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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2020


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

For the transition period from to

Commission file number: 001-34391

LOGMEIN, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-1515952
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

320 Summer Street Boston, Massachusetts		02210
(Address of principal executive offices)		(Zip Code)

781-638-9050

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	LOGM	NASDAQ Global Select Market

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 27, 2020, there were 49,028,170 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

LOGMEIN, INC.

INDEX

		PAGE NUMBER

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2020		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020		4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2020		5
Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2019 and 2020		6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2020		7
Notes to Condensed Consolidated Financial Statements		8
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk		37
ITEM 4: Controls and Procedures		38

PART II. OTHER INFORMATION

ITEM 1: Legal Proceedings		39
ITEM 1A: Risk Factors		40
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds		55
ITEM 6: Exhibits		56
Signatures		57

LogMeIn, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

	December 31, 2019			June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	128,005		$	249,464
Accounts receivable (net of allowances of $3,744 and $4,078 as of December 31, 2019 and June 30, 2020, respectively)		107,595			108,959
Prepaid expenses and other current assets		89,351			103,585
Total current assets		324,951			462,008
Property and equipment, net		99,157			97,911
Operating lease assets		99,026			94,539
Restricted cash		1,883			1,796
Intangibles, net		840,427			736,107
Goodwill		2,414,287			2,414,229
Other assets		68,272			85,203
Deferred tax assets		7,994			9,090
Total assets	$	3,855,997		$	3,900,883
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	52,104		$	43,965
Current operating lease liabilities		18,470			19,346
Accrued liabilities		161,996			151,198
Deferred revenue, current portion		390,087			448,755
Total current liabilities		622,657			663,264
Long-term debt		200,000			200,000
Deferred revenue, net of current portion		18,076			9,616
Deferred tax liabilities		170,482			151,684
Non-current operating lease liabilities		88,674			84,768
Other long-term liabilities		15,400			20,394
Total liabilities		1,115,289			1,129,726
Commitments and contingencies (Note 11)
Preferred stock, $0.01 par value — 5,000 shares authorized, 0 shares outstanding as of December 31, 2019 and June 30, 2020
Equity:
Common stock, $0.01 par value—145,000 shares authorized; 57,294 and 57,749 shares issued; and 48,573 and 49,028 outstanding as of December 31, 2019 and June 30, 2020, respectively		573			577
Additional paid-in capital		3,369,893			3,393,750
Retained earnings (accumulated deficit)		4,931			12,687
Accumulated other comprehensive income (loss)		684			(484	)
Treasury stock, at cost - 8,721 shares		(635,373	)		(635,373	)
Total equity		2,740,708			2,771,157
Total liabilities and equity	$	3,855,997		$	3,900,883

See notes to condensed consolidated financial statements.

LogMeIn, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2020			2019			2020
Revenue	$	313,064		$	350,727		$	620,764		$	673,110
Cost of revenue		80,767			93,497			158,455			178,375
Gross profit		232,297			257,230			462,309			494,735
Operating expenses
Research and development		40,379			37,170			81,096			77,049
Sales and marketing		120,825			121,521			235,459			247,731
General and administrative		34,539			30,291			68,425			63,990
Restructuring charge		956			3,032			9,430			21,573
Amortization of acquired intangibles		39,390			33,287			78,889			66,615
Total operating expenses		236,089			225,301			473,299			476,958
Income (loss) from operations		(3,792	)		31,929			(10,990	)		17,777
Interest income		415			225			1,076			492
Interest expense		(2,126	)		(1,132	)		(4,269	)		(2,812	)
Other income (expense), net		(107	)		(374	)		(367	)		65
Income (loss) before income taxes		(5,610	)		30,648			(14,550	)		15,522
(Provision for) benefit from income taxes		(912	)		(11,607	)		(1,011	)		(7,766	)
Net income (loss)	$	(6,522	)	$	19,041		$	(15,561	)	$	7,756
Net income (loss) per share:
Basic	$	(0.13	)	$	0.39		$	(0.31	)	$	0.16
Diluted	$	(0.13	)	$	0.39		$	(0.31	)	$	0.16
Weighted average shares outstanding:
Basic		49,768			48,887			50,201			48,744
Diluted		49,768			49,186			50,201			49,189
Cash dividends declared and paid per share:	$	0.325		$	—		$	0.65		$	—

See notes to condensed consolidated financial statements.

