10-Q 1 il-20130930x10q.htm 10-Q IL-2013.09.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
or
¨
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to            
Commission File Number 001-34832 
 
INTRALINKS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-8915510
 
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
150 East 42nd Street, 8th Floor
New York, New York
 
10017
 
(Address of principal executive offices)
 
(Zip Code)
(212) 543-7700
(Registrant’s telephone number, including area code) 
 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer þ
 
Non-accelerated filer ¨
 
Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Class
 
Outstanding at November 4 , 2013
Common Stock, par value $0.001 per share
 
55,952,538




INTRALINKS HOLDINGS, INC
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2013

Table of Contents


CORPORATE INFORMATION AND FORWARD-LOOKING STATEMENTS
Our Corporate Information
Our business was incorporated in Delaware as "Intralinks, Inc." in June 1996. In June 2007, we completed a merger, or the Merger, pursuant to which Intralinks, Inc. became a wholly-owned subsidiary of TA Indigo Holding Corporation, a newly-formed Delaware corporation owned by TA Associates, Inc. (which is now part of TA Associates Management, L.P.) and certain other stockholders of Intralinks, Inc., including Rho Capital Partners, Inc. and then former and current officers and employees of Intralinks, Inc. The Merger was funded in part through term loans made under various credit facilities in an aggregate principal amount of $275.0 million. The Merger was accounted for under the purchase accounting method in accordance with accounting principles generally accepted in the United States of America, or GAAP. In 2010, we changed the name of TA Indigo Holding Corporation to "Intralinks Holdings, Inc." Unless otherwise stated in this Quarterly Report on Form 10-Q (also referred to as this Quarterly Report or this Form 10-Q) or the context otherwise requires, references to "Intralinks," "we," "us," "our," the "Company" and similar references refer to Intralinks Holdings, Inc. and its subsidiaries.
Intralinks®, Intralinks Courier®, Intralinks VIATM, Intralinks DealspaceTM, Intralinks StudyspaceTM, Intralinks FundspaceTM, Intralinks DebtspaceTM, Intralinks DealNexusTM, and other trademarks and service marks of Intralinks appearing in this Quarterly Report are the property of Intralinks, Inc.  Other trademarks or service marks that may appear in this Quarterly Report are the property of their respective holders.  Solely for convenience, the trademarks and trade names in this Quarterly Report are referred to without the ®, TM and SM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Forward-Looking Statement Safe Harbor
Some of the statements in this Quarterly Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our operations and are based on our current expectations, estimates and projections. Words such as "may," "will," "could," "would," "should," "anticipate," "predict," "potential," "continue," "expects," "intends," "plans," "projects," "believes," "estimates," "goals," "in our view" and similar expressions are used to identify these forward-looking statements. The forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about our internal control over financial reporting, our results of operations and financial condition and our plans, strategies and developments. Forward-looking statements are only predictions and, as such, are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events or our future financial performance that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Many of the reasons for these differences include changes that occur in our continually changing business environment and other important factors. These risks, uncertainties and other factors are more fully described under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this Form 10-Q and under the heading "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission, or the SEC, on March 11, 2013. You are strongly encouraged to read those sections carefully as the occurrence of the events described therein and elsewhere in this report could materially harm our business. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these statements speak only as of the date they were made and, except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRALINKS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and per Share Data)
(unaudited)
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
  

Current assets:
 
 
 
  

Cash and cash equivalents
 
$
44,643

 
$
43,798

Accounts receivable, net of allowances of $3,370 and $2,927, respectively
 
37,868

 
37,667

Investments
 
34,721

 
31,549

Deferred taxes
 
10,484

 
7,469

Restricted cash
 
2,442

 
—

Prepaid expenses and other current assets
 
11,127

 
8,992

Total current assets
 
141,285

 
129,475

Fixed assets, net
 
12,293

 
10,645

Capitalized software, net
 
31,558

 
26,295

Goodwill
 
215,869

 
215,478

Other intangibles, net
 
89,514

 
106,750

Other assets
 
823

 
1,111

Total assets
 
$
491,342

 
$
489,754

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
  

Current liabilities:
 
 
 
  

Accounts payable
 
$
8,021

 
$
4,451

Accrued expenses and other current liabilities
 
21,111

 
20,320

Deferred revenue
 
47,346

 
40,719

Current portion of long-term debt
 
75,328

 
1,030

Total current liabilities
 
151,806

 
66,520

Long-term debt
 
153

 
75,238

Deferred taxes
 
17,644

 
21,135

Other long-term liabilities
 
4,072

 
4,809

Total liabilities
 
173,675

 
167,702

Commitments and contingencies (Note 13)
 


 


Stockholders' equity:
 
 
 
  

Undesignated Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2013 and December 31, 2012
 
—

 
—

Common Stock, $0.001 par value; 300,000,000 shares authorized; 55,933,403 and 55,486,651 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively
 
56

 
55

Additional paid-in capital
 
426,998

 
419,618

Accumulated deficit
 
(108,865
)
 
(97,436
)
Accumulated other comprehensive loss
 
(522
)
 
(185
)
Total stockholders' equity
 
317,667

 
322,052

Total liabilities and stockholders' equity
 
$
491,342

 
$
489,754

The accompanying notes are an integral part of these consolidated financial statements.

4


INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and per Share Data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Revenue
 
$
59,116

 
$
54,753

 
$
171,879

 
$
159,303

Cost of revenue
 
15,919

 
15,209

 
47,709

 
46,935

Gross profit
 
43,197

 
39,544

 
124,170

 
112,368

Operating expenses:
 
 
 
 
 
 
 
  

Product development
 
4,878

 
5,359

 
14,236

 
15,073

Sales and marketing
 
27,122

 
23,526

 
79,310

 
70,659

General and administrative
 
13,844

 
12,453

 
41,701

 
38,812

Impairment of capitalized software
 
—

 
—

 
—

 
8,377

Total operating expenses
 
45,844

 
41,338

 
135,247

 
132,921

Loss from operations
 
(2,647
)
 
(1,794
)
 
(11,077
)
 
(20,553
)
Interest expense
 
1,242

 
1,171

 
3,516

 
5,245

Amortization of debt issuance costs
 
71

 
177

 
287

 
591

Other (income) expense, net
 
(662
)
 
(689
)
 
306

 
(1,478
)
Net loss before income tax
 
(3,298
)
 
(2,453
)
 
(15,186
)
 
(24,911
)
Income tax benefit
 
(782
)
 
(1,194
)
 
(3,757
)
 
(9,039
)
Net loss
 
$
(2,516
)
 
$
(1,259
)
 
$
(11,429
)
 
$
(15,872
)
Net loss per common share
 
 
 
 
 
 
 
 
Basic
 
$
(0.05
)
 
$
(0.02
)
 
$
(0.21
)
 
$
(0.29
)
Diluted
 
$
(0.05
)
 
$
(0.02
)
 
$
(0.21
)
 
$
(0.29
)
Weighted average number of shares used in calculating net loss per share
 
 
 
 
 
 
 
  

Basic
 
55,191,868

 
54,391,089

 
55,042,305

 
54,291,683

Diluted
 
55,191,868

 
54,391,089

 
55,042,305

 
54,291,683

 
The accompanying notes are an integral part of these consolidated financial statements.

5


INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Net loss
 
$
(2,516
)
 
$
(1,259
)
 
$
(11,429
)
 
$
(15,872
)
Foreign currency translation adjustments, net of tax
 
112

 
39

 
(337
)
 
(186
)
Total other comprehensive income (loss), net of tax
 
112

 
39

 
(337
)
 
(186
)
Comprehensive loss
 
$
(2,404
)
 
$
(1,220
)
 
$
(11,766
)
 
$
(16,058
)
 
The accompanying notes are an integral part of these consolidated financial statements.

6

INTRALINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
 
 
Nine Months Ended September 30,
  
 
2013
 
2012
Net loss
 
$
(11,429
)
 
$
(15,872
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
15,142

 
13,502

Stock-based compensation expense
 
6,225

 
4,831

Amortization of intangible assets
 
17,778

 
19,928

Amortization of deferred costs
 
1,160

 
1,335

Provision for bad debts and customer credits
 
1,058

 
1,443

Loss on disposal of fixed assets
 
—

 
16

Impairment of capitalized software
 
—

 
8,377

Deferred taxes
 
(6,298
)
 
(11,537
)
Gain on interest rate swap
 
—

 
(1,455
)
Currency remeasurement (gain) loss
 
(107
)
 
465

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(1,186
)
 
330

Prepaid expenses and other assets
 
(2,430
)
 
(3,362
)
Accounts payable
 
3,550

 
(1,612
)
Accrued expenses and other current liabilities
 
710

 
4,307

Deferred revenue
 
5,960

 
486

Net cash provided by operating activities
 
30,133

 
21,182

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(5,432
)
 
(6,882
)
Restricted cash
 
(2,443
)
 
—

Acquisition
 
(600
)
 
—

Capitalized software development costs
 
(16,575
)
 
(14,676
)
Purchase of short-term investments
 
(36,477
)
 
(31,346
)
Maturity of short-term investments
 
32,596

 
31,820

Net cash used in investing activities
 
(28,931
)
 
(21,084
)
Cash flows from financing activities:
 
 
 
 
Proceeds from exercise of stock options and issuance of common stock
 
1,155

 
476

Repayments of outstanding financing arrangements
 
(631
)
 
(300
)
Repayments of outstanding principal on long-term debt
 
(616
)
 
(15,656
)
Net cash used in financing activities
 
(92
)
 
(15,480
)
Effect of foreign exchange rate changes on cash and cash equivalents
 
(265
)
 
(236
)
Net increase (decrease) in cash and cash equivalents
 
845

 
(15,618
)
Cash and cash equivalents at beginning of period
 
43,798

 
46,694

Cash and cash equivalents at end of period
 
$
44,643

 
$
31,076

The accompanying notes are an integral part of these consolidated financial statements.

