Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies |
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(a) | The Company and Nature of Operations | | | | | | | | | | | |
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FalconStor Software, Inc., a Delaware Corporation (the "Company"), develops, manufactures and sells data migration, business continuity, disaster recovery, optimized backup and de-duplication solutions and provides the related maintenance, implementation and engineering services. |
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(b) | Principles of Consolidation | | | | | | | | | | | |
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The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. |
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(c) | Reclassifications | | | | | | | | | | | |
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Certain prior year’s amounts have been reclassified to conform to the current year presentation. |
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(d) | Use of Estimates | | | | | | | | | | | |
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The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include those related to revenue recognition, accounts receivable allowances, share-based payment compensation, marketable securities, valuation of embedded derivatives, software development costs, goodwill and other intangible assets and income taxes. Actual results could differ from those estimates. |
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The financial market volatility, both in the U.S. and in many other countries where the Company operates, has impacted and may continue to impact the Company’s business. Such conditions could have a material impact to the Company’s significant accounting estimates discussed above. |
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(e) | Cash Equivalents, Restricted Cash and Marketable Securities | | | | | | | | | | | |
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The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company records its cash equivalents and marketable securities at fair value in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurements and disclosures. As of December 31, 2014 the Company’s cash equivalents consisted of money market funds. As of December 31, 2013, the Company’s cash equivalents consisted of money market funds and commercial paper. At December 31, 2014 and 2013, the fair value of the Company’s cash equivalents amounted to approximately $2.0 million and $8.5 million, respectively. |
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As of December 31, 2013, the Company had $0.8 million of restricted cash. The restricted cash served as collateral related to deposit service indebtedness with the Company’s commercial bank. During 2014, this cash was released by the company's commercial bank and is no longer considered restricted cash. |
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As of December 31, 2014 and 2013, the Company’s marketable securities consisted of corporate bonds and government securities. As of December 31, 2014 and 2013, the fair value of the Company’s marketable securities was approximately $10.9 million and $8.1 million, respectively. All of the Company’s marketable securities are classified as available-for-sale, and accordingly, unrealized gains and losses on marketable securities, net of tax, are reflected as a component of accumulated other comprehensive loss in stockholders’ equity. Any other-than-temporary impairments are recorded within interest and other (loss) income, net in the consolidated statement of operations. See Note (4) Marketable Securities for additional information. |
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(f) | Fair Value of Financial Instruments | | | | | | | | | | | |
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows: |
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Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets. |
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Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
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Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. |
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As of December 31, 2014 and 2013, the fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated carrying value due to the short maturity of these instruments. See Note (3) Fair Value Measurements for additional information. |
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(g) | Derivative Financial Instruments | | | | | | | | | | | |
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The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible preferred stock are reviewed to determine whether or not they contain embedded derivative instruments that are required under FASB ASC 815 “Derivatives and Hedging” (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivatives are required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. |
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(h) | Revenue Recognition | | | | | | | | | | | |
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The Company derives its revenue from sales of its products, support and services. Product revenue consists of the Company’s software integrated with industry standard hardware and sold as complete turn-key integrated solutions and as stand-alone software applications. Support and services revenue consists of both maintenance revenues and professional services revenues. Revenue is recorded net of applicable sales taxes. |