LogMeIn, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2020		2019			2020
Net income (loss)	$	(6,522	)	$	19,041	$	(15,561	)	$	7,756
Other comprehensive gain (loss):
Net translation gains (losses)		2,872			3,058		247			(1,168	)
Comprehensive income (loss)	$	(3,650	)	$	22,099	$	(15,314	)	$	6,588

See notes to condensed consolidated financial statements.

LogMeIn, Inc.

Condensed Consolidated Statements of Equity

(In thousands)

	Three Months Ended June 30, 2019
	Common Stock								Retained			Accumulated
	Number of Shares			Amount		Additional Paid-In Capital			Earnings (accumulated deficit)			Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at April 1, 2019		50,166		$	569	$	3,322,862		$	58,487		$	(492	)	$	(486,490	)	$	2,894,936
Issuance of common stock upon exercise of stock options		1		—			41		—			—			—				41
Net issuance of common stock upon vesting of restricted stock units		238			2		(8,867	)	—			—			—				(8,865	)
Stock-based compensation	—			—			18,203		—			—			—				18,203
Treasury stock		(839	)	—		—			—			—				(66,038	)		(66,038	)
Dividends on common stock	—			—		—				(16,182	)	—			—				(16,182	)
Net income (loss)	—			—		—				(6,522	)	—			—				(6,522	)
Cumulative translation adjustments	—			—		—			—				2,872		—				2,872
Balance at June 30, 2019		49,566		$	571	$	3,332,239		$	35,783		$	2,380		$	(552,528	)	$	2,818,445

	Six Months Ended June 30, 2019
	Common Stock											Accumulated
	Number of Shares			Amount		Additional Paid-In Capital			Retained Earnings			Other Comprehensive Income (Loss)		Treasury Stock			Total Equity
Balance at January 1, 2019		50,692		$	567	$	3,316,603		$	84,043		$	2,133	$	(428,658	)	$	2,974,688
Issuance of common stock upon exercise of stock options		2		—			82		—			—		—				82
Net issuance of common stock upon vesting of restricted stock units		425			4		(17,680	)	—			—		—				(17,676	)
Stock-based compensation	—			—			33,234		—			—		—				33,234
Treasury stock		(1,553	)	—		—			—			—			(123,870	)		(123,870	)
Dividends on common stock	—			—		—				(32,699	)	—		—				(32,699	)
Net income (loss)	—			—		—				(15,561	)	—		—				(15,561	)
Cumulative translation adjustments	—			—		—			—				247	—				247
Balance at June 30, 2019		49,566		$	571	$	3,332,239		$	35,783		$	2,380	$	(552,528	)	$	2,818,445

	Three Months Ended June 30, 2020
	Common Stock							Retained			Accumulated
	Number of Shares		Amount		Additional Paid-In Capital			Earnings (accumulated deficit)			Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at April 1, 2020		48,619	$	573	$	3,384,902		$	(6,354	)	$	(3,542	)	$	(635,373	)	$	2,740,206
Issuance of common stock upon exercise of stock options		6		—		266			—			—			—			266
Net issuance of common stock upon vesting of restricted stock units		304		3		(11,354	)		—			—			—			(11,351	)
Issuance of common stock for employee stock purchase plan		99		1		6,504			—			—			—			6,505
Stock-based compensation		—		—		13,432			—			—			—			13,432
Net income (loss)		—		—		—			19,041			—			—			19,041
Cumulative translation adjustments		—		—		—			—			3,058			—			3,058
Balance at June 30, 2020		49,028	$	577	$	3,393,750		$	12,687		$	(484	)	$	(635,373	)	$	2,771,157