7

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)



1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Intralinks Holdings, Inc. and its subsidiaries (collectively, the "Company"). The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP" or "U.S. GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading.
The financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and related notes to audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary for the fair statement of the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results, and the results for the nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the full year or for any other period.
Out-of-period Adjustments — During the financial statement close process for the three months ended June 30, 2013, the Company identified a prior period error totaling approximately $839, which was corrected and recorded as a cumulative adjustment to long-term deferred tax assets within the Consolidated Balance Sheet at June 30, 2013, and was reflected as an income tax expense within the Consolidated Statement of Operations for the three and six months ended June 30, 2013. The Company does not believe that this adjustment is material to the consolidated financial statements for any prior period. The Company also does not believe this adjustment will be material to the Company's 2013 results.
During the financial statement close process for the three months ended March 31, 2012, the Company identified a prior period error totaling approximately $849, which was corrected and recorded as a cumulative adjustment to long-term deferred tax assets within the Consolidated Balance Sheet at March 31, 2012, and was reflected as an income tax benefit within the Consolidated Statement of Operations for the three months ended March 31, 2012. The Company does not believe that this adjustment is material to the consolidated financial statements for any prior period or to the 2012 results.
2. Summary of Significant Accounting Policies
Revenue Recognition — The Company derives revenue principally through fixed commitment contracts under which the Company provides customers various services, including access to the cloud-based Intralinks platform, which includes Intralinks exchanges, as well as related customer support and other services. The Company's customers do not have a contractual right, or the ability, to take possession of the Intralinks software at any time during the hosting period, or to contract with an unrelated third party to host the Intralinks software. Therefore, revenue recognition for the Company's services is not accounted for under specific guidance of the Financial Accounting Standards Board ("FASB") on software revenue recognition. The Company recognizes revenue for its services ratably over the related service period, provided that there is persuasive evidence of an arrangement; the service has been provided to the customer; collection is reasonably assured; the amount of fees to be paid by the customer is fixed or determinable; and the Company has no significant remaining obligation at the completion of the contracted term. In circumstances where the Company has a significant remaining obligation after completion of the initial contract term, revenue is recognized ratably over the extended service period. The Company's contracts do not contain general rights of return. Certain of the Company's contracts contain customer acceptance clauses, for which revenue is deferred until acceptance occurs.
From time to time, the Company agrees to sales concessions with its customers for which a reserve is estimated based on historical patterns of actual credits issued. Expenses associated with maintaining this reserve are recorded as a reduction to revenue, which the Company believes represents an accurate reflection of the underlying business activity for each reporting period and is in line with the requirement that all revenue recognized during the period is earned and realizable.
The Company offers services to customers through single-element and multiple-element arrangements, some of which contain offerings for optional services, including document scanning, data archiving and other professional services. In accordance with the FASB's guidance on multiple-deliverable arrangements, the Company has evaluated the deliverables in its arrangements to determine whether they represent separate units of accounting and, specifically, whether the deliverables have value to the Company's customers on a standalone basis. The Company has determined that the services delivered to customers under its

8

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


existing arrangements generally represent a single unit of accounting. Revenue for optional services is recognized as delivered, or as completed, provided that the general revenue recognition criteria described above are met. The Company continues to evaluate the nature of the services offered to customers under its fixed commitment contracts, as well as its pricing practices, to determine if a change in policy regarding multiple-element arrangements and related disclosures is warranted in future periods.
Additionally, certain contracts contain provisions for set-up and implementation services relating to the customer's use of the Intralinks platform. The Company believes that these set-up and implementation services provide value to the customer over the entire period that the exchange is active, including renewal periods, and therefore the revenue related to these set-up types of services are recognized over the longer of the contract term or the estimated relationship life. The Company will continue to evaluate from time to time the length of the amortization period of the revenue related to set up and implementation fees to determine if a change in estimate is warranted in future periods.
During the nine months ended September 30, 2013, there were no material changes to the Company's significant accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Recent Accounting Pronouncements
In June 2013, the FASB ratified accounting guidance proposed by the Emerging Issues Task Force that requires entities to present an unrecognized tax benefit net with certain deferred tax assets when specific requirements are met. The amendments in this updated guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the effect this guidance will have on its consolidated balance sheet.
3. Investments and Fair Value Measurements
The Company has classified its short-term investments in commercial paper and corporate bonds as held-to-maturity and, as such, has recorded them at amortized cost. Interest earned on these debt securities is included in "Other (income) expense, net" within the Consolidated Statements of Operations. The gross unrecognized holding gains and losses on these assets for the three and nine months ended September 30, 2013 were not material.
The following tables summarize these short-term investments as of September 30, 2013 and December 31, 2012:
 
 
 
 
 
 
September 30, 2013
Security Type
 
Maturity
 
Consolidated Balance Sheet Classification
 
Amortized Cost
Commercial Paper
 
192 Days
 
Investments (short-term)
 
$
2,398

Corporate Notes
 
37 to 318 Days
 
Investments (short-term)
 
32,323

Total
 
 
 
 
 
$
34,721

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
Security Type
 
Maturity
 
Consolidated Balance Sheet Classification
 
Amortized Cost
Corporate Bonds
 
44 to 72 Days
 
Cash and cash equivalents
 
$
2,509

Commercial Paper
 
363 Days
 
Investments (short-term)
 
2,493

Corporate Notes
 
152 to 365 Days
 
Investments (short-term)
 
29,056

Total
 
 
 
 
 
$
34,058

The fair value framework under the FASB’s guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
•
Level 1:  Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;
•
Level 2:  Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets

9

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
•
Level 3:  Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.
During the nine months ended September 30, 2013, there were no transfers in or out of the Company’s Level 1, Level 2 or Level 3 assets or liabilities.
The following tables summarize those of the Company's assets that were measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:
 
 
 
 
September 30, 2013
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Asset:
 
  

 
  

 
  

 
  

Money market funds as cash equivalents
 
$
5,124

 
5,124

 
—

 
—

 
 
 
 
December 31, 2012
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Asset:
 
  

 
  

 
  

 
  

Money market funds as cash equivalents
 
$
5,642

 
5,642

 
—

 
—

4. Goodwill and Other Intangibles
Goodwill
At September 30, 2013, the Company had recorded $215,869 of goodwill. Goodwill is assessed for impairment annually (as of October 1) or more frequently if events or changes in circumstances indicate that this asset may be impaired. The Company’s operations consist of one reporting unit, which is evaluated during each goodwill impairment assessment.
The Company's most recently completed qualitative impairment assessment is as of October 1, 2012. Among the factors included in this qualitative assessment were general economic conditions and the competitive environment, actual and expected financial performance, including consideration of the Company's revenue growth and operating results year-over-year, forward-looking business measurements, external market conditions, the Company's stock price performance compared to overall market and industry peers, market capitalization and other relevant entity-specific events.
The Company is in the process of preparing its annual goodwill impairment assessment as of October 1, 2013 and will disclose the results of this assessment in its Annual Report on Form 10-K for the fiscal year ending December 31, 2013. There have been no triggering events since the most recently completed assessment as of October 1, 2012 to indicate that the Company could be at risk of recording a goodwill impairment.
As of September 30, 2013, Other intangibles consisted of the following:
 
 
Definite – Lived Intangible Assets
  
 
Developed Technology
 
Customer Relationships
 
Trade Name
 
Non-Compete Agreement
 
Total
Net book value at December 31, 2012
 
$
35,494

 
$
63,327

 
$
7,868

 
$
61

 
$
106,750

Acquisition made during 2013
 
188

 
93

 
11

 
250

 
542

Amortization
 
(6,151
)
 
(10,646
)
 
(924
)
 
(57
)
 
(17,778
)
Net book value at September 30, 2013
 
$
29,531

 
$
52,774

 
$
6,955

 
$
254

 
$
89,514

The Company has not identified impairment for any of the definite-lived intangible assets through September 30, 2013.

10

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


Amortization of intangible assets is classified in each of the operating expense categories as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Cost of revenue
 
$
2,082

 
$
1,986

 
$
6,151

 
$
8,383

Sales and marketing
 
3,550

 
3,544

 
10,646

 
10,631

General and administrative
 
335

 
304

 
981

 
914

Total
 
$
5,967

 
$
5,834

 
$
17,778

 
$
19,928

At September 30, 2013, amortization of intangible assets for each of the next five years and thereafter is estimated to be as follows:
 
 
2013 remaining
$
5,868

2014
23,470

2015
23,470

2016
23,387

2017
11,386

2018
1,249

Thereafter
684

Total
$
89,514

5. Fixed Assets
Fixed assets consisted of the following:
 
 
September 30,
2013
 
December 31,
2012
Computer and office equipment and software
 
$
30,006

 
$
26,710

Furniture and fixtures
 
2,180

 
2,036

Leasehold improvements
 
6,358

 
4,321

Total fixed assets
 
38,544


33,067

Less: Accumulated depreciation and amortization
 
(26,251
)
 
(22,422
)
Fixed assets, net
 
$
12,293


$
10,645

No country outside of the United States holds greater than 10% of the Company’s total fixed assets. Depreciation expense relating to fixed assets for the three months ended September 30, 2013 and 2012 was $1,269 and $1,384, respectively, and was $3,829 and $3,657 for the nine months ended September 30, 2013 and 2012, respectively.
6. Capitalized Software
Capitalized software consisted of the following:
 
 
September 30,
2013
 
December 31,
2012
Capitalized software
 
$
91,291

 
$
83,432

Less: Impairment on capitalized software
 
—

 
(8,715
)
Less: Accumulated amortization
 
(59,733
)
 
(48,422
)
Capitalized software, net
 
$
31,558

 
$
26,295


11

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


Amortization expense of capitalized software for the three months ended September 30, 2013 and 2012 was $4,021 and $3,347, respectively, and was $11,313 and $9,845 for the nine months ended September 30, 2013 and 2012, respectively.
During 2012, the Company recorded an impairment loss on capitalized software of $8,715 in conjunction with its strategic review, as management decided at that time to replace certain server-based systems with SaaS-based solutions.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
 
 
September 30,
2013
 
December 31,
2012
Sales commissions and bonuses
 
$
12,549

 
$
9,838

Professional fees
 
1,591

 
2,103

Deferred rent
 
110

 
298

Accrued vacation
 
591

 
522

Other accrued expenses
 
6,270

 
7,559

Total accrued expenses and other current liabilities
 
$
21,111

 
$
20,320

8. Income Tax
The Company's effective tax rates for the three and nine month periods ended September 30, 2013 were 23.7% and 24.7%, respectively. These effective tax rates differ from the U.S. Federal statutory tax rate due primarily to non tax-deductible stock-based compensation expense for incentive stock options ("ISOs") and the Company's 2010 Employee Stock Purchase Plan ("2010 ESPP"), foreign income taxes and state and local income taxes, offset by federal and state research and development tax credits and tax benefits from ISO disqualifications. In addition, the nine month effective tax rate at September 30, 2013 was increased by the out-of-period adjustment discussed in Note 1 above.
The Company's effective tax rates for the three and nine month periods ended September 30, 2012 were 48.7% and 36.3%, respectively. These effective tax rates differ from the U.S. Federal statutory tax rate due primarily to non tax-deductible stock-based compensation expense for ISOs and the 2010 ESPP, foreign income taxes and state and local income taxes, offset by state research and development tax credits and tax benefits from ISO disqualifications.
In the second quarter of 2013, the Company concluded an audit by the U.S. Internal Revenue Service (“IRS”) of its U.S. Federal income tax returns for the years ended December 31, 2006 through 2009. The Company received Notices of Proposed Adjustments for 2006, 2007 and 2008 from the IRS disallowing $58.3 million of foreign branch losses on the basis that they constitute dual consolidated losses in the U.S. and the IRS is asserting that the Company is not entitled to reasonable cause relief for late election filings. The Company disagrees with the proposed adjustments and has filed an appeal. Management believes that it is more likely than not that the Company's position with respect to these adjustments will be sustained.

