Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the Transition Period from                to              

Commission File Number: 001-34707

Convio, Inc.

(Exact name of registrant as specified in its charter)

11501 Domain Drive, Suite 200, Austin, Texas 78758

(Address of Principal Executive Offices)(Zip Code)

Telephone: (512) 652-2600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether 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 o  No x

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 o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares outstanding of the Registrant’s Common Stock, $0.001 par value, was 17,369,797 as of May 14, 2010.

Table of Contents

Convio, Inc.

Form 10-Q for the Three Months Ended March 31, 2010

Table of Contents

Cautionary Statement

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (as well as documents incorporated herein by reference) may be considered “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. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Convio, Inc. and its management and may be signified by the words “expects,” “anticipates,” “target,” “project,” “goals,” “estimates,” “potential,” “predicts,” “may,” “might,” “could,” “intends,” “believes” or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements.  Factors that could cause or contribute to such differences include those discussed under “Risk Factors” and elsewhere in this report.  Convio, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

PART I.  Financial Information

Item 1.  Unaudited Consolidated Financial Statements

Convio, Inc.
Consolidated Balance Sheets

(in thousands, except share and per share amounts)

See accompanying notes.

1

Table of Contents

Convio, Inc.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

(1)                                  Includes amortization of acquired technology of $127 and $254 for the three month period ended March 31, 2010 and 2009, respectively.

(2)                                  Includes stock-based compensation expense as follows:

See accompanying notes.

2

Table of Contents

Convio, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying notes.

3

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

1. The Company

Convio, Inc., together with its wholly-owned subsidiary (collectively, the “Company” or “Convio”), is a provider of on-demand constituent engagement solutions that enable nonprofit organizations (“NPOs”) to more effectively raise funds, advocate for change and cultivate relationships with donors, activists, volunteers, alumni and other constituents. The Company’s integrated solutions include its Convio Online Marketing (“COM”) platform and Convio Common Ground CRM, its constituent relationship management application. The COM platform enables NPOs to harness the full potential of the Internet and social media as new channels for constituent engagement and fundraising. Common Ground delivers next-generation donor management capabilities, integrates marketing activities across online and offline channels and is designed to increase operational efficiency. The Company’s solutions are enhanced by a portfolio of value-added services tailored to its clients’ specific needs.

The Company was incorporated in Delaware on October 12, 1999. On February 16, 2007, the Company acquired GetActive Software, Inc. (“GetActive”), a privately owned company based in Berkeley, California. The Company acquired GetActive, a provider of online constituent relationship management software and services and a competitor of the Company, to expand its client base and increase its market presence in the nonprofit market. The Company currently markets its products and services throughout North America.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Prospectus filed pursuant to rule 424(b) under the Securities and Exchange Act, as amended (“the Securities Act”) with the SEC on April 29, 2010 (the “Prospectus”). The December 31, 2009 consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary, all of which are of a normal recurring nature, for the fair presentation of the Company’s statement of financial position as of March 31, 2010 and December 31, 2009, the Company’s results of operations and its cash flows for the three months ended March 31, 2010 and 2009. The results for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2010. All references to March 31, 2010 or to the three months ended March 31, 2010 and 2009 in the notes to the consolidated financial statements are unaudited.

Basis of Consolidation

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions and balances have been eliminated in consolidation.

Quarterly Financial Information

The Company’s quarterly operating results normally fluctuate as a result of seasonal variations in its business, principally due to usage revenue which is derived from funds raised by its clients at special events and sales commissions which are expensed in the period in which the agreements are signed. The growth and amount of usage revenue vary based on the number of events, the percent of funds raised online for these events, the growth and success of events and the signing of new clients for events. The Company recognizes the usage revenue from these events when it bills clients. Usage revenue is seasonal as events are typically held in the spring and fall. Historically, the Company’s usage revenue has been higher during the second and third quarters. In addition, period-over-period comparisons may be impacted significantly by the addition or loss of any special events of enterprise clients. The Company’s operating expenses may also fluctuate as a result of sales commissions. The Company expenses sales commissions in the period in which it signs agreements, but the Company generally recognizes the related revenue over the terms of those agreements. The Company may report poor operating results due to higher sale commissions in a period in which it experiences strong sales of its solutions, particularly sales to enterprise clients. Alternatively, the Company may report better operating results due to lower sales commissions in a period in which it experiences a slowdown in sales. As a result, its sales and marketing expenses may fluctuate quarterly and will not be indicative of annual sales and marketing expenses.