	Six Months Ended June 30, 2020
	Common Stock									Accumulated
	Number of Shares		Amount		Additional Paid-In Capital			Retained Earnings		Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at January 1, 2020		48,573	$	573	$	3,369,893		$	4,931	$	684		$	(635,373	)	$	2,740,708
Issuance of common stock upon exercise of stock options		10		—		351			—		—			—			351
Net issuance of common stock upon vesting of restricted stock units		346		3		(13,291	)		—		—			—			(13,288	)
Issuance of common stock for employee stock purchase plan		99		1		6,504			—		—			—			6,505
Stock-based compensation		—		—		30,293			—		—			—			30,293
Net income (loss)		—		—		—			7,756		—			—			7,756
Cumulative translation adjustments		—		—		—			—		(1,168	)		—			(1,168	)
Balance at June 30, 2020		49,028	$	577	$	3,393,750		$	12,687	$	(484	)	$	(635,373	)	$	2,771,157

See notes to condensed consolidated financial statements.

LogMeIn, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended June 30,
	2019			2020
Cash flows from operating activities
Net income (loss)	$	(15,561	)	$	7,756
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation		33,234			30,293
Depreciation and amortization		152,333			138,873
Benefit from deferred income taxes		(22,786	)		(19,942	)
Other, net		1,131			1,359
Changes in assets and liabilities, excluding effect of acquisitions:
Accounts receivable		4,110			(3,121	)
Prepaid expenses and other current assets		4,777			(15,226	)
Other assets		(13,546	)		(17,039	)
Accounts payable		15,507			(9,318	)
Accrued liabilities		16,226			(2,508	)
Deferred revenue		30,250			52,655
Other long-term liabilities		(2,308	)		4,873
Net cash provided by (used in) operating activities		203,367			168,655
Cash flows from investing activities
Purchases of property and equipment		(22,081	)		(18,104	)
Intangible asset additions		(18,745	)		(19,078	)
Cash paid for acquisitions, net of cash acquired		(22,463	)		—
Net cash provided by (used in) investing activities		(63,289	)		(37,182	)
Cash flows from financing activities
Proceeds from issuance of common stock upon option exercises and employee stock purchase plan		82			6,856
Payments of withholding taxes in connection with restricted stock unit vesting		(17,676	)		(13,288	)
Payment of contingent consideration		(1,857	)		(1,294	)
Dividends paid on common stock		(32,699	)		—
Purchase of treasury stock		(124,232	)		—
Net cash provided by (used in) financing activities		(176,382	)		(7,726	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(792	)		(2,375	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(37,096	)		121,372
Cash, cash equivalents and restricted cash, beginning of period		150,492			129,888
Cash, cash equivalents and restricted cash, end of period	$	113,396		$	251,260
Supplemental disclosure of cash flow information
Cash paid for interest	$	3,218		$	3,645
Cash paid (refunds received) from income taxes	$	4,258		$	24,174
Noncash investing and financing activities
Purchases of property and equipment included in accounts payable and accrued liabilities	$	5,659		$	4,713
Purchases of treasury stock included in accrued liabilities	$	1,427		$	—
Fair value of contingent consideration in connection with acquisition, included in accrued liabilities	$	1,347		$	—
Lease assets obtained (relieved) and related operating lease liabilities	$	(3,096	)	$	4,903

See notes to condensed consolidated financial statements.

LogMeIn, Inc.

Notes to Condensed Consolidated Financial Statements

1. Nature of the Business

LogMeIn, Inc., which is referred to herein as LogMeIn or the Company, provides a portfolio of cloud-based unified communications and collaboration, identity and access management, and customer engagement and support solutions designed to simplify how people connect with each other and the world around them to drive meaningful interactions, deepen relationships, and create better outcomes for individuals and businesses. The Company is headquartered in Boston, Massachusetts with additional locations in North America, South America, Europe, Asia and Australia.