Unrecognized tax benefits totaled $3,847 and $3,335 at September 30, 2013 and December 31, 2012, respectively. Management does not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
The Company's tax reserves for uncertain tax positions of $4,005 (including interest and penalties of $158) are included within “Other long term liabilities” on the September 30, 2013 Consolidated Balance Sheet.
9. Debt
Debt consisted of the following:

12

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


 
 
September 30,
2013
 
December 31,
2012
First Lien Credit Agreement ("First Lien Credit Facility")
 
$
75,103

 
$
75,719

Other financing arrangements
 
378

 
549

Less: current portion (First Lien Credit Facility)
 
(75,103
)
 
(821
)
Less: current portion (Other financing arrangements)
 
(225
)
 
(209
)
Total long-term debt
 
$
153

 
$
75,238

In the second quarter of 2013, the Company classified the balance of $75,103 of long-term debt related to the First Lien Credit Facility to current liabilities because the First Lien Credit Facility expires June 15, 2014. Based on available market information, the estimated fair value of the Company’s total debt was approximately $75,385 and $76,647 as of September 30, 2013 and December 31, 2012, respectively. These fair value measurements were determined using Level 2 observable inputs. The estimated fair value of the Company’s other financing arrangements approximates the carrying value at each reporting period.
First Lien Credit Facility
The First Lien Credit Facility provides for term loans in the aggregate principal amount of $135,000. Principal payments are due on the last day of each quarter, with the first payment made on September 30, 2007 and the final installment (which will include the remaining balance) due on June 15, 2014. Additionally, the First Lien Credit Facility includes a requirement for mandatory prepayments based on annual excess free cash flow. Term loans under the First Lien Credit Facility, as amended, bear interest at the higher of the Eurodollar Rate (as defined in the agreement) or 1.50%, plus 4.50% per annum. At September 30, 2013, the interest rate on the First Lien Credit Facility was 6.00%. At September 30, 2012, the interest rate on the First Lien Credit Facility was 5.75%.
The First Lien Credit Facility limits annual consolidated capital expenditures, including amounts related to capitalized software, and restricts the ability to borrow against the now expired revolving line of credit if a consolidated EBITDA ratio is not achieved. The agreement also contains other positive and negative covenants. The Company was in compliance with these covenants as of September 30, 2013 and December 31, 2012.
On April 6, 2012, the Company entered into Amendment No. 3 (the "Third Amendment") to the First Lien Credit Facility. The Third Amendment amends certain provisions of the First Lien Credit Facility to, among other things, increase the capital expenditures limit from $21,000 to $35,000 per year through the remainder of the term. As provided for in the Third Amendment, the Company prepaid $15,000 of the outstanding balance on the First Lien Credit Facility. As a result, the quarterly installment payment beginning June 30, 2012 decreased from $246 to $205 for the remaining term of the loan.
The First Lien Credit Facility also provided for a $15,000 revolving line of credit, which expired on June 15, 2013. The obligations previously covered by the Company's revolving line of credit, which were primarily related to the Company's operating lease agreements for its various office locations, were replaced under a separate cash collateralized facility under which the Company originally provided the bank with $2,464 and they provided certain of the Company's landlords with separate letters of credit for each location. The cash collateral balance is $2,442 at September 30, 2013. This facility expires on June 3, 2014 and as such is classified as current restricted cash on the Company's Consolidated Balance Sheet. In May 2013, a requirement for a $800 standby letter of credit related to the Company's corporate charge card utilized by executives and certain other employees was terminated.
10. Employee Stock Plans
Stock-based compensation expense is measured at the grant date, based on the fair value of the award and recognized as expense over the requisite service period, net of an estimated forfeiture rate. The Company maintains several stock-based compensation plans, which are more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

13

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


Total stock-based compensation expense related to all of the Company’s stock awards is classified in each of the operating expense categories as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Cost of revenue
 
$
194

 
$
121

 
$
511

 
$
321

Product development
 
342

 
368

 
973

 
1,041

Sales and marketing
 
359

 
225

 
981

 
825

General and administrative
 
1,202

 
1,081

 
3,760

 
2,644

Total
 
$
2,097

 
$
1,795

 
$
6,225

 
$
4,831

2010 Employee Stock Purchase Plan
As originally adopted in 2010, a maximum of 400,000 shares of the Company's Common Stock had been reserved for issuance under the Company's 2010 Employee Stock Purchase Plan (the "ESPP"). On August 9, 2013, the Company's stockholders approved a proposal that resulted in an additional 600,000 shares being made available for issuance under the ESPP, resulting in an aggregate of 1,000,000 shares being available for issuance under the ESPP. As of August 9, 2013, there were 633,261 shares available for grant under the ESPP.
During the three months ended September 30, 2013, 29,807 shares were issued under the ESPP at a price of $6.23 which represented 85% of the market price of the Common Stock on July 1, 2013, the offering date, which was lower than the market price of the Common Stock on September 30, 2013, which was the exercise date.
11. Net Loss per Share
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share of Common Stock:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Numerator:
 
  

 
  

 
  

 
  

Net loss
 
$
(2,516
)
 
$
(1,259
)
 
$
(11,429
)
 
$
(15,872
)
Denominator:
 
  

 
  

 
  

 
  

Basic shares:
 
  

 
  

 
  

 
  

Weighted-average common shares outstanding
 
55,191,868

 
54,391,089

 
55,042,305

 
54,291,683

Diluted shares:
 
  

 
  

 
  

 
  

Weighted-average shares used to compute basic net loss per share
 
55,191,868

 
54,391,089

 
55,042,305

 
54,291,683

Effect of potentially dilutive securities:
 
  

 
  

 
  

 
  

Options to purchase Common Stock
 
—

 
—

 
—

 
—

Unvested shares of RSAs
 
—

 
—

 
—

 
—

Unvested shares of RSUs
 
—

 
—

 
—

 
—

Weighted-average shares used to compute diluted net loss per share
 
55,191,868

 
54,391,089

 
55,042,305

 
54,291,683

Net loss per share:
 
  

 
  

 
  

 
  

Basic
 
$
(0.05
)
 
$
(0.02
)
 
$
(0.21
)
 
$
(0.29
)
Diluted
 
$
(0.05
)
 
$
(0.02
)
 
$
(0.21
)
 
$
(0.29
)

14

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


The following outstanding options to purchase Common Stock, unvested shares under restricted stock awards and unvested shares issuable upon settlement of restricted stock units were excluded from the computation of diluted net loss per share for the periods presented as their effect would have been antidilutive:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Options to purchase Common Stock
 
5,251,770

 
5,869,080

 
5,251,770

 
5,869,080

Unvested shares of RSAs
 
577,449

 
673,381

 
577,449

 
673,381

Unvested shares issuable upon settlement of RSUs
 
1,240,548

 
460,846

 
1,240,548

 
460,846

12. Related Party Transactions
Affiliates of one of the Company's largest shareholders, TA Associates, L.P. (which is now part of TA Associates Management, L.P.), are also customers of the Company. These affiliates made payments to the Company in connection with their purchase of its services using the Intralinks platform. Revenue generated from TA Associates, L.P. and its affiliates for the three and nine months ended September 30, 2013 totaled approximately $60 and $175, respectively. Revenue generated from TA Associates, L.P. and its affiliates for the three and nine months ended September 30, 2012 totaled approximately $49 and $146, respectively. At September 30, 2013, amounts due from TA Associates, L.P. and its affiliates totaled approximately $5. There were no amounts due from TA Associates, L.P. at December 31, 2012.
13. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries are subject to various claims, charges, disputes, litigation and regulatory inquiries and investigations. These matters, if resolved adversely against the Company, may result in monetary damages, fines and penalties or require changes in business practices. The Company is not currently aware of any pending or threatened material claims, charges, disputes, litigation and regulatory inquiries and investigations except as follows:
Securities Class Action. On December 5, 2011, the Company became aware of a purported class action lawsuit filed in the U.S. District Court for the Southern District of New York (the "SDNY" or the "Court") against the Company and certain of its then current and former executive officers. The initial complaint (the "Wallace Complaint") alleges that the defendants made false and misleading statements or omissions in violation of the Securities Exchange Act of 1934, as amended. The plaintiff seeks unspecified compensatory damages for the purported class of purchasers of the Company's Common Stock during the period from February 17, 2011 through November 10, 2011 (the "Allegation Period"). On December 27, 2011, a second purported class action complaint, which makes substantially the same claims as, and is related to, the Wallace Complaint, was filed in the SDNY against the Company and certain of its current and former executive officers seeking similar unspecified compensatory damages for the Allegation Period.  On April 3, 2012, the Court consolidated the actions and appointed Plumbers and Pipefitters National Pension Fund as lead plaintiff, and also appointed lead counsel in the consolidated action ("Consolidated Class Action").  On June 15, 2012, the lead plaintiff filed an amended complaint (“Consolidated Class Action Complaint”), that in addition to the original allegations made in the Wallace Complaint, alleges that the Company, certain of its current and former officers and directors, and the underwriters in the Company's April 6, 2011 stock offering issued a registration statement and prospectus in connection with the offering that contained untrue statements of material fact or omitted material information required to be stated therein in violation of the Securities Act of 1933, as amended.  The defendants filed their motion to dismiss the action on July 31, 2012, and in response to the lead plaintiff’s opposition to the defendants' motions, which was filed on September 17, 2012, the defendants filed their replies to plaintiff's opposition on October 10, 2012.  On May 8, 2013, the Court issued an opinion dismissing claims based on certain allegations in the complaint, but otherwise denied defendants' motions to dismiss.  On June 28, 2013, defendants filed their answers to the Consolidated Class Action Complaint. On October 15, 2013, the Court entered the parties’ pretrial scheduling stipulation, which provided, inter alia, that the parties would fully brief any motions for summary judgment by February 17, 2015. The Company believes that these claims are without merit and intends to defend these lawsuits vigorously.
Dixon Derivative Action.  On December 28, 2011, a shareholder derivative complaint was filed in the SDNY against the Company and certain of its current and former directors. The complaint (the "Dixon Action") alleges that the defendants breached their fiduciary duties by causing the Company to issue materially false and misleading statements about the Company's business prospects, financial condition and performance during the same Allegation Period alleged in the Consolidated Class Action

15

INTRALINKS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and per Share Data)
(unaudited)


Complaint. On June 6, 2013, the parties filed a stipulation with the SDNY agreeing to stay all proceedings in the Dixon Action, including discovery, until ninety days after the SDNY issues a scheduling order in the Consolidated Class Action. The Company believes that the claims in the Dixon Action are without merit and intends to defend this lawsuit vigorously.
Horbal Derivative Action. On April 16, 2012, a second shareholder derivative complaint (the "Horbal Action") was filed in the Supreme Court of the State of New York in New York County ("New York State Court") against the Company and certain of its current and former directors and officers. The Horbal Action makes substantially the same claims as, and is related to, the Dixon Action, except that it alleges violations of state law. On April 24, 2012, one of the director defendants removed the Horbal Action to the SDNY, and on May 7, 2012, it was assigned to the same judge as in the Dixon Action. On May 22, 2012, the plaintiff in the Horbal Action moved to remand the case to New York State Court. On June 8, 2012, defendant filed an opposition to remand, and the plaintiff filed a reply on June 15, 2012. On March 11, 2013, the SDNY granted plaintiff's motion to remand, and the case is currently pending in New York State Court. On June 6, 2013, the parties filed a stipulation with the New York State Court agreeing to stay all proceedings in the Horbal Action, including discovery, until ninety days after the SDNY issues a scheduling order in the Consolidated Class Action. The Company believes the claims in the Horbal Action are without merit and intends to defend this lawsuit vigorously.
Levine Shareholder Demand Letter. The Company received a shareholder demand letter, dated May 16, 2013, demanding that the Company's Board take action to remedy alleged breaches of fiduciary duty by current and former directors and officers of the Company. These alleged breaches are based on the same alleged misconduct in the complaints in the Dixon, Horbal, and Consolidated Class Actions. The letter specifically demands that the Company's Board undertake an independent internal investigation into the alleged breaches and commence a civil action against each of the allegedly breaching current and former directors and officers. On June 26, 2013, the Company's Board created a Demand Committee to conduct an investigation into the allegations in the Levine demand letter.
SEC Investigation.  On July 10, 2013, the Company announced that it received written notification from the SEC that the SEC's investigation into the Company, as previously disclosed, has been terminated and that no enforcement action has been recommended against the Company. The investigation commenced on August 4, 2011 upon the SEC's request for certain documents related to the Company's business from January 1, 2011 through August 4, 2011.

