Subsequent to the original issuance of the 2012 consolidated financial statements, the Company identified errors that impacted the 2012 and 2011 consolidated financial statements. Each of those errors are discussed in more detail below, and tables are included illustrating the impact of those errors on the Company’s previously issued financial statements.

 

We have concluded that revenue recognition of our subscription fees for our Diligent Boardbooks service should not commence until the date the service is made available to the customer, as determined by the date the customer has full access to the product. Our historical practice was to consider the contract date to be the service commencement date, and to begin revenue recognition as of the beginning of the month in which the contract date falls. We have corrected recognition of revenue to prorate revenue on a daily basis starting on the date at which access is provided, which is generally later than the contract date. Additionally, we have concluded that installation fees charged for initial set-up of our product and training should be recognized ratably over the expected life of the customer relationship, which is estimated to be nine years, rather than over the initial contract period, generally one year, as had been our historical practice. The effect of correcting these two errors was to reduce previously reported revenue and increase previously reported deferred revenue by $4.6 million and $2.4 million for the years ended December 31, 2012 and 2011, respectively.

 

The Company previously recorded sales commissions earned by account managers by recognizing them immediately in the period earned. In order to more appropriately match expenses with the related revenue and to be consistent with how the Company recognizes commissions for its sales staff, the Company has changed the method of recognizing commission expense for account management personnel, by amortizing commissions over the related contract period, generally twelve months. The effect of correcting this error decreased cost of revenues and increased deferred commissions by $508 thousand and $193 thousand in the years ended December 31, 2012 and 2011, respectively. In addition, the Company historically netted deferred commissions against accrued expense. They are now presented as a separate line item on the consolidated balance sheet as “Deferred Commissions”.

 

The Company has historically not collected state sales tax on the sale of its subscription service. The Company has determined that it should have collected sales tax in certain states and may also have exposure in several other states, accordingly, the Company has recorded a provision of $470 thousand and $266 thousand in general and administrative costs and accrued expenses for the years ended December 31, 2012 and 2011, respectively. The resulting cumulative provision as of December 31, 2012 related to the uncollected sales tax is $736 thousand. We intend to start collecting and remitting sales tax in certain states in 2014.

 

The Company also determined that a note receivable due from a related party should have been recorded as a deduction of stockholders’ equity, rather than an asset, in accordance with SEC Staff Accounting Bulletin Topic 4-G. Upon formation of the Company in 2007, the Company recorded a note receivable from its predecessor entity of approximately $6.8 million. At December 31, 2008, the Company determined that the value of the note was impaired and recorded an impairment charge of $5.8 million. In 2009 through 2011, the value of the note recovered and the Company recorded impairment recoveries of $0.3 million, $4.3 million and $1.2 million in 2009, 2010 and 2011, respectively. The note matured and was settled in 2012. We have corrected the accounting for the note by presenting it as a reduction in stockholders’ equity in all applicable consolidated balance sheets and eliminating the impairment charge and subsequent recoveries from the consolidated statements of operations.

 

In addition, we made corrections to accrued liabilities to record expenses in the proper periods, corrected the recording of the capital contribution for the waiver of the preferred stock dividends and made other adjustments and presentation corrections identified subsequent to the Original Filing.

 

The changes in the Company’s income (loss) before provision for income taxes resulting from the adjustments discussed in the above paragraphs also impacted the provision for income taxes throughout each of the periods subject to restatement. In addition, we made corrections to our provision for income taxes for each of the periods subject to the restatement to correct for errors in the calculation of our NOL limitation under Section 382 of the Internal Revenue Code, state tax apportionment factors, uncertain tax positions and other tax matters. Accordingly, throughout each of the periods subject to restatement, we have restated our provision for income tax and related deferred tax assets and liabilities.

 

The basic earnings per share calculation has been corrected as the weighted average shares outstanding used to compute basic earnings per share has historically excluded the convertible preferred stock outstanding. The preferred stockholders are entitled to participate on an as converted basis in any dividend on the Company’s common stock, and as such are considered participating securities to which earnings should be allocated. The preferred stock should have been considered in the calculation of earnings per share using the two-class method in periods in which the Company had net income.

 

Additionally, we have corrected the accounting for an equipment and software lease that was entered into in the first quarter of 2013 but initially recorded in the fourth quarter of 2012, and an internal use software license arrangement entered into in the third quarter of 2011.

 

The restated opening balances within the accompanying consolidated statement of changes in stockholders’ equity as of January 1, 2011, which present the cumulative effect of the errors noted above through January 1, 2011, are as follows:

 

 

The following is a reconciliation of the previously reported consolidated statements of operations, balance sheet and statement of cash flow amounts to the restated amounts.