In December 2019, the Company entered into an Agreement and Plan of Merger, or the Merger Agreement, with Logan Parent, LLC, or Parent, and Logan Merger Sub, Inc., a wholly-owned subsidiary of Parent, or Merger Sub. Pursuant to the terms of the Merger Agreement, Merger Sub would merge with and into LogMeIn, in a transaction which the Company refers to herein as the Merger. Parent and Merger Sub are controlled by Francisco Partners, a technology-focused global private equity firm, and Evergreen Coast Capital Corp., the technology-focused global private equity affiliate of Elliott Management Corporation, an investment management firm. The Company’s stockholders voted to adopt the Merger Agreement at a special meeting of stockholders on March 12, 2020. In July 2020, the parties received the final regulatory approvals required to complete the transaction and now anticipate the Merger to close later in the third quarter of 2020, following the completion of Francisco Partners and Evergreen Coast Capital Corp.’s debt marketing periods and subject to the satisfaction or waiver of the remaining customary closing conditions. The Company recorded $2.6 million in general and administrative expense for Merger-related costs during the six months ended June 30, 2020.

The Company continues to closely monitor the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. While the COVID-19 pandemic has not had a material adverse impact on the Company’s operations to date, the future impacts of the pandemic and any resulting economic impact remains largely unknown and is rapidly evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as its customers. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Quarterly Report on Form 10-Q. Refer to Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q for a complete description of the material risks that the Company currently faces.

2. Summary of Significant Accounting Policies

Principles of Consolidation — The accompanying condensed consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP.

Unaudited Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited and have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read along with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 14, 2020. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and in the opinion of management, reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.

Revenue Recognition — The Company derives its revenue primarily from subscription fees for its premium subscription software services, usage fees from audio services, and, to a lesser extent, the sale or lease of telecommunications equipment. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to the Company’s customers. Revenue is recognized when control of these services or products are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the contract’s performance obligations.

The Company determines revenue recognition through the following five steps:

•

Identification of the contract, or contracts, with a customer

•

Identification of the performance obligations in the contract

•

Determination of the transaction price

•

Allocation of the transaction price to the performance obligations in the contract

•

Recognition of revenue when, or as, performance obligations are satisfied

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Disaggregated Revenue — The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s revenue by geography (based on customer address) is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2020		2019		2020
	(In thousands)				(In thousands)
Revenues:
United States	$	247,570	$	270,302	$	488,864	$	523,249
International		65,494		80,425		131,900		149,861
Total revenue	$	313,064	$	350,727	$	620,764	$	673,110

The Company’s revenue by product grouping is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2020		2019		2020
	(In thousands)				(In thousands)
Revenues:
Unified communications and collaboration	$	171,817	$	193,778	$	341,774	$	367,465
Identity and access management		98,266		111,726		192,445		217,307
Customer engagement and support		42,981		45,223		86,545		88,338
Total revenue	$	313,064	$	350,727	$	620,764	$	673,110

Performance Obligations

Premium Subscription Services — Revenue from the Company’s premium subscription services represents a single promise to provide continuous access (i.e., a stand-ready obligation) to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers. The Company’s software cannot be run on another entity’s hardware and customers do not have the right to take possession of the software and use it on their own or another entity’s hardware.

As each day of providing access to the software is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its premium subscription services arrangements include a single performance obligation comprised of a series of distinct services. Revenue from the Company’s premium subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. Subscription periods range from monthly to multi-year, are typically billed in advance and are non-cancelable.

Audio Services — Revenue from the Company’s audio services represent a single promise to stand-ready to provide access to the Company’s platform. As each day of providing audio services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its audio services arrangements include a single performance obligation comprised of a series of distinct services. These audio services may include fixed consideration, variable consideration or a combination of the two. Variable consideration in these arrangements is typically a function of the corresponding rate per minute. The Company allocates the variable amount to each distinct service period within the series and recognizes revenue as each distinct service period is performed (i.e., recognized as incurred).