16

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as well as our reports on Form 8-K and other publicly available information. Amounts in tabular format are presented in thousands, except per share data, or as otherwise indicated.
Executive Overview
Intralinks is a leading global provider of Software-as-a-Service, or SaaS, solutions for secure content management and collaboration within and among organizations. Our cloud-based solutions enable organizations to control, track, search, exchange and collaborate on time-sensitive information inside and outside the firewall, all within a secure and easy-to-use environment. Our customers rely on our cost-effective solutions to manage large amounts of confidential electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflow, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner. We help our customers eliminate many of the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information.
At our founding in 1996, we introduced cloud-based collaboration for the debt capital markets industry and, shortly thereafter, extended our solutions to merger and acquisition transactions. Today, we service enterprises and governmental agencies in over 60 countries across a variety of industries, including financial services, pharmaceutical, manufacturing, biotechnology, consumer, energy, telecommunications, industrial, legal, accounting, agriculture, insurance, real estate and technology, which use our solutions for the secure management and online exchange of information within and among organizations. Across all of our principal markets, we help transform a wide range of slow, expensive and information-intensive tasks into streamlined, efficient and real-time business processes.
We deliver our solutions entirely through a multi-tenant SaaS architecture in which a single instance of our software serves all of our customers. We sell our solutions directly through a field team with industry-specific expertise and an inside sales team, and indirectly through a customer referral network and channel partners. During the nine months ended September 30, 2013, we generated $171.9 million in revenue, of which approximately 41% was derived from sales across 66 countries outside of the United States.
During 2012, management initiated a business strategy review to explore long-term growth opportunities. The objective was to assess the competitive environment, identify the most attractive market opportunities, define a product roadmap and further develop our execution strategy. We have made significant progress in validating our market opportunities and aligning the Company to effectively address them. In addition, we review our strategy on a periodic basis and make adjustments as we deem necessary and appropriate. Our strategic assessments reinforce our commitment to anticipate the changing needs of our customers, industry trends and competitive forces.
Key Metrics
We evaluate our operating and financial performance using various performance indicators, as well as against the macroeconomic trends affecting the demand for our solutions in our principal markets. We also monitor relevant industry performance, including transactional activity in the debt capital markets, or DCM, and the mergers and acquisitions, or M&A, market globally, to provide insight into the success of our sales activities as compared to our peers and to estimate our market share in each of our principal markets.
Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue under "Results of Operations," and cash flow provided by operating activities, including deferred revenue, under "Liquidity and Capital Resources." Other measures of our performance, including adjusted gross profit, adjusted operating income, adjusted net income, adjusted EBITDA and adjusted EBITDA margin and free cash flow are defined and discussed under "Non-GAAP Financial Measures" below.

17

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Consolidated Statement of Operations Data:
 
 
 
  

 
 
 
  

Total revenue
 
$
59,116

 
$
54,753

 
$
171,879

 
$
159,303

Non-GAAP gross profit
 
$
45,473

 
$
41,651

 
$
130,832

 
$
121,072

Non-GAAP gross margin
 
76.9
%
 
76.1
%
 
76.1
%
 
76.0
%
Non-GAAP adjusted operating income
 
$
5,417

 
$
5,835

 
$
12,926

 
$
12,583

Non-GAAP adjusted net income
 
$
2,955

 
$
3,209

 
$
5,467

 
$
5,129

Non-GAAP adjusted EBITDA
 
$
10,707

 
$
10,567

 
$
28,068

 
$
26,085

Non-GAAP adjusted EBITDA margin
 
18.1
%
 
19.3
%
 
16.3
%
 
16.4
%
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
Deferred revenue at September 30 (1)
 
$
47,346

 
$
40,719

 
$
47,346

 
$
40,719

Consolidated Statement of Cash Flows Data:
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
10,376

 
$
2,457

 
$
30,133

 
$
21,182

Free cash flow
 
$
2,494

 
$
(2,830
)
 
$
8,126

 
$
(376
)
 
 
 
 
 
 
 
 
 
(1) Current portion only
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures
This Form 10-Q includes information about certain financial measures that are not prepared in accordance with generally accepted accounting principles in the United States, or GAAP or U.S. GAAP, including non-GAAP gross profit and gross margin, non-GAAP adjusted operating income, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and margin and free cash flow. These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies.
Management defines its non-GAAP financial measures as follows:
•
Non-GAAP gross profit represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense and (2) amortization of intangible assets, if any.
•
Non-GAAP adjusted operating income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs and (4) costs related to public stock offerings, if any.
•
Non-GAAP adjusted net income represents the corresponding GAAP measure adjusted to exclude (1) stock-based compensation expense, (2) amortization of intangible assets, (3) impairment charges or asset write-offs, (4) costs related to debt repayments and (5) costs related to public stock offerings, if any. Non-GAAP adjusted net income is calculated using an estimated long-term effective tax rate.
•
Non-GAAP net income per share represents non-GAAP adjusted net income (which is defined above) divided by fully diluted weighted average shares outstanding.
•
Non-GAAP adjusted EBITDA represents net loss adjusted to exclude (1) interest expense, (2) income tax provision (benefit), (3) depreciation and amortization, (4) amortization of intangible assets, (5) stock-based compensation expense, (6) amortization of debt issuance costs, (7) other (income) expense, net, (8) impairment charges or asset write-offs and (9) costs related to public stock offerings, if any.
•
Free cash flow represents net cash provided by operating activities less capital expenditures and capitalized software development costs.
Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. In addition, free cash flow provides management with useful information for managing the cash needs of our business. Management also believes that these non-GAAP financial measures provide a more meaningful comparison of our operating results against those of other companies in our industry, as well as on a period-to-period basis, because these measures exclude items that are not representative of our operating performance, such as amortization of intangible assets, interest expense and fair value adjustments to the interest rate swap that matured as of June 30, 2012. Management believes that including these costs in our results of operations results in a lack of comparability between our operating results and

18

those of our peers in the industry, the majority of which are not highly leveraged and do not have comparable amortization expense related to intangible assets. However, non-GAAP gross profit, non-GAAP adjusted operating income, non-GAAP adjusted net income, non-GAAP adjusted net income per share, non-GAAP adjusted EBITDA and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered as substitutes for or superior to gross profit, loss from operations, net loss and net cash provided by operating activities as indicators of operating performance.
The table below provides reconciliations of U.S. GAAP financial measures to the non-GAAP financial measures discussed above:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Gross profit
 
$
43,197

 
$
39,544

 
$
124,170

 
$
112,368

Gross margin
 
73.1
%
 
72.2
%
 
72.2
%
 
70.5
%
Cost of revenue – stock-based compensation expense
 
194

 
121

 
511

 
321

Cost of revenue – amortization of intangible assets
 
2,082

 
1,986

 
6,151

 
8,383

Non-GAAP gross profit
 
$
45,473

 
$
41,651

 
$
130,832

 
$
121,072

Non-GAAP gross margin
 
76.9
%
 
76.1
%
 
76.1
%
 
76.0
%
Loss from operations
 
$
(2,647
)
 
$
(1,794
)
 
$
(11,077
)
 
$
(20,553
)
Stock-based compensation expense
 
2,097

 
1,795

 
6,225

 
4,831

Amortization of intangible assets
 
5,967

 
5,834

 
17,778

 
19,928

Impairment on capitalized software
 
—

 
—

 
—

 
8,377

Non-GAAP adjusted operating income
 
$
5,417

 
$
5,835

 
$
12,926

 
$
12,583

Net loss before income tax
 
$
(3,298
)
 
$
(2,453
)
 
$
(15,186
)
 
$
(24,911
)
Stock-based compensation expense
 
2,097

 
1,795

 
6,225

 
4,831

Amortization of intangible assets
 
5,967

 
5,834

 
17,778

 
19,928

Impairment on capitalized software
 
—

 
—

 
—

 
8,377

Costs related to debt repayments
 
—

 
—

 
—

 
47

Non-GAAP adjusted net income before tax
 
4,766

 
5,176

 
8,817

 
8,272

Non-GAAP income tax provision
 
1,811

 
1,967

 
3,350

 
3,143

Non-GAAP adjusted net income
 
$
2,955

 
$
3,209

 
$
5,467

 
$
5,129

Net loss
 
$
(2,516
)
 
$
(1,259
)
 
$
(11,429
)
 
$
(15,872
)
Interest expense
 
1,242

 
1,171

 
3,516

 
5,245

Income tax benefit
 
(782
)
 
(1,194
)
 
(3,757
)
 
(9,039
)
Depreciation and amortization
 
5,290

 
4,732

 
15,142

 
13,502

Amortization of intangible assets
 
5,967

 
5,834

 
17,778

 
19,928

Stock-based compensation expense
 
2,097

 
1,795

 
6,225

 
4,831

Impairment on capitalized software
 
—

 
—

 
—

 
8,377

Amortization of debt issuance costs
 
71

 
177

 
287

 
591

Other (income) expense, net(1)
 
(662
)
 
(689
)
 
306

 
(1,478
)
Non-GAAP adjusted EBITDA
 
$
10,707

 
$
10,567

 
$
28,068

 
$
26,085

Non-GAAP adjusted EBITDA margin
 
18.1
%
 
19.3
%
 
16.3
%
 
16.4
%
Net cash provided by operating activities
 
$
10,376

 
$
2,457

 
$
30,133

 
$
21,182

Capital expenditures
 
(2,143
)
 
(963
)
 
(5,432
)
 
(6,882
)
Capitalized software development costs
 
(5,739
)
 
(4,324
)
 
(16,575
)
 
(14,676
)
Free cash flow
 
$
2,494

 
$
(2,830
)
 
$
8,126

 
$
(376
)
                       
(1) 
"Other (income) expense, net" primarily includes foreign currency transaction gains and losses and fair value adjustments to the interest rate swap that matured as of June 30, 2012.

