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AMBR > SEC Filings for AMBR > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for AMBER ROAD, INC.

Form 10-Q for AMBER ROAD, INC.


8-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations and cash flows should be read in conjunction with (1) the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our prospectus dated March 20, 2014, filed with the Securities and Exchange Commission (SEC) on March 24, 2014 pursuant to Rule 424(b)(4) under the Securities Act (File No. 333-193858). As discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below.
Overview
We are a leading provider of cloud-based global trade management (GTM) solutions, which automates import and export processes to enable goods to flow across international borders in the most efficient, compliant and profitable way. Our solution combines enterprise-class software, trade content sourced from government agencies and transportation providers in 125 countries, and a global supply chain network connecting our customers with their trading partners, including suppliers, freight forwarders, customs brokers and transportation carriers. As a result, our solution reduces transportation costs, optimizes logistics, leverages trade agreements, provides shipment tracking, and ensures compliance with import and export regulations. By automating more GTM processes, we enable our customers to enjoy significantly lower supply chain costs compared to legacy systems. We deliver our GTM solution using a Software-as-a-Service (SaaS) model and leverage a highly flexible technology framework to quickly and efficiently meet our customers' unique requirements around the world. We have achieved significant growth since our inception and plan to continue to invest in growth. For the three months ended June 30, 2013 compared to the three months ended June 30, 2014, our subscription revenue grew from $8.7 million to $10.6 million, representing a 21.8% period over period growth rate. For the three months ended June 30, 2013 compared to the three months ended June 30, 2014, our total revenue grew from $11.9 million to $15.8 million, representing a 32.8% period over period growth rate. To continue to achieve this growth, we will invest in our sales and marketing efforts worldwide. For the three months ended June 30, 2014 and 2013, and the six months ended June 30, 2014 and 2013, revenue from international customers accounted for 13%, 11%, and 13%, 10% of total revenue, respectively. For the six months ended June 30, 2014, one customer accounted for 10% of total revenue and a different customer accounted for 11% of total revenue for the six months ended June 30, 2013. Our operating results in a given quarter can fluctuate based on the mix of subscription and professional services revenue. For the three months ended June 30, 2014 and 2013, and the six months ended June 30, 2014 and 2013, subscription revenue accounted for 67%, 73%, and 69%, 74% of total revenue, respectively. Our subscription agreements typically have an initial term of three to five years, with an average initial term of approximately 4.0 and 3.6 years for enterprise and mid-market customers, respectively. We expect our cost of revenue and operating expenses to continue to increase in absolute dollars in future periods. We expect sales and marketing expenses to increase as we continue to expand our sales teams, increase our marketing activities and grow our international operations. We also expect research and development expenses to increase in absolute dollars as we enhance our existing solution modules and develop new ones. We also plan to invest in maintaining a high quality of professional services and customer support, and plan to continue investing in our data center infrastructure in order to support continued customer growth. Considering all of these plans for investment, we cannot assure you that we will be profitable in the near term.
On March 26, 2014, we closed our IPO of 8,500,299 shares of common stock, including 1,108,734 shares sold pursuant to the underwriters' option to purchase additional shares. Of the total shares sold, 3,717,429 were sold by selling stockholders, and we did not receive any of the proceeds of such sales. The public offering price of the shares sold in our IPO was $13.00 per share. Immediately prior to the closing of our IPO, all outstanding shares of our redeemable convertible preferred stock converted to 13,993,566 shares of common stock and 808,622 shares of common stock were issued in satisfaction of accrued but unpaid dividends to preferred stockholders. We received proceeds from our IPO of $57.8 million, net of underwriting discounts and commissions, but before offering expenses of $4.7 million.