4

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies

Applicable Accounting Guidance

Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative non-governmental United States GAAP as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences could be material to the Company’s financial statements.

Revenue Recognition

The Company derives its revenue from subscriptions, services and usage and recognizes revenue in accordance with relevant authoritative accounting principles. The Company’s subscription arrangements do not allow the client to take possession of the software application. The Company’s arrangements do not contain general rights of return. The Company recognizes revenue when all of the following conditions are met:

·                  there is persuasive evidence of an arrangement;

·                  the service has been provided to the client;

·                  the collection of the fees is reasonably assured; and

·                  the amount of fees to be paid by the client is fixed or determinable.

In determining whether collection of the subscription and related services fee is reasonably assured, the Company considers financial and other information about clients, such as a client’s funding level, obtained as part of the Company’s sales effort with the clients. As a client relationship progresses, the Company also considers the client’s payment history. The Company’s experience in determination of collectibility has historically been good as bad debt expenses have not been significant to date.

5

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies (Continued)

In determining whether the fee is fixed or determinable, the Company only recognizes revenue for amounts that the client is legally obligated to pay. There are no instances where the Company is recognizing revenue prior to invoicing the client. For example, for multi-year contracts where the client has the right to cancel a portion of the contractual term, the Company only recognizes revenue for amounts related to the noncancellable portion of the contract until the client has relinquished its right to cancel. For multi-year contracts with increasing annual payments, the Company recognizes revenue based upon the amounts actually invoiced which results in an increasing amount of revenue recognized each year. For multi-year contracts with decreasing annual payments, the Company recognizes revenue ratably using the entire noncancellable contract value which results in cash received in the early portion of the contract term exceeding the amount of revenue recognized. For contracts that have usage-based terms, the Company recognizes revenue when the usage amounts are reported and billed to the client.

Subscription and services revenue is recognized ratably over the term of the agreement beginning on the activation date. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Services revenues, when sold with a subscription of the Company’s modules do not qualify for separate accounting as the Company does not have objective and reliable evidence of fair value of the undelivered subscription service. Therefore, it recognizes such services revenue ratably over the term of the related subscription agreement.

When the Company sells services other than with the subscription of its modules, the Company considers the following factors to determine the proper accounting:

·                  availability of the services from other vendors;

·                  whether objective and reliable evidence of fair value exists for the undelivered elements;

·                  the nature of the services;

·                  the timing of when the services agreement was signed in comparison to the subscription service start date; and

·                  the contractual dependence of the subscription service on the client’s satisfaction with the services.

When the Company sells services other than with the subscription of its modules, the Company recognizes revenue under time and material contracts as the services are rendered and the Company recognizes revenue from fixed price contracts as milestones are achieved and, if applicable, accepted by the client.

Certain clients have contracts that provide for a percentage of donations received online through its modules to be paid to the Company in place of or in conjunction with the standard monthly subscription fee. In addition, certain clients have contracts which require payment of additional fees for usage above the levels included in the standard monthly subscription fee. Such fees are recognized as revenue when the usage amounts are determined and reported and billed to the client.

Deferred Revenue

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s subscription service described above and is recognized as the revenue recognition criteria are met. The Company generally invoices its customers in quarterly installments. Accordingly, the deferred revenue balance does not represent the total contract value of annual or multi-year, noncancellable subscription agreements.