19

Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an ongoing basis. The following accounting estimates are viewed by management to be critical because they require significant judgment on the part of management. Management has discussed and reviewed the development, selection and disclosure of critical accounting estimates with our Audit Committee.
Among the estimates we review, we evaluate those related to the determination of the fair value of stock options and estimated forfeitures of equity-based awards, the fair value of our reporting unit, valuation of intangible assets (and their related useful lives), fair value of financial instruments, certain components of the income tax provisions, including valuation allowances on our deferred tax assets, accruals for certain compensation expenses, allowances for doubtful accounts and reserves for customer credits. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Financial results could be materially different if other methodologies were used or if management modified its assumptions.
During the nine months ended September 30, 2013, there were no material changes to our significant accounting policies from those contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The following is a discussion of our revenue recognition accounting policy and our goodwill impairment analysis.
Revenue Recognition
We derive revenue principally through fixed commitment contracts under which we provide customers various services, including access to our cloud-based Intralinks platform, which includes our Intralinks exchanges, as well as related customer support and other services.
We currently sell our services under service contracts that we consider either "subscription" or "transaction" arrangements, as follows:
•
Subscription arrangements include those customer contracts with an initial term of 12 months or more that automatically renew for successive terms of at least 12 months. Because some long-term customers will not accept automatic renewal terms, we also consider among our subscription customers those whose contracts have been extended upon mutual agreement for at least one renewal term of at least 12 months. We believe subscription arrangements appeal mainly to customers that have integrated our service into their business processes and plan to use our service offerings for a series of expected projects or on an ongoing basis. Subscription arrangements afford customers of our exchange products several benefits, including the ability to manage the creation, opening and closing of any number of exchanges at their convenience during the commitment period, and potentially lower pricing than they would generally be charged under a single-event contract.
•
Transaction arrangements include those customer contracts having an initial term of less than 12 months. We also consider transaction customers to be those first-time customers whose contracts do not have an automatic renewal clause and who have not yet renewed their contracts by mutual agreement. We believe these types of arrangements appeal mainly to customers who have a single discrete project. Unlike subscription contracts, which generally renew for at least one year at a time, transaction contracts continue in effect after their initial term on a month-to-month basis, until the customer terminates, often by closing the relevant exchange.
Revenue from both subscription and transaction contracts is recognized ratably over the contracted service period, provided that there is persuasive evidence of an arrangement, the service has been provided to the customer, collection is reasonably assured, the amount of fees to be paid by the customer is fixed or determinable and we have no significant remaining obligation at the completion of the contracted term. In circumstances where we have a significant remaining obligation after completion of the initial contract term, revenue is recognized ratably over the extended service period. Our contracts do not contain general rights of return. Certain of our contracts contain customer acceptance clauses, in which case revenue is deferred until acceptance occurs.
Under most subscription arrangements for our exchange offering, an annual fixed commitment fee is determined based on the aggregate value of the expected number of exchanges required over the term, the type of exchanges expected to be opened, the number of users that are expected to access each exchange and the volume of data expected to be managed in the exchanges. We bill customers with annual commitment fees in advance, generally in four equal quarterly installments. Similarly, a transaction contract for a single project will have a fee covering services for the expected duration of the project, for which we generally bill customers in full, in advance, upon the commencement of the contract. Subscription and transaction fees payable in advance are recorded initially in accounts receivable, or cash upon their collection, and deferred revenue, until such time that the relevant revenue recognition criteria have been met for such amounts to be included in revenue.

20

Annual subscription fees, as well as the fixed fees payable upfront under transaction contracts, are payable in full and are non-refundable regardless of actual usage of services. Similarly, while customers may close exchanges and cease using services, our contracts generally do not allow for cancellation or termination for convenience during the contract term. We reserve the right under subscription and transaction contracts to charge customers for loading data or adding users to exchanges in excess of their original usage estimates. Incremental fees for overages are billed monthly or quarterly in arrears and the related revenue is recognized ratably from the point that the overage is measured through the remaining contract term, or the remaining contract quarter, depending on the usage terms within the customer contract.
Our customers do not have a contractual right, or the ability, to take possession of the Intralinks software at any time during the hosting period, or to contract with an unrelated third party to host the Intralinks software. Therefore, revenue recognition for our services is not accounted for under the FASB's specific guidance on software revenue recognition. We recognize revenue for our services ratably over the related service period, as described above.
We offer our services to customers through single-element and multiple-element arrangements, some of which contain offerings for optional services, including document scanning, data archiving and other professional services. In accordance with the FASB's guidance on multiple-deliverable arrangements, we have evaluated the deliverables in our arrangements to determine whether they represent separate units of accounting and, specifically, whether the deliverables have value to our customers on a standalone basis. We have determined that the services delivered to customers under our existing arrangements generally represent a single unit of accounting. Revenue for optional services is recognized as delivered, or as completed, provided that the general revenue recognition criteria described above are met. We will continue to evaluate the nature of the services offered to customers under our fixed commitment contracts, as well as our pricing practices, to determine if a change in policy regarding multiple-element arrangements and related disclosures is warranted in future periods.
Additionally, certain of our customer contracts contain provisions for set-up and implementation services relating to the customer's use of our platform. We believe that these set-up and implementation services provide value to the customer over the entire period that the exchange is active, including renewal periods, and therefore the revenue related to these services is recognized over the longer of the contract term or the estimated relationship life. We continue to evaluate from time to time the length of the amortization period of the revenue related to set up and implementation fees, as we gain more experience with customer contract renewals.
From time to time, we agree to sales concessions with our customers, a reserve for which is estimated based on historical patterns of actual credits issued. Expenses associated with maintaining this reserve are recorded as a reduction to revenue.
Deferred revenue represents the billed but unearned portion of existing contracts for services to be provided. Deferred revenue does not include the unbilled portion of existing contractual commitments of our customers. Accordingly, the deferred revenue balance does not represent the total contract value of outstanding arrangements. Amounts that have been invoiced but not yet collected are recorded as revenue or deferred revenue, as appropriate, and are included in our accounts receivable balances. Deferred revenue that will be recognized during the subsequent 12-month period is classified as "Deferred revenue," with the remaining portion as non-current deferred revenue as a component of "Other long term liabilities" on our Consolidated Balance Sheets.
Goodwill Impairment Analysis
At September 30, 2013, we had $215.9 million of goodwill. Goodwill is assessed for impairment annually (as of October 1) or more frequently if events or changes in circumstances indicate that this asset may be impaired. Our operations consist of one reporting unit, which is evaluated during each goodwill impairment assessment.
Our most recently completed qualitative impairment assessment is as of October 1, 2012. Among the factors included in this qualitative assessment were general economic conditions and the competitive environment, actual and expected financial performance, including consideration of our revenue growth and operating results year-over-year, forward-looking business measurements, external market conditions, our stock price performance compared to overall market and industry peers, market capitalization and other relevant entity-specific events.
We are in the process of preparing our annual goodwill impairment assessment as of October 1, 2013 and will disclose the results of this assessment in our Annual Report on Form 10-K for the fiscal year ending December 31, 2013. There have been no triggering events since the most recently completed assessment as of October 1, 2012 to indicate that we could be at risk of recording a goodwill impairment.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. When performing the quantitative analysis, we utilize valuation techniques consistent with the income approach and market approach to measure fair value for purposes of impairment testing. An estimate of fair value can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates, including the expected operational performance of our business in the future, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows — including sales growth, pricing of our services, market penetration, competition, technological obsolescence, fair value of net operating loss carryforwards and discount rates — are

21

consistent with our internal planning. Significant changes in these estimates and the related assumptions, or changes in qualitative factors affecting us in the future, could result in an impairment charge related to our goodwill.
Recent Accounting Pronouncements
In June 2013, the FASB ratified accounting guidance proposed by the Emerging Issues Task Force that requires entities to present an unrecognized tax benefit net with certain deferred tax assets when specific requirements are met. The amendments in this updated guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the effect this guidance will have on our consolidated balance sheet.
Results of Operations
The following table sets forth consolidated statements of operations data for each of the periods indicated as a percentage of total revenue.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
Total revenue
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
 
26.9
 %
 
27.8
 %
 
27.8
 %
 
29.5
 %
Gross profit
 
73.1
 %
 
72.2
 %
 
72.2
 %
 
70.5
 %
Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
8.3
 %
 
9.8
 %
 
8.3
 %
 
9.5
 %
Sales and marketing
 
45.9
 %
 
43.0
 %
 
46.1
 %
 
44.4
 %
General and administrative
 
23.4
 %
 
22.7
 %
 
24.3
 %
 
24.4
 %
Impairment of capitalized software
 
—
 %
 
—
 %
 
—
 %
 
5.3
 %
Total operating expenses
 
77.5
 %
 
75.5
 %
 
78.7
 %
 
83.4
 %
Loss from operations
 
(4.5
)%
 
(3.3
)%
 
(6.4
)%
 
(12.9
)%
Interest expense
 
2.1
 %
 
2.1
 %
 
2.0
 %
 
3.3
 %
Amortization of debt issuance costs
 
0.1
 %
 
0.3
 %
 
0.2
 %
 
0.4
 %
Other expense (income), net
 
(1.1
)%
 
(1.3
)%
 
0.2
 %
 
(0.9
)%
Net loss before income tax
 
(5.6
)%
 
(4.5
)%
 
(8.8
)%
 
(15.6
)%
Income tax benefit
 
(1.3
)%
 
(2.2
)%
 
(2.2
)%
 
(5.7
)%
Net loss
 
(4.3
)%
 
(2.3
)%
 
(6.6
)%
 
(10.0
)%

22

Comparison of the Three Months Ended September 30, 2013 and 2012
Revenue
Total revenue was $59.1 million for the three months ended September 30, 2013, up $4.4 million or 8.0% from the $54.8 million for the three months ended September 30, 2012, primarily due to a 19.9% increase in M&A revenue. The following table sets forth revenue by principal market for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, the percentage increase or decrease between those periods, and the percentage of total revenue that each principal market represented for those periods:
 
 
 
 
 
 
 
 
 
 
% Revenue
  
 
Three Months Ended September 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
Three Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
M&A
 
$
28,670

 
$
23,905

 
$
4,765

 
19.9
 %
 
48.5
%
 
43.7
%
Enterprise
 
23,246

 
23,822

 
(576
)
 
(2.4
)%
 
39.3
%
 
43.5
%
DCM
 
7,200

 
7,026

 
174

 
2.5
 %
 
12.2
%
 
12.8
%
Total revenue
 
$
59,116

 
$
54,753

 
$
4,363

 
8.0
 %
 
100
%
 
100
%
M&A — The results for the three months ended September 30, 2013 reflect an increase in M&A revenue of $4.8 million, or 19.9%, as compared to the three months ended September 30, 2012. The increase in M&A revenue reflects larger deal sizes, increased deal count and a gain in market share.
Enterprise — The results for the three months ended September 30, 2013 reflect a decrease in Enterprise revenue of $0.6 million, or 2.4%, as compared to the three months ended September 30, 2012. The anticipated decrease in Enterprise revenue resulted from the impact of our continued focus on refreshing and repositioning our products, including the need for enhanced functionality.
DCM — The results for the three months ended September 30, 2013 reflect an increase in DCM revenue of $0.2 million, or 2.5%, as compared to the three months ended September 30, 2012. The increase in DCM revenue primarily reflects the impact of a higher volume of loan syndication market transactions during the third quarter, partially offset by the net cumulative impact of 2012 cancellations.
We believe our revenue growth will be driven, barring unforeseen circumstances, by our ongoing investments in our platform and in enhanced service offerings such as our Intralinks VIA offering, by improving our mid-market advisory firm coverage, by expanding our focus on underrepresented geographies and by increasing our overall market share in our strategic transactions business.  We believe that our continued investments in our platform, services and operational infrastructure will allow us to service a greater number of clients more efficiently, including those with larger-scale requirements.
Cost of Revenue and Gross Profit
The following table presents cost of revenue, gross profit and gross margin for the three months ended September 30, 2013 compared to the three months ended September 30, 2012:
 
 
Three Months Ended September 30,
 
Increase
 
% Increase
  
 
2013
 
2012
 
Cost of revenue
 
$
15,919

 
$
15,209

 
$
710

 
4.7
%
Gross profit
 
$
43,197

 
$
39,544

 
$
3,653

 
9.2
%
Gross margin
 
73.1
%
 
72.2
%
 
 
 
0.9
%
Cost of revenue for the three months ended September 30, 2013 increased $0.7 million, or 4.7%, as compared to the three months ended September 30, 2012, primarily due to a $0.8 million increase in depreciation and amortization related primarily to the enhancement of our service offerings since the second quarter. Gross margin increased 0.9% due to the fact that revenue increased by $4.4 million, driven primarily by increased revenue related to our M&A business, which was somewhat offset by a $0.7 million increase in cost of revenue.

