a lesser extent, higher levels of investment in marketing efforts to create increased awareness of our services as well as increased lead generation efforts for our Software segment.

Research and development

Research and development expense increased $685,000 or 30% to $3.0 million during the three months ended June 30, 2013 from $2.3 million during the same period in 2012. The increase relates to our efforts to expand our content offerings, upgrade and extend our service offerings and develop new technologies.

General and administrative

General and administrative expense increased $762,000 or 19% to $4.9 million during the three months ended June 30, 2013 compared to $4.0 million during the same period in 2012. The increase is primarily due to increased costs incurred to support our domestic and international business expansion.

Other expense

Other expense decreased $114,000 to $90,000 during the three months ended June 30, 2013 from $204,000 for the same period in 2012.  The difference is primarily due to a decrease of net interest expense for the second quarter of 2013 compared to the comparable period in 2012 due to lower average outstanding balances on our term notes payable and capital lease obligations in the second quarter of 2013 as compared to the same period in 2012.

Income taxes

Income taxes consist of various state income taxes and foreign taxes remained consistent for the three months ended June 30, 2013 compared to the same period in 2012.

Six Months Ended June 30, 2013 and 2012

The following is a tabular presentation of our condensed consolidated operating results for the six months ended June 30, 2013 compared to our condensed consolidated operating results for the six months ended June 30, 2012 (in thousands):

   

 

   

2013

   

      

2012

   

   

$ Change

   

   

% Change

   

Net revenue

$

62,728

   

      

$

51,696

   

   

$

11,032

   

   

   

21

%

Costs of revenue

   

32,422

   

      

   

28,772

   

   

   

3,650

   

   

   

13

%

Gross profit

   

30,306

   

      

   

22,924

   

   

   

7,382

   

   

   

   

   

Gross margin

   

48

%

      

   

44

%

   

   

   

   

   

   

   

   

Operating expenses:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Selling and marketing

   

17,430

   

      

   

13,918

   

   

   

3,512

   

   

   

25

%

Research and development

   

5,735

   

      

   

4,116

   

   

   

1,619

   

   

   

39

%

General and administrative

   

9,856

   

      

   

8,143

   

   

   

1,713

   

   

   

21

%

Total operating expenses

   

33,021

   

      

   

26,177

   

   

   

6,844

   

   

   

   

   

Loss from operations

   

(2,715

)

      

   

(3,253

)

   

   

538

   

   

   

   

   

Other expense

   

(175

)

      

   

(345

)

   

   

170

   

   

   

(49

%)

Loss before income taxes

   

(2,890

)

      

   

(3,598

)

   

   

708

   

   

   

   

   

Income tax expense

   

(49

)

      

   

(30

)

   

   

(19

   

   

   

   

Net loss

$

(2,939

)

      

$

(3,628

)

   

$

689

   

   

   

   

   

 

 

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Revenue

Total revenues increased $11.0 million or 21% to $62.7 million during the six months ended June 30,