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In accordance with the authoritative guidance issued by the FASB on revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, the fee is fixed and determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. Products delivered to a customer on a trial basis are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller customers typically send the Company a purchase order when they have an end user identified. Distributor customers typically send the Company a purchase order when they have a reseller and an end user identified. For bundled arrangements that include either maintenance or both maintenance and professional services, the Company uses the residual method to determine the amount of product revenue to be recognized. Under the residual method, consideration is allocated to the undelivered elements based upon vendor-specific objective evidence (“VSOE”) of the fair value of those elements, with the residual of the arrangement fee allocated to and recognized as product revenue. If VSOE does not exist for all undelivered elements of an arrangement, the Company recognizes total revenue from the arrangement ratably over the term of the maintenance agreement. The Company's long-term portion of deferred revenue consists of (i) payments received for maintenance contracts with terms in excess of one year as of the balance sheet date, (ii) payments received for product sales bundled with multiple years of maintenance but for which VSOE did not exist for all undelivered elements of the arrangement, and (iii) payments received in connection with a joint development agreement entered into by the Company in 2013 pursuant to which certain revenue was deferred until final delivery and acceptance of the final software. The Company provides an allowance for product returns as a reduction of revenue, based upon historical experience and known or expected trends. |
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Revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract. Revenues associated with software implementation and software engineering services are recognized when the services are performed. Costs of providing these services are included in cost of support and services. |
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The Company has entered into various distribution, licensing and joint promotion agreements with OEMs, whereby the Company has provided to the OEM a non-exclusive software license to install the Company’s software on certain hardware or to resell the Company’s software in exchange for payments based on the products distributed by these OEMs. Such payments from the OEM or distributor are recognized as revenue in the period reported by the OEM. |
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From time to time the Company will enter into funded software development arrangements. Under such arrangements, revenue recognition will not commence until final delivery and/or acceptance of the product. For arrangements where the Company has VSOE for the undelivered elements, the Company will follow the residual method and recognize product revenue upon final delivery and/or acceptance of the product. For arrangements where the Company does not have VSOE for the undelivered elements, the Company will recognize the entire arrangement fee ratably commencing at the time of final delivery and/or acceptance through the end of the service period in the arrangement. Certain arrangements, for which VSOE of fair value for the undelivered maintenance elements cannot be established, are accounted for as a single unit of accounting. The revenue recognized from single units of accounting are typically allocated and classified on the consolidated statements of operations as product revenue and support and services revenue. Since VSOE cannot be established, VSOE of similar maintenance offerings provides the basis for the support and services revenue classification, and the remaining residual consideration provides the basis for the product revenue classification. Final acceptance of the software delivered under the joint development agreement occurred on November 16, 2014. Therefore the Company will recognize the total committed fee as revenue ratably over a twenty-five and a half month period which began on November 16, 2014 and includes the contractual twenty-four month maintenance period. As of December 31, 2014, the Company recorded product revenue of approximately $0.6 million and maintenance revenue of approximately $0.2 million related to this agreement. As of December 2014, the Company recorded short term deferred revenue of $5.6 million and long term deferred revenue of $5.6 million, related to this agreement. If at any time, the customer elects to terminate their maintenance agreement, any unrecognized deferred revenue would be accelerated and recognized as revenue during the period in which the termination becomes effective. |
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(i) | Property and Equipment | | | | | | | | | | | |
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Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets (3 to 7 years). Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases or over their estimated useful lives, whichever is shorter. |
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(j) | Goodwill and Other Intangible Assets | | | | | | | | | | | |
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Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. The Company has not amortized goodwill related to its acquisitions, but instead tests the balance for impairment. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. |
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The Company’s annual impairment assessment is performed during the fourth quarter of each year, and the Company has determined there to be no impairment for any of the periods presented. Based on the Company’s analysis, the fair value of its reporting unit substantially exceeds the carrying value of its goodwill balances as of December 31, 2014 and 2013. Identifiable intangible assets include (i) assets acquired through business combinations, which include customer contracts and intellectual property, and (ii) patents amortized over three years using the straight-line method. |
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The gross carrying amount and accumulated amortization of other intangible assets as of December 31, 2014 and 2013 are as follows: |
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| | 31-Dec-14 | | 31-Dec-13 | | | | |
Goodwill | | $ | 4,150,339 | | | $ | 4,150,339 | | | | | |
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Other intangible assets: | | | | | | | | | | |
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Gross carrying amount | | $ | 3,395,024 | | | $ | 3,256,709 | | | | | |
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Accumulated amortization | | (3,198,987 | ) | | (3,077,113 | ) | | | | |
Net carrying amount | | $ | 196,037 | | | $ | 179,596 | | | | | |