23

Operating Expenses
Total operating expenses for the three months ended September 30, 2013 increased by approximately $4.5 million, or 10.9%, as compared to the three months ended September 30, 2012. The following table presents the components of operating expenses for the three months ended September 30, 2013 compared to the three months ended September 30, 2012:
 
 
Three Months Ended September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
  
 
2013
 
2012
 
Product development
 
$
4,878

 
$
5,359

 
$
(481
)
 
(9.0
)%
Sales and marketing
 
27,122

 
23,526

 
3,596

 
15.3
 %
General and administrative
 
13,844

 
12,453

 
1,391

 
11.2
 %
Total operating expenses
 
$
45,844

 
$
41,338

 
$
4,506

 
10.9
 %
Product Development — The results for the three months ended September 30, 2013 reflect a decrease in product development expense of $0.5 million, or 9.0%, as compared to the three months ended September 30, 2012, primarily driven by a $0.8 million decrease in salaries and related expense that resulted from (i) a greater percentage of product development costs being capitalized, including work on Intralinks VIA, our new Enterprise-related content sharing and collaborative solution, as well as development of enhanced functionality in our DCM and M&A products, and (ii) the transfer of certain employees from our product development group to our general and administrative group, which occurred in 2013. This decrease was partially offset by an increase in consulting expense of $0.6 million, primarily product architectural work related to Intralinks VIA.
Sales and Marketing — The results for the three months ended September 30, 2013 reflect an increase in sales and marketing expense of $3.6 million, or 15.3%, as compared to the three months ended September 30, 2012. The increase in sales and marketing expense was primarily driven by (i) an increase of $2.3 million in salaries, commissions and related expense mostly from increased headcount and incentive compensation accruals, and (ii) an increase of $1.0 million of travel and entertainment expense related to the timing of our annual sales conference and the launch of our Intralinks VIA offering.
General and Administrative — The results for the three months ended September 30, 2013 reflect an increase in general and administrative expense of $1.4 million, or 11.2%, as compared to the three months ended September 30, 2012, primarily driven by an increase of $1.3 million in salaries and related expense due to an increase in headcount, as well as the transfer of certain employees from our product development group to our general and administrative group,which occurred in 2013.
Non-Operating Expenses
The following table presents the components of non-operating expenses for the three months ended September 30, 2013 compared to the three months ended September 30, 2012:
 
 
Three Months Ended September 30,
 
Increase(Decrease)
 
% Increase(Decrease)
  
 
2013
 
2012
 
Interest expense
 
$
1,242

 
$
1,171

 
$
71

 
6.1
 %
Amortization of debt issuance costs
 
$
71

 
$
177

 
$
(106
)
 
(59.9
)%
Other (income) expense, net
 
$
(662
)
 
$
(689
)
 
$
27

 
(3.9
)%
Interest Expense — Interest expense for the three months ended September 30, 2013 increased by $0.1 million, or 6.1%, as compared to the three months ended September 30, 2012, primarily due to a higher interest rate on our First Lien Credit Facility, somewhat offset by a lower outstanding debt balance due to principal repayments.
Amortization of Debt Issuance Costs — Amortization of debt issuance costs for the three months ended September 30, 2013 decreased by $0.1 million, or 59.9%, as compared to the three months ended September 30, 2012, due to certain debt issuance costs that became fully amortized in the second quarter of 2013.
Other (Income) Expense, Net — Other (income) expense, net for the three months ended September 30, 2013 and 2012 primarily relates to foreign currency transaction gains.
Income Tax Benefit
Our effective tax rates for the three months ended September 30, 2013 and 2012 of 23.7% and 48.7%, respectively, differ from the U.S. Federal statutory tax rate primarily due to non tax-deductible stock-based compensation expense for incentive stock options, or ISOs, and our employee stock purchase plan, or ESPP, foreign income taxes and state and local income taxes, partially offset by research and development tax credits and tax benefits from ISO disqualifications.

24


Comparison of the Nine Months Ended September 30, 2013 and 2012
Revenue
Total revenue was $171.9 million for the nine months ended September 30, 2013, up $12.6 million or 7.9% from the $159.3 million for the nine months ended September 30, 2012, primarily due to a 21.3% increase in M&A revenue. The following table sets forth revenue by principal market for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, the percentage increase or decrease between those periods, and the percentage of total revenue that each principal market represented for those periods:
 
 
 
 
 
 
 
 
 
 
% Revenue
  
 
Nine Months Ended September 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
Nine Months Ended September 30,
  
 
2013
 
2012
 
2013
 
2012
M&A
 
$
79,297

 
$
65,366

 
$
13,931

 
21.3
 %
 
46.1
%
 
41.0
%
Enterprise
 
70,759

 
70,446

 
313

 
0.4
 %
 
41.2
%
 
44.2
%
DCM
 
21,823

 
23,491

 
(1,668
)
 
(7.1
)%
 
12.7
%
 
14.7
%
Total revenue
 
$
171,879

 
$
159,303

 
$
12,576

 
7.9
 %
 
100
%
 
100
%
M&A — The results for the nine months ended September 30, 2013 reflect an increase in M&A revenue of $13.9 million, or 21.3%, as compared to the nine months ended September 30, 2012.  The increase in M&A revenue reflects larger deal sizes, increased deal count and market share gains in each of the geographic regions in which we operate.
Enterprise — The results for the nine months ended September 30, 2013 reflect a nominal increase in Enterprise revenue as compared to the nine months ended September 30, 2012, due primarily to increased upsells to existing customers.
DCM — The results for the nine months ended September 30, 2013 reflect a decrease in DCM revenue of $1.7 million, or 7.1%, as compared to the nine months ended September 30, 2012.  The decrease in DCM revenue primarily reflects the net cumulative impact of 2012 contract cancellations, partially offset by the impact of a higher volume of loan syndication market transactions during the third quarter.
We believe our revenue growth will be driven, barring unforeseen circumstances, by our ongoing investments in our platform and in enhanced service offerings such as our new Intralinks VIA offering, by improving our mid-market advisory firm coverage, by expanding our focus on underrepresented geographies and by increasing our overall market share in our strategic transactions business.  We believe that our continued investments in our platform, services and operational infrastructure will allow us to service a greater number of clients more efficiently, including those with larger-scale requirements.
Cost of Revenue and Gross Profit
The following table presents cost of revenue, gross profit and gross margin for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012:
 
 
Nine Months Ended September 30,
 
Increase
 
% Increase
  
 
2013
 
2012
 
Cost of revenue
 
$
47,709

 
$
46,935

 
$
774

 
1.6
%
Gross profit
 
$
124,170

 
$
112,368

 
$
11,802

 
10.5
%
Gross margin
 
72.2
%
 
70.5
%
 
 
 
1.7
%
Cost of revenue for the nine months ended September 30, 2013 increased $0.8 million, or 1.6%, as compared to the nine months ended September 30, 2012, primarily due to (i) a $2.3 million increase in depreciation and amortization related primarily to the enhancement of our service offerings and (ii) an increase of $0.7 million in salaries and related expense, which was primarily related to incentive compensation accruals.  These increases were somewhat offset by a decrease of $2.2 million in amortization of intangible assets in accordance with the amortization schedule associated with these intangible assets.  Gross margin increased 1.7% due to the $12.6 million increase in revenue, primarily related to the growth in M&A revenue, partially offset by an increase of $0.8 million in cost of revenue.
Operating Expenses

25

Total operating expenses for the nine months ended September 30, 2013 increased by approximately $2.3 million, or 1.7%, as compared to the nine months ended September 30, 2012. Excluding an impairment charge taken in the second quarter of 2012, operating expenses increased by $10.7 million, or 8.6%. The following table presents the components of operating expenses for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012:
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
  
 
2013
 
2012
 
Product development
 
$
14,236

 
$
15,073

 
$
(837
)
 
(5.6
)%
Sales and marketing
 
79,310

 
70,659

 
8,651

 
12.2
 %
General and administrative
 
41,701

 
38,812

 
2,889

 
7.4
 %
Impairment loss on capitalized software
 
—

 
8,377

 
(8,377
)
 
NM

Total operating expenses
 
$
135,247

 
$
132,921

 
$
2,326

 
1.7
 %
Product Development — The results for the nine months ended September 30, 2013 reflect a decrease in product development expense of $0.8 million, or 5.6%, as compared to the nine months ended September 30, 2012, primarily driven by (i) a decrease of $2.0 million in salaries and related expense that resulted from (a) a greater percentage of product development costs being capitalized, including work on Intralinks VIA, our new Enterprise-related content sharing and collaborative solution, as well as development of enhanced functionality in our DCM and M&A products, and (b) the transfer of certain employees from our product development group to our general and administrative group, which occurred in 2013, and (ii) a decrease of $0.2 million in depreciation expense. These decreases were partially offset by an increase of $1.6 million in consulting expense, primarily related to product architectural work and pre-production support.
Sales and Marketing — The results for the nine months ended September 30, 2013 reflect an increase in sales and marketing expense of $8.7 million, or 12.2%, as compared to the nine months ended September 30, 2012, primarily driven by (i) an increase of $5.4 million in salaries, commissions and related expense mostly from increased headcount and incentive compensation accruals, (ii) an increase of $2.1 million in marketing expenses related to the launch of Intralinks VIA and our new corporate branding, and (iii) an increase of $1.2 million of professional fees related to our strategic initiatives.
General and Administrative — The results for the nine months ended September 30, 2013 reflect an increase in general and administrative expense of $2.9 million, or 7.4%, as compared to the nine months ended September 30, 2012, primarily driven by an increase of $4.0 million in salaries and related expense due to an increase in headcount, as well as the transfer of certain employees from our product development group to our general and administrative group, which occurred in 2013, partially offset by a $1.0 million reduction in software maintenance and licensing fees due, in part, to the end of an agreement.
Capitalized Software Impairment — The results for the nine months ended September 30, 2012 include an impairment loss of $8.4 million related to capitalized software. We recorded an impairment loss in the nine months ended September 30, 2012 in conjunction with our strategic review, as management decided at that time to replace certain server-based systems with SaaS-based solutions.
Non-Operating Expenses
The following table presents the components of non-operating expenses for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012:
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
% Increase (Decrease)
  
 
2013
 
2012
 
Interest expense
 
$
3,516

 
$
5,245

 
$
(1,729
)
 
(33.0
)%
Amortization of debt issuance costs
 
$
287

 
$
591

 
$
(304
)
 
(51.5
)%
Other (income) expense, net
 
$
306

 
$
(1,478
)
 
$
1,784

 
(120.7
)%
Interest Expense — Interest expense for the nine months ended September 30, 2013 decreased by $1.7 million, or 33.0%, as compared to the nine months ended September 30, 2012. The decrease was primarily driven by the expiration of the interest rate swap as of June 30, 2012 and a lower outstanding debt balance due to principal repayments, partially offset by a higher interest rate on our First Lien Credit Facility.
Amortization of Debt Issuance Costs — Amortization of debt issuance costs for the nine months ended September 30, 2013 decreased by $0.3 million, or 51.5%, as compared to the nine months ended September 30, 2012 due to certain debt issuance costs that became fully amortized subsequent to September 30, 2012.