6

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies (Continued)

Research and Development

The Company capitalizes the costs to develop software for internal use (including the costs of developing the Company’s COM and Common Ground solutions) incurred during the application development stage as well as costs to develop significant upgrades or enhancements to existing internal use software. These costs are amortized on a straight-line basis over an estimated useful life of three years. During the quarter ended March 31, 2010, the Company capitalized approximately $225,000 of costs incurred to upgrade and enhance existing internal use software. Costs incurred to improve or enhance the Company’s products in the quarter ended March 31, 2009 were expensed as incurred as these costs did not qualify as significant upgrades or enhancements. Capitalized costs are recorded as part of property and equipment.

Sales Commissions

Sales commissions are earned by the salesperson at the time of contract signing and sales commissions are expensed as incurred.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be realized, and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs the positive evidence of its pre-tax income for the three months ended March 31, 2010 and forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence and it will adjust the valuation allowance as sufficient objective positive evidence becomes available.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through March 31, 2010, the Company has not identified any material uncertain tax positions for which liabilities would be required.

Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the estimated fair value of the award on that date, and is recognized as expense over the requisite service period, which is generally over the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of stock based awards.

7

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies (Continued)

Net Income (Loss) Per Share

Net income (loss) per share is presented in conformity with the two-class method required for participating securities. The holders of the Series C convertible preferred stock are entitled to receive dividends when, as and if declared by the board of directors, in preference to a declaration or payment of a dividend, at a rate of $0.7114 per share. In addition, the holders of the Series A and Series B convertible preferred stock are entitled to receive dividends, when, as and if declared by the board of directors, in preference to any common stock of the Company. The dividends are non-cumulative and as of March 31, 2010, no dividends had been declared. Holders of Series A, Series B and Series C convertible preferred stock do not share in losses of the Company.

Under the two-class method, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net income attributable to common stockholders is determined by allocating undistributed earnings between the holders of common stock and Series A, Series B and Series C convertible preferred stock. Diluted net income per share attributable to common stockholders is computed by using the weighted average number of common shares outstanding, including potential dilutive shares of common stock assuming the dilutive effect of convertible preferred stock, on an if-converted basis, and outstanding stock options and convertible preferred stock warrants using the treasury stock method.

Due to losses incurred during the three months ended March 31, 2009, the shares associated with stock options, convertible preferred stock warrants and convertible preferred stock are not included in diluted net loss per share because they are anti-dilutive.

Series P, Series Q, Series R and Series S common stock have the same dividend rights, and therefore, result in basic and diluted net income (loss) per share being the same for each class of common stock. As such, net income (loss) per share for the three months ended March 31, 2010 and 2009 is presented on a combined basis.

Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share amounts):

8

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies (Continued)

The following table displays the Company’s other outstanding common stock equivalents that were excluded from the computation of diluted net loss per share for the three months ended March 31, 2009, as the effect of including them would have been anti-dilutive (in thousands):

Recent Accounting Pronouncements

In October 2009, the FASB issued an ASU that amended the accounting rules addressing revenue recognition for multiple-deliverable revenue arrangements by eliminating the currently existing criteria that objective and reliable evidence of fair value for undelivered products or services exist in order to be able to separately account for deliverables. Additionally the ASU provides for elimination of the use of the residual method of allocating arrangement consideration and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables that can be accounted for separately based on their relative selling price. A hierarchy for estimating such selling price is included in the update. This ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact this update will have on its consolidated financial statements.

9

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

2. Summary of Significant Accounting Policies (Continued)

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and more disaggregation for the different types of financial instruments. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required. The Company did not have any significant transfers in or out of Level 1 and Level 2 fair value measurements during the three months ended March 31, 2010.

3. Fair Value Measurements

Financial assets and liabilities with carrying amounts approximating fair value include accounts receivable, accounts payable and accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities. The carrying amount of the Company’s debt and other long-term liabilities approximate their fair value. The fair value of debt was based upon management’s best estimate of interest rates that would be available for similar debt obligations as of March 31, 2010 and 2009. The Company measures certain financial instruments at fair value on a recurring basis. As of March 31, 2010, those instruments were comprised of cash equivalents invested in money market mutual funds and preferred stock warrants. The fair value of the preferred stock warrant liability was estimated using the Black-Scholes valuation model. The fair value of these instruments was determined using the following inputs at March 31, 2010:

Changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2010 were as follows:

4. Commitments and Contingencies

On November 17, 2006, the Company entered into an office building lease with RREEF Domain, LP pursuant to which Convio was leasing approximately 67,000 square feet in an office facility located in Austin, Texas. In January 2008, the Company entered into an amendment to that lease pursuant to which Convio is leasing an additional 23,000 square feet for a total of approximately 90,000 square feet and the Company began occupying the additional space in January 2009. The lease has a term of seventy-eight months, which commenced in April 2007. The lease agreement contains escalating rent payments, which may be adjusted for component charges, taxes, insurance and maintenance related to the property. The total basic rent payable over the full seventy-eight month lease term (net of three months’ rent abatement) will be approximately $8,678,000. The Austin office under the lease serves as the Company’s headquarters.

In January 2010, the Company entered into a sublease agreement pursuant to which Convio sublet approximately 12,000 square feet of its office facility located in Austin, Texas. The sublease has a term of forty-four months. The total sublease payments receivable over the full forty-four month lease term will be approximately $823,000.

10

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

4. Commitments and Contingencies (Continued)

On April 3, 2009, the Company entered into an office building lease with 1255 23rd Street, L.P. pursuant to which Convio is leasing approximately 12,000 square feet in an office facility located in Washington, D.C. Pursuant to the agreement, Convio will lease an additional 2,600 square feet beginning on August 1, 2013. The lease has a term of one hundred twenty months, which commenced on August 1, 2009. The lease agreement contains escalating rent payments, which may be adjusted for component charges, taxes, insurance and maintenance related to the property. The total basic rent payable over the full one hundred twenty month lease term will be approximately $7,420,000.

From time to time, the Company is subject to various claims that arise in the normal course of business. In the opinion of management, the Company is unaware of any pending or unasserted claims that would have a material adverse effect on the financial position, liquidity or results of the Company.

Certain executive officers are entitled to certain payments if they are terminated without cause or as a result of a change in control. Upon termination without cause, and not as a result of death or disability, each of such officers is entitled to receive a payment of base salary for four to six months following termination of employment and certain officers will be entitled to continue to receive coverage under medical and dental benefit plans for four to six months or until such officers are covered under a separate plan from another employer. Upon a termination other than for cause or with good reason following a change in control, each of such officers will be entitled to the same benefits as upon termination without cause and will also be entitled to certain acceleration of such officer’s outstanding unvested options at the time of such termination.

5. Income Taxes

In accordance with applicable accounting guidance, the income tax provision for the three months ended March 31, 2010 is based on the estimated annual effective tax rate for fiscal year 2010. The estimated effective tax rate may be subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year, along with other items that may affect the rate change.

For the three-month periods ended March 31, 2010 and 2009, the Company’s provision for income taxes reflects an effective tax rate of approximately 11.5% and (1.4%), respectively. For each of the three-month periods ended March 31, 2010 and 2009, the Company’s effective tax rate was lower than the U.S. federal statutory rate primarily due to changes to its valuation allowance.

The Company has significant deferred tax assets related to its net operating loss carryforwards and tax credits, and has provided a valuation allowance for the full amount of its deferred tax assets, as it is not more likely than not that any future benefit from deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards will be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs the positive evidence of its pre-tax income for the three months ended March 31, 2010 and forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence and it will adjust the valuation allowance as sufficient objective positive evidence becomes available.

The Company had approximately $148,000 in unrecognized tax benefits as of March 31, 2010. The Company does not expect to recognize any amount of the unrecognized tax benefit in the next twelve months, as the unrecognized income tax benefits relate to the uncertainty regarding certain credits taken on returns that have not been examined by the applicable tax authority. The Company’s tax years 2006 through 2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the Company is not currently under examination by any taxing jurisdictions.

11

Table of Contents

Convio, Inc.