Key Metrics
We regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
Annualized Recurring Revenue Retention. We believe our annualized recurring revenue retention rate is an important metric to measure the long-term value of customer agreements with regard to revenue and billings visibility. We calculate our annualized recurring revenue retention rate by comparing, for a given quarter, subscription revenue for all customers in the corresponding quarter of the prior year to the subscription revenue from those same customers in the given quarter and calculating the average of the four quarters for the stated year. The annualized recurring revenue retention rate for the quarters ended June 30, 2014 and 2013 was 102% and 101%, respectively.
Adjusted EBITDA. EBITDA consists of net income (loss) plus depreciation and amortization, interest expense (income) and income tax expense (benefit). Adjusted EBITDA consists of EBITDA plus our non-cash, stock-based compensation expense, as well as the change in fair value of our warrant liability and compensation expense related to loan forgiveness for certain executives. We use adjusted EBITDA as a measure of operating performance because it assists us in comparing performance on a consistent basis across reporting periods, as it removes from our operating results the impact of our capital structure. We believe adjusted EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company's operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of performance exclusive of our capital structure and the method by which assets were acquired.
Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles, or GAAP. We have provided below a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider adjusted EBITDA together with other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
The following table provides a reconciliation of net loss to adjusted EBITDA:

                                             Three Months Ended                  Six Months Ended
                                                  June 30,                           June 30,
                                            2014             2013             2014              2013
Net loss                               $ (2,185,184 )   $ (5,357,924 )   $ (24,124,915 )   $ (10,395,114 )
Depreciation and amortization             1,215,928          832,346         2,345,420         1,628,596
Interest expense                             55,917           18,745           168,894            24,193
Interest income                                 (91 )        (17,861 )            (304 )         (18,028 )
Income tax expense                          150,537           41,325           249,549           242,568
EBITDA                                     (762,893 )     (4,483,369 )     (21,361,356 )      (8,517,785 )
Stock-based compensation                    165,790           92,925           339,324           169,734
Restricted stock expense                          -        3,182,357        18,683,277         6,712,211
Compensation expense related to loan
forgiveness                                       -                -           927,093                 -
Puttable stock compensation                  13,691                -            27,382                 -
Increase in fair value of contingent
consideration liability                      15,859                -            97,423                 -
Warrant expense                                   -          562,947         1,244,635         1,059,581
Adjusted EBITDA                        $   (567,553 )   $   (645,140 )   $     (42,222 )   $    (576,259 )


Components of Operating Results
Revenue
Revenue. We primarily generate revenue from the sale of subscriptions and subscription-related professional services. Our subscriptions are multi-year arrangements for software and content, and in certain instances include a transactional component. We derive professional services revenue from implementation, integration and other elements associated with solution and content subscriptions.
We typically invoice subscription customers in advance on an annual basis, with payment due upon receipt of the invoice. We reflect invoiced amounts on our balance sheet as accounts receivable or as cash when collected, and as deferred revenue until earned and recognized as revenue ratably over the performance period. Accordingly, deferred revenue represents the amount billed to customers that has not yet been earned or recognized as revenue, pursuant to agreements executed during current and prior periods, and does not reflect that portion of a contract to be invoiced to customers on a periodic basis for which payment is not yet due.
Subscription Revenue. We derive our subscription revenue from fees paid to us by our customers for access to our solution. We recognize the revenue associated with subscription agreements ratably on a straight-line basis over the term of the agreement, provided all criteria required for revenue recognition have been met.
Professional Services Revenue. Professional services revenue consists primarily of fees charged for implementation, integration, training and other services associated with the subscription agreements entered into with our customers. Generally, we charge for professional services to implement our solution on a time and materials basis.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue consists primarily of personnel and related costs of our hosting, support, and content teams, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead, software license fees, hosting costs, Internet connectivity, depreciation expenses directly related to delivering our solution, as well as amortization of capitalized software development costs. As we continue to add datacenter capacity and personnel, as well as develop our trade content in advance of anticipated growth, our cost of subscription revenue may increase. We generally expense our cost of subscription revenue as we incur the costs.
Cost of Professional Services Revenue. Cost of professional services revenue consists primarily of personnel and related costs of our professional services team, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, the costs of contracted third-party vendors, reimbursable expenses and depreciation, amortization and other allocated costs. As our personnel are employed on a full-time basis, our cost of professional services is largely fixed in the short-term, while our professional services revenue may fluctuate, leading to fluctuations in professional services gross profit. We expense our cost of professional services revenue as we incur the costs. Operating Expenses
Our operating expenses are classified into three categories: sales and marketing, research and development, and general and administrative. Sales and Marketing. Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing staff, including salaries, benefits, commissions, bonuses, payroll taxes, stock-based compensation and costs of promotional events, corporate communications, online marketing, solution marketing and other brand-building activities, in addition to depreciation, amortization and other allocated costs. We capitalize and amortize commission costs as an expense ratably over the term of the related customer contract in proportion to the recognition of the subscription revenue. If a subscription agreement is terminated, we recognize the unamortized portion of any deferred commission cost as an expense immediately upon such termination, when the initial customer contract is signed and upon any renewal as our obligation to pay a sales commission arises at these times. We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to expand our business.
Research and Development. Research and development expenses primarily consist of personnel and related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and costs of certain third-party contractors, as well as depreciation, amortization and other allocated costs. We capitalize research and development costs related to the development of our solution modules and amortize them over their useful life. We have devoted our solution modules development efforts primarily to enhancing the functionality and expanding the capabilities of