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For the years ended December 31, 2014, 2013 and 2012, amortization expense was $121,874, $122,951 and $118,789, respectively. As of December 31, 2014, amortization expense for existing identifiable intangible assets is expected to be $108,460, $64,965 and $22,612 for the years ended December 31, 2015, 2016 and 2017, respectively. Such assets will be fully amortized at December 31, 2017. |
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(k) | Software Development Costs and Purchased Software Technology | | | | | | | | | | | |
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In accordance with the authoritative guidance issued by the FASB on costs of software to be sold, leased, or marketed, costs associated with the development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility of the product has been established. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Amortization of software development costs is recorded at the greater of the straight-line basis over the product’s estimated life, or the ratio of current period revenue of the related products to total current and anticipated future revenue of these products. The gross carrying amount and accumulated amortization of software development costs as of December 31, 2014 and 2013 are as follows: |
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| | December 31, 2014 | | December 31, 2013 | | | | |
Software development costs: | | | | | | | | |
Gross carrying amount | | $ | 2,903,115 | | | $ | 2,718,900 | | | | | |
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Accumulated amortization | | (1,394,598 | ) | | (922,825 | ) | | | | |
Software development costs, net | | $ | 1,508,517 | | | $ | 1,796,075 | | | | | |
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During the years ended December 31, 2014, 2013 and 2012, the Company recorded $0.5 million, $0.3 million and $0.3 million, respectively, of amortization expense related to capitalized software costs. As of December 31, 2014, amortization expense for software development costs is expected to be $0.5 million, $0.4 million, $0.3 million, $0.2 million and $0.1 million for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively. Such assets will be fully amortized at December 31, 2019. |
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(l) | Income Taxes | | | | | | | | | | | |
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The Company records income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In determining the period in which related tax benefits are realized for financial reporting purposes, excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted. |
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The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued by the FASB on income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return, should be recorded in the financial statements. Pursuant to the authoritative guidance, the Company may recognize the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained on examination by the taxing authority, based on the technical merits of the position or expiration of statutes. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. In addition, the authoritative guidance addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods, and also requires increased disclosures. The Company includes interest and penalties related to its uncertain tax positions as part of income tax expense within its consolidated statement of operations. See Note (6) Income Taxes for additional information. |
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(m) | Long-Lived Assets | | | | | | | | | | | |
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The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. |
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(n) | Share-Based Payments | | | | | | | | | | | |
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The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of estimated forfeitures. For share-based payment awards that contain performance criteria share-based compensation expense is recorded when the achievement of the performance condition is considered probable of achievement and is recorded straight-line over the requisite service period. If such performance criteria are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model or the Monte Carlo simulation model if a market condition exists. Share-based compensation expense for a share-based payment award with a market condition is recorded straight-line over the longer of the explicit service period or the service period derived from the Monte Carlo simulation. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. All share-based awards are expected to be fulfilled with new shares of common stock. See Note (10) Share-Based Payment Arrangements for additional information. |
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(o) | Foreign Currency | | | | | | | | | | | |
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Assets and liabilities of foreign operations are translated at rates of exchange at the end of the period, while results of operations are translated at average exchange rates in effect for the period. Gains and losses from the translation of foreign assets and liabilities from the functional currency of the Company’s subsidiaries into the U.S. dollar are classified as accumulated other comprehensive loss in stockholders’ equity. Gains and losses from foreign currency transactions are included in the consolidated statements of operations within interest and other income (loss), net. |
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During the years ended December 31, 2014, 2013 and 2012, foreign currency transactional losses totaled approximately $0.7 million, $1.1 million and $0.7 million, respectively. |
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(p) | Earnings Per Share (EPS) | | | | | | | | | | | |
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Basic EPS is computed based on the weighted average number of shares of common stock outstanding. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by dilutive common stock equivalents, attributable to stock option awards, restricted stock awards, restricted stock unit awards and Series A redeemable convertible preferred stock outstanding. |
