LogMeIn, Inc. Annual Report 2009

Plain-text annual report

Simply ConnectedSM ANNUAL REPORT Financial Growth 80 64 48 32 16 0 Revenue (mm) $74.4 $51.7 $27.0 $11.3 2006 2007 2008 2009 25 20 15 10 5 0 Operating Cash Flow (mm) $24.3 $10.1 $3.4 $(0.9) 2006 2007 2008 2009 Customer Dynamics Percentage of Sales 70% North America 30% International 300 240 180 120 60 0 Premium Customers (000s) 300 174 102 48 $13.0 2006 2007 2008 2009 2009 Highlights Industry Recognition Grew revenue by 44% year-over-year. Generated $24.3M in operating cash ﬂ ow. Added 126,000 premium customers. “SMB Excellence Award” International Data Group (IDC) “Recognized Innovator” Technology Services Industry Association “Top 10 Apps of 2009” TechCrunch Dear Stockholders: Welcome to our first annual report. We’ve built a great company by taking a complex problem – connecting individuals and businesses to their digital world – and making it simple and secure. Millions of people around the world have become more mobile and more connected via the Internet, thanks to LogMeIn. A quick look at how we got here provides a great jumping-off point to tell you why we have been successful, and how we intend to develop in the future. In 2004, we introduced LogMeIn Free – the first large-scale remote access service available free of charge. As broadband was becoming truly mainstream, we believed that everyone, including consumers, should be able to access their digital lives – computer programs, files, photos – from wherever they are, whenever they want. Millions of users later, it looks like we are onto something. LogMeIn has a unique talent for making complex technical solutions look simple. LogMeIn is a SaaS company, and our proprietary “Gravity” platform, the software, hardware and networking technology that we use to deliver our free and premium services, allows us to reduce the time, cost and risk associated with bringing new products to market. Fast forward to 2010 and LogMeIn now has a portfolio of free and premium products that run on Gravity, including all of our remote access offerings, as well as a powerful suite of remote support tools for IT professionals. Coming soon: collaboration. 2009 Review For fiscal year 2009, our revenue increased 44 percent to $74.4 million, up from $51.7 million in 2008. Our revenue growth was due to good performance of our core products LogMeIn Rescue and Pro2, and was helped by sales of our newer products LogMeIn Ignition and Central. Our bottom line also grew, with net income for 2009 of $8.8 million. That compares to a net loss of $5.4 million in 2008. This helped LogMeIn grow operating cash flow by 140% year-over-year to $24.3 million. This strong financial performance happened in the midst of the prolonged economic downturn. We believe our ability to grow the business when budgets are tight is a testament to the value we deliver to our customers. LogMeIn products can be easily downloaded and tried, can be quickly deployed and are purchased on a subscription basis, helping customers see a fast return on their purchase. These customers are primarily small and medium-sized businesses, IT service providers (which help businesses manage and support their computer systems) and consumers. Our business customers and IT service providers use LogMeIn to provide remote, end-user support and to access and manage computers and other Internet-enabled devices, like smartphones. Individual consumers and mobile workers use LogMeIn to access their office and home computer resources remotely, which gives them the flexibility to work from almost anywhere. This can improve the work/life balance for just about anyone with a computer and an Internet connection, while increasing productivity. 2010 and Beyond As people and businesses become more dispersed, the need and desire to be connected grows. Wired broadband continues to increase in both availability and bandwidth speeds. Perhaps more importantly, mobile broadband is becoming the Internet "on-ramp" of choice for millions of new users each year. Mobile devices, from Android smartphones to tablet devices like the newly announced iPad, are expected to increase in popularity and importance. To that end, we intend to introduce products that enable people to connect with and support these new devices. Our Ignition for iPhone app has proven to be a popular and highly rated means of connecting iPhones to Macs and Windows PCs. We are launching a similar application for Android devices, as analysts predict that operating system becoming a serious player in the mobile space. Beyond our core access and support products, we see collaboration as a potential new market for us. We believe LogMeIn Gravity is an ideal platform on which to build fast, easy-to-use and secure services that further deliver on our promise to eliminate location as a barrier. Our vision is that someone in Seattle can instantly connect with a colleague in Sydney, as if those two (or three or 20) people were in the next cubicle. We believe this capability will empower our customers to work smarter and even more productively. Geographically, we are looking at areas where the business and revenue potential for our products can deliver value to customers and our stockholders, including the United Kingdom. Of course, new products and new countries require new people. It is extremely gratifying that LogMeIn has been able to attract some of the smartest, most creative and hardest-working people in the technology industry. Their drive and determination to deliver great products has resulted in our financial success as well as industry acknowledgments, including being named as a "100 Top Places to Work" by the Boston Globe, receiving an "SMB Excellence Award" from research firm IDC and a "Recognized Innovator Award" by the Technology Services Industry Association. Our products have won awards and high praise from industry publications and web sites including CNET, PC Magazine and Mobile Enterprise Magazine, to name but a few. These are exciting times. Businesses and individuals need and demand to connect their increasingly mobile digital lives. LogMeIn makes it easy for them to do that. We believe our potential is limited only by the size of the Internet and our own imaginations. Finally, on behalf of every employee at LogMeIn, thank you, our stockholders, for your support as we connect with the future. Sincerely, Michael K. Simon Chairman, President & Chief Executive Officer UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549Form10-K(MarkOne)¥ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedDecember31,2009ornTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber001-34391LOGMEIN,INC.(Exactnameofregistrantasspecifiedinitscharter)Delaware20-1515952(Stateorotherjurisdictionofincorporationororganization)(I.R.S.EmployerIdentificationNo.)500UnicornParkDriveWoburn,Massachusetts01801(Addressofprincipalexecutiveoffices)(ZipCode)(781)638-9050(Registrant’stelephonenumber,includingareacode)SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofEachClassNameofExchangeonWhichRegisteredCommonStock,$.01parvalueNASDAQGlobalMarketSecuritiesregisteredpursuanttoSection12(g)oftheAct:None.Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesnNo¥IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesnNo¥Indicatebycheckmarkwhethertheregistrant:(1)hasfiledallreportsrequiredtobefiledbySection13and15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes¥NonIndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesnNonIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestoftheregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.¥Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(Checkone):LargeacceleratedfilernAcceleratedfilernNon-acceleratedfiler¥(Donotcheckifasmallerreportingcompany)SmallerreportingcompanynIndicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheAct).YesnNo¥Theaggregatemarketvalueofthevotingandnon-votingcommonequityheldbynon-affiliatescomputedbyreferencetothepriceatwhichthecommonequitywaslastsoldontheNASDAQGlobalMarketonFebruary15,2010was$294,868,000.TheregistranthasprovidedthisinformationasofFebruary15,2010becauseitscommonequitywasnotpubliclytradedasofthelastbusinessdayofitsmostrecentlycompletedsecondfiscalquarter.AsofFebruary15,2010,theregistranthad22,555,126sharesofCommonStock,$0.01parvaluepershare,outstanding.Portionsoftheregistrant’sdefinitiveproxystatementtobefiledwiththeSecuritiesandExchangeCommissionforthe2010annualstockholders’meetingtobeheldonMay27,2010areincorporatedbyreferenceintoItems10,11,12,13and14ofPartIIIofthisAnnualReportonForm10-K.LOGMEIN,INC.INDEXPageNumberPARTIITEM1.Business..........................................................2ITEM1A.RiskFactors.......................................................12ITEM1B.UnresolvedStaffComments...........................................26ITEM2.Properties.........................................................26ITEM3.LegalProceedings..................................................26ITEM4.SubmissionofMatterstoaVoteofSecurityHolders.........................27PARTIIITEM5.MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities.........................................27ITEM6.SelectedFinancialData..............................................29ITEM7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations........................................................31ITEM7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk...................42ITEM8.FinancialStatementsandSupplementaryData..............................43ITEM9.ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure........................................................65ITEM9A(T).ControlsandProcedures..............................................65ITEM9B.OtherInformation...................................................65PARTIIIITEM10.Directors,ExecutiveOfficersandCorporateGovernance......................65ITEM11.ExecutiveCompensation..............................................65ITEM12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters.................................................66ITEM13.CertainRelationshipsandRelatedTransactions,andDirectorIndependence........66ITEM14.PrincipalAccountingFeesandServices..................................66PARTIVITEM15.ExhibitsandFinancialStatementSchedules...............................66SIGNATURES.................................................................671Forward-LookingStatementsMattersdiscussedinthisAnnualReportonForm10-Krelatingtofutureeventsorourfutureperformance,includinganydiscussion,expressorimplied,ofouranticipatedgrowth,operatingresults,futureearningspershare,marketopportunity,plansandobjectives,are“forward-lookingstatements”withinthemeaningofSection27AoftheSecuritiesActof1933,asamended,andSection21EoftheSecuritiesExchangeActof1934,asamended.Thesestatementsareoftenidentifiedbythewords“may,”“will,”“expect,”“believe,”“anticipate,”“intend,”“could,”“estimate,”or“continue,”andsimilarexpressionsorvariations.Suchforward-lookingstatementsaresubjecttorisks,uncertaintiesandotherfactorsthatcouldcauseactualresultsandthetimingofcertaineventstodiffermateriallyfromfutureresultsexpressedorimpliedbysuchforward-lookingstatements.Factorsthatcouldcauseorcontributetosuchdifferencesinclude,butarenotlimitedto,thosediscussedinthesectiontitled“RiskFactors,”setforthinItem1AofthisAnnualReportonForm10-KandelsewhereinthisReport.Theforward-lookingstatementsinthisAnnualReportonForm10-KrepresentourviewsasofthedateofthisAnnualReportonForm10-K.Weanticipatethatsubsequenteventsanddevelopmentswillcauseourviewstochange.However,whilewemayelecttoupdatetheseforward-lookingstatementsatsomepointinthefuture,wehavenocurrentintentionofdoingsoexcepttotheextentrequiredbyapplicablelaw.Youshould,therefore,notrelyontheseforward-lookingstatementsasrepresentingourviewsasofanydatesubsequenttothedateofthisAnnualReportonForm10-K.PARTIITEM1.BUSINESSOverviewLogMeInprovideson-demand,remote-connectivitysolutionstosmallandmedium-sizedbusinesses,orSMBs,ITserviceprovidersandconsumers.WebelieveoursolutionsareusedtoconnectmoreInternet-enableddevicesworldwidethananyotherconnectivityservice.BusinessesandITserviceprovidersuseoursolutionstodeliverremote,end-usersupportandtoaccessandmanagecomputersandotherInternet-enableddevicesmoreeffectivelyandefficientlyfromaremotelocation,orremotely.Consumersandmobileworkersuseourremoteconnectivitysolutionstoaccesscomputerresourcesremotely,therebyfacilitatingtheirmobilityandincreasingtheirproductivity.Oursolutions,whicharedeployedandaccessedfromanywherethroughawebbrowser,oron-demand,aresecure,scalableandeasyforourcustomerstotry,purchaseanduse.InFebruary2003,weincorporatedunderthelawsofBermuda.InAugust2004,wecompletedadomesticationintheStateofDelawareunderthename3amLabs,Inc.WechangedournametoLogMeIn,Inc.inMarch2006.Ourprincipalexecutiveofficesarelocatedat500UnicornParkDrive,Woburn,Massachusetts01801,andourtelephonenumberis(781)638-9050.Ourwebsiteaddressiswww.logmein.com.Wehaveincludedourwebsiteaddressinthisreportsolelyasaninactivetextualreference.In2004,weintroducedLogMeInFree,aservicethatallowsuserstoaccesscomputerresourcesremotely.WebelieveLogMeInFreeandLogMeInHamachi2,ourpopularfreeservices,provideon-demandremoteaccess,orremote-connectivity,tocomputingresourcesformoreusersthananyotheron-demandconnectivityservice,givingusaccesstoalargeanddiversegroupofusersandincreasingawarenessofourfee-based,orpremiumservices,whichwesellonasubscriptionbasis.AsofDecember31,2009,ourusershaveconnectedover94millioncomputersandotherInternet-enableddevicestoaLogMeInservice.Wecomplementourfreeserviceswithninepremiumservicessoldonasubscriptionbasis,includingLogMeInRescueandLogMeInCentral,ourflagshipremotesupportandmanagementservices,andLogMeInPro2,ourpremiumremoteaccessservice.Salesofourpremiumservicesaregeneratedthroughword-of-mouthreferrals,web-basedadvertising,expiringfreetrialsthatweconverttopaidsubscriptionsanddirectmarketingtonewandexistingcustomers.Allofourfreeandpremiumsolutionsaredeliveredashostedservices,whichmeansthatthetechnologyenablingtheuseofoursolutionsresidesonourserversandIThardware,ratherthanthoseofourusers.Wecallthesoftware,hardwareandnetworkingtechnologyusedtodeliveroursolutionsGravity.TheGravity2proprietaryplatformconsistsofsoftwareapplications,customizeddatabasesandwebservers.GravityestablishessecureconnectionsovertheInternetbetweenremotecomputersandotherInternet-enableddevicesandmanagesthedirecttransmissionofdatabetweenremotelyconnecteddevices.Thisrobustandscalableplatformconnectsover10millioncomputerstoourserviceseachday.Webelievethatoursalesmodelofahighvolumeofnewandrenewedsubscriptionsatlowtransactionpricesincreasesthepredictabilityofourrevenuescomparedtoperpetuallicensed-basedsoftwarebusinesses.DuringthefiscalyearsendedDecember31,2007,2008and2009,wegeneratedrevenuesof$27.0million,$51.7millionand$74.4million,respectively.Periodicreports,proxystatementsandotherinformationareavailabletothepublic,freeofcharge,onourwebsite,www.logmein.com,assoonasreasonablypracticableaftertheyhavebeenfiledwiththeSECandthroughtheSEC’swebsite,www.sec.gov.Suchreports,proxystatementsandotherinformationmaybeobtainedbyvisitingthePublicReferenceRoomoftheSECat100FStreet,N.E.,Washington,DC20549orbycallingtheSECat1-800-SEC-0330.OurSolutionsOursolutionsallowouruserstoremotelyaccess,supportandmanagecomputersandotherInternet-enableddevicesondemand.Webelieveoursolutionsbenefitusersinthefollowingways:(cid:129)Reducedset-up,supportandmanagementcosts.OurservicesenableITstafftoadminister,monitorandsupportcomputersandotherInternet-enableddevicesataremotelocation.Businesseseasilysetupouron-demandserviceswithlittleornomodificationtotheremotelocation’snetworkorsecuritysystemsandwithouttheneedforupfronttechnologyorsoftwareinvestment.Inaddition,ourcustomerslowertheirsupportandmanagementcostsbyperformingmanagement-relatedtasksremotely,reducingoreliminatingthecostsofon-sitesupportandmanagement.(cid:129)Increasedmobileworkerproductivity.Ourremote-accessservicesallownon-technicaluserstoaccessandcontrolremotecomputersandotherInternet-enableddevices,increasingtheirmobilityandallowingthemtoremainproductivewhileawayfromtheoffice.(cid:129)Increasedend-usersatisfaction.Ourcustomersrelyonouron-demandservicestoimprovetheefficiencyandeffectivenessofend-usersupport.Satisfactionwithsupportservicesisprimarilymeasuredbycall-handlingtimeandwhetherornottheproblemisresolvedonthefirstcall.Ourservicesenablehelpdesktechnicianstoquicklyandeasilygaincontrolofaremoteuser’scomputer.Onceconnected,thetechniciancandiagnoseandresolveproblemswhileinteractingwithandpossiblytrainingtheenduser.Byusingoursolutionstosupportremoteusers,ourcustomershavereportedincreasedusersatisfactionwhilereducingcallhandlingtimebyasmuchas50%overphone-onlysupport.(cid:129)Reliable,fastandsecureservice.Ourservicepossessesbuilt-inredundancyofserversandotherinfrastructureinthreedatacenters,twolocatedintheUnitedStatesandonelocatedinEurope.Ourproprietaryplatformenablesourservicestoconnectandmanagedevicesatenhancedspeeds.Ourservicesimplementindustry-standardsecurityprotocolsandauthenticateandauthorizeusersofourserviceswithoutstoringpasswords.(cid:129)Easytotry,buyanduse.Ourservicesaresimpletoinstall,whichallowsourprospectivecustomerstouseourserviceswithinminutesofregisteringforatrial.OurcustomerscanuseourservicestomanagetheirremotesystemsfromanyWebbrowser.Inaddition,ourlowservice-deliverycostsandhosteddeliverymodelallowustooffereachofourservicesatcompetitivepricesandtoofferflexiblepaymentoptions.3OurCompetitiveStrengthsWebelievethatthefollowingcompetitivestrengthsdifferentiateusfromourcompetitorsandarekeytooursuccess:(cid:129)Largeestablishedusercommunity.AsofDecember31,2009,over28millionregisteredusershaveconnectedover94millionInternet-enableddevicestoaLogMeInservice.Theseusersdriveawarenessofourservicesthroughpersonalrecommendations,blogs,socialmediaandotheronlinecommunicationmethodsandprovideuswithasignificantaudiencetowhichwecanmarketandsellpremiumservices.(cid:129)Efficientcustomeracquisitionmodel.Webelieveourfreeproductsandourlargeinstalleduserbasehelptogenerateword-of-mouthreferrals,whichinturnincreasestheefficiencyofourpaidmarketingactivities,thelargemajorityofwhicharefocusedonpay-per-clicksearchengineadvertising.Salesofourpremiumservicesaregeneratedthroughword-of-mouthreferrals,Web-basedadvertising,expiringfreetrialsthatweconverttopayingcustomersandmarketingtoourexistingcustomeranduserbase.Webelievethisdirectapproachtoacquiringnewcustomersgeneratesanattractiveandpredictablereturnonoursalesandmarketingexpenditures.(cid:129)Technology-enabledcostadvantage.Ourservicedeliveryplatform,Gravity,establishessecureconnec-tionsovertheInternetbetweenremotecomputingdevicesandmanagesthedirecttransmissionofdatabetweenthem.Thispatentedplatformreducesourbandwidthandotherinfrastructurerequirements,whichwebelievemakesourservicesfasterandlessexpensivetodeliverascomparedtocompetingservices.Webelievethiscostadvantageallowsustoofferfreeservicesandserveabroaderusercommunitythanourcompetitors.(cid:129)On-demanddelivery.Deliveringourserviceson-demandallowsustoserveadditionalcustomerswithlittleincrementalexpenseandtodeploynewapplicationsandupgradesquicklyandefficientlytoourexistingcustomers.(cid:129)Highrecurringrevenueandhightransactionvolumes.Wesellourservicesonamonthlyorannualsubscriptionbasis,whichprovidesgreaterlevelsofrecurringrevenuesandpredictabilitycomparedtotraditionalperpetual,license-basedbusinessmodels.Approximately95%ofoursubscriptionshaveaone-yearterm.Webelievethatoursalesmodelofahighvolumeofnewandrenewedsubscriptionsatlowtransactionpricesincreasesthepredictabilityofourrevenuescomparedtoperpetuallicensed-basedsoftwarebusinesses.GrowthStrategyOurobjectiveistoextendourpositionasaleadingproviderofon-demand,remote-connectivitysolutions.Toaccomplishthis,weintendto:(cid:129)Acquirenewcustomers.Weacquirenewcustomersthroughword-of-mouthreferralsfromourexistingusercommunityandfrompaid,onlineadvertisingdesignedtoattractvisitorstoourwebsite.Wealsoencourageourwebsitevisitorstoregisterforfreetrialsofourpremiumservices.Wesupplementouronlineeffortswithemail,newsletterandothertraditionalmarketingcampaignsandbyparticipatingintradeeventsandWeb-basedseminars.Toincreaseoursales,weplantocontinueaggressivelymarketingoursolutionsandencouragingtrialsofourserviceswhileexpandingoursalesforce.(cid:129)Increasesalestoexistingcustomers.Weupsellandcross-sellourbroadportfolioofservicestoourexistingcustomerbase.Inthefirsttwelvemonthsaftertheirinitialpurchase,ourcustomers,onaverage,subscribetoadditionalservicesworthapproximately40%oftheirinitialpurchase.Tofurtherpenetrateourcustomerbase,weplantocontinueactivelymarketingourportfolioofservicesthroughe-commerceandbyexpandingoursalesforce.(cid:129)Continuetobuildourusercommunity.Wegrowourcommunityofusersbymarketingourservicesthroughpaidadvertisingthattargetsprospectivecustomerswhoareseekingremote-connectivitysolutionsandbyofferingourpopularfreeservices,LogMeInFreeandLogMeInHamachi2.This4strategyimprovestheeffectivenessofouronlineadvertisingbyincreasingourresponserateswhenpeopleseekingremote-connectivitysolutionsconductonlinesearches.Inaddition,ourlargeandgrowingcommunityofusersdrivesawarenessofourservicesandincreasesreferralsofpotentialcustomersandusers.(cid:129)Expandinternationally.Webelievethereisasignificantopportunitytoincreaseoursalesinternation-ally.Weoffersolutionsin12differentlanguagesandoursolutionsareusedinmorethan200countries.Weintendtoexpandourinternationalsalesandmarketingstaffandincreaseourinternationalmarketingexpenditurestotakeadvantageofthisopportunity.(cid:129)Continuetoexpandourserviceportfolio.Weintendtocontinuetoinvestinthedevelopmentofnewon-demand,remote-connectivitysolutionsforbusinesses,ITserviceprovidersandconsumers.(cid:129)Pursuestrategicacquisitions.Weplantopursueacquisitionsthatcomplementourexistingbusiness,representastrongstrategicfitandareconsistentwithouroverallgrowthstrategy.Wemayalsotargetfutureacquisitionstoexpandoraddfunctionalityandcapabilitiestoourexistingportfolioofservices,aswellasaddnewsolutionstoourportfolio.ServicesandTechnologyOurservicesareaccessedontheWebanddeliveredon-demandviaourservicedeliveryplatform,Gravity.Ourservicesgenerallyfallintooneoftwocategories:(cid:129)Remoteuseraccessservices.TheseservicesallowuserstoaccesscomputersandotherInternet-enableddevicesinordertocontinueworkingwhileawayfromtheofficeortoaccesspersonalsystemswhileawayfromhome.Theseservicesincludefreeremoteaccessofferingsandpremiumversionsthatincludeadditionalfeatures.(cid:129)Remotesupportandmanagementservices.TheseservicesareusedbyinternalITdepartmentsandbyexternalserviceandsupportorganizationstodeliversupportandmanagementofITresourcesremotely.RemoteUserAccessServicesLogMeInFreeisourfreeremoteaccessservice.ItprovidessecureaccesstoaremotecomputerorotherInternet-enableddevice.Onceinstalledonadevice,ausercanquicklyandeasilyaccessthatdevice’sdesktop,files,applicationsandnetworkresources.LogMeInPro2isourpremiumremoteaccessservice.ItcanberapidlyinstalledwithoutITexpertise.Userstypicallyengageinatrialpriortopurchase.LogMeInPro2offersseveralpremiumfeaturesnotavailablethroughLogMeInFree,including:(cid:129)Filetransfer.Filesandfolderscanbemovedeasilybetweencomputersusingdrag-and-dropordual-panefiletransfercapabilities.(cid:129)Remotesound.Ausercanhearonhislocalcomputere-mailnotifications,musicandpodcastsoriginatingfromaremotePC.(cid:129)Fileshare.LargefilescanbedistributedbysendingalinkthatpermitsremotethirdpartiestodownloadafiledirectlyfromaLogMeInsubscriber’scomputer.(cid:129)Remotetolocalprinting.FilesfromaremotePCareautomaticallyprintedtoalocalprinterwithoutdownloadingdriversormanuallyconfiguringprintersettings.(cid:129)Desktopsharing.Aremotethird-partyusercanbeinvitedtovieworcontrolaLogMeInuser’sdesktopforonlinemeetingsandcollaboration.(cid:129)Filesync.Filesandfolderscanbesynchronizedbetweenremoteandlocalcomputers.(cid:129)Drivemapping.DrivesonaremotePCcanbeaccessedasiftheyarelocal.5LogMeInHamachi2isahostedvirtualprivatenetwork,orVPN,servicethatsetsupacomputernetworkamongremotecomputers.Ittypicallyworkswithexistingnetworkandfirewallconfigurationsandcanbemanagedfromawebbrowserortheuser’ssoftware.UsingLogMeInHamachi2,userscansecurelycommunicateovertheInternetasiftheircomputersareonthesamelocalareanetwork,allowingforremoteaccessandvirtualnetworking.LogMeInHamachi2isofferedbothasafreeservicefornon-commercialuseandasapaidserviceforcommercialuse.LogMeInIgnitionisapremiumservicethatdeliversoneclickaccesstoremotecomputersthatsubscribetoLogMeInFreeorLogMeInPro2.UserscaninstallLogMeInIgnitiononacomputerorruntheapplicationfromauniversalstoragedeviceinordertodirectlyaccesstheirsubscribedcomputer,eliminatingtheneedforinstallationofadditionalsoftware.LogMeInIgnitionalsodeliversaccessthroughanAppleiPhoneorAppleiPodtouch.RemoteSupportandManagementServicesLogMeInRescueisaWeb-basedremotesupportserviceusedbyhelpdeskprofessionalstosupportremotecomputersandapplicationsandassistcomputerusersviatheInternet.LogMeInRescueenablesthedeliveryofinteractivesupporttoaremotecomputerwithouthavingpre-installedsoftware.Theendusergrantspermissiontothehelpdesktechnicianbeforethetechniciancanaccess,vieworcontroltheenduser’scomputer.UsingLogMeInRescue,supportprofessionalscancommunicatewithendusersthroughanInternetchatwindowwhilediagnosingandrepairingcomputerproblems.Ifgivenadditionalpermissionbythecomputeruser,thesupportprofessionalcantakeoverkeyboardandmousecontroloftheenduser’scomputertotakenecessarysupportactionsandtotraintheenduserontheuseofsoftwareandoperatingsystemapplications.Uponcompletionofthesession,allLogMeInsoftwareisremovedfromtheremotecomputer.LogMeInRescueisusedbycompaniesofvaryingsizes,fromone-personsupportorganizationstoFortune100companiesservicingemployeesandcustomers.LogMeInRescueincludesthefollowingfeatures:(cid:129)Rapidincidentresolution.HelpdeskprofessionalscangainaccesstothetargetPCquickly,ofteninunder60seconds,andcantakeadvantageofourremotecontrolcapabilitiestoperformsupportfunctionsavailablethroughatechnicianconsole,including:readingcriticalsysteminformation,deployingscripts,copyingfilesthroughdraganddropandrebootingthemachine.(cid:129)Seamlessend-userexperience.LogMeInRescuefacilitatesanenduser’sreceiptofcustomersupport.Endusersremainincontrolofthesupportsessionandcaninitiateasessioninavarietyofways,suchasbyclickingalinkonawebsiteorinanemailorbyenteringapincodeprovidedbythesupportprovider.Theenduserthenseesachatwindow,brandedwiththesupportprovider’slogo,andrespondstoaseriesofaccessandcontrolrequestswhilechattingwiththesupportprovider.(cid:129)Supportsessionandqueuemanagement.ThehelpdeskprofessionalcanusetheLogMeInTechnicianConsoletomanageaqueueofsupportincidentrequestsanduptotensimultaneousliveremotesessions.Thesupportqueuecanbesharedandcurrentlivesessionscanbetransferredtootherco-workersasneeded.(cid:129)AdministrationCenter.TheAdministrationCenterisusedtocreateandassignpermissionsforgroupsofsupporttechnicians.Itisalsousedtocreatesupportchannelstheweb-basedlinksand/oriconsthatautomaticallyconnectcustomerstotechniciansandassignthemtospecificgroups.SupportmanagersusetheAdministrationCentertogeneratereportsaboutindividualsessions,post-sessionsurveydataandtechnicianactivity.(cid:129)Integratedsecurity.LogMeInRescueincludessecurityfeaturesdesignedtosafeguardthesecurityandprivacyofboththesupportproviderandtheenduser.Alldatatransmissionisencryptedusingindustry-standardencryptionoftenusedbyfinancialinstitutions.Sessionscanberecordedbythesupportproviderandwillcreatearecordofeachlevelofaccesspermissiongrantedbytheenduser.Anyfilestransferredbetweencomputersareuniquelyidentifiedtodemonstratethatnochangesweremadetooriginalfiles.6LogMeInRescue+MobileisanextensionofLogMeInRescue’sweb-basedremotesupportservicethatallowscallcentertechniciansandITprofessionalstoremotelyaccessandsupportsmartphones.Smartphoneusersrequestinghelpwillreceiveatextmessagefromatechniciantodownloadasmallsoftwareapplicationontothesmartphone.Onceinstalled,theuserentersacodeconnectingthedevicetothetechnician.Aftertheusergrantsthetechnicianpermission,thetechniciancanremotelyaccessandcontrolthephonefromtheirRescue+MobileTechnicianConsoletoremotelycontrolandupdatethephone’sconfigurationsettings,accesssysteminformation,filetransferandrebootthesmartphone.LogMeInCentralisaweb-basedmanagementconsolethathelpsbusinessusers,ITprofessionalsandotherusersdeployandadministerLogMeInPro2,LogMeInFreeandLogMeInHamachi2.LogMeInCentralisofferedasapremiumserviceandincludesthefollowingfeatures:(cid:129)Usermanagement.LogMeInCentralprovidesaccountholderswiththeabilitytomanageadditionalusersforanaccount,includinguseraccesscontrolsandpermissions.