Accounts Receivable, Net — Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $7.7 million and $9.0 million are included in this balance at December 31, 2019 and June 30, 2020, respectively. The payment of consideration related to these unbilled receivables is subject only to the passage of time. As of December 31, 2019 and June 30, 2020, lease receivables totaled $10.0 million (of which, $5.1 million was long term and in other assets), and $11.3 million (of which, $6.1 million was long term and in other assets), respectively.

Contract Assets and Contract Liabilities — Contract assets and contract liabilities (deferred revenue) are reported net at the contract level for each reporting period.

Contract Assets — Contract assets primarily relate to unbilled amounts typically resulting from sales contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. The contract assets are transferred to accounts receivable when the rights become unconditional. The Company had contract assets of $7.9 million as of December 31, 2019 ($4.4 million included in prepaid and other current assets and $3.5 million included in other assets) and $11.1 million as of June 30, 2020 ($6.0 million included in prepaid and other current assets and $5.1 million included in other assets).

Contract Liabilities (Deferred Revenue) — Deferred revenue primarily consists of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. The Company initially records subscription fees as deferred revenue and then recognizes revenue as performance obligations are satisfied over the subscription period. Typically, subscriptions automatically renew at the end of the subscription period unless the customer specifically terminates it prior to the end of the period. Deferred revenue to be recognized within the next twelve months is included in current deferred revenue, and the remaining amount is included in long-term deferred revenue in the condensed consolidated balance sheets.

For the three and six months ended June 30, 2020, revenue recognized related to deferred revenue at January 1, 2020 was approximately $111 million and $283 million, respectively. As of June 30, 2020, approximately $748 million of revenue is expected to be recognized from remaining performance obligations, including backlog, primarily over the next two years.

Changes in contract liabilities for the six months ended June 30, 2020 are as follows:

	Deferred Revenue
	Current		Non- Current			Total
	(In thousands)
Balance as of January 1, 2020	$	390,087	$	18,076		$	408,163
Increase (decrease), net		58,668		(8,460	)		50,208
Balance as of June 30, 2020	$	448,755	$	9,616		$	458,371

Concentrations of Credit Risk and Significant Customers — The Company’s principal credit risk relates to its cash, cash equivalents, restricted cash and accounts receivable. Cash, cash equivalents and restricted cash are deposited primarily with financial institutions that management believes to be of high-credit quality. To manage accounts receivable credit risk, the Company regularly evaluates the creditworthiness of its customers and maintains allowances for expected credit losses. The Company also reserves against its lease receivables and contract assets for expected losses. To date, losses resulting from uncollected receivables have not exceeded management’s expectations.

For the three and six months ended June 30, 2019 and 2020, no customer accounted for more than 10% of revenue. As of December 31, 2019 and June 30, 2020, no customer accounted for more than 10% of accounts receivable.

Costs to Obtain and Fulfill a Contract — The Company’s incremental costs of obtaining a contract consist of sales commissions and their related fringe benefits. Sales commissions and fringe benefits paid on renewals are not commensurate with sales commissions paid on the initial contract, but they are commensurate with each other. Sales commissions and fringe benefits are deferred and amortized on a straight-line basis over the period of benefit, which the Company has estimated to be three to four years for initial contracts and amortized over the renewal period for renewal contracts, typically one year. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and the Company’s ability to retain customers. Deferred commissions are classified as current or noncurrent assets based on the timing the expense will be recognized. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other assets, respectively, in the Company’s condensed consolidated balance sheets. As of December 31, 2019 and June 30, 2020, the Company had $49.7 million of current deferred commissions and $53.1 million of noncurrent deferred commissions, and $58.5 million of current deferred commissions and $67.4 million of noncurrent deferred commissions, respectively. Commissions expense is primarily included in sales and marketing expense on the condensed consolidated statements of operations. The Company had amortization expense of $9.4 million and $17.9 million related to employee-based deferred commissions during the three and six months ended June 30, 2019 and $16.2 million and $30.5 million during the three and six months ended June 30, 2020, respectively. Other costs incurred to fulfill contracts have been immaterial to date.