Notes to Unaudited Consolidated Financial Statements (Continued)

(unaudited)

6. Stockholders’ Equity

Series A, B and C Convertible Preferred Stock

As of March 31, 2010, the Company had outstanding 3,036,198, 1,138,380 and 1,141,459 shares of Series A, B and C convertible preferred stock, respectively. Each share of preferred stock was convertible into one share of common stock. The conversion of all shares of preferred stock into 5,316,037 shares of common stock occurred immediately prior to the closing of the Company’s initial public offering on May 4, 2010.

Stock Warrants

As of March 31, 2010, there were 252,655 shares of common stock issuable upon the exercise of outstanding warrants, assuming the conversion of all outstanding shares of preferred stock and common stock into shares of a single class of common stock immediately prior to the closing of the Company’s initial public offering, which occurred on May 4, 2010. The warrants had a weighted average exercise price of $4.55 per share.

Stock Option Plans

The Company has in effect equity compensation plans under which incentive stock options and non-qualified stock options have been granted to employees, directors and consultants to purchase shares of the Company’s Series P common stock at a price not less than the fair market value of the stock at the date of grant except in the event of a business combination.

2009 Stock Incentive Plan

During 2009, the Company’s Board of Directors approved resolutions to adopt the 2009 Stock Incentive Plan (the “2009 Plan”) providing for the issuance of up to 580,096 shares of the Company’s common stock to directors, employees, consultants and other independent advisors. The share reserve under the 2009 Plan contains an evergreen provision that allows for an annual increase on January 1 of each year equal to the lesser of (a) 4% of the aggregate outstanding shares on the first day of the applicable year and (b) any lesser amount determined by our board of directors. The 2009 Plan provides for the issuance of restricted common stock, incentive stock options or nonqualified stock options. Pursuant to the 2009 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant, or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant.

In the event of a change in control, outstanding stock options and other awards that are payable in or convertible into common stock under the 2009 Plan will terminate upon the effective time of the change in control unless provision is made in connection with the transaction for the continuation or assumption of such awards by, or for the substitution of the equivalent awards under a cash incentive program. Fifty percent of the outstanding stock options and other awards that will terminate upon the effective time of the change in control shall become fully vested immediately before the effective time of the change in control or upon involuntary termination, in the case the participant has completed at least one year of service with the company prior to the change in control. Participants not completing at least one year of service, shall only vest in that number of outstanding stock options and other awards in which the participant would have vested upon the participant’s completion of one year of service.

As of March 31, 2010, 239,348 options had been granted from the 2009 Plan.

12

Table of Contents

Convio, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)
(unaudited)

6. Stockholders’ Equity (Continued)

The Company uses the Black-Scholes model to estimate the fair value of its share-based payment awards. The Black-Scholes model requires estimates regarding the risk-free rate of return, dividend yields, expected life of the award and estimated forfeitures of awards during the service period. The calculation of expected volatility is based on historical volatility for comparable industry peer groups over periods of time equivalent to the expected life of each stock option grant. As the Company has no history of trading in the public equity markets, the Company believes that comparable industry peer groups provide a more reasonable measurement of volatility in order to calculate an accurate fair value of each stock award. The expected term is calculated based on the weighted average of the remaining vesting term and the remaining contractual life of each award. The Company bases the estimate of risk-free rate on the U.S. Treasury yield curve in effect at the time of grant or modification. The Company has never paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a dividend yield of zero.

The Company estimates potential forfeitures of stock grants and adjusts compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

The following table summarizes the weighted average grant-date value of options and the assumptions used to develop their fair value for the three months ended March 31, 2010 and 2009.

A summary of the changes in common stock options issued under all of the existing stock options plans is as follows:

The aggregate intrinsic value was calculated based on the positive differences between the estimated fair value of the Company’s common stock of $8.75 per share on March 31, 2010 and December 31, 2009, or at time of exercise, and the exercise price of the options.

13

Table of Contents

Convio, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)
(unaudited)

6. Stockholders’ Equity (Continued)

The following table summarizes information about options outstanding at March 31, 2010:

At March 31, 2010, there was an estimated $4.4 million of total unrecognized compensation costs related to stock-based compensation arrangements. These costs will be recognized over a weighted average period of 2.6 years.