(cid:129)Softwaredeployment.LogMeInCentralallowsthedeploymentofLogMeInhostsoftwareovertheweb.(cid:129)Reporting.LogMeInCentralprovidestheabilitytoreportonaccount,deviceandsessiondata.(cid:129)Integratedsecurity.LogMeInCentralutilizesindustry-standardencryptionandauthenticationmethods.Inaddition,LogMeInCentralalsosupportsdetailedaccountauditlogging,includingchangestoaccountemailaddresses,failedattemptstologinandchangestoaccountsecuritysettings.(cid:129)Hostconfiguration.LogMeInCentralenablestheconfigurationofLogMeInhostsoftware,includingaccesssettings,networkrestrictionsandothercomplianceoptions.(cid:129)Computergroupingandaccountpersonalization.LogMeInCentralallowsuserstoorganizetheirdevicesintospecificgroups,andpersonalizetheconsoletomeetspecificneeds,includingthesavedsearches,linkstoresourcesandcustomizedchartingandgraphing.WhencombinedwithLogMeInPro2hostsoftware,LogMeInCentralalsoprovidesalertingandmonitor-ing,computerinventorytracking,backgroundloginandadvancedreportingandanalysis.WhencombinedwithLogMeInHamachi2hostsoftware,LogMeInCentralprovidesadditionalweb-basedmanagementcapabilitiesforVPNconnectivityservices,suchashub-and-spoke,gatewayandmeshnetworkingandadvancedreportingandanalysis.WealsoofferasystemsadministrationproductcalledRemotelyAnywhere.RemotelyAnywhereisusedtomanagepersonalcomputersandserversfromwithintheITsystemofanenterprise.UnlikeourLogMeInservices,RemotelyAnywhereislicensedtoourcustomersonaperpetualbasis,andweoffermaintenancecoveringupgradesandservicesupportingthisapplication.LogMeInBackupisaservicethatsubscribersinstallontwoormorecomputerstocreateabackupnetworkandisgenerallysoldasacomplementtotheLogMeInCentralorLogMeInPro2services.LogMeInBackupiseasytoinstallandprovidesITserviceprovidersasimplebackupalternativetooffertheircustomersusingstoragecapacitythattheycontrol.Userscantransferspecifiedfilesandfoldersfromonecomputertoanothereithermanuallyorautomaticallyinaccordancewithapre-determinedschedule.Filescanbestoredon,andrestoredto,anyPCthatthesubscriberchooses,usingindustry-standardencryptionprotocolsforthetransmissionandstorageofthedata.LogMeInGravityServiceDeliveryPlatformTheGravityproprietaryplatformconsistsofsoftwareapplications,customizeddatabasesandwebservers.GravityestablishessecureconnectionsovertheInternetbetweenremotecomputersandotherInternet-enableddevicesandmanagesthedirecttransmissionofdatabetweenremotelyconnecteddevices.Thispatentedplatformreducesourbandwidthandotherinfrastructurerequirements,whichwebelievemakesourservicesfasterandlessexpensivetodeliverascomparedtocompetingservices.Gravityconsistsofproprietary7softwareapplicationsthatrunonstandardhardwareserversandoperatingsystemsandisdesignedtobescalableandserveourlarge-scaleusercommunityatlowcost.Theinfrastructure-relatedcostsofdeliveringourservicesincludebandwidth,power,serverdepreciationandco-locationfees.GravitytransmitsdatausingacombinationofmethodsworkingtogethertorelaydataviaourdatacentersandtotransmitdataovertheInternetdirectlybetweenend-pointdevices.DuringthetwelvemonthsendedDecember31,2009,morethan90%ofthedatatransmittedbyourserviceswastransmitteddirectlybetweenend-pointdevices,reducingourbandwidthandbandwidth-relatedcosts.Gravityisphysicallyhostedinthreeseparatedatacenters.Weleasespaceinco-locationhostingfacilitiesoperatedbythirdparties.TwoofourGravitydatacentersarelocatedintheUnitedStates,andthethirdislocatedinEurope.DuringthetwelvemonthsendedDecember31,2009,weaveraged10.8millioncomputersconnectingtoourGravityserviceeachday.Ourgoalistomaintainsufficientexcesscapacitysuchthatanyoneofthedatacenterscouldfail,andtheremainingdatacenterscouldhandletheloadwithoutextensivedisruptiontoourservice.DuringthetwelvemonthsendedDecember31,2009,ourGravityservicewasavailable99.96%ofthetime.Gravityalsoimplementsmultiplelayersofsecurity.Ourserviceutilizesindustry-standardsecurityprotocolsforencryptionandauthentication.AccesstoadevicethroughourservicerequiressystempasswordssuchastheusernameandpasswordforWindows.Wealsoaddadditionallayersofsecuritysuchassingle-usepasswords,IPaddressfilteringandIPaddresslockout.Forsecuritypurposes,Gravitydoesnotsaveend-userpasswordsfordevices.SalesandMarketingOursalesandmarketingeffortsaredesignedtoattractprospectstoourwebsite,enrolltheminfreetrialsofourservicesandconvertthemtoandretainthemaspayingcustomers.Wealsoexpendsalesandmarketingresourcestoattractusersofourfreeservices.Weacquirenewcustomersthroughacombinationofpaidandunpaidsources.Wealsoinvestinpublicrelationstobroadenthegeneralawarenessofourservicesandtohighlightthequalityandreliabilityofourservicesforspecificaudiences.Weareconstantlyseekingandemployingnewmethodstoreachmoreusersandtoconvertthemtopayingcustomers.PaidSourcesofDemandGenerationOnlineAdvertising.Weadvertiseonlinethroughpay-per-clickspendingwithsearchengines,banneradvertisingwithonlineadvertisingnetworksandotherwebsitesandemailnewsletterslikelytobefrequentedbyourtargetconsumers,SMBsandITprofessionals.Tradeshows.Weshowcaseoursuiteofservicesattechnologyandindustry-specifictradeshows.Ourparticipationintheseshowsrangesfromelaboratepresentationsinfrontoflargegroupstoone-on-onediscussionsanddemonstrationsatmannedbooths.In2009,weattended28tradeshowsintheUnitedStatesandEurope.OfflineAdvertising.Ourofflineprintadvertisingiscomprisedofpublications,suchasWinITPro,CRN,andVARBusiness,whicharetargetedatITprofessionals.Wesponsoradvertorialsinregionalnewspapers,whichtargetITconsumers.Additionally,wehaveadvertisedusingmoretraditionalmethods,suchasradioandoutdooradvertising,inregionalmarkets.UnpaidSourcesofDemandGenerationWord-of-MouthReferrals.Webelievethatwehavedevelopedaloyalcustomeranduserbase,andnewcustomersfrequentlyclaimtohaveheardaboutusfromacurrentLogMeInuser.Manyofourusersarriveatourwebsiteviaword-of-mouthreferralsfromexistingusersofourservices.DirectAdvertisingIntoOurUserCommunity.Wehavealargeexistingcommunityoffreeusersandpayingcustomers.Usersofmostofourservices,includingourmostpopularservice,LogMeInFree,cometo8ourwebsiteeachtimetheyinitiateanewremoteaccesssession.Weusethisopportunitytopromoteadditionalpremiumservicestothem.OtherMarketingInitiativesSocialMediaMarketing.WeparticipateinonlinecommunitiessuchasTwitter,FacebookandYouTubeforthepurposeofmarketing,publicrelationsandcustomerservice.Throughtheseonlinecollaborationsites,weactivelyengageourusers,learnabouttheirwants,andfosterword-of-mouthbycreatingandrespondingtocontentaboutLogMeInevents,promotions,productnewsanduserquestions.Web-BasedSeminars.Weofferfreeonlineseminarstocurrentandprospectivecustomersdesignedtoeducatethemaboutthebenefitsofremoteaccess,supportandadministration,particularlywithLogMeIn,andguidethemintheuseofourservices.WeoftenhighlightcustomersuccessstoriesandfocustheseminaronbusinessproblemsandkeymarketandITtrends.PublicRelations.Weengageintargetedpublicrelationsprograms,includingpressreleasesannouncingimportantcompanyeventsandproductreleases,interviewswithreportersandanalysts,bothgeneralandindustryspecific,attendingpanelandgroupdiscussionsandmakingspeechesatindustryevents.Wealsoregisterourservicesinawardscompetitionsandencouragebloggerstocommentonourproducts.SalesEffortsandOtherInitiativesNewAccountSales.Oursalesaretypicallyprecededbyatrialofoneofourservices,and98%ofourpurchasetransactionsaresettledviacreditcard.Oursalesoperationsteamdetermineswhetherornotatrialshouldbemanagedbyatelephone-basedsalesrepresentativeorhandledviaoure-commercesalesprocess.AsofDecember31,2009,weemployed49telephone-basedsalesrepresentativestomanagenewlygeneratedtrials.Inaddition,asmallsalesandbusinessdevelopmentteamconcentratesonsalestolargerorganizationsandtheformulationofstrategictechnologypartnershipsthatareintendedtogenerateadditionalsales.RenewalSales.Allofourservicesaresoldonasubscriptionbasis.Approximately95%ofoursubscriptionshaveatermofoneyear.InternationalSales.WecurrentlyhavesalesteamslocatedinEuropeandAustraliafocusingoninternationalsales.IneachoftheyearsendedDecember31,2007,2008and2009,wegeneratedapproxi-mately30%ofoursalesordersoutsideofNorthAmerica.AsofDecember31,2007,2008and2009,wehadlong-livedassetsofapproximately20%,22%and38%,respectively,locatedoutsideoftheUnitedStates.ForthetwelvemonthsendedDecember31,2007,2008and2009,wespent$19.5million,$31.6millionand$35.8million,respectively,onsalesandmarketing.IntelRelationshipInDecember2007,weenteredintoaserviceandmarketingagreementwithIntelCorporationtojointlydevelopaservicethatdeliversconnectivitytocomputersbuiltwithIntelcomponents.Underthetermsofthisfour-yearagreement,wehaveadaptedourservicedeliveryplatform,Gravity,toworkwithspecifictechnologydeliveredwithIntelhardwareandsoftwareproducts.ThisagreementprovidesthatIntelwillmarketandselltheservicetoitscustomers.Intelpaysusaminimumlicenseandservicefeeonaquarterlybasisduringthetermoftheagreement.WebeganrecognizingrevenueassociatedwiththeIntelserviceandmarketingagreementinthequarterendedSeptember30,2008.Inaddition,wesharerevenuegeneratedbytheuseoftheservicesbythirdpartieswithInteltotheextentitexceedstheminimumpayments.Inconjunctionwiththisagreement,IntelCapitalpurchased2,222,223sharesofourseriesB-1redeemableconvertiblepreferredstockfor$10.0millioninDecember2007,whichconvertedinto888,889sharesofcommonstockupontheclosingofourinitialpublicoffering,orIPO.InJune2009,weenteredintoalicense,royaltyandreferralagreementwithIntelAmericas,Inc.,pursuanttowhichwewillpayIntelaspecifiedroyaltysothatwemaydistributethetechnologycoveredbytheserviceandmarketingagreementwithIntelCorporation.Inaddition,intheeventIntelreferscustomerstousunderthisagreement,wewillpayIntelspecifiedfees.9ResearchandDevelopmentWehavemadeandintendtocontinuemakingsignificantinvestmentsinresearchanddevelopmentinordertocontinuetoimprovetheefficiencyofourservicedeliveryplatform,improveexistingservicesandbringnewservicestomarket.OurprimaryengineeringorganizationisbasedinBudapest,Hungary,wherethefirstversionofourservicewasdeveloped.Ourfoundingengineeringteamhasworkedtogetherforover10years,designingandrunninghighlylarge-scaleInternetservices.Approximately42%ofouremployees,asofDecember31,2009,workinresearchanddevelopment.Researchanddevelopmentexpensestotaled$6.7millionin2007,$12.0millionin2008and$13.1millionin2009.InJune2009,wereceivedapprovalofagrantfromtheHungariangovernmentwhichreimbursesusforaportionofourHungarianresearchanddevelopmentrelatedcostsforafouryearperiod,beginninginSeptember2008.Thesereimbursementsarerecordedasareductionofresearchanddevelopmentexpenseandtotaledapproximately$200,000intheyearendedDecember31,2009.CompetitionThemarketforremote-accessbasedproductsandservicesisevolving,andweexpecttofaceadditionalcompetitioninthefuture.Webelievethatthekeycompetitivefactorsinthemarketinclude:(cid:129)servicereliability;(cid:129)easeofinitialsetupanduse;(cid:129)fitnessforuseandthedesignoffeaturesthatbestmeettheneedsofthetargetcustomer;(cid:129)theabilitytosupportmultipledevicetypesandoperatingsystems;(cid:129)costofcustomeracquisition;(cid:129)productandbrandawareness;(cid:129)theabilitytoreachlargefragmentedgroupsofusers;(cid:129)costofservicedelivery;and(cid:129)pricingflexibility.Webelievethatourlarge-scaleuserbase,efficientcustomeracquisitionmodelandlowservicedeliverycostsenableustocompeteeffectively.Citrix’sOnlinedivisionandCisco’sWebExdivisionareourtwomostsignificantcompetitors.Bothcompaniesofferaservicethatprovideshostedremoteaccessandremoteaccess-basedservices.Bothofthesecompetitorsfocusagreaterpercentageoftheirproductofferingsoncollaborationthanwedo,whilewecontinuetofocusourdevelopmentandmarketingeffortsonservingtheneedsofITstaffandITserviceproviders.Bothofthesecompetitorsattractnewcustomersthroughtraditionalmarketingandsalesefforts,whilewehavefocusedfirstonbuildingalarge-scalecommunityofusers.OurapproachisdifferentiatedfrombothCitrixandWebExbecausewebelievewereachsignificantlymoreuserswhichallowsustoattractpayingcustomersefficiently.Inaddition,certainofoursolutions,includingourfreeremoteaccessservice,alsocompetewithcurrentorpotentialservicesofferedbyMicrosoftandApple.Certainofourcompetitorsmayalsooffer,currentlyorinthefuture,lowerpriced,orfree,productsorservicesthatcompetewithoursolutions.Webelieveourlargeuserbasealsogivesusanadvantageoversmallercompetitorsandpotentialnewentrantsintothemarketbymakingitmoreexpensiveforthemtogaingeneralmarketawareness.Wecurrentlycompeteagainstseveralsmallercompetitors,includingNTRglobal(headquarteredinSpain),NetViewerandTeamViewer(headquarteredinGermany)andBomgar.Inaddition,potentialcustomersmaylooktosoftware-10basedandfreesolutions,includingSymantec’sPCAnywhereandMicrosoft’sRemoteDesktop,whichcomesbundledintomostcurrentversionsoftheMicrosoftoperatingsystem,andothers.Manyofouractualandpotentialcompetitorsenjoygreaternamerecognition,longeroperatinghistories,morevariedproductsandservicesandlargermarketingbudgets,aswellassubstantiallygreaterfinancial,technicalandotherresources,thanwedo.Inaddition,wemayalsofacefuturecompetitionfromnewmarketentrants.Webelievethatourlargeuserbase,efficientcustomeracquisitionmodelandlowservicedeliverypositionuswelltocompeteeffectivelyinthefuture.IntellectualPropertyOurintellectualpropertyrightsareimportanttoourbusiness.Werelyonacombinationofcopyright,tradesecret,trademarkandotherrightsintheUnitedStatesandotherjurisdictions,aswellasconfidentialityproceduresandcontractualprovisionstoprotectourproprietarytechnology,processesandotherintellectualproperty.Wealsohaveoneissuedpatentandthreepatentspendingandareintheprocessoffilingadditionalpatentapplicationsthatcovermanyfeaturesofourservices.Weenterintoconfidentialityandotherwrittenagreementswithouremployees,customers,consultantsandpartners,andthroughtheseandotherwrittenagreements,weattempttocontrolaccesstoanddistributionofoursoftware,documentationandotherproprietarytechnologyandotherinformation.Despiteoureffortstoprotectourproprietaryrights,thirdpartiesmay,inanunauthorizedmanner,attempttouse,copyorotherwiseobtainandmarketordistributeourintellectualpropertyrightsortechnologyorotherwisedevelopproductsorserviceswiththesamefunctionalityasourservices.Inaddition,U.S.patentfilingsareintendedtoprovidetheholderwitharighttoexcludeothersfrommaking,using,sellingorimportingintheUnitedStatestheinventionscoveredbytheclaimsofgrantedpatents.Ifgranted,ourpatentsmaybecontested,circumventedorinvalidated.Moreover,therightsthatmaybegrantedinthosependingpatentsmaynotprovideuswithproprietaryprotectionorcompetitiveadvantages,andwemaynotbeabletopreventthirdpartiesfrominfringingthesepatents.Therefore,theexacteffectofourpendingpatents,ifissued,andtheotherstepswehavetakentoprotectourintellectualpropertycannotbepredictedwithcertainty.Althoughtheprotectionaffordedbycopyright,tradesecretandtrademarklaw,writtenagreementsandcommonlawmayprovidesomeadvantages,webelievethatthefollowingfactorshelpusmaintainacompetitiveadvantage:(cid:129)thetechnologicalskillsofourresearchanddevelopmentpersonnel;(cid:129)frequentenhancementstoourservices;and(cid:129)continuedexpansionofourproprietarytechnology.“LogMeIn”isaregisteredtrademarkintheUnitedStatesandintheEuropeanUnion.Wealsoholdanumberofothertrademarksandservicemarksidentifyingcertainofourservicesorfeaturesofourservices.Wealsohaveanumberoftrademarkapplicationspending.EmployeesAsofDecember31,2009,wehad338full-timeemployees.Noneofouremployeesarerepresentedbylaborunionsorcoveredbycollectivebargainingagreements.Weconsiderourrelationshipwithouremployeestobegood.SegmentsWehavedeterminedthatwehaveoneoperatingsegment.Formoreinformationaboutoursegments,seeNote2toourconsolidatedfinancialstatements,SummaryofSignificantAccountingPolicies—SegmentData.11ITEM1A.RISKFACTORSThesearerisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromtheresultscontemplatedbytheforward-lookingstatementscontainedinthisAnnualReportonForm10-K.Becauseofthesefactors,aswellasothervariablesaffectingouroperatingresults,pastfinancialperformanceshouldnotbeconsideredasareliableindicatoroffutureperformanceandinvestorsshouldnotusehistoricaltrendstoanticipateresultsortrendsinfutureperiods.Theserisksarenottheonlyonesweface.Pleasealsosee“FORWARD-LOOKINGSTATEMENTS”earlierinthisAnnualReportonForm10-K.RISKSRELATEDTOOURBUSINESSOurlimitedoperatinghistorymakesitdifficulttoevaluateourcurrentbusinessandfutureprospects.Ourcompanyhasbeeninexistencesince2003,andmuchofourgrowthhasoccurredinrecentperiods.Ourlimitedoperatinghistorymaymakeitdifficultforyoutoevaluateourcurrentbusinessandourfutureprospects.Wehaveencounteredandwillcontinuetoencounterrisksanddifficultiesfrequentlyexperiencedbygrowingcompaniesinrapidlychangingindustries,includingincreasingexpensesaswecontinuetogrowourbusiness.Ifwedonotmanagetheseriskssuccessfully,ourbusinesswillbeharmed.Ourbusinessissubstantiallydependentonmarketdemandfor,andacceptanceof,theon-demandmodelfortheuseofsoftware.Wederive,andexpecttocontinuetoderive,substantiallyallofourrevenuefromthesaleofon-demandsolutions,arelativelynewandrapidlychangingmarket.Asaresult,widespreadacceptanceanduseoftheon-demandbusinessmodeliscriticaltoourfuturegrowthandsuccess.Undertheperpetualorperiodiclicensemodelforsoftwareprocurement,usersofthesoftwaretypicallyrunapplicationsontheirhardware.BecausecompaniesaregenerallypredisposedtomaintainingcontroloftheirITsystemsandinfrastructure,theremayberesistancetotheconceptofaccessingthefunctionalitythatsoftwareprovidesasaservicethroughathirdparty.Ifthemarketforon-demand,softwaresolutionsfailstogroworgrowsmoreslowlythanwecurrentlyanticipate,demandforourservicescouldbenegativelyaffected.Growthofourbusinessmaybeadverselyaffectedifbusinesses,ITsupportprovidersorconsumersdonotadoptremoteaccessorremotesupportsolutionsmorewidely.Ourservicesemploynewandemergingtechnologiesforremoteaccessandremotesupport.Ourtargetcustomersmayhesitatetoaccepttherisksinherentinapplyingandrelyingonnewtechnologiesormethodologiestosupplanttraditionalmethodsofremoteconnectivity.Ourbusinesswillnotbesuccessfulifourtargetcustomersdonotaccepttheuseofourremoteaccessandremotesupporttechnologies.AdverseeconomicconditionsorreducedITspendingmayadverselyimpactourrevenuesandprofitability.OurbusinessdependsontheoveralldemandforITandontheeconomichealthofourcurrentandprospectivecustomers.Theuseofourserviceisoftendiscretionaryandmayinvolveacommitmentofcapitalandotherresources.Weakeconomicconditions,orareductioninITspendingevenifeconomicconditionsimprove,wouldlikelyadverselyimpactourbusiness,operatingresultsandfinancialconditioninanumberofways,includingbylengtheningsalescycles,loweringpricesforourservicesandreducingsales.FailuretoreneworearlyterminationofouragreementwithIntelwouldadverselyimpactourrevenues.InDecember2007,weenteredintoaserviceandmarketingagreementwithIntelCorporationtojointlydevelopandmarketaservicethatdeliversconnectivitytocomputersbuiltwithIntelcomponents.Underthetermsofthisfour-yearagreement,weareadaptingourservicedeliveryplatform,Gravity,toworkwithspecifictechnologydeliveredwithIntelhardwareandsoftwareproducts.IfweareunabletorenewouragreementwithIntelaftertheinitialfour-yeartermoncommerciallyreasonableterms,oratall,ourrevenuewoulddecrease.Inaddition,theagreementgrantsIntelearlyterminationrightsincertaincircumstances,such12asafailureofthepartiestoexceedcertainminimumrevenuelevelsafterthethirdyearoftheagreement.IfIntelexercisesanyofitsearlyterminationrights,evenafterIntel’spaymentofrequiredearlyterminationfees,ourrevenueswoulddecrease.Assertionsbyathirdpartythatourservicesinfringeitsintellectualproperty,whetherornotcorrect,couldsubjectustocostlyandtime-consuminglitigationorexpensivelicenses.Thereisfrequentlitigationinthesoftwareandtechnologyindustriesbasedonallegationsofinfringementorotherviolationsofintellectualpropertyrights.Aswefaceincreasingcompetitionandbecomeincreasinglyvisible,thepossibilityofintellectualpropertyrightsclaimsagainstusmaygrow.During2007and2008,wewereadefendantinthreepatentinfringementlawsuitsandpaidapproximately$2.8milliontosettletheselawsuits.Inaddition,onJuly20,2009wereceivedserviceofacomplaintfromPB&JSoftware,LLC,allegingthatwehaveinfringedononeoftheirpatentsrelatingtoaparticularapplicationorsystemfortransferringorstoringback-upcopiesoffilesfromonecomputertoasecondcomputer.Whilewebelievewehavemeritoriousdefensestothisclaim,wecouldberequiredtospendsignificantresourcesinvestigatinganddefendingthisclaim.Inaddition,anyadversedeterminationorsettlementofthisclaimcouldpreventusfromofferingaportionofourservicesorrequireustopaydamagesorlicensefees.Inaddition,althoughwehavelicensedproprietarytechnology,wecannotbecertainthattheowners’rightsinsuchtechnologywillnotbechallenged,invalidatedorcircumvented.Furthermore,manyofourserviceagreementsrequireustoindemnifyourcustomersforcertainthird-partyintellectualpropertyinfringementclaims,whichcouldincreaseourcostsasaresultofdefendingsuchclaimsandmayrequirethatwepaydamagesiftherewereanadverserulingrelatedtoanysuchclaims.Thesetypesofclaimscouldharmourrelationshipswithourcustomers,maydeterfuturecustomersfromsubscribingtoourservicesorcouldexposeustolitigationfortheseclaims.Evenifwearenotapartytoanylitigationbetweenacustomerandathirdparty,anadverseoutcomeinanysuchlitigationcouldmakeitmoredifficultforustodefendourintellectualpropertyinanysubsequentlitigationinwhichweareanamedparty.Anyintellectualpropertyrightsclaimagainstusorourcustomers,withorwithoutmerit,couldbetime-consuming,expensivetolitigateorsettleandcoulddivertmanagementattentionandfinancialresources.Anadversedeterminationalsocouldpreventusfromofferingourservices,requireustopaydamages,requireustoobtainalicenseorrequirethatwestopusingtechnologyfoundtobeinviolationofathirdparty’srightsorprocureordevelopsubstituteservicesthatdonotinfringe,whichcouldrequiresignificantresourcesandexpenses.Wedependonsearchenginestoattractasignificantpercentageofourcustomers,andifthosesearchengineschangetheirlistingsorincreasetheirpricing,itwouldlimitourabilitytoattractnewcustomers.Manyofourcustomerslocateourwebsitethroughsearchengines,suchasGoogle.Searchenginestypicallyprovidetwotypesofsearchresults,algorithmicandpurchasedlistings,andwerelyonbothtypes.Algorithmiclistingscannotbepurchasedandaredeterminedanddisplayedsolelybyasetofformulasdesignedbythesearchengine.Searchenginesrevisetheiralgorithmsfromtimetotimeinanattempttooptimizesearchresultlistings.Ifthesearchenginesonwhichwerelyforalgorithmiclistingsmodifytheiralgorithmsinamannerthatreducestheprominenceofourlisting,fewerpotentialcustomersmayclickthroughtoourwebsite,requiringustoresorttoothercostlyresourcestoreplacethistraffic.Anyfailuretoreplacethistrafficcouldreduceourrevenueandincreaseourcosts.Inaddition,costsforpurchasedlistingshaveincreasedinthepastandmayincreaseinthefuture,andfurtherincreasescouldhavenegativeeffectsonourfinancialcondition.Wehavehadahistoryoflosses.Weexperiencednetlossesof$6.7millionfor2006,$9.1millionfor2007,and$5.4millionfor2008.InthequarterendedSeptember30,2008,weachievedprofitabilityandreportednetincomeforthefirsttime.Wereportednetincomeof$8.8millionfor2009.Wecannotpredictifwewillsustainthisprofitabilityor,ifwefailtosustainthisprofitability,againattainprofitabilityinthenearfutureoratall.Weexpecttocontinue13makingsignificantfutureexpenditurestodevelopandexpandourbusiness.Inaddition,asanewlypubliccompany,weincuradditionalsignificantlegal,accountingandotherexpensesthatwedidnotincurasaprivatecompany.Theseincreasedexpendituresmakeitharderforustomaintainfutureprofitability.Ourrecentgrowthinrevenueandcustomerbasemaynotbesustainable,andwemaynotachievesufficientrevenuetoachieveormaintainprofitability.Wemayincursignificantlossesinthefutureforanumberofreasons,includingduetotheotherrisksdescribedinthisreportandwemayencounterunforeseenexpenses,difficulties,complicationsanddelaysandotherunknownevents.Accordingly,wemaynotbeabletomaintainprofitability,andwemayincursignificantlossesfortheforeseeablefuture.Ifweareunabletoattractnewcustomerstoourservicesonacost-effectivebasis,ourrevenueandresultsofoperationswillbeadverselyaffected.Wemustcontinuetoattractalargenumberofcustomersonacost-effectivebasis,manyofwhomhavenotpreviouslyusedon-demand,remote-connectivitysolutions.Werelyonavarietyofmarketingmethodstoattractnewcustomerstoourservices,suchaspayingprovidersofonlineservicesandsearchenginesforadvertisingspaceandpriorityplacementofourwebsiteinresponsetoInternetsearches.Ourabilitytoattractnewcustomersalsodependsonthecompetitivenessofthepricingofourservices.Ifourcurrentmarketinginitiativesarenotsuccessfulorbecomeunavailable,ifthecostofsuchinitiativesweretosignificantlyincrease,orifourcompetitorsoffersimilarservicesatlowerprices,wemaynotbeabletoattractnewcustomersonacost-effectivebasisand,asaresult,ourrevenueandresultsofoperationswouldbeadverselyaffected.Ifweareunabletoretainourexistingcustomers,ourrevenueandresultsofoperationswouldbeadverselyaffected.Wesellourservicespursuanttoagreementsthataregenerallyoneyearinduration.Ourcustomershavenoobligationtorenewtheirsubscriptionsaftertheirsubscriptionperiodexpires,andthesesubscriptionsmaynotberenewedonthesameoronmoreprofitableterms.Asaresult,ourabilitytogrowdependsinpartonsubscriptionrenewals.Wemaynotbeabletoaccuratelypredictfuturetrendsincustomerrenewals,andourcustomers’renewalratesmaydeclineorfluctuatebecauseofseveralfactors,includingtheirsatisfactionordissatisfactionwithourservices,thepricesofourservices,thepricesofservicesofferedbyourcompetitorsorreductionsinourcustomers’spendinglevels.Ifourcustomersdonotrenewtheirsubscriptionsforourservices,renewonlessfavorableterms,ordonotpurchaseadditionalfunctionalityorsubscriptions,ourrevenuemaygrowmoreslowlythanexpectedordecline,andourprofitabilityandgrossmarginsmaybeharmed.Ifwefailtoconvertourfreeuserstopayingcustomers,ourrevenueandfinancialresultswillbeharmed.Asignificantportionofouruserbaseutilizesourservicesfreeofchargethroughourfreeservicesorfreetrialsofourpremiumservices.Weseektoconvertthesefreeandtrialuserstopayingcustomersofourpremiumservices.Ifourrateofconversionsuffersforanyreason,ourrevenuemaydeclineandourbusinessmaysuffer.Wemayexpandbyacquiringorinvestinginothercompanies,whichmaydivertourmanagement’sattention,resultinadditionaldilutiontoourstockholdersandconsumeresourcesthatarenecessarytosustainourbusiness.Ourbusinessstrategymayincludeacquiringcomplementaryservices,technologiesorbusinesses.Wealsomayenterintorelationshipswithotherbusinessestoexpandourportfolioofservicesorourabilitytoprovideourservicesinforeignjurisdictions,whichcouldinvolvepreferredorexclusivelicenses,additionalchannelsofdistribution,discountpricingorinvestmentsinothercompanies.Negotiatingthesetransactionscanbetime-consuming,difficultandexpensive,andourabilitytoclosethesetransactionsmayoftenbesubjecttoconditionsorapprovalsthatarebeyondourcontrol.Consequently,thesetransactions,evenifundertakenandannounced,maynotclose.14Anacquisition,investmentornewbusinessrelationshipmayresultinunforeseenoperatingdifficultiesandexpenditures.Inparticular,wemayencounterdifficultiesassimilatingorintegratingthebusinesses,technologies,products,personneloroperationsoftheacquiredcompanies,particularlyifthekeypersonneloftheacquiredcompanychoosenottoworkforus,thecompany’ssoftwareisnoteasilyadaptedtoworkwithoursorwehavedifficultyretainingthecustomersofanyacquiredbusinessduetochangesinmanagementorotherwise.Acquisitionsmayalsodisruptourbusiness,divertourresourcesandrequiresignificantmanagementattentionthatwouldotherwisebeavailablefordevelopmentofourbusiness.Moreover,theanticipatedbenefitsofanyacquisition,investmentorbusinessrelationshipmaynotberealizedorwemaybeexposedtounknownliabilities.Foroneormoreofthosetransactions,wemay:(cid:129)issueadditionalequitysecuritiesthatwoulddiluteourstockholders;(cid:129)usecashthatwemayneedinthefuturetooperateourbusiness;(cid:129)incurdebtontermsunfavorabletousorthatweareunabletorepay;(cid:129)incurlargechargesorsubstantialliabilities;(cid:129)encounterdifficultiesretainingkeyemployeesoftheacquiredcompanyorintegratingdiversesoftwarecodesorbusinesscultures;and(cid:129)becomesubjecttoadversetaxconsequences,substantialdepreciationordeferredcompensationcharges.Anyoftheseriskscouldharmourbusinessandoperatingresults.Weusealimitednumberofdatacenterstodeliverourservices.Anydisruptionofserviceatthesefacili-tiescouldharmourbusiness.Wehostourservicesandserveallofourcustomersfromthreethird-partydatacenterfacilities,ofwhichtwoarelocatedintheUnitedStatesandoneislocatedinEurope.Wedonotcontroltheoperationofthesefacilities.Theownersofourdatacenterfacilitieshavenoobligationtorenewtheiragreementswithusoncommerciallyreasonableterms,oratall.Ifweareunabletorenewtheseagreementsoncommerciallyreasonableterms,wemayberequiredtotransfertonewdatacenterfacilities,andwemayincursignificantcostsandpossibleserviceinterruptioninconnectionwithdoingso.Anychangesinthird-partyservicelevelsatourdatacentersoranyerrors,defects