Segment Data — Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision-making group when making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company, whose management uses consolidated financial information in determining how to allocate resources and assess performance, has determined that it operates in one segment.

Goodwill — Goodwill is the excess of the acquisition price over the fair value of the tangible and identifiable intangible net assets acquired. The Company does not amortize goodwill but performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. As of November 30, 2019, our measurement date, the fair value of the Company as a whole exceeded the carrying amount of the Company. As of June 30, 2020, the fair value of the Company as a whole continued to exceed the carrying amount of the Company.

Long-Lived Assets and Intangible Assets — The Company records intangible assets at their respective estimated fair values at the date of acquisition. Intangible assets are being amortized based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives, which range up to eleven years.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. Through June 30, 2020, the Company recorded no material impairments.

Foreign Currency Translation — The functional currency of operations outside the United States of America is deemed to be the currency of the local country, unless otherwise determined that the United States dollar would serve as a more appropriate functional currency given the economic operations of the entity. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of equity. Foreign currency transaction gains and losses are charged to operations.

Derivative Financial Instruments — The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company uses foreign currency forward contracts to manage exposure to fluctuations in foreign currency exchange rates that arise from receivables and payables denominated in foreign currencies. The Company does not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because the Company enters into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in foreign currency net gains and losses.

As of December 31, 2019 and June 30, 2020, the Company had outstanding forward contracts with notional amounts equivalent to the following:

	December 31, 2019		June 30, 2020
Currency Hedged	(In thousands)
Euro / U.S. Dollar	$	3,503	$	4,592
British Pound / U.S. Dollar		858		826
Euro / Hungarian Forint		3,139		3,272
U.S. Dollar / Canadian Dollar		1,810		1,885
Total	$	9,310	$	10,575

Net realized and unrealized foreign currency gains and losses was a net loss of $0.1 million and $0.4 million for the three and six months ended June 30, 2019, respectively, and a net loss of $0.4 million and a net gain of $26,000 for the three and six months ended June 30, 2020, respectively, which are included in other income (expense), net in the condensed consolidated statements of operations. Excluding the underlying foreign currency exposure being hedged, net realized and unrealized gains and losses on forward contracts included in foreign currency gains and losses was a net gain of $0.1 million and a net loss of $0.4 million for the three and six months ended June 30, 2019, respectively, and a net gain of $48,000 and a net loss of $16,000 for the three and six months ended June 30, 2020, respectively.

Stock-Based Compensation — The Company values all stock-based compensation awards, primarily restricted stock units, at fair value on the date of grant and recognizes the expense over the requisite service period, which is generally the vesting period, on a straight-line basis.

Income Taxes — Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. At each balance sheet date, the Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.

Guarantees and Indemnification Obligations — As permitted under Delaware law, the Company has agreements whereby the Company indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. As permitted under Delaware law, the Company also has similar indemnification obligations under its certificate of incorporation and bylaws. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has directors’ and officers’ insurance coverage that the Company believes limits its exposure and enables it to recover a portion of any future amounts paid.

In the ordinary course of business, the Company enters into agreements with certain customers that contractually obligate the Company to provide indemnifications of varying scope and terms with respect to certain matters including, but not limited to, losses arising out of the breach of such agreements, from the services provided by the Company or claims alleging that the Company’s products infringe third-party patents, copyrights, or trademarks. The term of these indemnification obligations is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is, in many cases, unlimited. Through June 30, 2020, the Company has not experienced any losses related to these indemnification obligations.