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The following represents the common stock equivalents that were excluded from the computation of diluted shares outstanding because their effect would have been anti-dilutive for the years ended December 31, 2014 and 2013: |
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Stock options and restricted stock | | 7,800,293 | | | 8,150,032 | | | 11,532,032 | | | | |
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Series A redeemable convertible preferred stock | | 8,781,516 | | | 8,781,516 | | | — | | | | |
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Total anti-dilutive common stock equivalents | | 16,581,809 | | | 16,931,548 | | | 11,532,032 | | | | |
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The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computation: |
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| | Year Ended December 31, |
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Net Loss | | $ | (7,211,821 | ) | | $ | (10,932,590 | ) | | $ | (14,984,321 | ) |
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Effects of redeemable convertible preferred stock: | | | | | | |
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Less: Series A redeemable convertible preferred stock dividends | | 747,616 | | | 216,379 | | | — | |
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Less: Accretion to redemption value of series A redeemable convertible preferred stock | | 493,363 | | | 127,504 | | | — | |
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Net loss attributable to common stockholders | | $ | (8,452,800 | ) | | $ | (11,276,473 | ) | | $ | (14,984,321 | ) |
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Denominator: | | | | | | |
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Weighted average basic shares outstanding | | 46,265,225 | | | 47,979,467 | | | 47,408,995 | |
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Effect of dilutive securities: | | | | | | |
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Stock options and restricted stock | | — | | | — | | | — | |
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Series A redeemable convertible preferred stock | | — | | | — | | | — | |
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Weighted average diluted shares outstanding | | 46,265,225 | | | 47,979,467 | | | 47,408,995 | |
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EPS: | | | | | | |
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Basic net loss per share attributable to common stockholders | | $ | (0.18 | ) | | $ | (0.24 | ) | | $ | (0.32 | ) |
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Diluted net loss per share attributable to common stockholders | | $ | (0.18 | ) | | $ | (0.24 | ) | | $ | (0.32 | ) |
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(q) | Investments | | | | | | | | | | | |
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As of December 31, 2014 and 2013, the Company did not have any cost-method investments. During December 2013, the Company sold its interest in Tianjin Zhongke Blue Whale Information Technologies Co., Ltd. (“Blue Whale”), a Chinese joint venture, for $3.0 million. The Company recorded a gain of $2.1 million within "interest and other (loss) income, net" in the accompanying consolidated statements of operations. During 2012, the Company recognized an impairment charge of approximately $11,000 related to certain of its cost-method investments as a result of other-than-temporary declines in market value related to certain of these investments. This charge is included within “interest and other (loss) income, net” in the accompanying consolidated statements of operations. |
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(r) | Treasury Stock | | | | | | | | | | | |
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The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. |
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(s) | Recently Adopted Accounting Pronouncements | | | | | | | | | | | |
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In July 2013, the FASB issued new guidance which requires the netting of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, against a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance is effective prospectively to all existing unrecognized tax benefits, but entities can choose to apply it retrospectively. The adoption of this new accounting guidance in the first quarter of 2014 did not have any impact on the Company's consolidated financial position, results of operations or cash flows. |
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(t) Recently Issued Accounting Pronouncements |
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In November 2014, the FASB issued new guidance which requires an entity to determine whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The effects of initially adopting the amendments in this update should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, which for the Company will be the annual period ending December 31, 2016. Early adoption, including adoption in an interim period, is permitted. The Company has not yet adopted this guidance and currently does not expect the adoption of the new guidance by the Company to have a significant impact on our financial results. |
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In August 2014, the FASB issued new guidance which requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable), and to provide related footnote disclosures in certain circumstances. The new standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, which for the Company will be the annual period ending December 31, 2016. Early application is permitted. The Company has not yet adopted this guidance and currently does not expect the adoption of the new guidance by the Company to have a significant impact on our financial results. |
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In May 2014, the FASB issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles in the United States when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that this new guidance will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. |
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