,disruptionsorotherperformanceproblemswithourservicescouldharmourreputationandmaydamageourcustomers’businesses.Interruptionsinourservicesmightreduceourrevenue,causeustoissuecreditstocustomers,subjectustopotentialliability,causecustomerstoterminatetheirsubscriptionsorharmourrenewalrates.Ourdatacentersarevulnerabletodamageorinterruptionfromhumanerror,intentionalbadacts,pandemics,earthquakes,hurricanes,floods,fires,war,terroristattacks,powerlosses,hardwarefailures,systemsfailures,telecommunicationsfailuresandsimilarevents.Atleastoneofourdatafacilitiesislocatedinanareaknownforseismicactivity,increasingoursusceptibilitytotheriskthatanearthquakecouldsignificantlyharmtheoperationsofthesefacilities.Theoccurrenceofanaturaldisasteroranactofterrorism,orvandalismorothermisconduct,adecisiontoclosethefacilitieswithoutadequatenoticeorotherunanticipatedproblemscouldresultinlengthyinterruptionsinourservices.Ifthesecurityofourcustomers’confidentialinformationstoredinoursystemsisbreachedorotherwisesubjectedtounauthorizedaccess,ourreputationmaybeharmed,andwemaybeexposedtoliabilityandalossofcustomers.Oursystemstoresourcustomers’confidentialinformation,includingcreditcardinformationandothercriticaldata.Anyaccidentalorwillfulsecuritybreachesorotherunauthorizedaccesscouldexposeustoliabilityforthelossofsuchinformation,time-consumingandexpensivelitigationandotherpossibleliabilitiesaswellasnegativepublicity.Techniquesusedtoobtainunauthorizedaccessortosabotagesystemschangefrequentlyandgenerallyaredifficulttorecognizeandreactto.Weandourthird-partydatacenterfacilitiesmaybeunabletoanticipatethesetechniquesortoimplementadequatepreventativeorreactionarymeasures.15Inaddition,manystateshaveenactedlawsrequiringcompaniestonotifyindividualsofdatasecuritybreachesinvolvingtheirpersonaldata.Thesemandatorydisclosuresregardingasecuritybreachoftenleadtowidespreadnegativepublicity,whichmaycauseourcustomerstoloseconfidenceintheeffectivenessofourdatasecuritymeasures.Anysecuritybreach,whethersuccessfulornot,wouldharmourreputation,anditcouldcausethelossofcustomers.Failuretocomplywithdataprotectionstandardsmaycauseustolosetheabilitytoofferourcustomersacreditcardpaymentoptionwhichwouldincreaseourcostsofprocessingcustomerordersandmakeourserviceslessattractivetoourcustomers,themajorityofwhichpurchaseourserviceswithacreditcard.Majorcreditcardissuershaveadopteddataprotectionstandardsandhaveincorporatedthesestandardsintotheircontractswithus.Ifwefailtomaintainourcompliancewiththedataprotectionanddocumentationstandardsadoptedbythemajorcreditcardissuersandapplicabletous,theseissuerscouldterminatetheiragreementswithus,andwecouldloseourabilitytoofferourcustomersacreditcardpaymentoption.MostofourindividualandSMBcustomerspurchaseourservicesonlinewithacreditcard,andourbusinessdependssubstantiallyuponourabilitytoofferthecreditcardpaymentoption.Anylossofourabilitytoofferourcustomersacreditcardpaymentoptionwouldmakeourserviceslessattractivetothemandhurtourbusiness.Ouradministrativecostsrelatedtocustomerpaymentprocessingwouldalsoincreasesignificantlyifwewerenotabletoacceptcreditcardpaymentsforourservices.FailuretoeffectivelyandefficientlyserviceSMBswouldadverselyaffectourabilitytoincreaseourrevenue.WemarketandsellasignificantamountofourservicestoSMBs.SMBsarechallengingtoreach,acquireandretaininacost-effectivemanner.Togrowourrevenuequickly,wemustaddnewcustomers,selladditionalservicestoexistingcustomersandencourageexistingcustomerstorenewtheirsubscriptions.Sellingto,andretainingSMBsismoredifficultthansellingtoandretaininglargeenterprisecustomersbecauseSMBcustomersgenerally:(cid:129)havehighfailurerates;(cid:129)arepricesensitive;(cid:129)aredifficulttoreachwithtargetedsalescampaigns;(cid:129)havehighchurnratesinpartbecauseofthescaleoftheirbusinessesandtheeaseofswitchingservices;and(cid:129)generatelessrevenuespercustomerandpertransaction.Inaddition,SMBsfrequentlyhavelimitedbudgetsandmaychoosetospendfundsonitemsotherthanourservices.Moreover,SMBsaremorelikelytobesignificantlyaffectedbyeconomicdownturnsthanlarger,moreestablishedcompanies,andiftheseorganizationsexperienceeconomichardship,theymaybeunwillingorunabletoexpendresourcesonIT.IfweareunabletomarketandsellourservicestoSMBswithcompetitivepricingandinacost-effectivemanner,ourabilitytogrowourrevenuequicklyandbecomeprofitablewillbeharmed.Wemaynotbeabletorespondtorapidtechnologicalchangeswithnewservices,whichcouldhaveamaterialadverseeffectonoursalesandprofitability.Theon-demand,remote-connectivitysolutionsmarketischaracterizedbyrapidtechnologicalchange,frequentnewserviceintroductionsandevolvingindustrystandards.Ourabilitytoattractnewcustomersandincreaserevenuefromexistingcustomerswilldependinlargepartonourabilitytoenhanceandimproveourexistingservices,introducenewservicesandsellintonewmarkets.Toachievemarketacceptanceforourservices,wemusteffectivelyanticipateandofferservicesthatmeetchangingcustomerdemandsinatimelymanner.Customersmayrequirefeaturesandcapabilitiesthatourcurrentservicesdonothave.Ifwefailtodevelopservicesthatsatisfycustomerpreferencesinatimelyandcost-effectivemanner,ourabilitytorenew16ourserviceswithexistingcustomersandourabilitytocreateorincreasedemandforourserviceswillbeharmed.Wemayexperiencedifficultieswithsoftwaredevelopment,industrystandards,designormarketingthatcoulddelayorpreventourdevelopment,introductionorimplementationofnewservicesandenhancements.Theintroductionofnewservicesbycompetitors,theemergenceofnewindustrystandardsorthedevelopmentofentirelynewtechnologiestoreplaceexistingserviceofferingscouldrenderourexistingorfutureservicesobsolete.Ifourservicesbecomeobsoleteduetowide-spreadadoptionofalternativeconnectivitytechnologiessuchasotherWeb-basedcomputingsolutions,ourabilitytogeneraterevenuemaybeimpaired.Inaddition,anynewmarketsintowhichweattempttosellourservices,includingnewcountriesorregions,maynotbereceptive.Ifweareunabletosuccessfullydeveloporacquirenewservices,enhanceourexistingservicestoanticipateandmeetcustomerpreferencesorsellourservicesintonewmarkets,ourrevenueandresultsofoperationswouldbeadverselyaffected.Themarketinwhichweparticipateiscompetitive,withlowbarrierstoentry,andifwedonotcompeteeffectively,ouroperatingresultsmaybeharmed.Themarketsforremote-connectivitysolutionsarecompetitiveandrapidlychanging,withrelativelylowbarrierstoentry.Withtheintroductionofnewtechnologiesandmarketentrants,weexpectcompetitiontointensifyinthefuture.Inaddition,pricingpressuresandincreasedcompetitiongenerallycouldresultinreducedsales,reducedmarginsorthefailureofourservicestoachieveormaintainwidespreadmarketacceptance.Oftenwecompeteagainstexistingservicesthatourpotentialcustomershavealreadymadesignificantexpenditurestoacquireandimplement.Certainofourcompetitorsoffer,ormayinthefutureoffer,lowerpriced,orfree,productsorservicesthatcompetewithoursolutions.Thiscompetitionmayresultinreducedpricesandasubstantiallossofcustomersforoursolutionsorareductioninourrevenue.WecompetewithCitrixSystems,WebEx(adivisionofCiscoSystems)andothers.Certainofoursolutions,includingourfreeremoteaccessservice,alsocompetewithcurrentorpotentialservicesofferedbyMicrosoftandApple.Manyofouractualandpotentialcompetitorsenjoycompetitiveadvantagesoverus,suchasgreaternamerecognition,longeroperatinghistories,morevariedservicesandlargermarketingbudgets,aswellasgreaterfinancial,technicalandotherresources.Inaddition,manyofourcompetitorshaveestablishedmarketingrelationshipsandaccesstolargercustomerbases,andhavemajordistributionagreementswithconsultants,systemintegratorsandresellers.Ifwearenotabletocompeteeffectively,ouroperatingresultswillbeharmed.Industryconsolidationmayresultinincreasedcompetition.Someofourcompetitorshavemadeormaymakeacquisitionsormayenterintopartnershipsorotherstrategicrelationshipstoofferamorecomprehensiveservicethantheyindividuallyhadoffered.Inaddition,newentrantsnotcurrentlyconsideredtobecompetitorsmayenterthemarketthroughacquisitions,partnershipsorstrategicrelationships.Weexpectthesetrendstocontinueascompaniesattempttostrengthenormaintaintheirmarketpositions.Manyofthecompaniesdrivingthistrendhavesignificantlygreaterfinancial,technicalandotherresourcesthanwedoandmaybebetterpositionedtoacquireandoffercomplementaryservicesandtechnologies.Thecompaniesresultingfromsuchcombinationsmaycreatemorecompellingserviceofferingsandmayoffergreaterpricingflexibilitythanwecanormayengageinbusinesspracticesthatmakeitmoredifficultforustocompeteeffectively,includingonthebasisofprice,salesandmarketingprograms,technologyorservicefunctionality.Thesepressurescouldresultinasubstantiallossofcustomersorareductioninourrevenues.17Originalequipmentmanufacturersmayadoptsolutionsprovidedbyourcompetitors.Originalequipmentmanufacturersmayinthefutureseektobuildthecapabilityforon-demand,remote-connectivitysolutionsintotheirproducts.Wemaycompetewithourcompetitorstosellourservicesto,orpartnerwith,thesemanufacturers.Ourabilitytoattractandpartnerwiththesemanufacturerswill,inlargepart,dependonthecompetitivenessofourservices.Ifwefailtoattractorpartnerwith,orourcompetitorsaresuccessfulinattractingorpartneringwith,thesemanufacturers,ourrevenueandresultsofoperationswouldbeaffectedadversely.Ourquarterlyoperatingresultsmayfluctuateinthefuture.Asaresult,wemayfailtomeetorexceedtheexpectationsofresearchanalystsorinvestors,whichcouldcauseourstockpricetodecline.Ourquarterlyoperatingresultsmayfluctuateasaresultofavarietyoffactors,manyofwhichareoutsideofourcontrol.Ifourquarterlyoperatingresultsorguidancefallbelowtheexpectationsofresearchanalystsorinvestors,thepriceofourcommonstockcoulddeclinesubstantially.Fluctuationsinourquarterlyoperatingresultsorguidancemaybeduetoanumberoffactors,including,butnotlimitedto,thoselistedbelow:(cid:129)ourabilitytorenewexistingcustomers,increasesalestoexistingcustomersandattractnewcustomers;(cid:129)theamountandtimingofoperatingcostsandcapitalexpendituresrelatedtotheoperation,maintenanceandexpansionofourbusiness;(cid:129)serviceoutagesorsecuritybreaches;(cid:129)whetherwemeettheservicelevelcommitmentsinouragreementswithourcustomers;(cid:129)changesinourpricingpoliciesorthoseofourcompetitors;(cid:129)thetimingandsuccessofnewapplicationandserviceintroductionsandupgradesbyusorourcompetitors;(cid:129)changesinsalescompensationplansororganizationalstructure;(cid:129)thetimingofcostsrelatedtothedevelopmentoracquisitionoftechnologies,servicesorbusinesses;(cid:129)seasonalvariationsorothercyclicalityinthedemandforourservices;(cid:129)generaleconomic,industryandmarketconditionsandthoseconditionsspecifictoInternetusageandonlinebusinesses;(cid:129)thepurchasingandbudgetingcyclesofourcustomers;(cid:129)thefinancialconditionofourcustomers;and(cid:129)geopoliticaleventssuchaswar,threatofwarorterroristacts.Webelievethatourquarterlyrevenueandoperatingresultsmayvarysignificantlyinthefutureandthatperiod-to-periodcomparisonsofouroperatingresultsmaynotbemeaningful.Youshouldnotrelyonpastresultsasanindicationoffutureperformance.Ifourservicesareusedtocommitfraudorothersimilarintentionalorillegalacts,wemayincursignifi-cantliabilities,ourservicesmaybeperceivedasnotsecureandcustomersmaycurtailorstopusingourservices.Ourservicesenabledirectremoteaccesstothird-partycomputersystems.Wedonotcontroltheuseorcontentofinformationaccessedbyourcustomersthroughourservices.Ifourservicesareusedtocommitfraudorotherbadorillegalacts,suchasposting,distributingortransmittinganysoftwareorothercomputerfilesthatcontainavirusorotherharmfulcomponent,interferingordisruptingthird-partynetworks,infringinganythirdparty’scopyright,patent,trademark,tradesecretorotherproprietaryrightsorrightsofpublicityorprivacy,transmittinganyunlawful,harassing,libelous,abusive,threatening,vulgarorotherwiseobjectionablematerial,oraccessingunauthorizedthird-partydata,wemaybecomesubjecttoclaimsfordefamation,18negligence,intellectualpropertyinfringementorothermatters.Asaresult,defendingsuchclaimscouldbeexpensiveandtime-consuming,andwecouldincursignificantliabilitytoourcustomersandtoindividualsorbusinesseswhowerethetargetsofsuchacts.Asaresult,ourbusinessmaysufferandourreputationwillbedamaged.Weprovideminimumservicelevelcommitmentstosomeofourcustomers,ourfailureofwhichtomeetcouldcauseustoissuecreditsforfutureservicesorpaypenalties,whichcouldsignificantlyharmourrevenue.Someofourcustomeragreementsnow,andmayinthefuture,provideminimumservicelevelcommitmentsregardingitemssuchasuptime,functionalityorperformance.Ifweareunabletomeetthestatedservicelevelcommitmentsforthesecustomersorsufferextendedperiodsofunavailabilityforourservice,weareormaybecontractuallyobligatedtoprovidethesecustomerswithcreditsforfutureservicesorpayotherpenalties.Ourrevenuecouldbesignificantlyimpactedifweareunabletomeetourservicelevelcommitmentsandarerequiredtoprovideasignificantamountofourservicesatnocostorpayotherpenalties.Wedonotcurrentlyhaveanyreservesonourbalancesheetforthesecommitments.Wehaveexperiencedrapidgrowthinrecentperiods.Ifwefailtomanageourgrowtheffectively,wemaybeunabletoexecuteourbusinessplan,maintainhighlevelsofserviceoraddresscompetitivechallengesadequately.Weincreasedournumberoffull-timeemployeesfrom209atDecember31,2007,to287atDecember31,2008andto338atDecember31,2009,andourrevenueincreasedfrom$27.0millionin2007to$51.7millionin2008andwas$74.4millionforthefiscalyearendedDecember31,2009.Ourgrowthhasplaced,andmaycontinuetoplace,asignificantstrainonourmanagerial,administrative,operational,financialandotherresources.Weintendtofurtherexpandouroverallbusiness,customerbase,headcountandoperationsbothdomesticallyandinternationally.Creatingaglobalorganizationandmanagingageographicallydispersedworkforcewillrequiresubstantialmanagementeffortandsignificantadditionalinvestmentinourinfrastruc-ture.Wewillberequiredtocontinuetoimproveouroperational,financialandmanagementcontrolsandourreportingproceduresandwemaynotbeabletodosoeffectively.Assuch,wemaybeunabletomanageourexpenseseffectivelyinthefuture,whichmaynegativelyimpactourgrossprofitoroperatingexpensesinanyparticularquarter.Ifwedonoteffectivelyexpandandtrainourworkforce,ourfutureoperatingresultswillsuffer.Weplantocontinuetoexpandourworkforcebothdomesticallyandinternationallytoincreaseourcustomerbaseandrevenue.Webelievethatthereissignificantcompetitionforqualifiedpersonnelwiththeskillsandtechnicalknowledgethatwerequire.Ourabilitytoachievesignificantrevenuegrowthwilldepend,inlargepart,onoursuccessinrecruiting,trainingandretainingsufficientnumbersofpersonneltosupportourgrowth.Newhiresrequiresignificanttrainingand,inmostcases,takesignificanttimebeforetheyachievefullproductivity.Ourrecenthiresandplannedhiresmaynotbecomeasproductiveasweexpect,andwemaybeunabletohireorretainsufficientnumbersofqualifiedindividuals.Ifourrecruiting,trainingandretentioneffortsarenotsuccessfulordonotgenerateacorrespondingincreaseinrevenue,ourbusinesswillbeharmed.Oursalescyclesforenterprisecustomers,currentlyapproximately10%ofouroverallsales,canbelong,unpredictableandrequireconsiderabletimeandexpense,whichmaycauseouroperatingresultstofluctuate.Thetimingofourrevenuefromsalestoenterprisecustomersisdifficulttopredict.Theseeffortsrequireustoeducateourcustomersabouttheuseandbenefitofourservices,includingthetechnicalcapabilitiesandpotentialcostsavingstoanorganization.Enterprisecustomerstypicallyundertakeasignificantevaluationprocessthathasinthepastresultedinalengthysalescycle,typicallyseveralmonths.Wespendsubstantialtime,effortandmoneyonourenterprisesaleseffortswithoutanyassurancethatoureffortswillproduceanysales.Inaddition,servicesubscriptionsarefrequentlysubjecttobudgetconstraintsandunplannedadministra-tive,processingandotherdelays.Ifsalesexpectedfromaspecificcustomerforaparticularquarterarenot19realizedinthatquarteroratall,ourresultscouldfallshortofpublicexpectationsandourbusiness,operatingresultsandfinancialconditioncouldbeadverselyaffected.Ourlong-termsuccessdepends,inpart,onourabilitytoexpandthesalesofourservicestocustomerslocatedoutsideoftheUnitedStates,andthusourbusinessissusceptibletorisksassociatedwithinterna-tionalsalesandoperations.WecurrentlymaintainofficesandhavesalespersonnelorindependentconsultantsoutsideoftheUnitedStatesandareattemptingtoexpandourinternationaloperations.Ourinternationalexpansioneffortsmaynotbesuccessful.Inaddition,conductinginternationaloperationssubjectsustonewrisksthatwehavenotgenerallyfacedintheUnitedStates.Theserisksinclude:(cid:129)localizationofourservices,includingtranslationintoforeignlanguagesandadaptationforlocalpracticesandregulatoryrequirements;(cid:129)lackoffamiliaritywithandunexpectedchangesinforeignregulatoryrequirements;(cid:129)longeraccountsreceivablepaymentcyclesanddifficultiesincollectingaccountsreceivable;(cid:129)difficultiesinmanagingandstaffinginternationaloperations;(cid:129)fluctuationsincurrencyexchangerates;(cid:129)potentiallyadversetaxconsequences,includingthecomplexitiesofforeignvalueaddedorothertaxsystemsandrestrictionsontherepatriationofearnings;(cid:129)dependenceoncertainthirdparties,includingchannelpartnerswithwhomwedonothaveextensiveexperience;(cid:129)theburdensofcomplyingwithawidevarietyofforeignlawsandlegalstandards;(cid:129)increasedfinancialaccountingandreportingburdensandcomplexities;(cid:129)political,socialandeconomicinstabilityabroad,terroristattacksandsecurityconcernsingeneral;and(cid:129)reducedorvariedprotectionforintellectualpropertyrightsinsomecountries.Operatingininternationalmarketsalsorequiressignificantmanagementattentionandfinancialresources.Theinvestmentandadditionalresourcesrequiredtoestablishoperationsandmanagegrowthinothercountriesmaynotproducedesiredlevelsofrevenueorprofitability.Oursuccessdependsonourcustomers’continuedhigh-speedaccesstotheInternetandthecontinuedreliabilityoftheInternetinfrastructure.BecauseourservicesaredesignedtoworkovertheInternet,ourrevenuegrowthdependsonourcustomers’high-speedaccesstotheInternet,aswellasthecontinuedmaintenanceanddevelopmentoftheInternetinfrastructure.Thefuturedeliveryofourserviceswilldependonthird-partyInternetserviceproviderstoexpandhigh-speedInternetaccess,tomaintainareliablenetworkwiththenecessaryspeed,datacapacityandsecurity,andtodevelopcomplementaryproductsandservices,includinghigh-speedmodems,forprovidingreliableandtimelyInternetaccessandservices.Thesuccessofourbusinessdependsdirectlyonthecontinuedaccessibility,maintenanceandimprovementoftheInternetasaconvenientmeansofcustomerinteraction,aswellasanefficientmediumforthedeliveryanddistributionofinformationbybusinessestotheiremployees.Allofthesefactorsareoutofourcontrol.TotheextentthattheInternetcontinuestoexperienceincreasednumbersofusers,frequencyofuseorbandwidthrequirements,theInternetmaybecomecongestedandbeunabletosupportthedemandsplacedonit,anditsperformanceorreliabilitymaydecline.AnyfutureInternetoutagesordelayscouldadverselyaffectourabilitytoprovideservicestoourcustomers.20Oursuccessdependsinlargepartonourabilitytoprotectandenforceourintellectualpropertyrights.Werelyonacombinationofcopyright,servicemark,trademarkandtradesecretlaws,aswellasconfidentialityproceduresandcontractualrestrictions,toestablishandprotectourproprietaryrights,allofwhichprovideonlylimitedprotection.Inaddition,wehaveoneissuedpatentandthreepatentspending,andweareintheprocessoffilingadditionalpatents.Wecannotassureyouthatanypatentswillissuefromourcurrentlypendingpatentapplicationsinamannerthatgivesustheprotectionthatweseek,ifatall,orthatanyfuturepatentsissuedtouswillnotbechallenged,invalidatedorcircumvented.Anypatentsthatmayissueinthefuturefrompendingorfuturepatentapplicationsmaynotprovidesufficientlybroadprotectionortheymaynotprovetobeenforceableinactionsagainstallegedinfringers.Also,wecannotassureyouthatanyfutureservicemarkortrademarkregistrationswillbeissuedforpendingorfutureapplicationsorthatanyregisteredservicemarksortrademarkswillbeenforceableorprovideadequateprotectionofourproprietaryrights.Weendeavortoenterintoagreementswithouremployeesandcontractorsandagreementswithpartieswithwhomwedobusinesstolimitaccesstoanddisclosureofourproprietaryinformation.Thestepswehavetaken,however,maynotpreventunauthorizeduseorthereverseengineeringofourtechnology.Moreover,othersmayindependentlydeveloptechnologiesthatarecompetitivetooursorinfringeourintellectualproperty.Enforcementofourintellectualpropertyrightsalsodependsonoursuccessfullegalactionsagainsttheseinfringers,buttheseactionsmaynotbesuccessful,evenwhenourrightshavebeeninfringed.Furthermore,effectivepatent,trademark,servicemark,copyrightandtradesecretprotectionmaynotbeavailableineverycountryinwhichourservicesareavailable.Inaddition,thelegalstandardsrelatingtothevalidity,enforceabilityandscopeofprotectionofintellectualpropertyrightsinInternet-relatedindustriesareuncertainandstillevolving.Ouruseof“opensource”softwarecouldnegativelyaffectourabilitytosellourservicesandsubjectustopossiblelitigation.Aportionofthetechnologieslicensedbyusincorporateso-called“opensource”software,andwemayincorporateopensourcesoftwareinthefuture.Suchopensourcesoftwareisgenerallylicensedbyitsauthorsorotherthirdpartiesunderopensourcelicenses.Ifwefailtocomplywiththeselicenses,wemaybesubjecttocertainconditions,includingrequirementsthatweofferourservicesthatincorporatetheopensourcesoftwarefornocost,thatwemakeavailablesourcecodeformodificationsorderivativeworkswecreatebasedupon,incorporatingorusingtheopensourcesoftwareand/orthatwelicensesuchmodificationsorderivativeworksunderthetermsoftheparticularopensourcelicense.Ifanauthororotherthirdpartythatdistributessuchopensourcesoftwareweretoallegethatwehadnotcompliedwiththeconditionsofoneormoreoftheselicenses,wecouldberequiredtoincursignificantlegalexpensesdefendingagainstsuchallegationsandcouldbesubjecttosignificantdamages,enjoinedfromthesaleofourservicesthatcontainedtheopensourcesoftwareandrequiredtocomplywiththeforegoingconditions,whichcoulddisruptthedistributionandsaleofsomeofourservices.Werelyonthird-partysoftware,includingserversoftwareandlicensesfromthirdpartiestousepatentedintellectualpropertythatisrequiredforthedevelopmentofourservices,whichmaybedifficulttoobtainorwhichcouldcauseerrorsorfailuresofourservices.Werelyonsoftwarelicensedfromthirdpartiestoofferourservices,includingserversoftwarefromMicrosoftandpatentedthird-partytechnology.Inaddition,wemayneedtoobtainfuturelicensesfromthirdpartiestouseintellectualpropertyassociatedwiththedevelopmentofourservices,whichmightnotbeavailabletousonacceptableterms,oratall.Anylossoftherighttouseanysoftwarerequiredforthedevelopmentandmaintenanceofourservicescouldresultindelaysintheprovisionofourservicesuntilequivalenttechnologyiseitherdevelopedbyus,or,ifavailable,isidentified,obtainedandintegrated,whichcouldharmourbusiness.Anyerrorsordefectsinthird-partysoftwarecouldresultinerrorsorafailureofourserviceswhichcouldharmourbusiness.21Ifwefailtomaintainproperandeffectiveinternalcontrols,ourabilitytoproduceaccurateandtimelyfinancialstatementscouldbeimpaired,whichcouldharmouroperatingresults,ourabilitytooperateourbusinessandinvestors’viewsofus.Ensuringthatwehaveadequateinternalfinancialandaccountingcontrolsandproceduresinplacesothatwecanproduceaccuratefinancialstatementsonatimelybasisisacostlyandtime-consumingeffortthatneedstobeevaluatedfrequently.OurinternalcontrolsoverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciplesintheUnitedStatesofAmerica.Weareintheprocessofdocumenting,reviewingandimproving,totheextentnecessary,ourinternalcontrolsoverfinancialreportingforcompliancewithSection404oftheSarbanes-OxleyActof2002,ortheSarbanes-OxleyAct,whichrequiresanannualmanagementassessmentoftheeffectivenessofourinternalcontrolsoverfinancialreportingandareportfromourindependentregisteredpublicaccountingfirmaddressingtheeffectivenessofourinternalcontrolsoverfinancialreporting.BothweandourindependentregisteredpublicaccountingfirmwillbeattestingtotheeffectivenessofourinternalcontrolsoverfinancialreportinginconnectionwiththefilingofourAnnualReportonForm10-KfortheyearendingDecember31,2010withtheSecuritiesandExchangeCommission.Aspartofourprocessofdocumentingandtestingourinternalcontrolsoverfinancialreporting,wemayidentifyareasforfurtherattentionandimprovement.Implementinganyappropriatechangestoourinternalcontrolsmaydistractourofficersandemployees,entailsubstantialcoststomodifyourexistingprocessesandtakesignificanttimetocomplete.Thesechangesmaynot,however,beeffectiveinmaintainingtheadequacyofourinternalcontrols,andanyfailuretomaintainthatadequacy,orconsequentinabilitytoproduceaccuratefinancialstatementsonatimelybasis,couldincreaseouroperatingcostsandharmourbusiness.Inaddition,investors’perceptionsthatourinternalcontrolsareinadequateorthatweareunabletoproduceaccuratefinancialstatementsonatimelybasismayharmourstockpriceandmakeitmoredifficultforustoeffectivelymarketandsellourservicestonewandexistingcustomers.Materialdefectsorerrorsinthesoftwareweusetodeliverourservicescouldharmourreputation,resultinsignificantcoststousandimpairourabilitytosellourservices.Thesoftwareapplicationsunderlyingourservicesareinherentlycomplexandmaycontainmaterialdefectsorerrors,particularlywhenfirstintroducedorwhennewversionsorenhancementsarereleased.Wehavefromtimetotimefounddefectsinourservices,andnewerrorsinourexistingservicesmaybedetectedinthefuture.Anydefectsthatcauseinterruptionstotheavailabilityofourservicescouldresultin:(cid:129)areductioninsalesordelayinmarketacceptanceofourservices;(cid:129)salescreditsorrefundstoourcustomers;(cid:129)lossofexistingcustomersanddifficultyinattractingnewcustomers;(cid:129)diversionofdevelopmentresources;(cid:129)harmtoourreputation;and(cid:129)increasedinsurancecosts.Afterthereleaseofourservices,defectsorerrorsmayalsobeidentifiedfromtimetotimebyourinternalteamandbyourcustomers.Thecostsincurredincorrectinganymaterialdefectsorerrorsinourservicesmaybesubstantialandcouldharmouroperatingresults.GovernmentregulationoftheInternetande-commerceandoftheinternationalexchangeofcertaintech-nologiesissubjecttopossibleunfavorablechanges,andourfailuretocomplywithapplicableregulationscouldharmourbusinessandoperatingresults.AsInternetcommercecontinuestoevolve,increasingregulationbyfederal,stateorforeigngovernmentsbecomesmorelikely.Forexample,webelieveincreasedregulationislikelyintheareaofdataprivacy,and22lawsandregulationsapplyingtothesolicitation,collection,processingoruseofpersonalorconsumerinformationcouldaffectourcustomers’abilitytouseandsharedata,potentiallyreducingdemandforourproductsandservices.Inaddition,taxationofproductsandservicesprovidedovertheInternetorotherchargesimposedbygovernmentagenciesorbyprivateorganizationsforaccessingtheInternetmayalsobeimposed.AnyregulationimposinggreaterfeesforInternetuseorrestrictingtheexchangeofinformationovertheInternetcouldresultinreducedgrowthoradeclineintheuseoftheInternetandcoulddiminishtheviabilityofourInternet-basedservices,whichcouldharmourbusinessandoperatingresults.Oursoftwareproductscontainencryptiontechnologies,certaintypesofwhicharesubjecttoU.S.andforeignexportcontrolregulationsand,insomeforeigncountries,restrictionsonimportationand/oruse.WehavesubmittedourencryptionproductsfortechnicalreviewunderU.S.exportregulationsandhavereceivedthenecessaryapprovals.AnyfailureonourparttocomplywithencryptionorotherapplicableexportcontrolrequirementscouldresultinfinancialpenaltiesorothersanctionsundertheU.S.exportregulations,whichcouldharmourbusinessandoperatingresults.ForeignregulatoryrestrictionscouldimpairouraccesstotechnologiesthatweseekforimprovingourproductsandservicesandmayalsolimitorreducethedemandforourproductsandservicesoutsideoftheUnitedStates.Ouroperatingresultsmaybeharmedifwearerequiredtocollectsalesorotherrelatedtaxesforoursub-scriptionservicesinjurisdictionswherewehavenothistoricallydoneso.Primarilyduetothenatureofourservicesincertainstatesandcountries,wedonotbelievewearerequiredtocollectsalesorotherrelatedtaxesfromourcustomersincertainstatesorcountries.However,oneormoreotherstatesorcountriesmayseektoimposesalesorothertaxcollectionobligationsonus,includingforpastsalesbyusorourresellersandotherpartners.Asuccessfulassertionthatweshouldbecollectingsalesorotherrelatedtaxesonourservicescouldresultinsubstantialtaxliabilitiesforpastsales,discouragecustomersfrompurchasingourservicesorotherwiseharmourbusinessandoperatingresults.Thelossofkeypersonneloraninabilitytoattractandretainadditionalpersonnelmayimpairourabilitytogrowourbusiness.Wearehighlydependentuponthecontinuedserviceandperformanceofourseniormanagementteamandkeytechnicalandsalespersonnel,includingourPresidentandChiefExecutiveOfficer,ChiefFinancialOfficerandChiefTechnicalOfficer.Theseofficersarenotpartytoanemploymentagreementwithus,andtheymayterminateemploymentwithusatanytimewithnoadvancenotice.Thereplacementoftheseofficerslikelywouldinvolvesignificanttimeandcosts,andthelossoftheseofficersmaysignificantlydelayorpreventtheachievementofourbusinessobjectives.Wefaceintensecompetitionforqualifiedindividualsfromnumeroustechnology,softwareandmanufac-turingcompanies.Forexample,ourcompetitorsmaybeableattractandretainamorequalifiedengineeringteambyofferingmorecompetitivecompensationpackages.Ifweareunabletoattractnewengineersandretainourcurrentengineers,wemaynotbeabletodevelopandmaintainourservicesatthesamelevelsasourcompetitorsandwemay,therefore,losepotentialcustomersandsalespenetrationincertainmarkets.Ourfailuretoattractandretainsuitablyqualifiedindividualscouldhaveanadverseeffectonourabilitytoimplementourbusinessplanand,asaresult,ourabilitytocompetewoulddecrease,ouroperatingresultswouldsufferandourrevenueswoulddecrease.RISKSRELATEDTOOWNERSHIPOFOURCOMMONSTOCKOurfailuretoraiseadditionalcapitalorgeneratethecashflowsnecessarytoexpandouroperationsandinvestinourservicescouldreduceourabilitytocompetesuccessfully.Wemayneedtoraiseadditionalfunds,andwemaynotbeabletoobtainadditionaldebtorequityfinancingonfavorableterms,ifatall.Ifweraiseadditionalequityfinancing,ourstockholdersmayexperiencesignificantdilutionoftheirownershipinterests,andthepersharevalueofourcommonstockcoulddecline.Ifweengageindebtfinancing,wemayberequiredtoaccepttermsthatrestrictourabilitytoincuradditional23indebtednessandforceustomaintainspecifiedliquidityorotherratios.Ifweneedadditionalcapitalandcannotraiseitonacceptableterms,wemaynotbeableto,amongotherthings:(cid:129)developorenhanceourservices;(cid:129)continuetoexpandourdevelopment,salesandmarketingorganizations;(cid:129)acquirecomplementarytechnologies,productsorbusinesses;(cid:129)expandouroperations,intheUnitedStatesorinternationally;(cid:129)hire,trainandretainemployees;or(cid:129)respondtocompetitivepressuresorunanticipatedworkingcapitalrequirements.Ourstockpricemaybevolatile,andthemarketpriceofourcommonstockmaydropinthefuture.Priortothecompletionofourinitialpublicoffering,orIPO,inJuly2009,therewasnopublicmarketforsharesofourcommonstock.DuringtheperiodfromourIPOuntilJanuary31,2010,ourcommonstockhastradedashighas$23.50andaslowas$15.15.Anactive,liquidandorderlymarketforourcommonstockmaynotdeveloporbesustained,whichcoulddepressthetradingpriceofourcommonstock.Someofthefactorsthatmaycausethemarketpriceofourcommonstocktofluctuateinclude:(cid:129)fluctuationsinourquarterlyfinancialresultsorthequarterlyfinancialresultsofcompaniesperceivedtobesimilartous;(cid:129)fluctuationsinourrecordedrevenue,evenduringperiodsofsignificantsalesorderactivity;(cid:129)changesinestimatesofourfinancialresultsorrecommendationsbysecuritiesanalysts;(cid:129)failureofanyofourservicestoachieveormaintainmarketacceptance;(cid:129)changesinmarketvaluationsofsimilarcompanies;(cid:129)successofcompetitiveproductsorservices;(cid:129)changesinourcapitalstructure,suchasfutureissuancesofsecuritiesortheincurrenceofdebt;(cid:129)announcementsbyusorourcompetitorsofsignificantservices,contracts,acquisitionsorstrategicalliances;(cid:129)regulatorydevelopmentsintheUnitedStates,foreigncountriesorboth;(cid:129)litigationinvolvingourcompany,ourgeneralindustryorboth;(cid:129)additionsordeparturesofkeypersonnel;(cid:129)generalperceptionofthefutureoftheremote-connectivitymarketorourservices;(cid:129)investors’generalperceptionofus;and(cid:129)changesingeneraleconomic,industryandmarketconditions.Inaddition,ifthemarketfortechnologystocksorthestockmarketingeneralexperiencesalossofinvestorconfidence,thetradingpriceofourcommonstockcoulddeclineforreasonsunrelatedtoourbusiness,financialconditionorresultsofoperations.Ifanyoftheforegoingoccurs,itcouldcauseourstockpricetofallandmayexposeustoclassactionlawsuitsthat,evenifunsuccessful,couldbecostlytodefendandadistractiontomanagement.24Asignificantportionofourtotaloutstandingsharesmaybesoldintothepublicmarketinthenearfuture,whichcouldcausethemarketpriceofourcommonstocktodropsignificantly,evenifourbusi-nessisdoingwell.AsofFebruary15,2010wehave22,555,126sharesofourcommonstockoutstanding.Inconnectionwithoursecondarypublicoffering,theholdersofapproximately8,690,000sharesofcommonstocksignedlock-upagreementsunderwhichtheyhaveagreednottosell,transferordisposeof,directlyorindirectly,anysharesofourcommonstockoranysecuritiesintoorexercisableorexchangeableforsharesofourcommonstock,withoutthepriorwrittenconsentofJ.P.MorganSecuritiesInc.andBarclaysCapitalInc.Thoselock-upagreementsareexpectedtoexpireonMarch7,2010.Aftertheexpirationofthelock-upperiod,thesesharesmaybesoldinthepublicmarket,subjecttopriorregistrationorqualificationforanexemptionfromregistration,including,inthecaseofsharesheldbyaffiliates,compliancewiththevolumerestrictionsofRule144.Totheextentthatanyofthesestockholderssell,orindicateanintenttosell,substantialamountsofourcommonstockinthepublicmarketafterthecontractuallock-upsandotherlegalrestrictionsonresalelapse,thetradingpriceofourcommonstockcoulddeclinesignificantly.Ifsecuritiesorindustryanalystsdonotpublishorceasepublishingresearchorreportsaboutus,ourbusinessorourmarket,oriftheychangetheirrecommendationsregardingourstockadversely,ourstockpriceandtradingvolumecoulddecline.Thetradingmarketforourcommonstockisinfluencedbytheresearchandreportsthatindustryorsecuritiesanalystspublishaboutus,ourbusiness,ourmarketorourcompetitors.Ifanyoftheanalystswhocoverusormaycoverusinthefuturechangetheirrecommendationregardingourstockadversely,orprovidemorefavorablerelativerecommendationsaboutourcompetitors,ourstockpricewouldlikelydecline.Ifanyanalystwhocoversusormaycoverusinthefutureweretoceasecoverageofourcompanyorfailtoregularlypublishreportsonus,wecouldlosevisibilityinthefinancialmarkets,whichinturncouldcauseourstockpriceortradingvolumetodecline.Ourmanagementhasbroaddiscretionovertheuseofourexistingcashresourcesandmightnotusesuchfundsinwaysthatincreasethevalueofourcommonstock.Ourmanagementwillcontinuetohavebroaddiscretiontouseourcashresources.Ourmanagementmightnotapplythesecashresourcesinwaysthatincreasethevalueofourcommonstock.Wedonotexpecttodeclareanydividendsintheforeseeablefuture.Wedonotanticipatedeclaringanycashdividendstoholdersofourcommonstockintheforeseeablefuture.Consequently,stockholdersmustrelyonsalesoftheircommonstockafterpriceappreciation,whichmayneveroccur,astheonlywaytorealizeanyfuturegainsonthevalueoftheirsharesofourcommonstock.Asanewlypubliccompany,weincursignificantcostswhichcouldharmouroperatingresults.Asanewlypubliccompany,weincursignificantadditionallegal,accountingandotherexpensesthatwedidnotincurasaprivatecompany,includingcostsassociatedwithpubliccompanyreportingrequirements.Wealsohaveincurredandwillcontinuetoincurcostsassociatedwithcurrentcorporategovernancerequirements,includingrequirementsunderSection404andotherprovisionsoftheSarbanes-OxleyAct,aswellasrulesimplementedbytheSecuritiesandExchangeCommission,orSEC,andTheNASDAQGlobalMarket.Theexpensesincurredbypubliccompaniesforreportingandcorporategovernancepurposeshaveincreaseddramatically.Weexpecttheserulesandregulationstosubstantiallyincreaseourlegalandfinancialcompliancecostsandtomakesomeactivitiesmoretime-consumingandcostly.Weareunabletocurrentlyestimatethesecostswithanydegreeofcertainty.Wealsoexpectthesenewrulesandregulationsmaymakeitmoredifficultandmoreexpensiveforustomaintaindirectorandofficerliabilityinsurance,andwemayberequiredtoacceptreducedpolicylimitsandcoverageorincursubstantiallyhighercoststoobtainthesameorsimilarcoveragepreviouslyavailable.Asaresult,itmaybemoredifficultforustoattractandretainqualifiedindividualstoserveonourboardofdirectorsorasourexecutiveofficers.25Anti-takeoverprovisionscontainedinourcertificateofincorporationandbylaws,aswellasprovisionsofDelawarelaw,couldimpairatakeoverattempt.Ourcertificateofincorporation,bylawsandDelawarelawcontainprovisionsthatcouldhavetheeffectofrenderingmoredifficultordiscouraginganacquisitiondeemedundesirablebyourboardofdirectors.Ourcorporategovernancedocumentsincludeprovisions:(cid:129)authorizingblankcheckpreferredstock,whichcouldbeissuedwithvoting,liquidation,dividendandotherrightssuperiortoourcommonstock;(cid:129)limitingtheliabilityof,andprovidingindemnificationto,ourdirectorsandofficers;(cid:129)limitingtheabilityofourstockholderstocallandbringbusinessbeforespecialmeetingsandtotakeactionbywrittenconsentinlieuofameeting;(cid:129)requiringadvancenoticeofstockholderproposalsforbusinesstobeconductedatmeetingsofourstockholdersandfornominationsofcandidatesforelectiontoourboardofdirectors;(cid:129)controllingtheproceduresfortheconductandschedulingofboardofdirectorsandstockholdermeetings;(cid:129)providingtheboardofdirectorswiththeexpresspowertopostponepreviouslyscheduledannualmeetingsandtocancelpreviouslyscheduledspecialmeetings;(cid:129)limitingthedeterminationofthenumberofdirectorsonourboardofdirectorsandthefillingofvacanciesornewlycreatedseatsontheboardtoourboardofdirectorstheninoffice;and(cid:129)providingthatdirectorsmayberemovedbystockholdersonlyforcause.Theseprovisions,aloneortogether,coulddelayhostiletakeoversandchangesincontrolofourcompanyorchangesinourmanagement.AsaDelawarecorporation,wearealsosubjecttoprovisionsofDelawarelaw,includingSection203oftheDelawareGeneralCorporationlaw,whichpreventssomestockholdersholdingmorethan15%ofouroutstandingcommonstockfromengagingincertainbusinesscombinationswithoutapprovaloftheholdersofsubstantiallyallofouroutstandingcommonstock.AnyprovisionofourcertificateofincorporationorbylawsorDelawarelawthathastheeffectofdelayingordeterringachangeincontrolcouldlimittheopportunityforourstockholderstoreceiveapremiumfortheirsharesofourcommonstock,andcouldalsoaffectthepricethatsomeinvestorsarewillingtopayforourcommonstock.ITEM1B.UNRESOLVEDSTAFFCOMMENTSNone.ITEM2.PROPERTIESOurprincipalfacilitiesconsistofapproximately31,200squarefeetofofficespacelocatedat500UnicornParkDrive,Woburn,Massachusetts,andapproximately25,200squarefeetofspaceatourdevelopmentfacilitylocatedinBudapest,Hungary.Additionally,wealsohaveleasedofficespaceinSzeged,Hungary,Amsterdam,TheNetherlands,Sydney,AustraliaandLondon,England.Webelieveourfacilitiesaresufficienttosupportourneedsthrough2010andthatadditionalspacewillbeavailableinthefutureoncommerciallyreasonabletermsasneeded.Wealsoleasespaceinthreedatacentersoperatedbythirdparties,ofwhichtwoarelocatedintheUnitedStatesandthethirdislocatedinEurope.ITEM3.LEGALPROCEEDINGSOnJune2,2009,PB&JSoftware,LLC,orPB&J,filedacomplaintthatnamedusandfourothercompaniesasdefendantsinalawsuitintheU.S.DistrictCourtfortheDistrictofMinnesota(CivilActionNo.09-cv-206-JMR/SRN).WereceivedserviceofthecomplaintonJuly20,2009.ThecomplaintallegesthatwehaveinfringedU.S.PatentNo.7,310,736,whichallegedlyisownedbyPB&Jandhasclaims26directedtoaparticularapplicationorsystemfortransferringorstoringback-upcopiesoffilesfromonecomputertoasecondcomputer.Thecomplaintseeksdamagesinanunspecifiedamountandinjunctiverelief.Webelievewehavemeritoriousdefensestotheclaimsandintendtodefendthelawsuitvigorously.InDecember2009,thecourtgrantedamotionforastayofactionpendingreexaminationproceedingsinitiatedattheUnitedStatedPatentandTrademarkOfficeaddressingthePB&Jpatentatissueinthelawsuit.AsofFebruary26,2010,thestayoflitigationisstillineffect.Wearefromtimetotimesubjecttovariouslegalproceedingsandclaims,eitherassertedorunasserted,whichariseintheordinarycourseofbusiness.Whiletheoutcomeoftheseotherclaimscannotbepredictedwithcertainty,managementdoesnotbelievethattheoutcomeofanyoftheseotherlegalmatterswillhaveamaterialadverseeffectonourconsolidatedfinancialstatements.ITEM4.SUBMISSIONOFMATTERSTOAVOTEOFSECURITYHOLDERSTherewerenomatterssubmittedtoavoteofsecurityholdersduringthefourthquarteroftheyearendedDecember31,2009.PARTIIITEM5.MARKETFORREGISTRANT’SCOMMONEQUITY,RELATEDSTOCKHOLDERMATTERSANDISSUERPURCHASESOFEQUITYSECURITIESCertainInformationRegardingtheTradingofOurCommonStockOurcommonstockbegantradingunderthesymbol“LOGM”ontheNASDAQGlobalMarketonJuly1,2009.Priortothatdate,therewasnoestablishedpublictradingmarketforourcommonstock.Thefollowingtablesetsforth,fortheperiodsindicated,thehighandlowsalepricepershareofourcommonstockontheNASDAQGlobalMarket:HighLow2009ThirdQuarter...................................................$20.99$15.15FourthQuarter..................................................$23.50$16.59HoldersofOurCommonStockAsofFebruary15,2010,therewere77holdersofrecordofsharesofourcommonstock.DividendsWehaveneverdeclaredorpaiddividendsonourcommonstock.Wecurrentlyintendtoretainanyfutureearningstofinanceourresearchanddevelopmentefforts,improvementstoourexistingservices,thedevelopmentofourproprietarytechnologiesandtheexpansionofourbusiness.Wedonotintendtodeclareorpaycashdividendsonourcapitalstockintheforeseeablefuture.Anyfuturedeterminationtopaydividendswillbeatthediscretionofourboardofdirectorsandwilldependuponanumberoffactors,includingourresultsofoperations,financialcondition,futureprospects,contractualrestrictions,restrictionsimposedbyapplicablelawandotherfactorsourboardofdirectorsdeemsrelevant.RecentSalesofUnregisteredSecurities;UseofProceedsfromRegisteredSecurities(a)RecentSalesofUnregisteredSecuritiesFromJanuary1,2009toOctober26,2009,thedatewefiledtheRegistrationonFormS-8(FileNo.333-162664)registeringsharesofcommonstockissuableunderourstockincentiveplans,weissuedoptionstocertainemployees,consultantsandotherstopurchaseanaggregateof93,200sharesofcommonstock,andoptionstopurchase112,300sharesofcommonstockwereexercised.27Theissuanceofsuchoptionsandthecommonstockissuableupontheexerciseofoptionsasdescribedabovewereissuedpursuanttowrittencompensatoryplansorarrangementswithouremployees,directorsandconsultants,inrelianceontheexemptionprovidedbyRule701promulgatedundertheSecuritiesActof1933,asamended,ortheSecuritiesAct.Allrecipientseitherreceivedadequateinformationaboutusorhadaccess,throughemploymentorotherrelationships,tosuchinformation.TheforegoingsecuritiesaredeemedrestrictedsecuritiesforpurposesoftheSecuritiesAct,andallcertificatesrepresentingtheissuedsharesofcommonstockdescribedaboveincludedappropriatelegendssettingforththatthesecuritieshadnotbeenregisteredandtheapplicablerestrictionsontransfer.(b)UseofProceedsfromPublicOfferingofCommonStockOnJuly7,2009,weclosedourIPO,inwhich7,666,667sharesofcommonstockweresoldatapricetothepublicof$16.00pershare.Wesold5,750,000sharesofourcommonstockintheofferingandsellingstockholderssold1,916,667ofthesharesofcommonstockintheoffering.Theaggregateofferingpriceforallsharessoldintheoffering,includingsharessoldbyusandthesellingstockholders,was$122.7million.TheofferandsaleofallofthesharesintheIPOwereregisteredundertheSecuritiesActpursuanttoaregistrationstatementonFormS-1(FileNo.333-148620),whichwasdeclaredeffectivebytheSEConJune30,2009.J.P.MorganSecurities,Inc.andBarclaysCapital,Inc.servedasrepresentativesoftheseveralunderwritersinthisoffering.Weraisedapproximately$82.9millioninnetproceedsafterdeductingunderwritingdiscountsandcommissionsof$6.4millionandotherestimatedofferingcostsof$2.7million.Nopaymentsweremadebyustodirectors,officersorpersonsowningtenpercentormoreofourcommonstockortotheirassociates,ortoouraffiliates,otherthanpaymentsintheordinarycourseofbusinesstoofficersforsalariesandtonon-employeedirectorsascompensationforboardorboardcommitteeservice,orasaresultofsalesofsharesofcommonstockbysellingstockholdersintheoffering.FromtheeffectivedateoftheregistrationstatementthroughDecember31,2009,wehavenotusedanyofthenetproceedsoftheIPO.Weintendtousethenetproceedsforgeneralcorporatepurposes,includingfinancingourgrowth,developingnewproducts,acquiringnewcustomers,fundingcapitalexpendituresand,potentially,theacquisitionof,orinvestmentin,businesses,technologies,productsorassetsthatcomplementourbusiness.Pendingtheseuses,wehaveinvestedthefundsinaregisteredmoneymarketfundandmarketablesecurities.TherehasbeennomaterialchangeintheplanneduseofproceedsfromourIPOasdescribedinourfinalprospectusfiledwiththeSECpursuanttoRule424(b).OnNovember19,2009,weclosedasecondarypublicofferingofourcommonstock.OnDecember16,2009,weclosedthesaleofadditionalsharesofcommonstockissuedintheofferingupontheexerciseoftheunderwriters’over-allotmentoption.Inaggregate,atotalof3,326,609sharesofcommonstockweresoldatapricetothepublicof$18.50pershare.J.P.MorganSecuritiesInc.andBarclaysCapitalInc.servedasrepresentativesoftheseveralunderwritersfortheoffering.Wesold99,778sharesofourcommonstockintheofferingandsellingstockholderssoldanadditional3,226,831sharesofcommonstockintheoffering.Theaggregateofferingpriceforallsharessoldintheoffering,includingsharessoldbyusandthesellingstockholders,was$61.5million.TheofferandsaleofallofthesharesinthesecondaryofferingwereregisteredundertheSecuritiesActpursuanttoaregistrationstatementonFormS-1(FileNo.333-162936),whichwasdeclaredeffectivebytheSEConNovember19,2009.Weraisedapproximately$1.2millioninnetproceedsafterdeductingunderwritingdiscountsandcommissionsof$0.1millionandotherestimatedofferingcostsof$0.5million.Nopaymentsweremadebyustodirectors,officersorpersonsowningtenpercentormoreofourcommonstockortotheirassociates,ortoouraffiliates,otherthanpaymentsintheordinarycourseofbusinesstoofficersforsalariesandtonon-employeedirectorsascompensationforboardorboardcommitteeservice,orasaresultofsalesofsharesofcommonstockbysellingstockholdersintheoffering.FromtheeffectivedateoftheregistrationstatementthroughDecember31,2009,wehavenotusedanyoftheofthenetproceedsreceivedfromoursecondarypublicoffering.Weintendtousethenetproceedsforgeneralcorporatepurposes,includingfinancingourgrowth,developingnewproducts,acquiringnewcustomers,fundingcapitalexpendituresand,potentially,theacquisitionof,orinvestmentin,businesses,technologies,productsorassetsthatcomplementourbusiness.TherehasbeennomaterialchangeintheplanneduseofproceedsfromoursecondarypublicofferingasdescribedinourfinalprospectusfiledwiththeSECpursuanttoRule424(b).28SecuritiesAuthorizedforIssuanceUnderEquityCompensationPlansInformationregardingourequitycompensationplansandthesecuritiesauthorizedforissuancethereunderissetforthhereinunderPartIII,Item12below.ITEM6.SELECTEDFINANCIALDATAYoushouldreadthefollowingselectedfinancialdatatogetherwithourconsolidatedfinancialstatementsandtherelatednotesappearingattheendofthisAnnualReportonForm10-Kandthe“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”sectionofthisAnnualReportonForm10-K.Ourhistoricalresultsforanypriorperiodarenotnecessarilyindicativeofresultstobeexpectedinanyfutureperiod.20052006200720082009YearsEndedDecember31,(Inthousands,exceptforpersharedata)ConsolidatedStatementofOperationsData:Revenue..................................$3,518$11,307$26,998$51,723$74,408Costofrevenue(1)..........................7672,0333,9255,9707,508Grossprofit...............................2,7519,27423,07345,75366,900Operatingexpenses:Researchanddevelopment(1)................1,6343,2326,66111,99713,149Salesandmarketing(1).....................5,75810,05019,48831,63135,821Generalandadministrative(1)................1,3512,9453,6116,5838,297Legalsettlements..........................——2,225600—Amortizationofintangibles(1)................—141328328328Totaloperatingexpenses......................8,74316,36832,31351,13957,595Income(loss)fromoperations..................(5,992)(7,094)(9,240)(5,386)9,305Interest,net................................105365260217128Otherincome(expense),net...................(27)28(25)(111)(294)Income(loss)beforeprovisionforincometaxes.....(5,914)(6,701)(9,005)(5,280)9,139Provisionforincometaxes....................——(50)(122)(342)Netincome(loss)...........................(5,914)(6,701)(9,055)(5,402)8,797Accretionofredeemableconvertiblepreferredstock..(279)(1,790)(1,919)(2,348)(1,311)Netincome(loss)attributabletocommonstockholders.............................$(6,193)$(8,491)$(10,974)$(7,750)$7,486Netincome(loss)attributabletocommonstockholderspershare:Basic..................................$(1.86)$(2.47)$(2.98)$(1.97)$0.39Diluted.................................$(1.86)$(2.47)$(2.98)$(1.97)$0.37Weightedaveragesharesoutstanding:Basic..................................3,3243,4343,6863,93312,990Diluted.................................3,3243,4343,6863,93314,835(1)Includesstock-basedcompensationexpenseandacquisition-relatedintangibleamortizationexpenseasindicatedinthefollowingtable:2920052006200720082009YearsEndedDecember31,(Inthousands)Costofrevenue:Stock-basedcompensation.............................$—$—$10$64$54Acquisition-relatedintangibleamortization................—179415415415Researchanddevelopment:Stock-basedcompensation.............................1011105419537Salesandmarketing:Stock-basedcompensation.............................—28177962932Generalandadministrative:Stock-basedcompensation.............................—272221,3041,399Amortizationofintangibles:Acquisition-relatedintangibleamortization................—14132832832820052006200720082009(1)AsofDecember31,(Inthousands)ConsolidatedBalanceSheetData:Cashandcashequivalentsandshort-termmarketablesecurities....................$11,962$7,983$18,676$22,913$130,246Totalassets.............................13,25514,65628,30237,415142,859Deferredrevenue,includinglong-termportion....2,8497,28816,10428,35834,103Long-termdebt,includingcurrentportion.......—2,2811,192——Totalliabilities...........................3,64011,61523,23835,19144,349Redeemableconvertiblepreferredstock........18,80620,59632,49534,843—Totalstockholders’equity(deficit)............(9,191)(17,554)(27,431)(32,619)98,509(1)Comparabilityaffectedbyproceedsreceivedfromour2009publicofferings.30ITEM7.MANAGEMENT’SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSYoushouldreadthefollowingdiscussionandanalysisofourfinancialconditionandresultsofoperationstogetherwithourconsolidatedfinancialstatementsandtherelatednotesandotherfinancialinformationincludedelsewhereinthisAnnualReportonForm10-K.SomeoftheinformationcontainedinthisdiscussionandanalysisorsetforthelsewhereinthisAnnualReportonForm10-K,includinginformationwithrespecttoourplansandstrategyforourbusinessandrelatedfinancing,includesforward-lookingstatementsthatinvolverisksanduncertainties.Youshouldreviewthe“RiskFactors”sectionofthisAnnualReportonForm10-Kforadiscussionofimportantfactorsthatcouldcauseactualresultstodiffermateriallyfromtheresultsdescribedinorimpliedbytheforward-lookingstatementscontainedinthefollowingdiscussionandanalysis.OverviewLogMeInprovideson-demand,remote-connectivitysolutionstoSMBs,ITserviceprovidersandconsum-ers.BusinessesandITserviceprovidersuseoursolutionstodeliverend-usersupportandtoremotelyaccessandmanagecomputersandotherInternet-enableddevicesmoreeffectivelyandefficiently.Consumersandmobileworkersuseoursolutionstoaccesscomputerresourcesremotely,therebyfacilitatingtheirmobilityandincreasingtheirproductivity.Oursolutions,whicharedeployedon-demandandaccessiblethroughawebbrowser,aresecure,scalableandeasyforourcustomerstotry,purchaseanduse.Weoffertwofreeservicesandninepremiumservices.Salesofourpremiumservicesaregeneratedthroughword-of-mouthreferrals,web-basedadvertising,expiringfreetrialsthatweconverttopaidsubscrip-tionsanddirectmarketingtonewandexistingcustomers.WederiveourrevenueprincipallyfromsubscriptionfeesfromSMBs,ITserviceprovidersandconsumers.Themajorityofourcustomerssubscribetoourservicesonanannualbasis.Ourrevenueisdrivenprimarilybythenumberandtypeofourpremiumservicesforwhichourpayingcustomerssubscribe.FortheyearendedDecember31,2009,wegeneratedrevenuesof$74.4million,comparedto$51.7millionfortheyearendedDecember31,2008,anincreaseofapproximately44%.Inadditiontosellingourservicestoendusers,weenteredintoaserviceandmarketingagreementwithIntelCorporationinDecember2007pursuanttowhichweareadaptingourservicedeliveryplatform,Gravity,toworkwithspecifictechnologydeliveredwithIntelhardwareandsoftwareproducts.TheagreementprovidesthatIntelwillmarketandselltheservicestoitscustomers.Intelpaysusaminimumlicenseandservicefeeonaquarterlybasisduringthetermoftheagreement,andwesharewithIntelrevenuegeneratedbytheuseoftheservicesbythirdpartiestotheextentitexceedstheminimumpayments.WebeganrecognizingrevenueassociatedwiththeIntelserviceandmarketingagreementinthequarterendedSeptember30,2008.DuringtheyearendedDecember31,2009,werecognized$6.0millioninrevenuefromthisagreement.ThroughDecember31,2009,wehaveprimarilyfundedouroperationsthroughthesaleofredeemableconvertiblepreferredstockwhichresultedinproceedsofapproximately$27.8millionandcashflowsfromoperations.Weincurrednetlossesof$9.1millionfor2007and$5.4millionfor2008andearnednetincomeof$8.7millionfor2009.Weexpecttocontinuemakingsignificantfutureexpenditurestodevelopandexpandourbusiness.CertainTrendsandUncertaintiesThefollowingrepresentsasummaryofcertaintrendsanduncertainties,whichcouldhaveasignificantimpactonourfinancialconditionandresultsofoperations.Thissummaryisnotintendedtobeacompletelistofpotentialtrendsanduncertaintiesthatcouldimpactourbusinessinthelongorshortterm.Thesummaryshouldbeconsideredalongwiththefactorsidentifiedinthesectiontitled“RiskFactors”ofthisAnnualReportonForm10-K.(cid:129)Wecontinuetocloselymonitorcurrentadverseeconomicconditions,particularlyastheyimpactSMBs,ITserviceprovidersandconsumers.Weareunabletopredictthelikelydurationandseverityofthe31currentadverseeconomicconditionsintheUnitedStatesandothercountries,butthelongerthedurationthegreaterriskswefaceinoperatingourbusiness.(cid:129)Webelievethatcompetitionwillcontinuetoincrease.Increasedcompetitioncouldresultfromexistingcompetitorsornewcompetitorsthatenterthemarketbecauseofthepotentialopportunity.Wewillcontinuetocloselymonitorcompetitiveactivityandrespondaccordingly.Increasedcompetitioncouldhaveanadverseeffectonourfinancialconditionandresultsofoperations.