Net Income (Loss) Per Share — Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential common shares outstanding from the assumed exercise of stock options and the vesting of restricted stock units.

The Company excluded the following options to purchase common shares and restricted stock units from the computation of diluted net income (loss) per share because they had an anti-dilutive impact:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2020		2019		2020
	(In thousands)				(In thousands)
Options to purchase common shares		43		—		43		—
Restricted stock units		1,816		186		1,816		186
Total options and restricted stock units		1,859		186		1,859		186

Basic and diluted net income (loss) per share was calculated as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2020		2019			2020
	(In thousands, except per share data)					(In thousands, except per share data)
Net income (loss)	$	(6,522	)	$	19,041	$	(15,561	)	$	7,756
Basic:
Weighted average common shares outstanding, basic		49,768			48,887		50,201			48,744
Net income (loss) per share, basic	$	(0.13	)	$	0.39	$	(0.31	)	$	0.16
Diluted:
Weighted average common shares outstanding		49,768			48,887		50,201			48,744
Add: Common stock equivalents		—			299		—			445
Weighted average common shares outstanding, diluted		49,768			49,186		50,201			49,189
Net income (loss) per share, diluted	$	(0.13	)	$	0.39	$	(0.31	)	$	0.16

Recently Adopted Accounting Pronouncements — On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), referred to herein as ASU 2016-13, which changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated balance sheets, statements of operations, financial positions or cash flows.

3. Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values due to their short maturities and the debt outstanding under the variable-rate credit facility approximates fair value. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

•

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.

•

Level 2: Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Money market funds and time deposits are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.

The principal market in which the Company executes foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are usually large financial institutions. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The Company’s Level 3 liability at December 31, 2019 related to a 2019 acquisition, described further in Note 4 below. The remaining contingent consideration liability of $2.0 million was based on the achievement of certain development milestones and was paid in January 2020.

The Company’s significant financial assets and liabilities are measured at fair value in the table below (in thousands), which excludes cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value.

	Fair Value Measurements at December 31, 2019
	Level 1		Level 2		Level 3			Total
Financial assets (liabilities):
Cash equivalents — money market funds	$	1,183	$	—	$	—		$	1,183
Forward contracts ($9.3 million notional amount)	$	—	$	20	$	—		$	20
Contingent consideration liability	$	—	$	—	$	(2,000	)	$	(2,000	)

	Fair Value Measurements at June 30, 2020
	Level 1		Level 2		Level 3			Total
Financial assets (liabilities):
Forward contracts ($10.6 million notional amount)	$	—	$	13	$	—		$	13

4. Acquisitions

Acquisition-Related Costs

Acquisition-related costs were $6.9 million for the six months ended June 30, 2019, including $5.6 million of retention-based bonuses and $1.2 million of transaction, transition and integration-related costs. Acquisition-related costs were $2.6 million for the six months ended June 30, 2020, comprised primarily of retention-based bonuses.

2019 Acquisitions

On February 6, 2019, the Company acquired substantially all of the assets of an Israeli-based company specializing in artificial intelligence, or A.I., and speech-to-text recognition, pursuant to an asset purchase agreement. The Company completed the acquisition for $5.0 million in cash and potential acquisition-related contingent consideration totaling up to $4.0 million contingent upon the achievement of certain development milestones. This contingent consideration liability was recorded at an estimated fair value of $3.2 million at the acquisition date. The Company paid $2.0 million of the contingent consideration in 2019 and paid the remaining $2.0 million in January 2020. The Company accounted for the acquisition as a business combination. Assets acquired were primarily intellectual property. The Company’s purchase price allocation of the $8.2 million purchase consideration was $5.1 million of completed technology and $3.1 million of goodwill. Additionally, the Company expects to pay up to $2.0 million in retention-based bonus payments to certain employees upon the achievement of specified retention milestones over the two-year period following the closing of the transaction, of which $1.0 million has been paid as of June 30, 2020.