our solution. We expect that our research and development expenses will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen and enhance our solution.
General and Administrative. General and administrative expenses primarily consist of personnel and related costs for our executive, administrative, finance, information technology, legal, accounting and human resource staffs, including salaries, benefits, bonuses, payroll taxes and stock-based compensation, professional fees, other corporate expenses and depreciation, amortization and other allocated costs. In addition, general and administrative expenses included our expenses related to certain outstanding warrants that had liability accounting prior to our IPO and, as such, any changes in fair value of the warrants was recorded in general and administrative expenses. Subsequent to our IPO, the warrants were exercised and therefore, we will not incur any additional expenses related to the warrants. We have recently incurred, and expect to continue to incur additional expenses as we grow our operations and operate as a public company, including higher legal, corporate insurance, accounting and auditing expenses, and the additional costs of enhancing and maintaining our internal control environment through the adoption of new corporate policies. Excluding the warrant expense, we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our operations, including internationally.
Restricted Stock. Restricted stock expense includes an intrinsic value charge related to vested restricted shares purchased by certain members of our management. In connection with the purchase of these shares, we loaned, on a nonrecourse basis, certain amounts to the purchasers of these shares to cover related tax liabilities incurred by them. Accordingly, we accounted for these shares as stock options. All of the restricted stock expense relates to our general and administrative functions. Prior to our IPO, we had the ability to repurchase 50% of these shares under certain conditions. These repurchase rights have lapsed and the shares became fully vested upon the closing of our IPO on March 26, 2014. Therefore, subsequent to our IPO, we will no longer incur charges for restricted stock expense.
In connection with the purchase of these shares, we loaned, on a nonrecourse basis, an aggregate of $960,599 to the purchasers of the shares to cover related tax liabilities incurred by the purchasers. The loans bore interest at an annual rate of 4.75% and were repayable upon the earlier of (i) 15 years following the date of the loans or (ii) upon each sale or other disposition by the purchasers of any shares to a third party, until the balance of the loans has been paid in full. On January 30, 2014, we forgave these loans, which amounted to $1,430,722, inclusive of accrued interest. In addition, we recorded compensation expense of $927,093 in general and administrative expense in our consolidated statement of operations for the six months ended June 30, 2014 related to a bonus provided to the borrowers to offset the tax consequences related to the loan forgiveness. Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of interest income on our cash balances, and interest expense on outstanding debt and capital lease obligations.
Income Tax Expense (Benefit)
Because we have generated net losses in all periods to date and recorded a full valuation allowance against our deferred tax assets, we have historically not recorded a provision for federal or state income taxes. The tax provision for the three and six months ended June 30, 2014 is exclusively related to foreign income taxes and is a result of the cost-plus transfer pricing agreements we have in place with our foreign subsidiaries. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Utilization of our net operating losses may be subject to annual limitations due to the ownership change rules under the Internal Revenue Code of 1986, as amended, and similar state provisions. We have not yet made a determination regarding the potential impact of these limitations. Moreover, in the event we have future changes in ownership, the availability of net operating losses could be further limited.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the estimates and judgments used for revenue recognition, deferred revenue,