26

Other (Income) Expense, Net — Other (income) expense, net for the nine months ended September 30, 2013 primarily relates to foreign currency transaction losses. Other (income) expense, net for the nine months ended September 30, 2012 primarily relates to a $1.5 million gain associated with the fair value adjustment to our interest rate swap that matured as of June 30, 2012.
Income Tax Benefit
Our effective tax rates for the nine months ended September 30, 2013 and 2012 of 24.7% and 36.3%, respectively, differ from the U.S. Federal statutory tax rate primarily due to non tax-deductible stock-based compensation expense for ISOs and our ESPP, foreign income taxes and state and local income taxes, partially offset by research and development tax credits and tax benefits from ISO disqualifications.
The nine month effective tax rate at September 30, 2013 was increased by a prior period adjustment totaling approximately $839, which was recorded as a cumulative decrease to long-term deferred tax assets within the Consolidated Balance Sheet at June 30, 2013, and was reflected as an income tax expense within the Consolidated Statement of Operations for the three and six months ended June 30, 2013. We do not believe that this adjustment is material to the consolidated financial statements for any prior period. We also do not believe this adjustment will be material to our 2013 results.
Cash Flows
 
 
Nine Months Ended September 30,
  
 
2013
 
2012
Cash and cash equivalents
 
$
44,643

 
$
31,076

Net cash provided by operating activities
 
$
30,133

 
$
21,182

Net cash used in investing activities
 
(28,931
)
 
(21,084
)
Net cash used in financing activities
 
(92
)
 
(15,480
)
Effect of exchange rates on cash and cash equivalents
 
(265
)
 
(236
)
Net increase (decrease) in cash and cash equivalents
 
$
845

 
$
(15,618
)
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2013 was $30.1 million, as a result of $23.5 million in cash generated from results of operations, after adjusting for non-cash items, and a net increase in our operating assets and liabilities of $6.6 million. The net increase in operating assets and liabilities consisted of: (i) a $6.0 million increase in deferred revenue, and (ii) an increase of $3.6 million in accounts payable due to more effective cash management, partially offset by (a) an increase of $2.4 million of prepaid expenses and other current assets, due primarily to prepaid licensing costs related to software infrastructure, and (b) an increase of $1.2 million in accounts receivable related, in part, to higher billings. Additionally, net cash provided by operating activities during the nine months ended September 30, 2013 primarily consisted of a net loss of $11.4 million plus adjustments for non-cash items including (a) amortization of intangible assets of $17.8 million, (b) depreciation and amortization of $15.1 million, (c) stock-based compensation expense of $6.2 million, (d) amortization of deferred costs of $1.2 million, and (e) provision for bad debts and customer credits of $1.1 million, partially offset by (f) a reduction in net deferred tax liability of $6.3 million.
Net cash provided by operating activities during the nine months ended September 30, 2012 was $21.2 million, as a result of $21.1 million in cash generated from results of operations, after adjusting for non-cash items, and a net increase in our operating assets and liabilities of $0.1 million. The net increase in operating assets and liabilities consisted of an increase of $4.3 million in accrued expenses and other current liabilities primarily driven by timing of payments, partially offset by (i) an increase of $3.4 million in prepaid expenses and other current assets primarily related to the timing of contractual and statutory obligations and (ii) a decrease of $1.6 million in accounts payable due to timing of payments. Additionally, net cash provided by operating activities during the nine months ended September 30, 2012 primarily consisted of a net loss of $15.9 million, plus adjustments for non-cash items including (a) amortization of intangible assets of $19.9 million, (b) depreciation and amortization of $13.5 million, (c) impairment of capitalized software of $8.4 million, (d) stock-based compensation expense of $4.8 million, (e) provision for bad debts and customer credits of $1.4 million, and (f) amortization of deferred costs of $1.3 million, partially offset by (g) a reduction in net deferred tax liability of $11.5 million, and (h) a realized gain on the interest rate swap of $1.5 million.

27

Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2013 and 2012 was $28.9 million and $21.1 million, respectively. During the nine months ended September 30, 2013 and 2012, purchases of investments of $36.5 million and $31.3 million, respectively, consisted primarily of commercial paper and corporate notes. The maturity of investments during the nine months ended September 30, 2013 and 2012 totaled $32.6 million and $31.8 million, respectively. Cash used in investing activities related to capital expenditures for infrastructure during the nine months ended September 30, 2013 and 2012 was $5.4 million and $6.9 million, respectively.
Investments in capitalized software development costs for the nine months ended September 30, 2013 and 2012 were $16.6 million and $14.7 million, respectively. We anticipate capital expenditures and investments in our software development may increase in future periods, in line with our growth strategy. Capital expenditures, including capital software, are currently restricted to $35.0 million on an annual basis, under the covenants of our First Lien Credit Facility. That amount will be increased or decreased by the under- or over-spend, respectively, compared to the base amount from the prior year. The annual maximum capital expenditure limit may be further increased at our option, by borrowing 25% of our capital expenditure availability from the succeeding year.
We restricted $2.4 million of cash during the nine months ended September 30, 2013 when we replaced the obligations previously covered by our now expired revolving line of credit, which relate to our office leases for various locations, under a separate cash collateralized facility.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2013 of $0.1 million includes $0.6 million of repayments of outstanding finance arrangements and $0.6 million of repayments of outstanding principal on long-term debt, partially offset by proceeds from the exercise of stock options and issuance of common stock of $1.2 million.
Net cash used in financing activities for the nine months ended September 30, 2012 of $15.5 million includes debt repayments of $15.7 million, partially offset by $0.5 million of proceeds from the exercise of stock options and issuance of common stock.
Covenants
The borrowings under the First Lien Credit Facility are subject to certain affirmative and negative covenants, both financial and non-financial. The terms of the First Lien Credit Facility include both an annual capital expenditures limit and an annual EBITDA limit. We were in compliance with all of our financial and non-financial covenants as of September 30, 2013. These agreements also contain customary events of default, including, but not limited to, cross-defaults among these agreements. Although we currently expect to remain in compliance with these existing covenants, any breach of these covenants or a change in control could result in a default, which could cause all of the outstanding indebtedness to become immediately due and payable and terminate all commitments from our lenders to extend further credit.
Liquidity and Capital Resources
We currently use the net cash generated from operations to fund our working capital needs and our capital expenditure requirements. At September 30, 2013, we had approximately $44.6 million in cash and cash equivalents, $34.7 million in short-term investments and $37.9 million in accounts receivable, net of allowance for doubtful accounts and credit reserve. We believe that we have sufficient cash resources to continue operations for at least the next 12 to 24 months.
If the credit markets were to experience a period of disruption, as has happened in the past, that could adversely affect our access to financing, as well as our revenue growth (due to our customer base in the DCM and M&A markets).  Additionally, if the national or global economy or credit market conditions in general were to deteriorate, it is possible that those changes could adversely affect our credit ratings, which, among other things, could have a material adverse effect on our ability to obtain external financing or to refinance our existing indebtedness.
Moody's has rated our First Lien Credit Facility B1 with a stable outlook and Standard & Poor's has rated our First Lien Credit Facility B+ with a stable outlook as of September 30, 2013.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, our financial position, conditions in any of our principal markets and changes in our business strategy. If weak financial market conditions or competitive dynamics cause any of these factors to deteriorate, we could see a reduction in our corporate credit rating.

28

On May 16, 2012, Standard & Poor's Rating Services placed all of our credit ratings, including our ‘BB-' corporate credit rating, on CreditWatch with negative implications. Subsequently on August 17, 2012, the Standard & Poor's Rating Services lowered our corporate credit rating from 'BB-' to 'B+' with a stable outlook. The stable outlook reflects a significant level of recurring base revenues, good channel partner relationships and a conservative financial policy. We will continue the steadfast execution of our strategic growth plan and remain committed to maintaining a strong credit rating.
Changes in our credit rating could adversely impact the interest rates on our First Lien Credit Facility. However, for so long as our corporate credit rating is at least B1 (stable) from Moody’s and at least B+ (stable) from Standard & Poor’s, our Eurodollar rate margin will be 4.25%. If our credit rating were to further decline, our Eurodollar rate margin would increase to 4.50%.
Our First Lien Credit Facility provided for term loans in the aggregate principal amount of $135.0 million. Prior to June 30, 2011, each quarterly installment payment was equal to $0.3 million. The terms of our First Lien Credit Facility require any voluntary prepayment of our term loans to be applied on a pro rata basis to each scheduled installment of principal. As of June 30, 2011, the quarterly installment payments decreased to $0.2 million as result of the voluntary prepayment made in April 2011. Each principal payment is due on the last day of each quarter, commencing with the quarter ended September 30, 2007 and continuing for 27 quarterly installments, with the balance due in a final installment on June 15, 2014. Additionally, the First Lien Credit Facility includes a requirement for mandatory prepayments of 50% of our excess free cash flow as measured on an annual basis. Excess free cash flow is generally defined as our adjusted EBITDA less debt service costs, capital expenditures, current income taxes paid and any cash security deposits made in respect of leases for office space, as adjusted for changes in our working capital. In line with the terms of the First Lien Credit Facility, an excess cash flow mandatory prepayment was not required for fiscal years 2011 and 2012 due to our Consolidated Leverage Ratio (as defined in the credit agreement) being less than 3.25 at December 31, 2011 and 2012.
The term loans under the First Lien Credit Facility, as amended, bear interest at the higher of the Eurodollar Rate (as defined in the credit agreement) or 1.50% plus 4.50% per annum, resulting in an interest rate of 6.00% at September 30, 2013. Interest payments on the First Lien Credit Facility are due on the last business day of each month.
The First Lien Credit Facility also provided for a $15.0 million revolving line of credit, which expired on June 15, 2013. The obligations previously covered by our revolving line of credit, which were primarily related to our operating lease agreements for our various office locations, were replaced under a separate cash collateralized facility under which we originally provided the bank with $2.5 million and the bank provided certain of our landlords with separate letters of credit for each location. The cash collateral balance is $2.4 million at September 30, 2013. This facility expires on June 3, 2014 and as such is classified as current restricted cash on our Consolidated Balance Sheet. In May 2013, a requirement for a $0.8 million standby letter of credit related to our corporate charge card utilized by executives and certain other employees was terminated.
The First Lien Credit Facility is secured by security interests and liens against all of our assets, including a pledge of 100% of the equity interests in our domestic subsidiaries and an obligation to pledge 65% of the equity interests in our direct foreign subsidiaries.
All obligations under the First Lien Credit Facility are unconditionally guaranteed by our direct and indirect domestic subsidiaries. These guarantees are secured by substantially all the present and future property of the guarantors.
In conjunction with our variable rate debt, we entered into an interest rate swap agreement to fix the interest rate, which matured on June 30, 2012. Upon maturity, we recognized a gain on the interest rate swap of $1.5 million during the nine months ended September 30, 2012 that is included in "Other (income) expense, net" on our Consolidated Statement of Operations.
The First Lien Credit Facility was originally implemented in 2007 as a $150 million facility, of which $135 million was in the form of term loans and $15 million was in the form of a revolving line of credit. In accordance with its original terms, the First Lien Credit Facility provides that the term loans mature on June 15, 2014, while the revolving line of credit expired on June 15, 2013. This facility provided us liquidity through our initial public offering in 2010 and we have since repaid half of the original balance of these term loans.
Cash paid for interest during the nine months ended September 30, 2013 and 2012 was $3.5 million and $5.2 million, respectively.
Due to the continued positive operating performance of our business, we have not needed to borrow additional amounts under our credit facilities or obtain additional financing to fund our operations and capital expenditures.