On February 21, 2019, the Company acquired a California-based provider of multi-factor and single-sign-on, or SSO, services pursuant to a stock purchase agreement dated February 13, 2019 for $17.5 million, net of cash acquired. The Company accounted for the acquisition as a business combination. The Company’s purchase price allocation of the $17.5 million purchase consideration was $11.8 million of completed technology, $8.7 million of goodwill and $0.1 million of other current assets partially offset by $0.3 million of current liabilities and $2.9 million of a long-term deferred tax liability primarily related to the amortization of intangible assets which cannot be deducted for tax purposes. Additionally, the Company expects to pay up to $4.4 million in retention-based bonus payments to certain employees upon the achievement of specified retention milestones over a three-year period following the closing of the transaction, of which $2.5 million has been paid as of June 30, 2020.

The operating results of these February 2019 acquisitions, which have been included in the Company’s results since the date of the acquisitions, are not material. Accordingly, pro forma financial information for these business combinations has not been presented.

5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill during the six months ended June 30, 2020 are primarily due to foreign currency translation adjustments.

Changes in goodwill for the six months ended June 30, 2020 are as follows (in thousands):

Balance, January 1, 2020	$	2,414,287
Foreign currency translation adjustments		(58	)
Balance, June 30, 2020	$	2,414,229

Intangible assets consist of the following (in thousands):

	December 31, 2019						June 30, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Life Remaining (in years)
Identifiable intangible assets:
Customer relationships	$	918,234	$	440,496	$	477,738	$	918,444	$	502,502	$	415,942		5.2
Technology		497,892		216,318		281,574		497,993		255,152		242,841		5.6
Trade names and trademarks		70,778		30,780		39,998		70,797		35,499		35,298		5.6
Other		3,575		1,639		1,936		3,573		1,798		1,775		5.5
Internally developed software		104,410		65,229		39,181		123,449		83,198		40,251		1.4
	$	1,594,889	$	754,462	$	840,427	$	1,614,256	$	878,149	$	736,107

During the six months ended June 30, 2019, the Company capitalized $16.9 million for technology as intangible assets in connection with its 2019 acquisitions. The Company capitalized $9.9 million and $8.8 million during the three months ended June 30, 2019 and 2020, respectively, and $18.8 million and $19.1 million during the six months ended June 30, 2019 and 2020, respectively, of costs related to internally developed software to be sold as a service incurred during the application development stage and is amortizing these costs over the expected lives of the related services.

The Company is amortizing its intangible assets based upon the pattern in which their economic benefit will be realized, or if this pattern cannot be reliably determined, using the straight-line method over their estimated useful lives. Amortization relating to technology, documented know-how (other) and internally developed software is recorded within cost of revenue and the amortization of trade names and trademarks, customer relationships, and domain names (other) is recorded within operating expenses. Amortization expense for intangible assets consisted of the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2020		2019		2020
	(In thousands)				(In thousands)
Cost of revenue:
Amortization of internally developed software	$	8,264	$	9,138	$	16,298	$	18,002
Amortization of acquired intangibles ⁽¹⁾		21,038		19,332		42,008		38,690
Sub-Total amortization of intangibles in cost of revenue		29,302		28,470		58,306		56,692
Amortization of acquired intangibles ⁽¹⁾		39,390		33,287		78,889		66,615
Total amortization of intangibles	$	68,692	$	61,757	$	137,195	$	123,307

(1)	Total amortization of acquired intangibles was $60.4 million and $52.6 million for the three months ended June 30, 2019 and 2020, respectively, and $120.9 million and $105.3 million for the six months ended June 30, 2019 and 2020, respectively.

Future estimated amortization expense for intangible assets at June 30, 2020 is as follows (in thousands):

Amortization Expense (Years Ending December 31)	Amount
2020 (six months ending December 31)	$	122,221
2021		200,516
2022		148,416
2023		115,487
2024

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LogMeIn, Inc. 10-Q