(cid:129)Webelievethataswecontinuetogrowrevenueatexpectedrates,ourcostofrevenueandoperatingexpenses,includingsalesandmarketing,researchanddevelopmentandgeneralandadministrativeexpenseswillincreaseinabsolutedollaramounts.Foradescriptionofthegeneraltrendsweanticipateinvariousexpensecategories,see“CostofRevenueandOperatingExpenses”below.SourcesofRevenueWederiveourrevenueprincipallyfromsubscriptionfeesfromSMBs,ITserviceprovidersandconsumers.Ourrevenueisdrivenprimarilybythenumberandtypeofourpremiumservicesforwhichourpayingcustomerssubscribeandisnotconcentratedwithinonecustomerorgroupofcustomers.Themajorityofourcustomerssubscribetoourservicesonanannualbasisandpayinadvance,typicallywithacreditcard,fortheirsubscription.Asmallerpercentageofourcustomerssubscribetoourservicesonamonthlybasisthrougheithermonth-to-monthcommitmentsorannualcommitmentsthatarethenpaidmonthlywithacreditcard.Weinitiallyrecordasubscriptionfeeasdeferredrevenueandthenrecognizeitratably,onadailybasis,overthelifeofthesubscriptionperiod.Typically,asubscriptionautomaticallyrenewsattheendofasubscriptionperiodunlessthecustomerspecificallyterminatesitpriortotheendoftheperiod.Inadditiontooursubscriptionfees,toalesserextent,wealsogeneraterevenuefromlicenseandannualmaintenancefeesfromthelicensingofourRemotelyAnywhereproduct.WelicenseRemotelyAnywheretoourcustomersonaperpetualbasis.Becausewedonothavevendorspecificobjectiveevidenceoffairvalue,orVSOE,forourmaintenancearrangements,werecordtheinitiallicenseandmaintenancefeeasdeferredrevenueandrecognizethefeesasrevenueratably,onadailybasis,overtheinitialmaintenanceperiod.Wealsoinitiallyrecordmaintenancefeesforsubsequentmaintenanceperiodsasdeferredrevenueandrecognizerevenueratably,onadailybasis,overthemaintenanceperiod.WealsogeneraterevenuefromthelicenseofourIgnitionforiPhoneproductwhichissoldasaperpetuallicenseandisrecognizedasdelivered.RevenuefromRemotelyAnywhereandIgnitionforiPhonerepresentedlessthan5%ofourrevenuefortheyearendedDecember31,2009.EmployeesWehaveincreasedournumberoffull-timeemployeesto338atDecember31,2009ascomparedto287atDecember31,2008.CostofRevenueandOperatingExpensesWeallocatecertainoverheadexpenses,suchasrentandutilities,toexpensecategoriesbasedontheheadcountinorofficespaceoccupiedbypersonnelinthatexpensecategoryasapercentageofourtotalheadcountorofficespace.Asaresult,anoverheadallocationassociatedwiththesecostsisreflectedinthecostofrevenueandeachoperatingexpensecategory.CostofRevenue.Costofrevenueconsistsprimarilyofcostsassociatedwithourdatacenteroperationsandcustomersupportcenters,includingwagesandbenefitsforpersonnel,telecommunicationandhostingfeesforourservices,equipmentmaintenance,maintenanceandlicensefeesforsoftwarelicensesanddepreciation.Additionally,amortizationexpenseassociatedwiththesoftwareandtechnologyacquiredaspartofouracquisitionofsubstantiallyalltheassetsofAppliedNetworking,Inc.isincludedincostofrevenue.Theexpensesrelatedtohostingourservicesandsupportingourfreeandpremiumcustomersisrelatedtothenumberofcustomerswhosubscribetoourservicesandthecomplexityandredundancyofourservicesand32hostinginfrastructure.Weexpecttheseexpensestoincreaseinabsolutedollarsaswecontinuetoincreaseournumberofcustomersovertimebut,intotal,toremainrelativelyconstantasapercentageofrevenue.ResearchandDevelopment.Researchanddevelopmentexpensesconsistprimarilyofwagesandbenefitsfordevelopmentpersonnel,consultingfeesassociatedwithoutsourceddevelopmentprojects,facilitiesrentanddepreciationassociatedwithassetsusedindevelopment.Wehavefocusedourresearchanddevelopmenteffortsonbothimprovingeaseofuseandfunctionalityofourexistingservices,aswellasdevelopingnewofferings.ThemajorityofourresearchanddevelopmentemployeesarelocatedinourdevelopmentcentersinHungary.Therefore,amajorityofresearchanddevelopmentexpenseissubjecttofluctuationsinforeignexchangerates.Weexpectthatresearchanddevelopmentexpenseswillincreaseinabsolutedollarsaswecontinuetoenhanceandexpandourservicesbutdecreaseasapercentageofrevenue.SalesandMarketing.Salesandmarketingexpensesconsistprimarilyofonlinesearchandadvertisingcosts,wages,commissionsandbenefitsforsalesandmarketingpersonnel,offlinemarketingcostssuchasmediaadvertisingandtradeshows,andcreditcardprocessingfees.Onlinesearchandadvertisingcostsconsistprimarilyofpay-per-clickpaymentstosearchenginesandotheronlineadvertisingmediasuchasbannerads.Offlinemarketingcostsincluderadioandprintadvertisementsaswellasthecoststocreateandproducetheseadvertisements,andtradeshows,includingthecostsofspaceattradeshowsandcoststodesignandconstructtradeshowbooths.Advertisingcostsareexpensedasincurred.Inordertocontinuetogrowourbusinessandawarenessofourservices,weexpectthatwewillcontinuetocommitresourcestooursalesandmarketingefforts.Weexpectthatsalesandmarketingexpenseswillincreaseinabsolutedollarsbutdecreaseasapercentageofrevenueovertimeasourrevenueincreases.GeneralandAdministrative.Generalandadministrativeexpensesconsistprimarilyofwagesandbenefitsformanagement,humanresources,internalITsupport,financeandaccountingpersonnel,professionalfees,insuranceandothercorporateexpenses.Weexpectthatgeneralandadministrativeexpenseswillincreaseaswecontinuetoaddpersonnelandenhanceourinternalinformationsystemsinconnectionwiththegrowthofourbusiness.Inaddition,weanticipatethatwewillincuradditionalpersonnelexpenses,professionalservicefees,includingauditing,legalandinsurancecosts,relatedtooperatingasapubliccompany.Weexpectthatourgeneralandadministrativeexpenseswillincreaseinbothabsolutedollarsandasapercentageofrevenue.CriticalAccountingPoliciesOurfinancialstatementsarepreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Thepreparationofourfinancialstatementsandrelateddisclosuresrequiresustomakeestimates,assumptionsandjudgmentsthataffectthereportedamountofassets,liabilities,revenue,costsandexpenses,andrelateddisclosures.Webaseourestimatesandassumptionsonhistoricalexperienceandotherfactorsthatwebelievetobereasonableunderthecircumstances.Weevaluateourestimatesandassumptionsonanongoingbasis.Ouractualresultsmaydifferfromtheseestimatesunderdifferentassumptionsandconditions.Ourmostcriticalaccountingpoliciesaresummarizedbelow.SeeNote2toourfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-Kforadditionalinformationaboutthesecriticalaccountingpolicies,aswellasadescriptionofourothersignificantaccountingpolicies.RevenueRecognition.Weprovideourcustomersaccesstoourservicesthroughsubscriptionarrange-mentsforwhichourcustomerspayusafee.Ourcustomersenterintoasubscriptionagreementwithusfortheuseofoursoftware,ourconnectivityserviceandaccesstoourcustomersupportservices,suchastelephoneandemailsupport.Subscriptionperiodsrangefrommonthlytofouryears,andtheyaregenerallyoneyearinduration.Thesoftwarecannotberunonanotherentity’shardware,andourcustomersdonothavetherighttotakepossessionofthesoftwareanduseitontheirownoranotherentity’shardware.Webegintorecognizerevenuewhenthereispersuasiveevidenceofanarrangement,thefeeisfixedordeterminableandcollectabilityisdeemedprobable.Werecognizethesubscriptionfeeasrevenueonadailybasisoverthesubscriptionperiod.Agreementsmayincludemultipledeliverablesbyussuchassubscriptionandprofessionalservices,includingdevelopmentservices.Agreementswithmultipleelementdeliverablesareanalyzedtodetermineif33fairvalueexistsforeachelementonastand-alonebasis.Ifthevalueofeachdeliverableisdeterminablethenrevenueisrecognizedseparatelywhenorastheservicesaredelivered,orifapplicable,whenmilestonesassociatedwiththedeliverableareachievedandacceptedbythecustomer.Ifthefairvalueofanyoftheundeliveredperformanceobligationscannotbedetermined,thearrangementisaccountedforasasingleelementandwerecognizerevenueonastraight-linebasisovertheperiodinwhichweexpecttocompleteperformanceobligationsundertheagreement.OurarrangementsforthelicensingofRemotelyAnywherepermitourcustomerstousethesoftwareontheirhardwareandincludeoneyearofmaintenanceservices,whichincludestherighttosupportandupgrades,onawhenandifavailablebasis.WedonothaveVSOEforourmaintenanceservicearrangementsandthusrecognizerevenueratablyonadailybasisovertheinitialmaintenanceperiod,whichisgenerallyoneyear.WealsorecognizerevenuefromthesaleofourIgnitionforiPhonesoftwareproduct,whichissoldonaperpetualbasis.Webegintorecognizerevenuewhenthereispersuasiveevidenceofanarrangement,theproducthasbeenprovidedtothecustomer,thefeeisfixedordeterminableandcollectabilityisdeemedprobable.IncomeTaxes.WearesubjecttofederalandvariousstateincometaxesintheUnitedStates,TheNetherlands,HungaryandAustralia,andweuseestimatesindeterminingourprovisionfortheseincometaxesanddeferredtaxassets.Deferredtaxassets,relatedvaluationallowances,currenttaxliabilitiesanddeferredtaxliabilitiesaredeterminedseparatelybytaxjurisdiction.Inmakingthesedeterminations,weestimatetaxassets,relatedvaluationallowances,currenttaxliabilitiesanddeferredtaxliabilities,andweassesstemporarydifferencesresultingfromdifferingtreatmentofitemsfortaxandaccountingpurposes.AtDecember31,2009,ourdeferredtaxassetsconsistedprimarilyofnetoperatinglossesandresearchanddevelopmentcreditcarryforwards.AsofDecember31,2009,wehadU.S.federalandstatenetoperatinglosscarryforwardsofapproximately$12.1millionand$13.8million,respectively,whichexpireatvaryingdatesthrough2029forU.S.federalincometaxpurposesandprimarilythrough2014forstateincometaxpurposes.Weusedapproximately$7.1millionoffederaland$4.3millionofstatenetoperatinglosscarryforwardsduringtheyearendedDecember31,2009.Weassessthelikelihoodthatdeferredtaxassetswillberealized,andwerecognizeavaluationallowanceifitismorelikelythannotthatsomeportionofthedeferredtaxassetswillnotberealized.Thisassessmentrequiresjudgmentastothelikelihoodandamountsoffuturetaxableincomebytaxjurisdiction.Todate,wehaveprovidedafullvaluationallowanceagainstourdeferredtaxassetsaswebelievetheobjectiveandverifiableevidenceofourhistoricalpre-taxnetlossesoutweighsthepositiveevidenceofour2009pre-taxprofitandforecastedfutureresults.Althoughwebelievethatourtaxestimatesarereasonable,theultimatetaxdeterminationinvolvessignificantjudgmentthatissubjecttoauditbytaxauthoritiesintheordinarycourseofbusiness.Wewillcontinuetomonitorboththepositiveandnegativeevidenceandwewilladjustthevaluationallowanceassufficientobjectivepositiveevidencebecomesavailable.SoftwareDevelopmentCosts.Wehavedeterminedthattechnologicalfeasibilityofoursoftwareproductsandthesoftwarecomponentofoursolutionstobemarketedtoexternalusersisreachedshortlybeforetheirintroductiontothemarketplace.Asaresult,thedevelopmentcostsincurredaftertheestablishmentoftechnologicalfeasibilityandbeforetheirreleasetothemarketplacehavenotbeenmaterial,andsuchcostshavebeenexpensedasincurred.Inaddition,costsincurredduringtheapplicationdevelopmentstageforsoftwareprogramstobeusedsolelytomeetourinternalneedshavenotbeenmaterial.ValuationofLong-LivedandIntangibleAssets,IncludingGoodwill.Wereviewlong-livedassetsforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountoftheassets,includingintangibleassets,maynotberecoverable.OurrecordedintangibleassetsareassociatedwithouracquisitionofsubstantiallyalloftheassetsofAppliedNetworking,Inc.inJuly2006.Weareamortizingtherecordedvaluesofsuchintangibleassetsovertheirestimatedusefullives,whichrangefromfourtofiveyears.ThroughDecember31,2009,wehavenotrecordedanyimpairmentchargesassociatedwithourlong-livedandintangibleassets.Wetestgoodwillforimpairmentonanannualbasisandwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofgoodwillmayexceeditsfairvalue.OurannualgoodwillimpairmenttestisatDecember31ofeachyear.TherecordedamountofgoodwillatDecember31,2009representsthegoodwillfromouracquisitionofAppliedNetworking,Inc.AtDecember31,2009,thefairvalueofour34reportingunitsignificantlyexceededitscarryingvalue.ThroughDecember31,2009,wehavenotrecordedanyimpairmentsofgoodwill.Stock-BasedCompensation.PriortoJanuary1,2006,weaccountedforshare-basedawards,includingstockoptions,toemployeesusingtheintrinsicvaluemethod.Undertheintrinsicvaluemethod,compensationexpensewasmeasuredonthedateofawardasthedifference,ifany,betweenthedeemedfairvalueofourcommonstockandtheoptionexerciseprice,multipliedbythenumberofoptionsgranted.Theoptionexercisepricesandfairvalueofourcommonstockweredeterminedbyourmanagementandboardofdirectorsbasedonareviewofvariousobjectiveandsubjectivefactors.NocompensationexpensewasrecordedforstockoptionsissuedtoemployeespriortoJanuary1,2006infixedamountsandwithfixedexercisepricesatleastequaltothefairvalueofourcommonstockatthedateofgrant.EffectiveJanuary1,2006,share-basedawardsareaccountedforatfairvalue,whichrequiresustorecognizecompensationexpenseforallshare-basedawardsgranted,modified,repurchasedorcancelledonorafterJanuary1,2006.Thesecostsarerecognizedonastraight-linebasisovertherequisiteserviceperiodforalltime-basedvestedawards.Wecontinuetoaccountforshare-basedawardsgrantedpriortoJanuary1,2006usingtheintrinsicmethod.Determiningtheappropriatefairvaluemodelandcalculatingthefairvalueofstock-basedpaymentawardsrequirestheuseofhighlysubjectiveestimatesandassumptions,includingtheestimatedfairvalueofcommonstock,expectedlifeofthestock-basedpaymentawardsandstockpricevolatility.BecausetherewasnopublicmarketforourcommonstockpriortoourIPO,ourBoardofDirectorsdeterminedthefairvalueofcommonstockateachoptiongrantdate,takingintoaccountourmostrecentlyavailableindependentvaluationofcommonstock,aswellasanumberofobjectiveandsubjectivefactors,includingpeergrouptradingmultiples,theamountofpreferredstockliquidationpreferences,theilliquidnatureofourcommonstockandoursizeandlackofhistoricalprofitability.Beginningin2006andthroughourIPOinJuly2009,weobtainedindependentcommonstockvaluationstoassistourBoardofDirectorsindeterminingthefairvalueofourcommonstock.Determiningthefairvalueofshare-basedawardsrequirestheuseofhighlysubjectiveassumptions,includingtheexpectedtermoftheawardandexpectedstockpricevolatility.Theassumptionsusedincalculatingthefairvalueofshare-basedawardsgrantedin2008and2009aresetforthbelow:20082009YearsEndedDecember31,Expecteddividendyield...............................0%0%Risk-freeinterestrate.................................2.52%-3.33%1.88%-2.71%Expectedterm(inyears)..............................5.54-6.255.11-6.25Volatility..........................................75%-80%75%Theassumptionsusedindeterminingthefairvalueofshare-basedawardsrepresentmanagement’sbestestimates,buttheseestimatesinvolveinherentuncertaintiesandtheapplicationofmanagement’sjudgment.Asaresult,iffactorschange,andweusedifferentassumptions,ourshare-basedcompensationcouldbemateriallydifferentinthefuture.Therisk-freeinterestrateusedforeachgrantisbasedonaU.S.Treasuryinstrumentwithatermsimilartotheexpectedtermoftheshare-basedaward.Theexpectedtermofoptionshasbeenestimatedutilizingthevestingperiodoftheoption,thecontractuallifeoftheoptionandouroptionexercisehistory.BecausetherewasnopublicmarketforourcommonstockpriortoourIPO,welackedcompany-specifichistoricalandimpliedvolatilityinformation.Therefore,weestimateourexpectedstockvolatilitybasedonthatofpublicly-tradedpeercompanies,andweexpecttocontinuetousethismethodologyuntilsuchtimeaswehaveadequatehistoricaldataregardingthevolatilityofourpublicly-tradedstockprice.Werecognizecompensationexpenseforonlytheportionofoptionsthatareexpectedtovest.Accordingly,wehaveestimatedexpectedforfeituresofstockoptionsbasedonourhistoricalforfeiturerateandweusetheseratestodevelopfutureforfeiturerates.Ifouractualforfeitureratevariesfromourhistoricalratesandestimates,additionaladjustmentstocompensationexpensemayberequiredinfutureperiods.35ResultsofConsolidatedOperationsThefollowingtablesetsforthselectedconsolidatedstatementsofoperationsdataforeachoftheperiodsindicatedasapercentageoftotalrevenue.200720082009YearsEndedDecember31,OperationsData:Revenue.................................................100%100%100%Costofrevenue...........................................151210Grossprofit..............................................858890Operatingexpenses:Researchanddevelopment..................................252318Salesandmarketing......................................726148Generalandadministrative.................................141311Legalsettlements........................................81—Amortizationofacquiredintangibles..........................11—Totaloperatingexpenses.....................................1209977Income(loss)fromoperations.................................(34)(11)13Interestandotherincome,net.................................11(1)Income(loss)beforeprovisionforincometaxes...................(33)(10)12Provisionforincometaxes...................................(1)——Netincome(loss)..........................................(34)%(10)%12%YearsEndedDecember31,2009and2008Revenue.RevenuefortheyearendedDecember31,2009was$74.4million,anincreaseof$22.7mil-lion,or44%,overrevenueof$51.7millionfortheyearendedDecember31,2008.Ofthe44%increaseinrevenue,themajorityoftheincreasewasduetoincreasesinrevenuefromnewcustomers,asourtotalnumberofpremiumaccountsincreasedtoapproximately300,000atDecember31,2009fromapproximately174,000premiumaccountsatDecember31,2008,incrementaladd-onrevenuesfromtheourexistingcustomerbaseandincrementalrevenueassociatedwithourIntelagreement.CostofRevenue.CostofrevenuefortheyearendedDecember31,2009was$7.5million,anincreaseof$1.5million,or26%,overcostofrevenueof$6.0millionfortheyearendedDecember31,2008.Asapercentageofrevenue,costofrevenuewas10%fortheyearendedDecember31,2009versus12%fortheyearendedDecember31,2008.Thedecreaseincostofrevenueasapercentageofrevenuewasprimarilytheresultofmoreefficientutilizationofourdatacenterandcustomersupportorganizations.Theincreaseinabsolutedollarsresultedprimarilyfromanincreaseinboththenumberofcustomersusingourpremiumservicesandthetotalnumberofdevicesthatconnectedtoourservices,includingdevicesownedbyfreeusers,whichresultedinincreasedhostingandcustomersupportcosts.Oftheincreaseincostofrevenue,$1.0millionresultedfromincreaseddatacentercostsassociatedwiththehostingofourservices.Theincreaseindatacentercostswasduetotheexpansionofourdatacenterfacilitiesasweaddedcapacitytoourhostinginfrastructure.Additionally,$0.7millionoftheincreaseincostofrevenuewasduetotheincreasedcostsinourcustomersupportorganizationweincurred,primarilyasaresultofhiringnewemployeestosupportourcustomergrowth.ResearchandDevelopmentExpenses.ResearchanddevelopmentexpensesfortheyearendedDecem-ber31,2009were$13.1million,anincreaseof$1.2million,or10%,overresearchanddevelopmentexpensesof$12.0millionfortheyearendedDecember31,2008.Asapercentageofrevenue,researchanddevelopmentexpenseswere18%and23%fortheyearsendedDecember31,2009and2008,respectively.Theincreasein36absolutedollarswasprimarilyduetoa$0.4millionincreaseinpersonnel-relatedcosts,includingsalaryandothercompensationrelatedcosts,asweincreasedthenumberofresearchanddevelopmentpersonnelto143atDecember31,2009from122atDecember31,2008.Theincreasewasalsoduetoa$0.3millionincreaseinrentcostsprimarilyrelatedtoournewofficespaceinBudapest,Hungary,a$0.2millionincreaseintelephonecosts,a$0.1millionincreaseindepreciationexpenseanda$0.1millionincreaseinconsultantcosts.SalesandMarketingExpenses.SalesandmarketingexpensesfortheyearendedDecember31,2009were$35.8million,anincreaseof$4.2million,or13%,oversalesandmarketingexpensesof$31.6millionfortheyearendedDecember31,2008.Asapercentageofrevenue,salesandmarketingexpenseswere48%and61%fortheyearsendedDecember31,2009and2008,respectively.Theincreaseinabsolutedollarswasprimarilyduetoa$2.1millionincreaseinpersonnelrelatedandrecruitingcostsfromadditionalemployeeshiredtosupportourgrowthinsalesandexpandourmarketingefforts.Thetotalnumberofsalesandmarketingpersonnelincreasedto115atDecember31,2009from101atDecember31,2008.Theincreasewasalsoduetoa$0.4millionincreaseinmarketingprogramcosts,a$0.3millionincreaseinconsultantcosts,a$0.3millionincreaseintelephonecosts,a$0.2millionincreaseinhardwareandsoftwaremaintenancecosts,a$0.2millionincreaseintravelrelatedcostsanda$0.5millionincreaseinothermiscellaneousexpenses,primarilyconsistingofcreditcardprocessingfees.GeneralandAdministrativeExpenses.GeneralandadministrativeexpensesfortheyearendedDecem-ber31,2009were$8.3million,anincreaseof$1.7million,or26%,overgeneralandadministrativeexpensesof$6.6millionfortheyearendedDecember31,2008.Asapercentageofrevenue,generalandadministrativeexpenseswere11%and13%fortheyearsendedDecember31,2009and2008,respectively.Theincreaseinabsolutedollarswasprimarilyduetoa$0.9millionincreaseinpersonnel-relatedcostsasweincreasedthenumberofgeneralandadministrativeemployeestosupportouroverallgrowth.Theincreasewasalsoduetoa$0.3millionincreaseinlegalcostsanda$0.2millionincreaseincorporateinsurancecosts.LegalSettlementExpenses.LegalsettlementexpensesfortheyearendedDecember31,2009werezero,adecreaseof$0.6million,or100%,overlegalsettlementexpensesof$0.6millionfortheyearendedDecember31,2008.InMay2008,wesettledalawsuitwhichbeganin2007relatedtoanallegedpatentinfringement.AmortizationofAcquiredIntangibles.AmortizationofacquiredintangiblesfortheyearendedDecember31,2009and2008was$0.3millionandrelatedtothevalueofintangibleassetsacquiredinourJuly2006acquisitionofAppliedNetworking,Inc.InterestandOther(Income)Expense,Net.Interestandother(income)expense,netfortheyearendedDecember31,2009wasanexpenseof$0.2million,comparedtoincomeof$0.1million,fortheyearendedDecember31,2008.ThechangewasmainlyduetoadecreaseininterestincomeandanincreaseinforeignexchangelossesoffsetbyadecreaseininterestexpenseassociatedwithanotepayablerelatedtoouracquisitionofAppliedNetworking,Inc.IncomeTaxes.DuringtheyearendedDecember31,2009and2008,werecordedadeferredtaxprovisionofapproximately$15,000and$17,000relatedtothedifferentbookandtaxtreatmentforgoodwillandaprovisionforalternativeminimumtaxes,foreignandstateincometaxestotaling$0.3millionand$0.1million,respectively.WerecordedafederalincometaxprovisionfortheyearendedDecember31,2009andafederalincometaxbenefitfortheyearendedDecember31,2008whichwereoffsetbythechangeinthevaluationallowance.Weassessthelikelihoodthatdeferredtaxassetswillberealized,andwerecognizeavaluationallowanceifitismorelikelythannotthatsomeportionofthedeferredtaxassetswillnotberealized.Thisassessmentrequiresjudgmentastothelikelihoodandamountsoffuturetaxableincomebytaxjurisdiction.Todate,wehaveprovidedafullvaluationallowanceagainstourdeferredtaxassetsaswebelievetheobjectiveandverifiableevidenceofourhistoricalpretaxnetlossesoutweighsthepositiveevidenceofour2009pre-taxprofitandforecastedfutureresults.Althoughwebelievethatourtaxestimatesarereasonable,theultimatetaxdeterminationinvolvessignificantjudgmentthatissubjecttoauditbytaxauthoritiesintheordinarycourseofbusiness.Wewillcontinuetomonitorthepositiveandnegativeevidenceandwewilladjustthevaluationallowanceassufficientobjectivepositiveevidencebecomesavailable.37NetIncome(Loss).Werecognizedanetincomeof$8.8millionfortheyearendedDecember31,2009comparedtoanetlossof$5.4millionfortheyearendedDecember31,2008.Theincreaseinnetincomearoseprincipallyfromanincreaseinrevenuespartiallyoffsetbyanincreaseinoperatingexpenses.YearsEndedDecember31,2008and2007Revenue.RevenuefortheyearendedDecember31,2008was$51.7million,anincreaseof$24.7mil-lion,or92%,overrevenueof$27.0millionfortheyearendedDecember31,2007.Ourrevenueconsistsoffeesforoursubscriptionservices.Ofthe92%increaseinrevenue,themajorityoftheincreasewasduetoincreasesinrevenuefromnewcustomers,asourtotalnumberofpremiumaccountsincreasedby67%toapproximately174,000atDecember31,2008fromapproximately104,000premiumaccountsatDecember31,2007.TheremainingincreaseinrevenuewasduetoincrementalsubscriptionrevenuefromourexistingcustomersandrevenueassociatedwiththeIntelagreement.CostofRevenue.CostofrevenuefortheyearendedDecember31,2008was$6.0million,anincreaseof$2.1million,or54%,overcostofrevenueof$3.9millionfortheyearendedDecember31,2007.Asapercentageofrevenue,costofrevenuewas12%fortheyearendedDecember31,2008versus15%fortheyearendedDecember31,2007.Thedecreaseincostsofrevenueasapercentageofrevenuewasprimarilytheresultofmoreefficientutilizationofourdatacenterandcustomersupportorganizations.Theincreaseincostofrevenueinabsolutedollarsisprimarilyduetoincreasedhostingandcustomersupportcostsresultingfromanincreaseinboththenumberofcustomersusingourpremiumservicesandthetotalnumberofdevicesthatconnectedtoourservices,includingdevicesownedbyfreeusers.Thetotalnumberofdevicesconnectedtoourserviceincreasedtoapproximately60millionasofDecember31,2008fromapproximately32millionasofDecember31,2007.Oftheincreaseincostofrevenue,$1.3millionresultedfromincreaseddatacentercostsassociatedwiththehostingofourservices.Theincreaseindatacentercostswasduetoexpansionofourdatacenterfacilitiesasweaddedcapacitytoourhostinginfrastructure,includingtheestablishmentoftwonewdatacentersin2007,includingoneinEuropeandoneintheUnitedStates.Additionally,$0.8millionoftheincreaseincostofrevenuewasduetoincreasedcostsinourcustomersupportorganizationprimarilyassociatedwithcostsofnewemployeeshiredtosupportourcustomergrowth.ResearchandDevelopmentExpenses.ResearchanddevelopmentexpensesfortheyearendedDecem-ber31,2008were$12.0million,anincreaseof$5.3million,or79%,overresearchanddevelopmentexpensesof$6.7millionfortheyearendedDecember31,2007.Theincreasewasprimarilyduetoadditionalpersonnel-relatedcosts,includingsalaryandothercompensationrelatedcosts,asweincreasedthenumberofresearchanddevelopmentemployeestoenhancethefunctionalityofourservicesandtodevelopnewofferings.Thetotalnumberofresearchanddevelopmentpersonnelincreasedby39%to122atDecember31,2008from88atDecember31,2007.SalesandMarketingExpenses.SalesandmarketingexpensesfortheyearendedDecember31,2008were$31.6million,anincreaseof$12.1million,or62%,oversalesandmarketingexpensesof$19.5millionfortheyearendedDecember31,2007.Theincreasewasprimarilyduetoa$6.1millionincreaseinpersonnel-relatedandrecruitingcosts,includingsalaryandothercompensationrelatedcosts,resultingfromincreasedheadcountmainlytosupportthegrowthinsalesandexpandedmarketingefforts.Thetotalnumberofsalesandmarketingpersonnelincreasedto101atDecember31,2008from69atDecember31,2007.Theincreasewasalsoattributabletoa$2.6millionincreaseinonlinesearchandadvertisingcosts,a$0.4millionincreaseintradeshowcosts,a$0.6millionincreaseintravelrelatedcosts,a$0.2millionincreaseintelephonecosts,anda$0.4millionincreaseinconsultingcosts,allaresultoftheinitiativestoincreaseawarenessofourservicesandtoaddnewusersandcustomers.Inaddition,weexperienceda$0.4millionincreaseinrentexpenseinconnectionwiththeexpansionofourWoburn,Massachusettsoffice,aswellastheadditionoftheofficeinAmsterdam,TheNetherlands.GeneralandAdministrativeExpenses.GeneralandadministrativeexpensesfortheyearendedDecem-ber31,2008were$6.6million,anincreaseof$3.0million,or83%,overgeneralandadministrativeexpensesof$3.6millionfortheyearendedDecember31,2007.Theprimaryreasonfortheincreasewasanincreaseinpersonnel-relatedandrecruitingcosts,includingsalaryandothercompensationrelatedcosts,of$2.0million38asweincreasedthenumberofgeneralandadministrativeemployeestosupportouroverallgrowth.Additionally,professionalfeesincreasedby$0.6millionandtravelrelatedcostsincreasedby$0.1million.LegalSettlementExpenses.LegalsettlementexpensesfortheyearendedDecember31,2008were$0.6million,adecreaseof$1.6million,or73%,overlegalsettlementexpensesof$2.2millionfortheyearendedDecember31,2007.InMay2008,wesettledalawsuitwhichbeganin2007relatedtoanallegedpatentinfringement.AmortizationofAcquiredIntangibles.AmortizationofacquiredintangiblesfortheyearsendedDecem-ber31,2008and2007was$0.3millionandrelatedtothevalueofintangibleassetsacquiredinourJuly2006acquisitionofAppliedNetworking,Inc.InterestandOtherIncome,Net.Interestandotherincome,net,fortheyearendedDecember31,2008was$0.1million,adecreaseof$0.1millionoverinterestandotherincome,netof$0.2millionfortheyearendedDecember31,2007.ThedecreasewasmainlyduetoanincreaseinforeignexchangelossesandadecreaseininterestincomeoffsetbyadecreaseininterestexpenseassociatedwithanotepayablerelatedtoouracquisitionofAppliedNetworking,Inc.Incometaxes.DuringtheyearsendedDecember31,2008and2007,werecordedadeferredtaxprovisionofapproximately$17,000and$25,000,respectively,relatedtothedifferentbookandtaxtreatmentforgoodwillandaprovisionforforeignandstateincometaxestotaling$105,000and$26,000,respectively.WerecordedafederalincometaxbenefitfortheyearsendedDecember31,2008and2007relatedtothenettaxlossesintheperiods.Wehavealsoprovidedafullvaluationallowanceforournetdeferredtaxassetsasitisnotmorelikelythannotthatanyfuturebenefitsfromthesedeferredtaxassetswouldberealized.Netloss.Werecognizedanetlossof$5.4millionfortheyearendedDecember31,2008versus$9.1millionfortheyearendedDecember31,2007.Thedecreaseinnetlosswasassociatedwiththeincreaseinrevenuespartiallyoffsetbyincreaseinoperatingexpenses.LiquidityandCapitalResourcesThefollowingtablesetsforththemajorsourcesandusesofcashforeachoftheperiodssetforthbelow:200720082009YearsEndedDecember31,(Inthousands)Netcashprovidedbyoperations..........................$3,378$10,131$24,339Netcashusedininvestingactivities.......................(1,695)(3,775)(33,165)Netcashprovidedby(usedin)financingactivities............8,965(2,101)86,157Effectofexchangeratechanges..........................46(18)46Netincreaseincash...................................