stock-based compensation, goodwill, capitalized software costs, and income taxes have the greatest potential impact on our consolidated financial statements, and consider these to be our critical accounting policies and estimates. During the six months ended June 30, 2014, there were no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our prospectus dated March 20, 2014, and filed with the SEC on March 24, 2014 pursuant to Rule 424(b)(4) under the Securities Act.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted. We are currently assessing the impact the adoption of this update will have on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2013. The adoption of ASU 2013-11 in 2014 did not have a material impact on our consolidated financial statements.


Results of Operations
The following tables summarize key components of our results of operations for
the periods indicated, both in dollars and as a percentage of revenue. The
period-to-period comparison of financial results is not necessarily indicative
of financial results to be achieved in future periods.
                                             Three Months Ended                  Six Months Ended
                                                  June 30,                           June 30,
                                            2014             2013             2014              2013
Revenue:
Subscription                           $ 10,630,709     $  8,668,142     $  21,140,478     $  17,415,329
Professional services                     5,178,236        3,273,244         9,657,475         6,119,121
Total revenue                            15,808,945       11,941,386        30,797,953        23,534,450

Cost of revenue:
Cost of subscription revenue              3,651,853        3,184,923         6,996,581         6,190,122
Cost of professional services revenue     3,342,566        2,340,002         6,242,890         4,356,433
Total cost of revenue                     6,994,419        5,524,925        13,239,471        10,546,555
Gross profit                              8,814,526        6,416,461        17,558,482        12,987,895

Operating expenses:
Sales and marketing                       5,114,468        4,091,874         9,962,492         7,765,128
Research and development                  2,379,144        1,833,111         4,567,618         3,774,251
General and administrative                3,299,735        2,624,834         8,051,871         4,882,686
Restricted stock expense                          -        3,182,357        18,683,277         6,712,211
Total operating expenses                 10,793,347       11,732,176        41,265,258        23,134,276
Loss from operations                     (1,978,821 )     (5,315,715 )     (23,706,776 )     (10,146,381 )
Interest income                                  91           17,861               304            18,028
Interest expense                            (55,917 )        (18,745 )        (168,894 )         (24,193 )
Loss before income taxes                 (2,034,647 )     (5,316,599 )     (23,875,366 )     (10,152,546 )
Income tax expense                          150,537           41,325           249,549           242,568
Net loss                               $ (2,185,184 )   $ (5,357,924 )   $ (24,124,915 )   $ (10,395,114 )



                                                      Three Months Ended            Six Months Ended
                                                           June 30,                     June 30,
                                                      2014             2013         2014         2013
Revenue:
Subscription                                          67  %              73  %       69  %         74  %
Professional services                                 33                 27          31            26
Total revenue                                        100                100         100           100

Cost of revenue:
Cost of subscription revenue (1)                      34                 37          33            36
Cost of professional services revenue (1)             65                 71          65            71
Total cost of revenue                                 44                 46          43            45
Gross profit                                          56                 54          57            55

Operating expenses:
Sales and marketing                                   32                 34          32            33
Research and development                              15                 15          15            16
General and administrative                            21                 22          26            21
Restricted stock expense                               -                 27          61            29
Total operating expenses                              68                 98         134            99
Loss from operations                                 (12 )              (44 )       (77 )         (44 )
Interest income                                        -                  -           -             -
Interest expense                                       -                  -          (1 )           -
Loss before income taxes                             (12 )              (44 )       (78 )         (44 )
Income tax expense                                     1                  -           1             1

Net loss (13 )% (44 )% (79 )% (45 )%

(1) The table shows cost of revenue as a percentage of each component of revenue.


Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013
Revenue. Revenue for the three months ended June 30, 2014 was $15.8 million, an increase of $3.9 million, or 32.8%, over revenue of $11.9 million for the three months ended June 30, 2013.
Subscription Revenue. Subscription revenue for the three months ended June 30, 2014 was $10.6 million, an increase of $1.9 million, or 21.8%, over subscription . . .

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