At March 31, 2010, there were 340,924 options available for future grant under the 2009 Plan and the Company had 3,593,042 shares of Series P common stock reserved for the exercise of outstanding stock options and stock options available for grant.

Certain stock options have been exercised prior to vesting resulting in the issuance of nonvested shares. A summary of the Company’s nonvested shares as of March 31, 2010, and changes during the three months ended March 31, 2010, is presented below:

Cash received from option exercises during the three months ended March 31, 2010 was $93,000. The Company has historically issued new shares to satisfy share option exercises.

14

Table of Contents

Convio, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)
(unaudited)

7. Subsequent Events

Reverse Stock Split

On April 5, 2010, the board of directors approved an amended and restated certificate of incorporation that (a) increased the authorized common stock to 40 million shares, (b) authorized 5 million shares of preferred stock and (c) effected a reverse stock split of all the outstanding shares of preferred stock and common stock into 0.352 of a share of preferred stock or common stock, respectively. The par value of the common and convertible preferred stock was not adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible preferred stock, warrants for common stock and convertible preferred stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was affected on April 22, 2010.

Initial Public Offering

On May 4, 2010, the Company completed an initial public offering consisting of 5,132,728 shares of common stock at $9.00 per share. The total shares sold in the offering included 1,343,201 shares sold by selling stockholders and 3,789,527 shares sold by the Company. In addition, the underwriters exercised their option to purchase an additional 769,909 shares to cover over-allotments. After deducting the payment of underwriters’ discounts and commissions, the net proceeds to the Company from the sale of shares in the offering were approximately $38.2 million.

Conversion of Common and Preferred Stock

On May 4, 2010, in conjunction with the Company’s qualified underwritten initial public offering of common stock, 5,316,037 outstanding shares of Series A, Series B and Series C preferred stock automatically converted into 5,316,037 shares of undesignated common stock. In addition, 7,419,199 outstanding shares of Series P, Series Q, Series R and Series S common stock automatically converted into 7,419,199 shares of undesignated common stock.

Preferred Stock Warrant Liability

Freestanding warrants related to shares that are redeemable are accounted for in accordance with the applicable guidance in ASC Topic 480. Under the provisions of this guidance, the freestanding warrants that are related to the Company’s preferred stock are classified as liabilities in the accompanying balance sheets. The warrants were subject to re-measurement at each balance sheet date, and any change in fair value was recognized as a component of other income (expense). The Company recorded $469,000 and $174,000 of other expense for the three months ended March 31, 2010 and 2009, respectively, to reflect the change in fair value of the preferred stock warrants during those periods. Immediately prior to the effectiveness of the Company’s initial public offering the Company recorded a final fair value adjustment based upon the offering price of $9.00 per share and recorded other income of $454,000. Upon the closing of the offering, all outstanding preferred stock warrants were converted into warrants to purchase common stock and, accordingly, the liability was reclassified to additional paid-in capital during the second quarter of 2010.

Net Exercise of Preferred Stock Warrants

On April 29, 2010, in conjunction with the Company’s initial public offering, 252,665 shares of common stock issuable upon the exercise of outstanding warrants were converted into an equivalent number of shares of a single class of common stock. Immediately prior to the closing of the initial public offering, a portion of the warrants were net exercised, resulting in the issuance of 72,800 shares of common stock. Subsequent to the net exercise, 106,725 shares of common stock issuable upon the exercise of the remaining warrants had a weighted average exercise price of $4.60 per share.

15

Table of Contents

Convio, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)
(unaudited)

7. Subsequent Events (Continued)

Use of Proceeds to Repay Debt

On May 12, 2010, the Company paid approximately $1.9 million to its principal lender, Comerica Bank, in satisfaction of the remaining balance on its line of credit. As a result, the Company has the ability to borrow $5.1 million under its revolving line of credit.

16

Table of Contents

Item 2. Management’s discussion and analysis of financial condition and results of operations

The terms “we,” “us” and “our” refer to Convio, Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America.