$10,694$4,237$77,377SinceourinceptionandthroughDecember31,2009,wehavefinancedouroperationsprimarilythroughthesaleofredeemableconvertiblepreferredstockandcashflowsfromoperations.AtDecember31,2009,ourprincipalsourceofliquiditywascashandcashequivalentsandshort-termmarketablesecuritiestotaling$130.2million.CashFlowsFromOperatingActivitiesNetcashprovidedbyoperatingactivitieswas$24.3million,$10.1million,and$3.4millionfortheyearsendedDecember31,2009,2008and2007,respectively.NetcashinflowsfromoperatingactivitiesduringtheyearendedDecember31,2009weremainlydueto$8.8millionofnetincomefortheperiod,non-cashoperatingexpenses,including$3.2millionfordepreciationandamortizationand$2.9millionforstockcompensation,aswellasa$2.8millionincreaseincurrentliabilities,a$5.7millionincreaseindeferredrevenueassociatedwiththeincreaseinsubscriptionsalesorders39andcustomergrowth,a$0.5millionincreaseinotherlong-termliabilitiesanda$0.4milliondecreaseinaccountsreceivable.Thesewereoffsetbya$0.2millionincreaseinprepaidexpensesandothercurrentassets.NetcashinflowsfromoperatingactivitiesduringtheyearendedDecember31,2008resultedfroma$12.3millionincreaseindeferredrevenueassociatedwiththeincreaseinsubscriptionsalesordersandcustomergrowthaswellasanincreaseincurrentliabilities.Theseincreasesandincreasesinnon-cashoperatingexpenses,including$2.4millionfordepreciationandamortizationand$2.8millionforstockcompensation,offseta$5.4millionoperatinglossfortheperiod,a$1.5millionincreaseinaccountsreceivableanda$1.0millionincreaseinprepaidexpensesandothercurrentassets.Netcashinflowsfromoperatingactivitiesduring2007resultedfromincreasesinsubscriptionsalesordersandincreasesincurrentliabilities.Increasesintheseitemsandincreasesinnon-cashoperatingexpensessuchasdepreciation,amortizationandstockcompensationoffsetanetlossfortheperiodof$9.1million,includinglegalsettlementspaidof$1.9million,andanincreaseinaccountsreceivable.Themajorityofourrevenuewasderivedfromannualsubscriptionspaidatthebeginningofthesubscriptionperiod,whichresultedinanincreaseindeferredrevenueof$8.8million.Accountsreceivableincreased$1.9millionassociatedwithincreasesinsubscriptionordersandcustomergrowth.Depreciationandamortizationwas$1.7million,anincreaseof$0.9millionover2006,duemainlytoincreaseddepreciationfrompurchasesofcomputerequipmentassociatedwithexpandingourdatacenterandincreasedamortizationcostsassociatedwiththeintangibleassetsacquiredaspartofouracquisitionofAppliedNetworking,Inc.Currentliabilitiesincreasedduemainlytoincreasedoperatingcostsofourbusinessin2007from2006.CashFlowsFromInvestingActivitiesNetcashusedininvestingactivitieswas$33.2million,$3.8millionand$1.7millionfortheyearsendedDecember31,2009,2008and2007,respectively.NetcashusedininvestingactivitiesduringtheyearendedDecember31,2009consistedprimarilyofnetcashpaidtopurchasemarketablesecuritiesandpropertyandequipment.PurchasesofequipmentresultedfromtheexpansionofourdatacentersaswellasournewofficespaceinBudapest,Hungary.Thepurchaseofmarketablesecuritiesandpropertyandequipmentwereoffsetbyareductioninrestrictedcash.NetcashusedininvestingactivitiesduringtheyearsendedDecember31,2008and2007consistedprimarilyofthepurchaseofequipmentrelatedtotheexpansionofourdatacenters.NetcashusedininvestingactivitiesduringtheyearendedDecember31,2008wasalsoduetothepurchaseofequipmentrelatedtotheincreaseinthenumberofouremployeesinconnectionwiththeexpansionofourofficeandrelatedinfrastructure,aswellastwocertificateofdepositsthatserveasasecuritydepositforcorporatecreditcardsandasecuritydepositrelatedtoanewleaseagreementforofficespaceinBudapest,Hungary.Ourcapitalexpenditurestotaled$3.4million,$3.3millionand$1.7millionfortheyearsendedDecember31,2009,2008and2007,respectively.Ourfuturecapitalrequirementsmayvarymateriallyfromthosecurrentlyplannedandwilldependonmanyfactors,including,butnotlimitedto,developmentofnewservices,marketacceptanceofourservices,theexpansionofoursales,support,developmentandmarketingorganizations,theestablishmentofadditionalofficesintheUnitedStatesandworldwideandtheexpansionofourdatacenterinfrastructurenecessarytosupportourgrowth.Sinceourinception,wehaveexperiencedincreasesinourexpendituresconsistentwiththegrowthinouroperationsandpersonnel,andweanticipatethatourexpenditureswillcontinuetoincreaseinthefuture.Wealsointendtomakeinvestmentsincomputerequipmentandsystemsandinfrastructurerelatedtoexistingandnewofficesaswemoveandexpandourfacilities,addadditionalpersonnelandcontinuetogrowourbusiness.Wearenotcurrentlypartytoanypurchasecontractsrelatedtofuturecapitalexpenditures.CashFlowsFromFinancingActivitiesNetcashflowsprovidedbyfinancingactivitieswere$86.2millionfortheyearendedDecember31,2009andweremainlytheresultofnetproceedsreceivedrelatedtoourIPOandsecondarypublicofferingandproceedsreceivedfromtheissuanceofcommonstockupontheexerciseofstockoptions.40Netcashflowsusedinfinancingactivitieswere$2.1millionfortheyearendedDecember31,2008andweremainlyassociatedwiththefinalpaymentof$1.3millionassociatedwithanotepayablerelatedtoouracquisitionofAppliedNetworking,Inc.andthepaymentofapproximately$1.0millionassociatedwithfeesrelatedtoourIPOpartiallyoffsetbyproceedsreceivedfromtheissuanceofcommonstockupontheexerciseofstockoptions.Netcashflowsfromfinancingactivitiesfor2007weremainlyassociatedwiththeissuanceof2,222,223sharesofourseriesB-1redeemableconvertiblepreferredstockinDecember2007foranaggregatepurchasepriceof$10.0millionand$0.5millionfromtheissuanceofcommonstockasaresultofcommonstockoptionexercises.Theseincreaseswereoffsetbythepaymentof$1.3millionassociatedwithanotepayablerelatedtoouracquisitionofAppliedNetworking,Inc.andthepaymentofapproximately$0.3millionassociatedwithfeesrelatedtoourIPO.OnJuly7,2009,weclosedourIPOraisingnetproceedsofapproximately$82.9millionafterdeductingunderwritingdiscountsandcommissionsandofferingcosts.OnDecember16,2009,weclosedoursecondarypublicofferingraisingnetproceedsofapproximately$1.2millionafterdeductingunderwritingdiscountsandcommissionsandofferingcosts.Whilewebelievethatourcurrentcashandcashequivalentswillbesufficienttomeetourworkingcapitalandcapitalexpenditurerequirementsforatleastthenexttwelvemonths,wemayelecttoraiseadditionalcapitalthroughthesaleofadditionalequityordebtsecuritiesorobtainacreditfacilitytodeveloporenhanceourservices,tofundexpansion,torespondtocompetitivepressuresortoacquirecomplementaryproducts,businessesortechnologies.Ifweelect,additionalfinancingmaynotbeavailableinamountsorontermsthatarefavorabletous,ifatall.Ifweraiseadditionalfundsthroughtheissuanceofequityorconvertibledebtsecurities,ourexistingstockholderscouldsuffersignificantdilution,andanynewequitysecuritiesweissuecouldhaverights,preferencesandprivilegessuperiortothoseofholdersofourcommonstock.Duringthelastthreeyears,inflationandchangingpriceshavenothadamaterialeffectonourbusinessandwedonotexpectthatinflationorchangingpriceswillmateriallyaffectourbusinessintheforeseeablefuture.Off-BalanceSheetArrangementsWedonotengageinanyoff-balancesheetfinancingactivities,nordowehaveanyinterestinentitiesreferredtoasvariableinterestentities.ContractualObligationsThefollowingtablesummarizesourcontractualobligationsatDecember31,2009andtheeffectsuchobligationsareexpectedtohaveonourliquidityandcashflowinfutureperiods.TotalLessThan1Year1-3Years3-5YearsMoreThan5YearsPaymentsDuebyPeriodOperatingleaseobligations..........$7,525,000$2,123,000$4,216,000$1,186,000$—Hostingserviceagreements..........$718,000$718,000———Total.........................$8,243,000$2,841,000$4,216,000$1,186,000$—ThecommitmentsunderouroperatingleasesshownaboveconsistprimarilyofleasepaymentsforourWoburn,Massachusettscorporateheadquarters,ourinternationalsalesandmarketingofficeslocatedinAmsterdam,TheNetherlands,Sydney,AustraliaandLondon,EnglandandourresearchanddevelopmentofficesinBudapestandSzegedHungary,andcontractualobligationsrelatedtoourdatacenters.RecentAccountingPronouncementsInOctober2009,anupdatewasmadeto“RevenueRecognition—MultipleDeliverableRevenueArrangements.”Thisupdateremovestheobjective-and-reliable-evidence-of-fair-valuecriterionfromthe41separationcriteriausedtodeterminewhetheranarrangementinvolvingmultipledeliverablescontainsmorethanoneunitofaccounting,replacesreferencesto“fairvalue”with“sellingprice”todistinguishfromthefairvaluemeasurementsrequiredunderthe“FairValueMeasurementsandDisclosures”guidance,providesahierarchythatentitiesmustusetoestimatethesellingprice,eliminatestheuseoftheresidualmethodforallocation,andexpandstheongoingdisclosurerequirements.ThisupdateiseffectivebeginningJanuary1,2011andcanbeappliedprospectivelyorretrospectively.Wearecurrentlyevaluatingtheeffectthatadoptionofthisupdatewillhaveonourconsolidatedfinancialstatements.Item7A.QUANTITATIVEANDQUALITATIVEDISCLOSUREABOUTMARKETRISK.ForeignCurrencyExchangeRisk.OurresultsofoperationsandcashflowsaresubjecttofluctuationsduetochangesinforeigncurrencyexchangeratesasaresultofthemajorityofourresearchanddevelopmentexpendituresbeingmadefromourHungarianresearchanddevelopmentfacilities,andinourinternationalsalesandmarketingofficesinAmsterdam,TheNetherlandsandSydney,Australia.IntheyearendedDecember31,2009,approximately17%,13%and2%ofouroperatingexpensesoccurredinouroperationsinHungary,AmsterdamandSydney,respectively.IntheyearendedDecember31,2008,approximately17%and10%ofouroperatingexpensesoccurredinouroperationsinHungaryandAmsterdam,respectively.Additionally,morethan40%ofoursalesoutsidetheUnitedStatesaredenominatedinlocalcurrenciesand,thus,alsosubjecttofluctuationsduetochangesinforeigncurrencyexchangerates.Todate,changesinforeigncurrencyexchangerateshavenothadamaterialimpactonouroperations,andafuturechangeof20%orlessinforeigncurrencyexchangerateswouldnotmateriallyaffectouroperations.Atthistimewedonot,butmayinthefuture,enterintoanyforeigncurrencyhedgingprogramsorinstrumentsthatwouldhedgeorhelpoffsetsuchforeigncurrencyexchangeraterisk.InterestRateSensitivity.InterestincomeissensitivetochangesinthegenerallevelofU.S.interestrates.However,basedonthenatureandcurrentlevelofourcashandcashequivalentsandshort-termmarketablesecurities,whichareprimarilyconsistedofcash,moneymarketinstruments,governmentsecurities,corporateandagencybondsandcommercialpaper,webelievethereisnomaterialriskofexposuretochangesinthefairvalueofourcashandcashequivalentsandmarketablesecuritiesasaresultofchangesininterestrates.42ITEM8.FINANCIALSTATEMENTSANDSUPPLEMENTARYDATALogMeIn,Inc.IndextoConsolidatedFinancialStatementsPage(s)REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM.................44FinancialStatements:ConsolidatedBalanceSheets.....................................................45ConsolidatedStatementsofOperations..............................................46ConsolidatedStatementsofRedeemableConvertiblePreferredStock,Stockholders’Equity(Deficit)andComprehensiveIncome(Loss)...............................................47ConsolidatedStatementsofCashFlows.............................................48NotestoConsolidatedFinancialStatements..........................................4943REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTotheStockholdersandBoardofDirectorsofLogMeIn,Inc.Woburn,MassachusettsWehaveauditedtheaccompanyingconsolidatedbalancesheetsofLogMeIn,Inc.andsubsidiaries(the“Company”)asofDecember31,2008and2009,andtherelatedconsolidatedstatementsofoperations,redeemableconvertiblepreferredstock,stockholders’equity(deficit)andcomprehensiveincome(loss),andcashflowsforeachofthethreeyearsintheperiodendedDecember31,2009.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.TheCompanyisnotrequiredtohave,norwereweengagedtoperform,anauditofitsinternalcontroloverfinancialreporting.Ourauditsincludedconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheCompany’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditalsoincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanage-ment,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.Inouropinion,suchconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofLogMeIn,Inc.andsubsidiariesasofDecember31,2008and2009,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2009,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica./s/Deloitte&ToucheLLPBoston,MassachusettsFebruary26,201044LogMeIn,Inc.ConsolidatedBalanceSheetsDecember31,2008December31,2009ASSETSCurrentassets:Cashandcashequivalents..............................................$22,912,981$100,290,001Marketablesecurities.................................................—29,956,204Accountsreceivable(netofallowancefordoubtfulaccountsofapproximately$69,000and$83,000asofDecember31,2008andDecember31,2009,respectively)...........4,700,6164,149,645Prepaidexpensesandothercurrentassets(including$149,578and$101,284ofnon-tradereceivableduefromrelatedpartyatDecember31,2008andDecember31,2009,respectively).....................................................1,665,3051,834,244Totalcurrentassets.................................................29,278,902136,230,094Propertyandequipment,net..............................................4,000,4974,859,139Restrictedcash.......................................................592,038373,184Acquiredintangibles,net................................................1,493,850750,915Goodwill...........................................................615,299615,299Deferredofferingcosts..................................................1,412,009—Otherassets.........................................................22,35929,918Totalassets......................................................$37,414,954$142,858,549LIABILITIES,REDEEMABLECONVERTIBLEPREFERREDSTOCKANDSTOCKHOLDERS’EQUITY(DEFICIT)Currentliabilities:Accountspayable....................................................$1,504,448$2,328,223Accruedliabilities...................................................5,197,8437,323,176Deferredrevenue,currentportion.........................................25,257,31632,190,539Totalcurrentliabilities..............................................31,959,60741,841,938Deferredrevenue,netofcurrentportion......................................3,101,0951,912,329Otherlong-termliabilities...............................................130,358594,931Totalliabilities....................................................35,191,06044,349,198Commitmentsandcontingencies(Note11)Redeemableconvertiblepreferredstock,parvalue$0.01pershare;30,901,343and5,000,000sharesauthorizedatDecember31,2008andDecember31,2009;SeriesA—designated,issued,andoutstanding17,010,413and0sharesatDecember31,2008andDecember31,2009..........................................12,500,967—SeriesB—designated11,668,707and0shares;issuedandoutstanding11,668,703and0sharesatDecember31,2008andDecember31,2009.......................11,628,984—SeriesB-1—designated,issued,andoutstanding2,222,223and0sharesatDecember31,2008andDecember31,2009..........................................10,713,318—Totalredeemableconvertiblepreferredstock...............................34,843,269—Stockholders’equity(deficit):Commonstock,$0.01parvalue—20,022,752and75,000,000sharesauthorizedasofDecember31,2008andDecember31,2009,respectively;3,980,278and22,448,808sharesoutstandingasofDecember31,2008andDecember31,2009,respectively......................................................39,803224,488Additionalpaid-incapital..............................................311,048122,465,372Accumulateddeficit..................................................(32,980,213)(24,182,960)Accumulatedothercomprehensiveincome..................................9,9872,451Totalstockholders’equity(deficit)......................................(32,619,375)98,509,351Totalliabilities,redeemableconvertiblepreferredstockandstockholders’equity(deficit)...$37,414,954$142,858,549Seenotestoconsolidatedfinancialstatements.45LogMeIn,Inc.ConsolidatedStatementsofOperations200720082009YearsEndedDecember31,Revenue(including$3,036,000and$6,007,000fromarelatedpartyduringtheyearsendedDecember31,2008and2009,respectively).....................................$26,998,592$51,723,453$74,408,660Costofrevenue....................................3,925,3115,970,2607,508,376Grossprofit...................................23,073,28145,753,19366,900,284OperatingexpensesResearchanddevelopment..........................6,661,33611,996,94713,148,986Salesandmarketing...............................19,488,12331,631,08035,820,996Generalandadministrative..........................3,610,8506,583,3178,297,399Legalsettlements.................................2,225,000600,000—Amortizationofacquiredintangibles...................327,715327,715327,716Totaloperatingexpenses..........................32,313,02451,139,05957,595,097Income(loss)fromoperations.........................(9,239,743)(5,385,866)9,305,187Interestincome....................................425,284276,439129,485Interestexpense....................................(164,495)(60,094)(1,766)Otherexpense.....................................(25,273)(110,519)(294,116)Income(loss)beforeincometaxes......................(9,004,227)(5,280,040)9,138,790Provisionforincometaxes............................(50,257)(122,005)(341,537)Netincome(loss)..................................(9,054,484)(5,402,045)8,797,253Accretionofredeemableconvertiblepreferredstock.........(1,919,366)(2,348,229)(1,311,225)Netincome(loss)attributabletocommonstockholders.......$(10,973,850)$(7,750,274)$7,486,028Netincome(loss)attributabletocommonstockholderspershare:Basic..........................................$(2.98)$(1.97)$0.39Diluted........................................$(2.98)$(1.97)$0.37Weightedaveragesharesoutstanding:Basic..........................................3,685,6563,933,44612,989,943Diluted........................................3,685,6563,933,44614,835,314Seenotestoconsolidatedfinancialstatements.46LogMeIn,Inc.ConsolidatedStatementsofRedeemableConvertiblePreferredStock,Stockholders’Equity(Deficit)andComprehensiveIncome(Loss)NumberofSharesAmountNumberofSharesAmountNumberofSharesAmountNumberofSharesAmountNumberofSharesAmountAdditionalPaid-InCapitalAccumulatedDeficitAccumulatedOtherComprehensiveIncome(Loss)TotalStockholders’DeficitComprehensiveIncome(Loss)SeriesARedeemableConvertiblePreferredStockSeriesBRedeemableConvertiblePreferredStockSeriesB-1RedeemableConvertiblePreferredStockTotalRedeemableConvertiblePreferredStockCommonStockBalanceatJanuary1,2007..........17,010,413$10,444,27311,668,703$10,151,325—$—28,679,116$20,595,5983,452,786$34,528$51,792$(17,656,906)$16,145$(17,554,441)Issuanceofcommonstockuponoptionexercises...................————————439,1924,392544,608——549,000SaleofSeriesB-1RedeemableConvertiblePreferredStock,netofissuancecostsof$19,928....................————2,222,2239,980,0762,222,2239,980,076——————AccretionofRedeemableConvertiblePreferredStocktoredemptionvalue....—1,146,025—763,455—9,886—1,919,366——(1,052,588)(866,778)—(1,919,366)Stock-basedcompensation...........——————————514,568——514,568Comprehensiveloss:Netloss....................———————————(9,054,484)—(9,054,484)$(9,054,484)Cumulativetranslationadjustments.....————————————34,08834,08834,088Totalcomprehensiveloss..........——————————————$(9,020,396)BalanceatDecember31,2007........17,010,41311,590,29811,668,70310,914,7802,222,2239,989,96230,901,33932,495,0403,891,97838,92058,380(27,578,168)50,233(27,430,635)Issuanceofcommonstockuponoptionexercises...................————————88,300883109,492——110,375AccretionofRedeemableConvertiblePreferredStocktoredemptionvalue....—910,669—714,204—723,356—2,348,229——(2,348,229)——(2,348,229)Stock-basedcompensation...........——————————2,491,405——2,491,405Comprehensiveloss:Netloss....................———————————(5,402,045)—(5,402,045)$(5,402,045)Cumulativetranslationadjustments.....————————————(40,246)(40,246)(40,246)Totalcomprehensiveloss..........——————————————$(5,442,291)BalanceatDecember31,2008........17,010,41312,500,96711,668,70311,628,9842,222,22310,713,31830,901,33934,843,2693,980,27839,803311,048(32,980,213)9,987(32,619,375)Issuanceofcommonstockuponoptionexercises...................————————258,2292,582514,027——516,609Issuanceofcommonstockinconnectionwithinitialpublicoffering,netofissuancecostsof$2,672,414................————————5,750,00057,50082,830,086——82,887,586Issuanceofcommonstockinconnectionwithsecondarypublicoffering,netofissuancecostsof$508,314..............————————99,7789981,235,057——1,236,055AccretionofRedeemableConvertiblePreferredStocktoredemptionvalue....—509,072—399,206—402,947—1,311,225——(1,311,225)——(1,311,225)Conversionofredeemableconvertiblepreferredstocktocommonstockuponcloseofinitialpublicoffering........(17,010,413)(13,010,039)(11,668,703)(12,028,190)(2,222,223)(11,116,265)(30,901,339)(36,154,494)12,360,523123,60536,030,889——36,154,494Stock-basedcompensation...........——————————2,855,490——2,855,490Comprehensiveincome:Netincome..................———————————8,797,253—8,797,253$8,797,253Unrealizedlossonavailable-for-salesecurities..................————————————(53,691)(53,691)$(53,691)Cumulativetranslationadjustments.....————————————46,15546,15546,155Totalcomprehensiveincome........——————————————$8,789,717BalanceatDecember31,2009........—$——$——$——$—22,448,808$224,488$122,465,372$(24,182,960)$2,45198,509,351Seenotestoconsolidatedfinancialstatements.47LogMeIn,Inc.ConsolidatedStatementsofCashFlows200720082009YearsEndedDecember31,CashflowsfromoperatingactivitiesNetincome(loss)..................................................$(9,054,484)$(5,402,045)$8,797,253Adjustmentstoreconcilenetincome(loss)tonetcashprovidedbyoperatingactivitiesDepreciationandamortization........................................1,704,3552,403,0573,201,029Amortizationofpremiumsoninvestments................................——931Provisionforbaddebts.............................................47,00079,000115,000Deferredincometaxexpense.........................................24,62916,66914,696Stock-basedcompensation...........................................514,5682,748,9252,921,612Lossondisposalofequipment........................................——998Discountonnotepayable...........................................161,23857,679—Changesinassetsandliabilities:Accountsreceivable.............................................(1,947,819)(1,541,298)435,971Prepaidexpensesandothercurrentassets...............................(286,704)(1,027,534)(168,939)Otherassets..................................................—(22,359)(7,559)Accountspayable...............................................1,976,208(1,254,196)729,687Accruedliabilities..............................................1,467,4691,734,6562,104,029Deferredrevenue...............................................8,815,67812,254,4175,744,457Otherlong-termliabilities.........................................(44,133)83,959449,877Netcashprovidedbyoperatingactivities..............................3,378,00510,130,93024,339,042CashflowsfrominvestingactivitiesPurchasesofmarketablesecurities.......................................——(30,010,825)Purchasesofpropertyandequipment.....................................(1,671,633)(3,313,004)(3,373,180)(Increase)decreaseinrestrictedcash......................................(23,737)(461,959)218,854Netcashusedininvestingactivities.................................(1,695,370)(3,774,963)(33,165,151)CashflowsfromfinancingactivitiesProceedsfromissuanceofcommonstockinconnectionwithinitialpublicoffering,netofissuancecostsof$1,397,000.........................................——84,162,339Proceedsfromissuanceofcommonstockinconnectionwithsecondarypublicoffering,netofissuancecostsof$266,000.........................................——1,478,027Paymentsofissuancecostsforproposedinitialpublicofferingofcommonstock.........(314,400)(961,864)—Proceedsfromsaleofredeemableconvertiblepreferredstockandwarrant—netofissuancecostsof$19,928.................................................9,980,076——Proceedsfromissuanceofcommonstockuponoptionexercises....................549,000110,375516,609Paymentsonnotepayable............................................(1,250,000)(1,250,000)—Netcashprovidedby(usedin)financingactivities........................8,964,676(2,101,489)86,156,975Effectofexchangeratechangesoncashandcashequivalentsandrestrictedcash.........46,590(17,918)46,154Netincreaseincashandcashequivalents..................................10,693,9014,236,56077,377,020Cashandcashequivalents,beginningofyear................................7,982,52018,676,42122,912,981Cashandcashequivalents,endofyear....................................$18,676,421$22,912,981$100,290,001SupplementaldisclosureofcashflowinformationCashpaidforinterest...............................................$109,092$205,123$1,768NoncashinvestingandfinancingactivitiesPurchasesofpropertyandequipmentincludedinaccountspayableandaccruedliabilities....................................................$290,616$219,084$163,639Accretionofredeemableconvertiblepreferredstock..........................$1,919,366$2,348,229$1,311,225Deferredstockofferingcostsincludedinaccountspayableandaccruedliabilities.......$148,781$135,745$241,972Conversionofredeemablepreferredstocktocommonstock.....................——36,154,494Seenotestoconsolidatedfinancialstatements.48LogMeIn,Inc.NotestoConsolidatedFinancialStatements1.NatureoftheBusinessLogMeIn,Inc.(the“Company”)developsandmarketsasuiteofremoteaccessandsupportsolutionsthatprovideinstant,secureconnectionsbetweeninternetenableddevices.TheCompany’sproductlineincludesGravitytm,LogMeIn»Free»,LogMeIn»Pro2»,LogMeIn»Centraltm,LogMeIn»Rescue»,LogMeIn»Rescue+Mobiletm,LogMeIn»Backuptm,LogMeIn»Ignitiontm,LogMeIn»Hamachitm,andRemotelyAnywhere».TheCompanyisbasedinWoburn,Massachusettswithwholly-ownedsubsidiariesinBudapest,Hungary,Amsterdam,TheNetherlands,Sydney,Australia,andLondon,England.2.SummaryofSignificantAccountingPolicesPrinciplesofConsolidation—TheaccompanyingconsolidatedfinancialstatementsincludetheresultsofoperationsoftheCompanyanditswholly-ownedsubsidiaries.Allintercompanytransactionsandbalanceshavebeeneliminatedinconsolidation.TheCompanyhaspreparedtheaccompanyingconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(“GAAP”).UseofEstimates—ThepreparationofconsolidatedfinancialstatementsinconformitywithGAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenueandexpensesduringthereportingperiod.Bytheirnature,estimatesaresubjecttoaninherentdegreeofuncertainty.Actualresultscoulddifferfromthoseestimates.StockSplit—OnJune25,2009,theCompanyeffecteda1-for-2.5reversestocksplitofitscommonstock.Allcommonsharesandpercommonshareinformationreferencedthroughouttheaccompanyingconsolidatedfinancialstatementshavebeenretroactivelyadjustedtoreflectthereversestocksplit.CashEquivalents—Cashequivalentsconsistofhighlyliquidinvestmentswithanoriginalorremainingmaturityoflessthanthreemonthsatthedateofpurchase.CashequivalentsconsistofinvestmentsinmoneymarketfundswhichprimarilyinvestinU.S.Treasuryobligations.Cashequivalentsarestatedatcost,whichapproximatesfairvalue.MarketableSecurities—TheCompany’smarketablesecuritiesareclassifiedasavailable-for-saleandarecarriedatfairvaluewiththeunrealizedgainsandlossesreportedasacomponentofaccumulatedothercomprehensiveincomeinstockholders’equity.Realizedgainsandlossesanddeclinesinvaluejudgedtobeotherthantemporaryareincludedasacomponentofearningsbasedonthespecificidentificationmethod.Fairvalueisdeterminedbasedonquotedmarketprices.AtDecember31,2009,marketablesecuritiesconsistedofU.S.governmentagencysecuritiesthatmaturewithinoneandonehalfyearsandhaveanaggregateamortizedcostof$30,009,895andanaggregatefairvalueof$29,956,204including$0unrealizedgainsand$53,691ofunrealizedlosses.RestrictedCash—AsofDecember31,2008and2009,theCompanyhadacertificateofdepositintheamountof$229,353and$5,118,respectively,servingassecurityforacorporatecreditcard.Inaddition,theCompanyhadaletterofcreditof$125,000atDecember31,2008and2009fromabank.TheletterofcreditwasissuedinlieuofasecuritydepositonitsWoburn,Massachusettsofficelease.Theletterofcreditissecuredbyacertificateofdepositinthesameamountwhichisheldatthesamefinancialinstitution.InNovember2008,theCompanyenteredintoanewagreementtoleaseofficespaceinBudapest,HungarywhichrequiredtheCompanytoestablishasecuritydepositwithabankintheamountof46,122,562HUF(whichtotaled$237,685and$243,066atDecember31,2008and2009,respectively).Suchamountsareclassifiedaslong-termrestrictedcashintheaccompanyingconsolidatedbalancesheets.AccountsReceivable—TheCompanyreviewsaccountsreceivableonaperiodicbasistodetermineifanyreceivableswillpotentiallybeuncollectible.Estimatesareusedtodeterminetheamountoftheallowancefor49doubtfulaccountsnecessarytoreduceaccountsreceivabletoitsestimatednetrealizablevalue.Theestimatesarebasedonananalysisofpastduereceivablesandhistoricalbaddebttrends.AftertheCompanyhasexhaustedallcollectionefforts,theoutstandingreceivableiswrittenoffagainsttheallowance.Activityintheallowancefordoubtfulaccountswasasfollows:200720082009December31,Balance,beginning...................................$52,183$55,316$69,266Provisionforbaddebt.................................47,00079,000115,000Uncollectibleaccountswrittenoff........................43,86765,050101,150Balance,ending......................................