29

Contractual Obligations and Commitments
The following table sets forth, as of September 30, 2013, certain significant cash obligations that will affect our future liquidity.
 
 
Total
 
Less than
1 year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 years
Long-term debt, including current portion
 
$
75,481

 
$
75,328

 
$
153

 
$
—

 
$
—

Interest on long-term debt
 
3,414

 
3,414

 


 
—

 
—

Operating leases
 
24,714

 
4,690

 
7,516

 
5,543

 
6,965

Third-party hosting commitments
 
9,392

 
4,252

 
5,140

 
—

 
—

Other contractual commitments (including interest)
 
1,301

 
1,150

 
151

 
—

 
—

Total
 
$
114,302

 
$
88,834

 
$
12,960

 
$
5,543

 
$
6,965

Long-Term Debt and Interest on Long-Term Debt
Interest on long-term debt consists of expected interest payments on the First Lien Credit Facility through its maturity date, June 15, 2014, based on assumptions regarding the amount of debt outstanding and assumed interest rates. The assumed interest rate on the First Lien Credit Facility was 6.00%, representing a 1.50% LIBOR floor plus a 4.50% spread. All of the First Lien Credit Facility is current as of September 30, 2013. We intend to refinance our debt on a long-term basis prior to the expiration of the First Lien Credit Facility.
Other Financing Arrangement
In June 2011, we entered into a financing arrangement in the amount of $1.2 million for third-party software, including financing costs of $0.1 million to be repaid over a term of 49 months. In December 2011, we entered into a second financing arrangement for licensing and support of internal systems in the amount of $0.2 million to be repaid over a term of 25 months.
Operating Leases and Third-party Hosting Commitments
Our principal executive office in New York, New York occupies approximately 66,832 square feet. This space is comprised of 43,304 square feet under a lease agreement that expires in July 2021 and 23,528 square feet under a sublease agreement that expires in December 2013. In addition, our facility in Charlestown, Massachusetts occupies 36,557 square feet under a lease that expires in December 2015.
We also maintain space in Amsterdam, London, Paris, Chicago, São Paulo, Frankfurt, Sydney and San Francisco for our sales and services activities. We believe that our facilities are adequate for our current needs. However, we may obtain additional office space to house additional services personnel in the near future and we may require other additional office space as our business grows.
Our commitments to our third-party hosting provider expire in December 2015. Our hosting obligations are largely impacted by service expansion requirements in line with the growth of our business.
Uncertain Tax Positions
Our tax reserves for uncertain tax positions of $4.0 million (including interest and penalties of $0.2 million) are included within “Other long term liabilities” on our Consolidated Balance Sheet as of September 30, 2013.
Unrecognized tax benefits totaled $3.8 million and $3.3 million at September 30, 2013 and December 31, 2012, respectively. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities beyond the next twelve months, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity.
Off-Balance Sheet Arrangements
We do not currently have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our consolidated balance sheets.

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting our company, see Item 7A: "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Our exposure related to market risk has not materially changed from that disclosed in our Annual Report.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP, and our principal executive officer and principal financial officer have certified that they fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31

PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the ordinary course of business, we and our subsidiaries are subject to various claims, charges, disputes, litigation and regulatory inquiries and investigations. These matters, if resolved adversely against us, may result in monetary damages, fines and penalties or require changes in our business practices. We are not currently aware of any pending or threatened material claims, charges, disputes, litigation and regulatory inquiries and investigations except as follows:
Securities Class Action. On December 5, 2011, we became aware of a purported class action lawsuit filed in the U.S. District Court for the Southern District of New York, or the SDNY or the Court, against us and certain of our then current and former executive officers. The initial complaint, or the Wallace Complaint, alleges that the defendants made false and misleading statements or omissions in violation of the Securities Exchange Act of 1934, as amended. The plaintiff seeks unspecified compensatory damages for the purported class of purchasers of our Common Stock during the period from February 17, 2011 through November 10, 2011, or the Allegation Period. On December 27, 2011, a second purported class action complaint, which makes substantially the same claims as, and is related to, the Wallace Complaint, was filed in the SDNY against us and certain of our current and former executive officers seeking similar unspecified compensatory damages for the Allegation Period. On April 3, 2012, the Court consolidated the actions and appointed Plumbers and Pipefitters National Pension Fund as lead plaintiff, and also appointed lead counsel in the consolidated action, or the Consolidated Class Action. On June 15, 2012, the lead plaintiff filed an amended complaint, or the Consolidated Class Action Complaint, that in addition to the original allegations made in the Wallace Complaint, alleges that we, certain of our current and former officers and directors, and the underwriters in our April 6, 2011 stock offering issued a registration statement and prospectus in connection with the offering that contained untrue statements of material fact or omitted material information required to be stated therein in violation of the Securities Act of 1933, as amended. The defendants filed their motion to dismiss the action on July 31, 2012, and in response to the lead plaintiff’s opposition to the defendants' motions, which was filed on September 17, 2012, the defendants filed their replies to plaintiff's opposition on October 10, 2012. On May 8, 2013, the Court issued an opinion dismissing claims based on certain allegations in the complaint, but otherwise denied defendants' motions to dismiss.  On June 28, 2013, defendants filed their answers to the Consolidated Class Action Complaint. On October 15, 2013, the Court entered the parties’ pretrial scheduling stipulation, which provided, inter alia, that the parties would fully brief any motions for summary judgment by February 17, 2015. We believe that these claims are without merit and intend to defend these lawsuits vigorously.
Dixon Derivative Action.  On December 28, 2011, a shareholder derivative complaint was filed in the SDNY against us and certain of our current and former directors. The complaint, or the Dixon Action, alleges that the defendants breached their fiduciary duties by causing us to issue materially false and misleading statements about our business prospects, financial condition and performance during the same Allegation Period alleged in the Consolidated Class Action Complaint. On June 6, 2013, the parties filed a stipulation with the SDNY agreeing to stay all proceedings in the Dixon Action, including discovery, until ninety days after the SDNY issues a scheduling order in the Consolidated Class Action. We believe that the claims in the Dixon Action are without merit and intend to defend this lawsuit vigorously.
Horbal Derivative Action.  On April 16, 2012, a second shareholder derivative complaint, or the Horbal Action, was filed in the Supreme Court of the State of New York in New York County, or the New York State Court, against us and certain of our current and former directors and officers. The Horbal Action makes substantially the same claims as, and is related to, the Dixon Action, except that it alleges violations of state law. On April 24, 2012, one of the director defendants removed the Horbal Action to the SDNY, and on May 7, 2012, it was assigned to the same judge as in the Dixon Action. On May 22, 2012, the plaintiff in the Horbal Action moved to remand the case to New York State Court. On June 8, 2012, defendant filed an opposition to remand, and the plaintiff filed a reply on June 15, 2012. On March 11, 2013, the SDNY granted plaintiff's motion to remand, and the case is currently pending in New York State Court. On June 6, 2013, the parties filed a stipulation with the New York State Court agreeing to stay all proceedings in the Horbal Action, including discovery, until ninety days after the SDNY issues a scheduling order in the Consolidated Class Action. We believe the claims in the Horbal Action are without merit and intend to defend this lawsuit vigorously.
Levine Shareholder Demand Letter. We received a shareholder demand letter, dated May 16, 2013, demanding that our board of directors, or the Board, take action to remedy alleged breaches of fiduciary duty by current and former directors and officers. These alleged breaches are based on the same alleged misconduct in the complaints in the Dixon, Horbal, and Consolidated Class Actions. The letter specifically demands that our Board undertake an independent internal investigation into the alleged breaches and commence a civil action against each of the allegedly breaching current and former directors and officers. On June 26, 2013, our Board created a Demand Committee to conduct an investigation into the allegations in the Levine demand letter.
SEC Investigation. On July 10, 2013, we announced that we received written notification from the SEC that the SEC's investigation, as previously disclosed, has been terminated and that no enforcement action has been recommended against us. The investigation commenced on August 4, 2011 upon the SEC's request for certain documents related to our business from January 1, 2011 through August 4, 2011.

32

ITEM 1A: RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this and previous Quarterly Reports on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which could materially affect our business, financial condition or future results. There are no material changes to the risk factors described in our Annual Report.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number
 
Description
10.1 *
 
Lease Agreement, dated July 15, 2008, as amended by a First Amendment to Lease dated December 21, 2010 and a Letter Agreement dated May 22, 2013, by and between Schrafft Center LLC and Intralinks, Inc.
10.2 *^
 
Employment Agreement, dated as of April 9, 2012, by and between Intralinks Holdings, Inc. and Rainer Gawlick.
31.1 *
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
 
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *
 
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+
 
XBRL Instance Document
101.SCH+
 
XBRL Taxonomy Extension Schema Document
101.CAL+
 
XBRL Taxonomy Calculation Linkbase Document
101.LAB+
 
XBRL Taxonomy Label Linkbase Document
101.PRE+
 
XBRL Taxonomy Presentation Linkbase Document
101.DEF+
 
XBRL Taxonomy Definitions Linkbase Document
                            
* Filed herewith.
^ Indicates a management contract or compensation plan, contract or arrangement.
+ Attached as Exhibits 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Comprehensive Loss, (iv) the Consolidated Statement of Cash Flows and (v) related notes to these financial statements.
The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed "filed" or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

33

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on the date set forth below by the undersigned thereunto duly authorized.
 
 
 
 
 
INTRALINKS HOLDINGS, INC.
Date: November 8, 2013
 
By: /s/ Ronald W. Hovsepian
 
Ronald W. Hovsepian
President and Chief Executive Officer
Date: November 8, 2013
 
By: /s/ Derek Irwin
 
Derek Irwin
Chief Financial Officer



34