$55,316$69,266$83,116PropertyandEquipment—Propertyandequipmentarerecordedatcostanddepreciatedusingthestraight-linemethodovertheestimatedusefullivesoftherelatedassets.Uponretirementorsale,thecostoftheassetsdisposedofandtherelatedaccumulateddepreciationareeliminatedfromtheaccounts,andanyresultinggainorlossisreflectedintheconsolidatedstatementsofoperations.Expendituresformaintenanceandrepairsarechargedtoexpenseasincurred.Estimatedusefullivesofassetsareasfollows:Computerequipmentandsoftware...............................2—3yearsOfficeequipment............................................3yearsFurnitureandfixtures........................................5yearsLeaseholdImprovements......................................ShorterofleasetermorestimatedusefullifeGoodwill—GoodwillistheexcessoftheacquisitionpriceoverthefairvalueofthetangibleandidentifiableintangibleassetsacquiredrelatedtotheAppliedNetworkingacquisitioninJuly2006.TheCompanydoesnotamortizegoodwill,butperformsanannualimpairmenttestofgoodwillonthelastdayofitsfiscalyearandwhenevereventsandcircumstancesindicatethatthecarryingamountofgoodwillmayexceeditsfairvalue.TheCompanyoperatesasasingleoperatingsegmentwithonereportingunitandconsequentlyevaluatesgoodwillforimpairmentbasedonanevaluationofthefairvalueoftheCompanyasawhole.ThroughDecember31,2009,noimpairmentshaveoccurred.DeferredOfferingCosts—TheCompanyfileditsinitialFormS-1withtheSecuritiesandExchangeCommissiononJanuary11,2008andcloseditsinitialpublicoffering(“IPO”)onJuly7,2009.TheCompanyfileditsinitialformS-1associatedwithitssecondarypublicoffering(“Secondary”)onNovember6,2009andcloseditsSecondaryofferingonDecember16,2009.ThecostsdirectlyassociatedwiththeCompany’sIPOandSecondaryofferingweredeferredasincurred,anduponthecloseofeachoffering,thecostswererecordedasareductionoftheproceedsreceivedinarrivingattheamounttoberecordedinstockholders’equity.Long-LivedAssetsandIntangibleAssets—TheCompanyrecordsacquiredintangibleassetsattheirrespectiveestimatedfairvaluesatthedateofacquisition.Acquiredintangibleassetsarebeingamortizedusingthestraight-linemethodovertheirestimatedusefullives,whichrangefromfourtofiveyears.TheCompanyreviewslong-livedassetsforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountoftheassets,includingintangibleassets,maynotberecoverable.Whensucheventsoccur,theCompanycomparesthecarryingamountsoftheassetstotheirundiscountedexpectedfuturecashflows.Ifthiscomparisonindicatesthatthereisimpairment,theamountoftheimpairmentiscalculatedasthedifferencebetweenthecarryingvalueandfairvalue.ThroughDecember31,2009,noimpairmentshaveoccurred.RevenueRecognition—TheCompanyderivesrevenueprimarilyfromsubscriptionfeesrelatedtoitsLogMeInpremiumservicesandfromthelicensingofitsRemotelyAnywheresoftwareandrelatedmaintenance.50RevenuefromtheCompany’sLogMeInpremiumservicesisrecognizedonadailybasisoverthesubscriptiontermastheservicesaredelivered,providedthatthereispersuasiveevidenceofanarrangement,thefeeisfixedordeterminableandcollectabilityisdeemedreasonablyassured.Subscriptionperiodsrangefrommonthlytofouryears,butaregenerallyoneyearinduration.TheCompany’ssoftwarecannotberunonanotherentity’shardwarenordocustomershavetherighttotakepossessionofthesoftwareanduseitontheirownoranotherentity’shardware.TheCompanyrecognizesrevenuefromthebundleddeliveryofitsRemotelyAnywheresoftwareproductandrelatedmaintenanceratably,onadailybasis,overthetermofthemaintenancecontract,generallyoneyear,whenthereispersuasiveevidenceofanarrangement,theproducthasbeenprovidedtothecustomer,thecollectionofthefeeisprobable,andtheamountoffeestobepaidbythecustomerisfixedordeterminable.TheCompanycurrentlydoesnothavevendor-specificobjectiveevidenceforthefairvalueofitsmaintenancearrangementsandthereforethelicenseandmaintenancearebundledtogether.TheCompanyrecognizesrevenuefromthesaleofitsIgnitionforiPhonesoftwareproductwhichissoldasaperpetuallicenseandisrecognizedwhenthereispersuasiveevidenceofanarrangement,theproducthasbeenprovidedtothecustomer,thecollectionofthefeeisprobable,andtheamountoffeestobepaidbythecustomerisfixedordeterminable.TheCompany’smulti-elementarrangementstypicallyincludemultipledeliverablesbytheCompanysuchassubscriptionandprofessionalservices,includingdevelopmentservices.Agreementswithmultipleelementdeliverablesareanalyzedtodetermineiffairvalueexistsforeachelementonastand-alonebasis.Ifthefairvalueofeachdeliverableisdeterminablethenrevenueisrecognizedseparatelywhenorastheservicesaredelivered,orifapplicable,whenmilestonesassociatedwiththedeliverableareachievedandacceptedbythecustomer.Ifthefairvalueofanyoftheundeliveredperformanceobligationscannotbedetermined,thearrangementisaccountedforasasingleelementandtheCompanyrecognizesrevenueonastraight-linebasisovertheperiodinwhichtheCompanyexpectstocompleteitsperformanceobligationsundertheagreement.DeferredRevenue—Deferredrevenueprimarilyconsistsofbillingsandpaymentsreceivedinadvanceofrevenuerecognition.TheCompanyprimarilybillsandcollectspaymentsfromcustomersforproductsandservicesinadvanceonamonthlyandannualbasis.Deferredrevenuetoberecognizedinthenexttwelvemonthsisincludedincurrentdeferredrevenue,andtheremainingamountsareincludedinlong-termdeferredrevenueintheconsolidatedbalancesheets.ConcentrationsofCreditRiskandSignificantCustomers—TheCompany’sprincipalcreditriskrelatestoitscash,cashequivalents,shorttermmarketablesecurities,restrictedcash,andaccountsreceivable.Cash,cashequivalents,andrestrictedcasharedepositedprimarilywithfinancialinstitutionsthatmanagementbelievestobeofhigh-creditqualityandcustodyofitsmarketablesecuritiesiswithanaccreditedfinancialinstitution.Tomanageaccountsreceivablecreditrisk,theCompanyregularlyevaluatesthecreditworthinessofitscustomersandmaintainsallowancesforpotentialcreditlosses.Todate,lossesresultingfromuncollectedreceivableshavenotexceededmanagement’sexpectations.AsofDecember31,2008and2009,therewerenocustomersthatrepresented10%ormoreofaccountsreceivable.Therewerenocustomersthatrepresented10%ormoreofrevenuefortheyearsendedDecember31,2007,2008,or2009.ResearchandDevelopment—Researchanddevelopmentexpendituresareexpensedasincurred.InJune2009,theCompanyreceivedapprovalofagrantfromtheHungariangovernmentwhichreimbursesitforaportionofitsHungarianresearchanddevelopmentrelatedcostsforafouryearperiod,beginninginSeptember2008.Thesereimbursementsarerecordedasareductionofresearchanddevelopmentexpenseandtotalledapproximately$200,000intheyearendedDecember31,2009.SoftwareDevelopmentCosts—TheCompanyhasdeterminedthattechnologicalfeasibilityofitssoftwareproductsandthesoftwarecomponentofitssolutionstobemarketedtoexternalusersisreachedshortlybeforetheirintroductiontothemarketplace.Asaresult,developmentcostsincurredaftertheestablishmentoftechnologicalfeasibilityandbeforetheirreleasetothemarketplacehavenotbeenmaterial,andsuchcosts51havebeenexpensedasincurred.Inaddition,costsincurredduringtheapplicationdevelopmentstageforsoftwareprogramstobeusedsolelytomeettheCompany’sinternalneedshavenotbeenmaterial.ForeignCurrencyTranslation—ThefunctionalcurrencyofoperationsoutsidetheUnitedStatesofAmericaisdeemedtobethecurrencyofthelocalcountry.Accordingly,theassetsandliabilitiesoftheCompany’sforeignsubsidiariesaretranslatedintoUnitedStatesdollarsusingtheperiod-endexchangerate,andincomeandexpenseitemsaretranslatedusingtheaverageexchangerateduringtheperiod.Cumulativetranslationadjustmentsarereflectedasaseparatecomponentofstockholders’equity(deficit).Foreigncurrencytransactiongainsandlossesarechargedtooperations.TheCompanyhadforeigncurrencylossesof$110,519and$17,795fortheyearendedDecember31,2008and2009.ForeigncurrencygainsandlosseswereinsignificantfortheyearendedDecember31,2007.Stock-BasedCompensation—Stock-basedcompensationismeasuredbaseduponthegrantdatefairvalueandrecognizedasanexpenseonastraightlinebasisinthefinancialstatementsoverthevestingperiodoftheawardforthoseawardsexpectedtovest.TheCompanyusestheBlack-Scholesoptionpricingmodeltoestimatethegrantdatefairvalueofstockawards.TheCompanyusesthewith-or-withoutmethodtodeterminewhenitwillrealizeexcesstaxbenefitsfromstockbasedcompensation.Underthismethod,theCompanywillrealizetheseexcesstaxbenefitsonlyafteritrealizesthetaxbenefitsofnetoperatinglossesfromoperations.IncomeTaxes—Deferredincometaxesareprovidedforthetaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforincometaxpurposes,andoperatinglosscarryforwardsandcreditsusingenactedtaxratesexpectedtobeineffectintheyearsinwhichthedifferencesareexpectedtoreverse.TheCompanyassessesthelikelihoodthatdeferredtaxassetswillberealized,andrecognizesavaluationallowanceifitismorelikelythannotthatsomeportionofthedeferredtaxassetswillnotberealized.Thisassessmentrequiresjudgmentastothelikelihoodandamountsoffuturetaxableincomebytaxjurisdiction.Todate,theCompanyhasprovidedafullvaluationallowanceagainstourdeferredtaxassetsasitbelievestheobjectiveandverifiableevidenceofitshistoricalpretaxnetlossesoutweighsthepositiveevidenceofits2009pre-taxprofitandforecastedfutureresults.AlthoughtheCompanybelievesthatitstaxestimatesarereasonable,theultimatetaxdeterminationinvolvessignificantjudgmentthatissubjecttoauditbytaxauthoritiesintheordinarycourseofbusiness.TheCompanywillcontinuetomonitorthepositiveandnegativeevidenceanditwilladjustthevaluationallowanceassufficientobjectivepositiveevidencebecomesavailable.TheCompanyevaluatesitsuncertaintaxpositionsbasedonadeterminationofwhetherandhowmuchofataxbenefittakenbytheCompanyinitstaxfilingsorpositionsismorelikelythannottoberealized.Potentialinterestandpenaltiesassociatedwithanyuncertaintaxpositionsarerecordedasacomponentofincometaxexpense.ThroughDecember31,2009,theCompanyhasnotidentifiedanymaterialuncertaintaxpositionsforwhichliabilitieswouldberequired.AdvertisingCosts—TheCompanyexpensesadvertisingcostsasincurred.AdvertisingexpensefortheyearsendedDecember31,2007,2008and2009,wasapproximately$9,101,000,$11,688,000and$11,717,000respectively,whichconsistedprimarilyofonlinepaidsearches,banneradvertising,andotheronlinemarketingandisincludedinsalesandmarketingexpenseintheaccompanyingconsolidatedstatementsofoperations.ComprehensiveIncome(Loss)—Comprehensiveincome(loss)isthechangeinstockholders’equity(deficit)duringaperiodrelatingtotransactionsandothereventsandcircumstancesfromnon-ownersourcesandcurrentlyconsistsofnetincome(loss),foreigncurrencytranslationadjustments,andunrealizedgainsandlossesonavailable-for-salesecurities.FairValueofFinancialInstruments—ThecarryingvalueoftheCompany’sfinancialinstruments,includingcashequivalents,restrictedcash,accountsreceivable,andaccountspayable,approximatetheirfairvaluesduetotheirshortmaturities.SegmentData—Operatingsegmentsareidentifiedascomponentsofanenterpriseaboutwhichseparatediscretefinancialinformationisavailableforevaluationbythechiefoperatingdecision-maker,ordecisionmakinggroup,inmakingdecisionsregardingresourceallocationandassessingperformance.TheCompany,whichusesconsolidatedfinancialinformationindetermininghowtoallocateresourcesandassessperfor-mance,hasdeterminedthatitoperatesinonesegment.TheCompanydoesnotdisclosegeographicinformation52forrevenueandlonglivedassetsasitisimpracticaltocalculaterevenuebygeographyandaggregatelonglivedassetslocatedoutsidetheUnitedStatesdonotexceed10%oftotalassets.NetIncome(Loss)AttributabletoCommonStockholdersPerShare—TheCompanyusesthetwo-classmethodtocomputenetincome(loss)persharebecausetheCompanyhadpreviouslyissuedsecurities,otherthancommonstock,thatcontractuallyentitledtheholderstoparticipateindividendsandearningsofthecompany.Thetwoclassmethodrequiresearningsavailabletocommonstockholdersfortheperiod,afteranallocationofearningstoparticipatingsecurities,tobeallocatedbetweencommonandparticipatingsecuritiesbasedupontheirrespectiverightstoreceivedistributedandundistributedearnings.TheCompany’sconvertiblepreferredstockwasaparticipatingsecurityasitsharedinanydividendspaidtocommonstockholders.SuchparticipatingsecuritieswereautomaticallyconvertedtocommonstockupontheCompany’sIPOinJuly2009.Basicnetincome(loss)attributabletocommonstockholderspershareiscomputedafterallocationofearningstotheconvertiblepreferredstock(lossesarenotallocated)byusingtheweightedaveragenumbercommonsharesoutstandingfortheperiod.ForperiodsinwhichtheCompanyhasreportednetlosses,dilutednetlosspercommonshareisthesameasbasicnetlosspercommonshare,sincetheCompany’sconvertiblepreferredstockdoesnotparticipateinlosses.Thefollowingpotentialcommonshareswereexcludedfromthecomputationofdilutednetincome(loss)pershareattributabletocommonstockholdersbecausetheyhadanantidilutiveimpact:200720082009YearsEndedDecember31,Optionstopurchasecommonstock..................3,046,0003,209,650116,900Conversionofredeemableconvertiblepreferredstock....12,360,52312,360,52312,360,523(1)Totaloptionsandconversionofredeemableconvertiblepreferredstock...............................15,406,52315,570,17312,477,423(1)TheredeemableconvertiblepreferredstockwasconsideredantidilutivefortheperiodpriortotheCompany’sIPOonJuly7,2009.Subsequenttotheconversionitisincludedincommonstock.YearEndedDecember31,2009Basic:Netincome.....................................................$8,797,253Accretionofredeemableconvertiblepreferredstock.......................(1,311,225)Netincomeallocatedtoredeemableconvertiblepreferredstock...............(2,466,543)Netincome,attributabletocommonstock.............................$5,019,485Weightedaveragecommonsharesoutstanding,basic.......................12,949,272Netincomeattributabletocommonstockholders,basic...................$0.39Diluted:Netincomeavailabletocommonstockholders...........................$7,486,028Accretionofredeemableconvertiblepreferredstock.......................908,278Netincome,attributabletodilutivesecurities..........................$8,394,306Weightedaveragecommonsharesoutstanding...........................20,711,725Add:Optionstopurchasecommonshares...............................1,845,371Weightedaveragecommonsharesoutstanding,diluted.....................22,557,096Netincomeattributabletocommonstockholders,diluted$0.3753NetincomefortheyearendedDecember31,2009wasallocatedbetweentheperiodsduringwhichtwoclassesofequitysecuritieswereoutstandingandtheperiodduringwhichonlyasingleclassofequitysecuritieswasoutstandingbasedontherespectivenumberofdaysineachsuchperiod.ThepreferredstockconvertedintocommonstockupontheCompany’sIPOinJuly2009.GuaranteesandIndemnificationObligations—AspermittedunderDelawarelaw,theCompanyhasagreementswherebytheCompanyindemnifiescertainofitsofficersanddirectorsforcertaineventsoroccurrenceswhiletheofficerordirectoris,orwas,servingattheCompany’srequestinsuchcapacity.Thetermoftheindemnificationperiodisfortheofficer’sordirector’slifetime.AspermittedunderDelawarelaw,theCompanyalsohassimilarindemnificationobligationsunderitscertificateofincorporationandby-laws.ThemaximumpotentialamountoffuturepaymentstheCompanycouldberequiredtomakeundertheseindemnificationagreementsisunlimited;however,theCompanyhasdirector’sandofficer’sinsurancecoveragethattheCompanybelieveslimitsitsexposureandenablesittorecoveraportionofanyfutureamountspaid.TheCompany’sagreementswithcustomersgenerallyrequiretheCompanytoindemnifythecustomeragainstclaimsinwhichtheCompany’sproductsinfringethird-partypatents,copyrights,ortrademarksandindemnifyagainstproductliabilitymatters.Thetermoftheseindemnificationagreementsisgenerallyperpetual.ThemaximumpotentialamountoffuturepaymentstheCompanycouldberequiredtomakeundertheseindemnificationagreementsisunlimited.ThroughDecember31,2009,theCompanyhadnotexperiencedanylossesrelatedtotheseindemnifica-tionobligations,andnoclaimswithrespecttheretowereoutstanding.TheCompanydoesnotexpectsignificantclaimsrelatedtotheseindemnificationobligationsand,consequently,concludedthatthefairvalueoftheseobligationsisnegligible,andnorelatedreserveswereestablished.RecentlyIssuedAccountingPronouncements—InOctober2009,anupdatewasmadeto“RevenueRecognition—MultipleDeliverableRevenueArrangements.”Thisupdateremovestheobjective-and-reliable-evidence-of-fair-valuecriterionfromtheseparationcriteriausedtodeterminewhetheranarrangementinvolvingmultipledeliverablescontainsmorethanoneunitofaccounting,replacesreferencesto“fairvalue”with“sellingprice”todistinguishfromthefairvaluemeasurementsrequiredunderthe“FairValueMeasurementsandDisclosures”guidance,providesahierarchythatentitiesmustusetoestimatethesellingprice,eliminatestheuseoftheresidualmethodforallocation,andexpandstheongoingdisclosurerequirements.ThisupdateiseffectivefortheCompanybeginningJanuary1,2011andcanbeappliedprospectivelyorretrospectively.Managementiscurrentlyevaluatingtheeffectthatadoptionofthisupdatewillhaveonitsconsolidatedfinancialstatements.SubsequentEvents—TheCompanyconsiderseventsortransactionsthatoccurafterthebalancesheetdatebutbeforethefinancialstatementsareissuedtoprovideadditionalevidencerelatedtocertainestimatesortoidentifymattersthatrequireadditionaldisclosure.SubsequenteventshavebeenevaluatedthroughFebruary26,2010.3.FairValueofFinancialInstrumentsThecarryingvalueoftheCompany’sfinancialinstruments,includingcashequivalents,restrictedcash,accountsreceivable,andaccountspayable,approximatetheirfairvaluesduetotheirshortmaturities.TheCompany’sfinancialassetsandliabilitiesaremeasuredusinginputsfromthethreelevelsofthefairvaluehierarchy.Afinancialassetorliability’sclassificationwithinthehierarchyisdeterminedbasedonthelowestlevelinputthatissignificanttothefairvaluemeasurement.Thethreelevelsareasfollows:Level1:UnadjustedquotedpricesforidenticalassetsorliabilitiesinactivemarketsaccessiblebytheCompanyatthemeasurementdate.Level2:Inputsincludequotedpricesforsimilarassetsandliabilitiesinactivemarkets,quotedpricesforidenticalorsimilarassetsandliabilitiesinmarketsthatarenotactive,inputsotherthanquotedpricesthatareobservablefortheassetorliability,andinputsthatarederivedprincipallyfromorcorroboratedbyobservablemarketdatabycorrelationorothermeans.54Level3:UnobservableinputsthatreflecttheCompany’sassumptionsabouttheassumptionsthatmarketparticipantswoulduseinpricingtheassetorliability.ThefollowingtablesummarizesthebasisusedtomeasurecertainoftheCompany’sfinancialassetsthatarecarriedatfairvalue:QuotedPricesinActiveMarketsforIdenticalItems(Level1)SignificantOtherObservableInputs(Level2)SignificantUnobservableInputs(Level3)BasisofFairValueMeasurementsBalanceatDecember31,2008Cashequivalents—moneymarketfunds.........................$19,322,320$19,322,320$—$—BalanceatDecember31,2009Cashequivalents—moneymarketfunds.........................$77,947,705$77,947,705$—$—Cashequivalents—bankdeposits.....$5,003,453$—$5,003,453$—Marketablesecurities—U.S.governmentagencysecurities.......$29,956,204$29,956,204$—$—4.IntangibleAssetsAcquiredintangibleassetsconsistofthefollowing:EstimatedUsefulLifeGrossCarryingAmountAccumulatedAmortizationNetCarryingAmountGrossCarryingAmountAccumulatedAmortizationNetCarryingAmountDecember31,2008December31,2009Identifiableintangibleassets:Trademark....5years$635,506$(308,902)$326,604$635,506$(436,004)$199,502Customerbase......5years1,003,068(487,564)515,5041,003,068(688,178)314,890Software.....4years298,977(181,656)117,321298,977(256,400)42,577Technology...4years1,361,900(827,479)534,4211,361,900(1,167,954)193,946$3,299,451$(1,805,601)$1,493,850$3,299,451$(2,548,536)$750,915TheCompanyisamortizingtheacquiredintangibleassetsonastraight-linebasisovertheestimatedusefullivesnotedabove.Amortizationexpenseforintangibleassetswas$742,934fortheyearsendedDecember31,2007,2008and2009.Amortizationrelatingtosoftwareandtechnologyisrecordedwithincostofrevenuesandtheamortizationoftrademarkandthecustomerbaseisrecordedwithinoperatingexpenses.FutureestimatedamortizationexpenseforintangibleassetsisasfollowsatDecember31,2009:AmortizationExpense(YearsEndingDecember31)Amount2010...............................................................$564,2382011...............................................................$186,677555.PropertyandEquipmentPropertyandequipmentconsistedofthefollowing:20082009December31,Computerequipmentandsoftware............................$5,629,204$7,493,322Officeequipment........................................502,8061,052,524Furniture&fixtures......................................822,225962,978Leaseholdimprovements...................................204,881904,184Constructioninprogress...................................94,780—Totalpropertyandequipment.............................7,253,89610,413,008Lessaccumulateddepreciationandamortization.................(3,253,399)(5,553,869)Propertyandequipment,net................................$4,000,497$4,859,139ConstructioninprogressconsistedprincipallyofleaseholdimprovementsandotherrelatedcostsassociatedwiththeCompany’snewofficeinBudapest,Hungary.TheCompanyoccupiedtheofficeinAugust2009.Depreciationexpenseforpropertyandequipmentwas$961,421,$1,660,123,$2,458,095theyearsendedDecember31,2007,2008and2009.6.AccruedExpensesAccruedexpensesconsistedofthefollowing:20082009December31,Marketingprograms........................................$855,038$1,242,250Payrollandpayrollrelated...................................2,346,3043,185,126Professionalfees..........................................214,422450,788Otheraccruedexpenses.....................................1,782,0792,445,012Totalaccruedexpenses....................................$5,197,843$7,323,1767.IncomeTaxesThedomesticandforeigncomponentsofincome(loss)beforeprovisionforincometaxesareasfollows:200720082009YearsEndedDecember31,Domestic....................................$(9,136,869)$(5,900,148)$6,875,833Foreign.....................................132,642620,1082,262,957Totalincome(loss)..........................$(9,004,227)$(5,280,040)$9,138,79056Theprovisionforincometaxesisasfollows:200720082009YearsEndedDecember31,CurrentFederal.........................................$—$—$163,444State...........................................5,85319,48990,789Foreign.........................................19,77585,84872,608Total...........................................25,628105,337326,841DeferredFederal.........................................20,77114,09613,947State...........................................3,8582,572749Foreign.........................................———Total...........................................24,62916,66814,696Totalprovisionforincometaxes.........................$50,257$122,005$341,537AreconciliationoftheCompany’seffectivetaxratetothestatutoryfederalincometaxrateisasfollows:200720082009FortheYearsEndedDecember31,Statutorytaxrate............................................34.0%34.0%34.0%Changeinvaluationallowance..................................(31.9)%(17.4)%(27.3)%Impactofpermanentdifferences.................................(1.1)%(10.7)%5.9%Foreigntaxratedifferential....................................0.4%1.6%(7.6)%Researchanddevelopmentcredits................................(0.8)%(5.2)%(3.1)%FederalAlternativeMinimumTax................................——1.8%Effectivetaxrate............................................0.6%2.3%3.7%TheCompanyhasdeferredtaxassetsrelatedtotemporarydifferencesandoperatinglosscarryforwardsasfollows:20082009December31,Deferredtaxassets:Netoperatinglosscarryforwards..........................$7,678,000$5,163,000Deferredrevenue.....................................1,801,0001,464,000Amortization........................................506,000694,000Depreciation........................................36,000—Researchanddevelopmentcreditcarryforwards..............384,000664,000Baddebtreserves.....................................28,00032,000Stockcompensationassociatedwithnon-qualifiedawards.......599,0001,130,000Other..............................................550,0001,898,000Totaldeferredtaxassets................................11,582,00011,045,000Deferredtaxassetvaluationallowance.......................(11,582,000)(10,606,000)Netdeferredtaxassets.................................—439,000Deferredtaxliabilities:Depreciation........................................—(439,000)Goodwillamortization.................................(42,000)(56,000)Totaldeferredtaxliabilities.............................(42,000)(495,000)Total..............................................$(42,000)$(56,000)57TheCompanyrecordedadeferredincometaxprovisionofapproximately$17,000and$14,000fortheyearsendedDecember31,2008and2009,respectively,relatedtothedifferentbookandtaxtreatmentforgoodwill.Fortaxpurposes,goodwillissubjecttoannualamortization,whilegoodwillisnotamortizedforbookpurposes.Thedeferredtaxliabilityofapproximately$42,000and$56,000atDecember31,2008and2009isincludedintheCompany’sconsolidatedbalancesheetswithinotherlong-termliabilities.TheCompanyhasprovidedavaluationallowanceforthefullamountofitsdeferredtaxassetsatDecember31,2008and2009,asitisnotmorethanlikelythannotthatanyfuturebenefitfromdeductibletemporarydifferencesandnetoperatinglossandtaxcreditcarryforwardswouldberealized.TheincreaseinthevaluationallowancefortheyearsendedDecember31,2007and2008was$3,672,000and$1,942,000,respectively.Thedecreaseinthevaluationallowancewas$976,000fortheyearendedDecember31,2009.AsofDecember31,2009,theCompanyhaddomesticfederalandstatenetoperatinglosscarryforwardsofapproximately$12,133,000and$13,793,000,respectively,whichexpireatvaryingdatesthrough2029forfederalpurposesandthrough2014forstateincometaxpurposes.Thesenetoperatinglosscarryforwardsincludeapproximately$2,100,000relatedtooperatinglosscarryforwardsresultingfromsharebasedawards,thetaxbenefitofwhich,whenrecognized,willbeaccountedforasacredittoadditionalpaid-incapitalratherthanareductionofincometax.TheCompanyalsohasfederalandstateresearchanddevelopmentcreditcarryforwardsofapproximately$384,000and$664,000,atDecember31,2008and2009,respectively,whichareavailabletooffsetfuturefederalandstatetaxesandexpirethrough2029.TheCompanygenerallyconsidersallearningsgeneratedoutsideoftheU.S.tobepermanentlyreinvestedoffshore.Therefore,theCompanydoesnotaccrueU.S.taxfortherepatriationoftheforeignearningsitconsiderstobepermanentlyreinvestedoutsidetheU.S.TheCompanyfilesincometaxreturnsintheU.S.federaljurisdictionandvariousstateandforeignjurisdictions.TheCompany’sincometaxreturnssinceinceptionareopentoexaminationbyfederal,state,andforeigntaxauthorities.TheCompanyhasnoamountrecordedforanyunrecognizedtaxbenefitsasDecember31,2007,2008or2009.TheCompany’spolicyistorecordestimatedinterestandpenaltiesrelatedtotheunderpaymentofincometaxesorunrecognizedtaxbenefitsasacomponentofitsincometaxprovision.Duringtheyearsended2007,2008and2009,theCompanydidnotrecognizeanyinterestorpenaltiesinitsstatementsofoperationsandtherearenoaccrualsforinterestorpenaltiesatDecember31,2008and2009.TheCompanyhasperformedananalysisofitsownershipchangesasdefinedbySection382oftheInternalRevenueCodeandhasdeterminedthatanownershipchangeasdefinedbySection382occurredinOctober2004resultinginapproximately$219,000ofNOLsbeingsubjecttolimitationasofDecember31,2008.AsofDecember31,2009,allNOL’sgeneratedbytheCompany,includingthosesubjecttolimitation,areavailableforutilizationgiventheCompany’slargeannuallimitationamount.SubsequentownershipchangesasdefinedbySection382couldpotentiallylimittheamountofnetoperatinglosscarryforwardsthatcanbeutilizedannuallytooffsetfuturetaxableincome.8.CommonStock,RedeemableConvertiblePreferredStockandStockholders’Equity(Deficit)AuthorizedShares—OnJune9,2009,theCompany’sBoardofDirectorsapprovedaRestatedCertificateofIncorporationtobeeffectiveupontheclosingoftheCompany’sIPO.ThisRestatedCertificateofIncorporation,amongotherthings,increasedtheCompany’sauthorizedcommonsharesto75,000,000andauthorized5,000,000sharesofundesignatedpreferredstock.58CommonStockReserved—AsofDecember31,2008and2009,theCompanyhasreservedthefollowingnumberofsharesofcommonstockforthepotentialconversionofPreferredStockandtheexerciseofstockoptions:December31,2008December31,2009NumberofSharesasofConversionofSeriesAPreferredStock........................6,804,160—ConversionofSeriesBPreferredStock.........................4,667,474—ConversionofSeriesB-1PreferredStock.......................888,889—Commonstockoptions.....................................3,281,9323,823,703Totalreserved...........................................15,642,4553,823,703PublicOfferings—OnJuly7,2009,theCompanycloseditsIPOof7,666,667sharesofcommonstockatanofferingpriceof$16.00pershare,ofwhich5,750,000sharesweresoldbytheCompanyand1,916,667sharesweresoldbysellingstockholders,resultinginnetproceedstotheCompanyofapproximately$83,000,000,afterdeductingunderwritingdiscountsandofferingcosts.OnDecember16,2009,theCompanycloseditsSecondaryofferingof3,226,831sharesofcommonstockatanofferingpriceof$18.50pershare,ofwhich99,778sharesweresoldbytheCompanyand3,127,053sharesweresoldbysellingstockholders,resultinginnetproceedstotheCompanyof$1,236,055,afterdeductingunderwritingdiscountsandofferingcosts.AttheclosingoftheCompany’sIPO,alloutstandingsharesofredeemableconvertiblepreferredstockwereautomaticallyconvertedinto12,360,523sharesofcommonstock.RedeemableConvertiblePreferredStock—SummaryinformationregardingtheSeriesA,B,andB-1PreferredStock(collectivelythe“PreferredStock”)priortotheirconversiontocommonstockispresentedbelow.Dividends—TheholdersofSeriesA,BandB-1Preferredwereentitledtocumulativedividendsattheannualrate,withoutcompounding,of$0.0464,$0.0652and$0.36pershare,respectively,fromthedateofissuanceoftheapplicableshareofPreferredStock.Dividendsaccrued,whetherornotdeclaredandwerecumulativeandwerepayableuponredemption.NodividendsweredeclaredthroughJuly7,2009,theclosingdateoftheCompany’sIPO.Liquidation—Upontheliquidation,dissolutionorwinding-upoftheCompany(includinganydeemedliquidationevents,asdefinedintheCompany’scertificateofincorporation,asamended),eachholderofSeriesA,BandB-1PreferredStockwasentitledtoreceiveapaymentequalto$0.5795,$0.8150and$4.50pershare,respectively,plusanydeclaredbutunpaiddividends.Voting—TheholdersofPreferredStockwereentitledtothenumberofvotesequaltothenumberofsharesofcommonstockintowhichthesharesofPreferredStockheldbyeachholderwerethenconvertible.Conversion—EachshareofPreferredStockwasconvertibleatanytimeattheoptionoftheholder.Theconversionpricewasinitiallybe$0.5795persharefortheSeriesAPreferredStock,$0.8150persharefortheSeriesBPreferredStock,and$4.50persharefortheSeriesB-1PreferredStock,aswouldhavebeenadjustedforcertaindefinedevents.Conversiontocommonstockwasmandatoryupontheearlierof(i)theclosingofthesaleofsharesofcommonstocktothepublicataprice(the“PricetoPublic”)ofatleast$4.075pershare,subjecttocertainadjustments,inafirm-commitmentunderwrittenpublicofferingpursuanttoaneffectiveregistrationstatementundertheSecuritiesActof1933,asamended,resultinginatleast$50millionofgrossproceedstotheCompany(a“QualifiedIPO”)or(ii)adatespecifiedbyvoteorwrittenconsentoftheholdersofatleast(A)60%ofthevotingpowerofthethenoutstandingsharesofPreferredStock;(B)amajorityoftheSeriesBPreferredStockand(C)amajorityoftheSeriesB-1PreferredStock.Redemption—ThePreferredStockwasredeemablebytheCompany,attherequestofholdersofatleast60%oftheoutstandingsharesofPreferredStock,onorafterDecember26,2011,atapersharepriceof59$0.5795fortheSeriesAPreferredStock,$0.8150fortheSeriesBPreferredStockand$4.50fortheSeriesB-1PreferredStock,subjecttocertainadjustmentsplusanyaccruedandunpaiddividends,whetherornotdeclared.ThePreferredStockwasredeemableinthreeannualinstallmentscommencing60daysfromtheredemptiondate.TheCompanywasaccretingthePreferredStocktoitsredemptionvalueovertheperiodfromissuancetoDecember26,2011,suchthatthecarryingamountsofthesecuritieswouldequaltheredemptionamountsattheearliestredemptiondate.TheCompanyrecordeddividendsandrelatedaccretionofissuancecostsusingtheeffectiveinterestmethodthroughachargetostockholders’deficitof$1,919,366,$2,348,229and$1,311,225fortheyearsendedDecember31,2007,2008and2009,respectively.InvestorRights—TheholdersofPreferredStockhavecertainrightstoregistersharesofcommonstockreceiveduponconversionofsuchinstrumentsundertheSecuritiesActof1933pursuanttoaninvestorrightsagreement.Theseholdersareentitled,iftheCompanyregisteredcommonstock,toincludetheirsharesofcommonstockinsuchregistration;however,thenumberofshareswhichcouldberegisteredtherebyissubjecttolimitationbytheunderwriters.TheinvestorsarealsoentitledtounlimitedpiggybackregistrationrightsofregistrationsoftheCompany,subjecttocertainlimitations.TheCompanyisresponsibleforallfees,costsandexpensesoftheseregistrations,otherthanunderwritingdiscountsandcommission.9.StockIncentivePlanOnJune9,2009,theCompany’sBoardofDirectorsapprovedthe2009StockIncentivePlan(the“2009Plan”)whichbecameeffectiveupontheclosingoftheIPO.Atotalof800,000sharesofcommonstock,subjecttoincreaseonanannualbasis,arereservedforfutureissuanceunderthe2009Plan.Sharesofcommonstockreservedforissuanceunderthe2007StockIncentivePlanthatremainedavailableforissuanceatthetimeofeffectivenessofthe2009Planandanysharesofcommonstocksubjecttoawardsunderthe2007Planthatexpire,terminate,orareotherwiseforfeited,canceled,orrepurchasedbytheCompanywereaddedtothenumberofsharesavailableunderthe2009Plan.The2009PlanisadministeredbytheBoardofDirectorsandCompensationCommittee,whichhavetheauthoritytodesignateparticipantsanddeterminethenumberandtypeofawardstobegranted,thetimeatwhichawardsareexercisable,themethodofpaymentandanyothertermsorconditionsoftheawards.Optionsgenerallyvestoverafour-yearperiodandexpiretenyearsfromthedateofgrant.Certainoptionsprovideforacceleratedvestingifthereisachangeincontrol.Therewere776,732sharesavailableforgrantunderthe2009PlanasofDecember31,2009.OnJanuary1,2010,subjecttotheprovisionsofthe2009Plan,448,996shareswereaddedtothesharesavailabletogrant.TheCompanygenerallyissuespreviouslyunissuedsharesofcommonstockfortheexerciseofstockoptions.TheCompanyreceived$549,000,$110,375and$516,609incashfromstockoptionexercisesduringtheyearsendedDecember31,2007,2008and2009,respectively.PriortotheCompany’sIPO,theCompany’sBoardofDirectorsestimatedthefairvalueoftheCompany’scommonstock,withinputfrommanagement,asofthedateofeachstockoptiongrant.TheBoardofDirectorsestimatedthefairvalueofcommonstockbyconsideringanumberofobjectiveandsubjectivefactors,includingtheoriginalsalepriceofcommonstockpriortoanypreferredfinancingrounds,thepersharevalueofanypreferredfinancingrounds,theamountofpreferredstockliquidationpreferences,peergrouptradingmultiples,theilliquidnatureoftheCompany’scommonstock,theCompany’ssizeandlackofhistoricalprofitability,andcommonstockvaluationsfromanindependentvaluationspecialist.ThefairvaluesoftheCompany’scommonstock,asdeterminedbytheCompany’sBoardofDirectorduringtheperiodfromJanuary1,2007throughMay7,2009(thelastgrantdatepriortotheIPO)rangedfrom$2.73pershareto$12.10pershare.InDecember2007,inconnectionwiththeCompany’sproposedinitialpublicoffering,theCompany’sBoardofDirectorsdecidedtoreassessthefairvalueofitscommonstockasofJanuary24,2007,April27,2007,andAugust3,2007.Aspartofthisreassessment,theBoardofDirectorsobtainedaretrospectivefairmarketvaluationfromthespecialistwhichemployedanoption-pricingmethodtodeterminethefairvalueoftheCompany’scommonstockasofthesedates.Asaresultoftheretrospectivevaluationsperformed,theBoarddeterminedthatoptionsgrantedonApril27,2007werenotgrantedattheestimatedfairvalue.Therefore,onApril18,2008,theCompany’sBoardofDirectorsauthorizedaplantoamendcertainstockoptionsissuedonApril27,2007toincreasetheexercisepriceofsuchstockoptionsfrom$1.25pershareto$5.60pershare.Aspartoftheseamendments,theCompanyiscompensatingtheaffectedoptionholdersofanaggregateof80,000optionsforthedifferencein60theexercisepricesuponthevestingoftheoptionswithacashbonuspayment.Theamendmentresultedinastockoptionmodificationandaliabilityof$348,000forcashbonusesisbeingrecordedoverthevestingperiodoftheoptionsofwhich$64,696willberecordedasareductiontoadditionalpaid-incapitaland$283,304asstock-basedcompensation.TheCompanyrecordedaliabilityof$257,520forcashbonuseswhichisincludedinaccruedexpensesasofDecember31,2008,andrecordedadditionalstockcompensationexpenseof$209,291duringtheyearendedDecember31,2008andadecreasetoadditionalpaidincapitalof$48,229.DuringtheyearendedDecember31,2009,theCompanymadecashbonuspaymentstotaling$304,500andrecordedanadditionalliabilityof$66,121includedinaccruedexpensesresultinginabalanceof$19,141asofDecember31,2009.TheCompanyrecordedadditionalstockcompensationexpenseof$53,828duringtheyearendedDecember31,2009andadecreasetoadditionalpaid-incapitalof$12,293.TheCompanyusestheBlack-Scholesoption-pricingmodeltoestimatethegrantdatefairvalueofstockoptiongrants.TheCompanyestimatestheexpectedvolatilityofitscommonstockatthedateofgrantbasedonthehistoricalvolatilityofcomparablepubliccompaniesovertheoption’sexpectedtermgiventheCompany’slimitedtradinghistory.TheCompanyestimatesexpectedtermbasedonhistoricalexerciseactivityandgivingconsiderationtothecontractualtermoftheoptions,vestingschedules,employeeturnover,andexpectationofemployeeexercisebehavior.TheassumeddividendyieldisbasedupontheCompany’sexpectationofnotpayingdividendsintheforeseeablefuture.Therisk-freerateforperiodswithintheestimatedlifeoftheoptionisbasedontheU.S.Treasuryzero-couponissueswitharemainingtermequaltotheexpectedlifeatthetimeofgrant.Historicalemployeeturnoverdataisusedtoestimatepre-vestingoptionforfeiturerates.Thecompensationexpenseisamortizedonastraight-linebasisovertherequisiteserviceperiodoftheoptions,whichisgenerallyfouryears.TheCompanyusedthefollowingassumptionstoapplytheBlack-Scholesoption-pricingmodel:200720082009YearsEndedDecember31,Expecteddividendyield.................0.00%0.00%0.00%Risk-freeinterestrate...................3.40%-4.93%2.52%-3.33%1.88%-2.71%Expectedterm(inyears)................2.00-6.255.54-6.255.11-6.25Volatility............................90%75%-80%75%Thefollowingtablesummarizesstockoptionactivity,includingperformance-basedoptions:NumberofShareOptionsWeightedAverageExercisePriceWeightedAverageRemainingContractualTerm(Years)AggregateIntrinsicValueOutstanding,January1,2009..............3,209,650$4.187.6Granted..............................185,70016.32Exercised.............................(258,229)2.00$3,879,591Forfeited.............................(90,150)10.03Outstanding,December31,2009...........3,046,9714.906.845,814,298ExercisableatDecember31,2009..........2,199,1713.166.337,072,985VestedorexpectedtovestatDecember31,2009..............................3,013,7674.826.845,602,680TheaggregateintrinsicvaluewascalculatedbasedonthepositivedifferencesbetweentheestimatedfairvalueoftheCompany’scommonstockonDecember31,2009of$19.95pershareorattimeofexercise,andtheexercisepriceoftheoptions.Theweightedaveragegrantdatefairvalueofstockoptionsissuedwas$4.58,$8.54and$11.02persharefortheyearsendedDecember31,2007,2008,and2009,respectively.61TheCompanyrecognizedstockbasedcompensationexpensewithintheaccompanyingconsolidatedstatementsofoperationsassummarizedinthefollowingtable:200720082009YearsEndedDecember31,Costofrevenue.................................$10,283$63,580$54,068Researchanddevelopment.........................105,030418,683536,800Sellingandmarketing.............................177,035962,302931,488Generalandadministrative.........................222,2201,304,3601,399,256$514,568$2,748,925$2,921,612AsofDecember31,2009,therewasapproximately$4,657,000oftotalunrecognizedshare-basedcompensationcost,netofestimatedforfeitures,relatedtounvestedstockoptiongrantswhichareexpectedtoberecognizedoveraweightedaverageperiodof2.1years.Thetotalunrecognizedshare-basedcompensationcostwillbeadjustedforfuturechangesinestimatedforfeitures.OfthetotalstockoptionsissuedsubjecttothePlans,certainstockoptionshaveperformance-basedvesting.Theseperformance-basedoptionsgrantedduring2004and2007weregenerallygrantedat-the-money,contingentlyvestoveraperiodoftwotofouryearsdependinguponthenatureoftheperformancegoal,andhaveacontractuallifeoftenyears.TheCompanygranted180,000performance-basedoptionsin2007,whichvestedupontheclosingoftheIPO.TheCompanyrecordedcompensationexpenseof$338,000inJuly2009relatedtotheseperformance-basedoptions.Theseperformance-basedoptionsaresummarizedbelow:NumberofShareOptionsWeightedAverageExercisePriceWeightedAverageRemainingContractualTerm(Years)AggregateIntrinsicValueOutstanding,January1,2009...............718,000$1.256.5Granted...............................—Exercised..............................(66,315)1.25$850,684Forfeited...............................—Outstanding,December31,2009.............651,6851.255.512,675,273ExercisableatDecember31,2009............651,6851.255.512,675,273TheaggregateintrinsicvaluewascalculatedbasedonthepositivedifferencesbetweentheestimatedfairvalueoftheCompany’scommonstockonDecember31,2009of$19.95pershare,orattimeofexercise,andtheexercisepriceoftheoptions.10.401(k)PlanOnJanuary1,2007,theCompanyestablishedadefinedcontributionsavingsplanunderSection401(k)oftheInternalRevenueCode.Theplanisavailabletoallemployeesuponemploymentandallowsparticipantstodeferaportionoftheirannualcompensationonapre-taxbasis.TheCompanymaycontributetotheplanatthediscretionoftheBoardofDirectors.TheCompanyhasnotmadeanycontributionstotheplanthroughDecember31,2009.6211.CommitmentsandContingenciesOperatingLeases—TheCompanyhasoperatingleaseagreementsforofficesinMassachusetts,Hungary,TheNetherlands,AustraliaandEnglandthatexpirein2010through2014.TheleaseagreementfortheMassachusettsofficerequiresasecuritydepositof$125,000intheformofaletterofcreditwhichiscollateralizedbyacertificateofdepositinthesameamount.TheleaseagreementwiththeHungarianofficerequiresasecuritydepositintheamountofapproximately$243,000(46,122,562HUF)atDecember31,2009.Thecertificateofdepositandthesecuritydepositareclassifiedasrestrictedcash(seeNote2).TheMassachusetts,TheNetherlands,andBudapest,HungaryleasescontainterminationoptionswhichallowtheCompanytoterminatetheleases.Rentexpenseundertheseleaseswasapproximately$560,000,$1,270,000and$1,778,000fortheyearsendedDecember31,2007,2008and2009,respectively.TheCompanyrecordsrentexpenseonastraight-linebasisforleaseswithscheduledaccelerationclausesorfreerentperiods.TheCompanyalsoentersintohostingservicesagreementswiththird-partydatacentersandinternetserviceprovidersthataresubjecttoannualrenewal.Hostingfeesincurredunderthesearrangementsaggregatedapproximately$934,000,$1,398,000and$1,621,000fortheyearsendedDecember31,2007,2008and2009,respectively.Futureminimumleasepaymentsundernon-cancelableoperatingleasesincludingoneyearcommitmentsassociatedwiththeCompany’shostingservicesarrangementsareapproximatelyasfollowsatDecember31,2009:YearsEndingDecember312010..............................................................$2,841,0002011..............................................................2,140,0002012..............................................................2,076,0002013..............................................................1,036,0002014..............................................................150,000Totalminimumleasepayments..........................................$8,243,000Litigation—During2007andthroughMay22,2008,theCompanysettledthreepatentinfringementlawsuitsforanaggregateamountof$2,825,000.Ineachsettlement,theplaintiffdismissedtheactionwithprejudiceandallpartiesprovidedmutualreleasesfromclaimsarisingfromorrelatedtothepatentorpatentsatissue.TheCompanyrecorded$2,225,000and$600,000relatedtotheselawsuitsintheyearsendedDecember31,2007,and2008,respectively.OnJune2,2009,PB&JSoftware,LLC(“PB&J”),filedacomplaintthatnamedtheCompanyandfourothercompaniesasdefendantsinalawsuitintheU.S.DistrictCourtfortheDistrictofMinnesota.TheCompanyreceivedserviceofthecomplaintonJuly20,2009.ThecomplaintallegesthattheCompanyhasinfringedU.S.PatentNo.7,310,736,whichallegedlyisownedbyPB&Jandhasallegedclaimsdirectedtoaparticularapplicationorsystemfortransferringorstoringback-upcopiesoffilesfromonecomputertoasecondcomputer.Thecomplaintseeksdamagesinanunspecifiedamountandinjunctiverelief.TheCompanybelievesthatithasmeritoriousdefensestotheclaimandintendstodefendthelawsuitvigorously.InDecember2009,thecourtgrantedamotionforastayofactionpendingreexaminationproceedingsinitiatedattheUnitedStatedPatentandTrademarkOfficeaddressingthePB&Jpatentatissueinthelawsuit.AsofFebruary26,2010thestayoflitigationisstillineffect.TheCompanyissubjecttovariousotherlegalproceedingsandclaims,eitherassertedorunasserted,whichariseintheordinarycourseofbusiness.Whiletheoutcomeoftheseotherclaimscannotbepredictedwithcertainty,managementdoesnotbelievethattheoutcomeofanyoftheseotherlegalmatterswillhaveamaterialadverseeffectontheCompany’sconsolidatedfinancialstatements.6312.RelatedPartyInDecember2007,theCompanyenteredintoastrategicagreementwithIntelCorporationtojointlydevelopaservicethatdeliversconnectivitytocomputersbuiltwithIntelcomponents.Underthetermsofthemulti-yearagreement,theCompanyhasadapteditsservicedeliveryplatform,Gravity,toworkwithspecifictechnologydeliveredwithIntelhardwareandsoftwareproducts.TheagreementprovidesthatIntelwillmarketandselltheservicetoitscustomers.IntelpaystheCompanyaminimumlicenseandservicefeeonaquarterlybasisduringthemulti-yeartermoftheagreement.TheCompanybeganrecognizingrevenueassociatedwiththeIntelserviceandmarketingagreementuponreceiptofacceptanceinthequarterendedSeptember30,2008.Inaddition,theCompanyandIntelwillsharerevenuegeneratedbytheuseoftheservicebythirdpartiestotheextentitexceedstheminimumpayments.Inconjunctionwiththisagreement,IntelCapitalpurchased2,222,223sharesofourSeriesB-1redeemableconvertiblepreferredstockfor$10,000,004,whichwereconvertedinto888,889sharesofcommonstockinconnectionwiththeclosingoftheIPOonJuly7,2009.InJune2009,theCompanyenteredintoalicense,royaltyandreferralagreementwithIntelAmericas,Inc.,pursuanttowhichtheCompanywillpayIntelspecifiedroyaltieswithrespecttosubscriptionstoitsproductsthatincorporatetheInteltechnologycoveredbytheserviceandmarketingagreementwithIntelCorporation.Inaddition,intheeventIntelreferscustomerstotheCompanyunderthisagreement,theCompanywillpayIntelspecifiedfees.AtDecember31,2008andDecember31,2009,IntelowedtheCompanyapproximately$150,000and$101,000,respectively,recordedasanon-tradereceivablerelatingtothisagreement.TheCompanyrecognized$3,036,000and$6,007,000ofnetrevenuerelatingtotheseagreementsfortheyearsendedDecember31,2008and2009,respectively.AsofDecember31,2008,theCompanyhadrecorded$3,214,000relatedtothisagreementasdeferredrevenueofwhich$2,143,000wasclassifiedaslongtermdeferredrevenue.AsofDecember31,2009,theCompanyhasrecorded$2,143,000relatedtothisagreementasdeferredrevenue,ofwhich$1,071,000isclassifiedaslong-termdeferredrevenue.TheCompanyrecordedexpensesrelatingtoreferralfeesofapproximately$33,000relatingtothisagreementduringtheyearendedDecember31,2009.Approximately$19,000relatingtothereferralfeesand$5,000relatingtolicensefeesarepayabletoIntelasofDecember31,2009.13.QuarterlyInformation(Unaudited)March31,2008June30,2008September30,2008December31,2008March31,2009June30,2009September30,2009December312009FortheThreeMonthsEnded,(Inthousands,exceptpersharedata)StatementofOperationsData:Revenue...............$9,919$11,422$14,386$15,996$17,197$18,007$18,971$20,233Grossprofit.............8,57610,04812,81114,31815,45316,15417,06118,232Income(loss)fromoperations............(3,686)(2,970)21,2672,2652,5071,9972,536Netincome(loss)........(3,643)(3,011)91,2432,1332,3401,8502,474Netincome(loss)pershare-basic.........(1.09)(0.92)(0.15)0.040.100.100.080.11Netincome(loss)pershare-diluted.......(1.09)(0.92)(0.15)0.040.100.100.070.1064ITEM9.CHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURENone.ITEM9A(T).CONTROLSANDPROCEDURESOurmanagement,withtheparticipationofourchiefexecutiveofficerandchieffinancialofficer,evaluatedtheeffectivenessofourdisclosurecontrolsandproceduresasofDecember31,2009.Theterm“disclosurecontrolsandprocedures,”asdefinedinRules13a-15(e)and15d-15(e)undertheExchangeActof1934,asamended,meanscontrolsandotherproceduresofacompanythataredesignedtoensurethatinformationrequiredtobedisclosedbyacompanyinthereportsthatitfilesorsubmitsundertheExchangeActisrecorded,processed,summarizedandreported,withinthetimeperiodsspecifiedintheSEC’srulesandforms.Disclosurecontrolsandproceduresinclude,withoutlimitation,controlsandproceduresdesignedtoensurethatinformationrequiredtobedisclosedbyacompanyinthereportsthatitfilesorsubmitsundertheExchangeActisaccumulatedandcommunicatedtothecompany’smanagement,includingitsprincipalexecutiveandprincipalfinancialofficers,asappropriatetoallowtimelydecisionsregardingrequireddisclosure.Managementrecognizesthatanycontrolsandprocedures,nomatterhowwelldesignedandoperated,canprovideonlyreasonableassuranceofachievingtheirobjectivesandmanagementnecessarilyappliesitsjudgmentinevaluatingthecost-benefitrelationshipofpossiblecontrolsandprocedures.BasedontheevaluationofourdisclosurecontrolsandproceduresasofDecember31,2009,ourchiefexecutiveofficerandchieffinancialofficerconcludedthat,asofsuchdate,ourdisclosurecontrolsandprocedureswereeffectiveatthereasonableassurancelevel.Thisannualreportdoesnotincludeareportofmanagement’sassessmentregardinginternalcontroloverfinancialreportingoranattestationreportofthecompany’sregisteredpublicaccountingfirmduetoatransitionperiodestablishedbyrulesoftheSecuritiesandExchangeCommissionfornewlypubliccompanies.Nochangeinourinternalcontroloverfinancialreporting(asdefinedinRule13a-15(f)and15d-(f)undertheExchangeAct)occurredduringthequarterendedDecember31,2009thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,ourinternalcontrolsoverfinancialreporting.ITEM9B.OTHERINFORMATIONNone.PARTIIIITEM10.DIRECTORS,EXECUTIVEOFFICERSANDCORPORATEGOVERNANCEInformationrequiredbythisitemisincorporatedbyreferencefromtheinformationinourproxystatementforthe2010AnnualMeetingofStockholders,whichwewillfilewiththeSecuritiesandExchangeCommissionwithin120daysofDecember31,2009.Wehaveadoptedacodeofethics,calledtheCodeofBusinessConductandEthics,whichappliestoourofficers,includingourprincipalexecutive,financialandaccountingofficers,andourdirectorsandemployees.WehavepostedtheCodeofBusinessConductandEthicsonourwebsiteathttps://secure.logmein.com/US/home.aspxunderthe“Investors”section.Weintendtomakeallrequireddisclosuresconcerninganyamendmentsto,orwaiversfrom,theCodeofBusinessConductandEthicsonourwebsite.ITEM11.EXECUTIVECOMPENSATIONInformationrequiredbythisitemisincorporatedbyreferencefromtheinformationinourproxystatementforthe2010AnnualMeetingofStockholders,whichwewillfilewiththeSecuritiesandExchangeCommissionwithin120daysofDecember31,2009.65ITEM12.SECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSANDMANAGEMENTANDRELATEDSTOCKHOLDERMATTERSInformationrequiredbythisitemisincorporatedbyreferencefromtheinformationinourproxystatementforthe2010AnnualMeetingofStockholders,whichwewillfilewiththeSecuritiesandExchangeCommissionwithin120daysofDecember31,2009.ITEM13.CERTAINRELATIONSHIPSANDRELATEDTRANSACTIONS,ANDDIRECTORINDEPENDENCEInformationrequiredbythisitemisincorporatedbyreferencefromtheinformationinourproxystatementforthe2010AnnualMeetingofStockholders,whichwewillfilewiththeSecuritiesandExchangeCommissionwithin120daysofDecember31,2009.ITEM14.PRINCIPALACCOUNTANTFEESANDSERVICESInformationrequiredbythisitemisincorporatedbyreferencefromtheinformationinourproxystatementforthe2010AnnualMeetingofStockholders,whichwewillfilewiththeSecuritiesandExchangeCommissionwithin120daysofDecember31,2009.PARTIVITEM15.EXHIBITSANDFINANCIALSTATEMENTSCHEDULES(a)(1)FinancialStatementsSeeIndextotheConsolidatedFinancialStatementsonpage43ofthisAnnualReportonForm10-K,whichisincorporatedintothisitembyreference.(a)(2)FinancialStatementSchedulesNofinancialstatementscheduleshavebeensubmittedbecausetheyarenotrequiredorarenotapplicableorbecausetheinformationrequiredisincludedintheconsolidatedfinancialstatementsorthenotesthereto.(a)(3)ExhibitsSeeExhibitIndexonpage68ofthisAnnualReportonForm10-K,whichisincorporatedintothisitembyreference.66SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.LOGMEIN,INC.By:/s/MichaelK.SimonMichaelK.SimonPresidentandChiefExecutiveOfficer(PrincipalExecutiveOfficer)Date:February26,2010PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.SignatureTitleDate/s/MICHAELK.SIMONMichaelK.SimonPresident,ChiefExecutiveOfficerandDirector(PrincipalExecutiveOfficer)February26,2010/s/JAMESF.KELLIHERJamesF.KelliherChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)February26,2010/s/DAVIDE.BARRETTDavidE.BarrettDirectorFebruary26,2010/s/STEVENJ.BENSONStevenJ.BensonDirectorFebruary26,2010/s/KENNETHD.CRONKennethD.CronDirectorFebruary26,2010/s/EDWINJ.GILLISEdwinJ.GillisDirectorFebruary26,2010/s/IRFANSALIMIrfanSalimDirectorFebruary26,201067EXHIBITINDEXExhibitNumberDescription3.1(1)RestatedCertificateofIncorporationoftheRegistrant3.2(1)AmendedandRestatedBylawsoftheRegistrant4.1(1)SpecimenCertificateevidencingsharesofcommonstock10.1(1)2004EquityIncentivePlan,asamended10.2(1)FormofIncentiveStockOptionAgreementunderthe2004EquityIncentivePlan10.3(1)FormofNonstatutoryStockOptionAgreementunderthe2004EquityIncentivePlan10.4(1)2007StockIncentivePlan10.5(1)FormofIncentiveStockOptionAgreementunderthe2007StockIncentivePlan10.6(1)FormofNonstatutoryStockOptionAgreementunderthe2007StockIncentivePlan10.7(1)FormofRestrictedStockAgreementunderthe2007StockIncentivePlan10.8(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandDavidBarrett10.9(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandStevenBenson10.10(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandKennethCron10.11(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandEdwinGillis10.12(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandIrfanSalim10.13(1)IndemnificationAgreement,datedasofJuly23,2008,betweentheRegistrantandMichaelSimon10.14(1)SecondAmendedandRestatedInvestorRightsAgreement,datedasofDecember26,2007,amongtheRegistrantandthepartieslistedtherein10.15(1)Lease,datedJuly14,2004,betweenAcquiportUnicorn,Inc.andtheRegistrant,asamendedbytheFirstAmendmenttoLease,datedasofDecember14,2005,asfurtheramendedbytheSecondAmendmenttoLease,datedOctober19,200710.16†(1)ConnectivityServiceandMarketingAgreement,datedasofDecember26,2007,betweenIntelCorporationandtheRegistrant10.17(1)AmendedandRestatedLetterAgreement,datedasofApril23,2008,betweentheRegistrantandMichaelSimon.10.18(1)AmendedandRestatedLetterAgreement,datedasofApril23,2008,betweentheRegistrantandJamesKelliher10.19(1)AmendedandRestatedLetterAgreement,datedasofApril23,2008,betweentheRegistrantandMartinAnka10.20(1)AmendedandRestatedLetterAgreement,datedasofApril23,2008,betweentheRegistrantandKevinHarrison10.21†(1)License,RoyaltyandReferralAgreement,datedasofJune8,2009,betweenIntelAmericas,Inc.andtheRegistrant10.22(1)2009StockIncentivePlan10.23(1)FormofManagementIncentiveStockOptionAgreementunderthe2009StockIncentivePlan10.24(1)FormofManagementNonstatutoryStockOptionAgreementunderthe2009StockIncentivePlan10.25(1)FormofDirectorNonstatutoryStockOptionAgreementunderthe2009StockIncentivePlan10.26(1)FormofEmploymentOfferLetter10.27(2)SeparationAgreement,datedOctober5,2009,betweentheRegistrantandCarolMeyers10.28*Summaryof2010ExecutiveCompensation21.1*SubsidiariesoftheRegistrant23.1*ConsentofIndependentRegisteredPublicAccountingFirm31.1*CertificationofChiefExecutiveOfficerpursuanttoSection302oftheSarbanes-OxleyActof200231.2*CertificationofChiefFinancialOfficerpursuanttoSection302oftheSarbanes-OxleyActof200232.1*CertificationoftheChiefExecutiveOfficerpursuanttoSection906oftheSarbanes-OxleyActof200232.2*CertificationoftheChiefFinancialOfficerpursuanttoSection906oftheSarbanes-OxleyActof2002*Filedherewith.†Confidentialtreatmentrequestedastocertainportions,whichportionshavebeenomittedandfiledsepa-ratelywiththeSecuritiesandExchangeCommission.(1)IncorporatedbyreferencetotheRegistrant’sRegistrationStatementonFormS-1,asamended(Reg333-148620)(2)IncorporatedbyreferencetoRegistrant’sForm10-QforthequarterendedSeptember30,2009(001-34391)68COMPARATIVE STOCK PERFORMANCE The following graph compares the cumulative total return to stockholders for our common stock for the period from July 1, 2009, the first day our common stock was publicly traded, through December 31, 2009 against the NASDAQ Composite Index and a peer group consisting of Blackboard, Inc., Concur Technologies, Inc., Constant Contact, Inc., DealerTrack Holdings, Inc., DemandTec, Inc., Kenexa Corporation, LogMeIn, Inc., RightNow Technologies, Inc., Salary.com, Inc., SuccessFactors, Inc., Taleo Corporation, The Ultimate Software Group, Inc. and Vocus, Inc., which we refer to as the Stock Performance Peer Group. The Stock Performance Peer Group is comprised of software-as-a-service companies that were of comparable market capitalization as of December 31, 2009. The comparison assumes $100.00 was invested in our common stock, the NASDAQ Composite Index and the Stock Performance Peer Group on July 1, 2009 and assumes reinvestment of dividends, if any. We have never paid or declared any cash dividends on our common stock and have no present plans to do so. The graph assumes the initial value of our common stock on July 1, 2009 was the closing sale price on that day of $20.02 per share and not the initial offering price to the public of $16.00 per share. The stock performance shown on the graph below is not necessarily indicative of future price performance. COMPARISON OF 6 MONTH CUMULATIVE TOTAL RETURN*Among LogMeIn, Inc., The NASDAQ Composite Index And A Peer Group$0$20$40$60$80$100$120$1407/1/097/31/098/31/099/30/0910/31/0911/30/0912/31/09LogMeIn, Inc.NASDAQ CompositePeer Group*$100 invested on 7/1/09 in stock or 6/30/09 in index, including reinvestment of dividends.Fiscal year ending December 31. Cumulative Total Return 7/1/09 7/31/09 8/31/09 9/30/09 10/31/09 11/30/09 12/31/09 LogMeIn, Inc. $ 100.00 $ 97.45 $ 81.42 $ 91.46 $ 100.40 $ 89.06 $ 99.65 NASDAQ Composite Index 100.00 107.78 109.80 115.78 111.95 117.53 124.11 Stock Performance Peer Group 100.00 105.82 106.80 117.50 110.60 112.71 124.63 NOTES NOTES NOTES Board of Directors Management Team Worldwide Oﬃ ces Headquarters LogMeIn, Inc. 500 Unicorn Park Drive Woburn, MA 01801 European Headquarters LogMeIn Europe B.V. Jacob Bontiusplaats 9 1018 LL Amsterdam The Netherlands Asia Paciﬁ c Headquarters LogMeIn Australia Pty. Ltd. Level 39, CitiGroup Centre 2 Park Street Sydney, NSW 2000, Australia Research & Development LogMeIn, Kft. Andrássy út, 9. II. em. 1061 Budapest, Hungary LogMeIn, Kft. Széchenyi tér 3. I. em. 6720 Szeged, Hungary Michael K. Simon Chairman, President Michael K. Simon Chairman, President & Chief Executive Oﬃ cer & Chief Executive Oﬃ cer David E. Barrett General Partner, Polaris Venture Partners Stephen J. Benson General Partner, Prism VentureWorks Marton B. Anka Chief Technology Oﬃ cer Michael J. Donahue Vice President & General Counsel Kenneth D. Cron Kevin K. Harrison President, Structured Portfolio Senior Vice President, Sales James F. Kelliher Chief Financial Oﬃ cer Management, LLC Edwin J. Gillis Business Consultant & Former Chief Financial Oﬃ cer of Veritas Software Corporation Irfan Salim President & Chief Executive Oﬃ cer, MarkMonitor, Inc. Stockholder Information Stock Listing NASDAQ Global Market Symbol: LOGM Independent Public Accountants Annual Shareholder Meeting Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 May 27, 2010, 9:00 a.m. EDT Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, MA 02109 Transfer Agent & Registrar Outside Legal Counsel American Stock Transfer and Wilmer Cutler Pickering Hale Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 and Dorr LLP 1100 Winter Street Waltham, MA 02451 LogMeIn makes it easy to access remote computers over the web, including desktops, laptops, and even from an iPhone or in-dash computer of a Ford F-150 truck. Over 28 million registered users have connected more than 90 million devices using LogMeIn for business productivity, personal mobility and IT support. LogMeIn, Inc. 500 Unicorn Park Drive Woburn, MA 01801 www.LogMeIn.com

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