Cautionary statement

The following discussion should be read along with the unaudited consolidated financial statements and unaudited notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto contained in the Company’s Prospectus filed pursuant to rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”) with the SEC on April 29, 2010 (the “Prospectus”). This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding the following: the sales of our software products and services; the impact of our revenue recognition policies; our belief that our current assets, including cash, cash equivalents, and expected cash flows from operating activities, will be sufficient to fund our operations; our anticipated additions to property, plant and equipment; our belief that our facilities are suitable and adequate to meet our current operating needs; our belief that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Words such as “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “might,” “could,” “intend,” and variations of these types of words and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Overview

We are a leading provider of on-demand constituent engagement solutions that enable nonprofit organizations, or NPOs, to more effectively raise funds, advocate for change and cultivate relationships with donors, activists, volunteers, alumni and other constituents. We serve approximately 1,300 NPOs of all sizes, and during 2009, our clients used our solutions to raise over $920 million and deliver over 3.8 billion emails to over 154 million email addresses to accomplish their missions. During the three months ended March 31, 2010, our clients used our solutions to raise over $436 million and deliver approximately 1.0 billion emails to accomplish their missions. Factoring out transactions directly related to the Haitian relief efforts during the three months ended March 31, 2010, online fundraising increased by approximately 20 percent from the same period last year.

We were incorporated in Delaware in October 1999, and we offered our first commercially available online marketing solution in 2000. We acquired GetActive Software, Inc. in February 2007. Our integrated solutions now include our Convio Online Marketing platform, or COM, and Convio Common Ground CRM, our constituent relationship management application. COM enables NPOs to harness the full potential of the Internet and new media as channels for constituent engagement and fundraising. Common Ground delivers next-generation donor management capabilities, integrates marketing activities across online and offline channels and is designed to increase operational efficiency. Our solutions are enhanced by a portfolio of value-added services tailored to our clients’ specific needs.

Our Business Approach

We define our target market as public charities that raise more than $50,000 in contributions annually, of which there were over 71,000 in 2009 in the United States according to GuideStar USA, Inc. We categorize our target market into enterprise NPOs that raise more than $10 million annually and mid-market NPOs that raise between $50,000 and $10 million annually. We sell our solutions through a direct sales force complemented by our partner network. Our sales force is increasing its focus on acquiring a higher number of mid-market clients.

We recognize subscription and services revenue ratably over the term of our client agreements beginning on the date such products and services become available for use by the client, or the activation date. The terms of our agreements are typically three years for COM and one year for Common Ground. We currently derive the substantial majority of our revenue from subscriptions to our COM solution.

17

Table of Contents

Pricing for our COM solution is based on the number of modules licensed, the email list size and any related services. We also recognize usage revenue from our clients as a percentage of funds raised at special events, such as runs, walks and rides, and based on additional fees for their increased use of our COM solution. Pricing for Common Ground is based on the number of seats licensed. We typically do not derive revenue from deployment services for Common Ground as deployment activities are generally handled by third-party implementation providers. Common Ground is built on salesforce.com’s Force.com platform. Common Ground clients enter into a license agreement with us and separately enter into a license agreement with salesforce.com for use of its solution.

We believe the nonprofit market for on-demand constituent engagement solutions is large and underserved, and we plan to continue to invest in our business to pursue this opportunity. In particular, we expect to incur significant sales and marketing expenses to increase the number of clients on our COM platform and Common Ground application. We also expect to make substantial investments in research and development, primarily on new features, platform extensibility and Common Ground. We anticipate increased operating expenses as a result of becoming a public company and more generally as we seek to grow our business domestically and outside of the United States. We expect the percentage of revenue generated from clients outside the United States to increase.

Opportunities, Trends and Uncertainties

We have noted several opportunities, trends and uncertainties that we believe are significant to an understanding of our financial results:

·                  Increasing Adjusted EBITDA on an annual basis.  Our management and board of directors use Adjusted EBITDA to monitor the performance of our business. Our Adjusted EBITDA was $2.2 million for the three months ended March 31, 2010, compared to $551,000 for the three months ended March 31, 2009. The growth in Adjusted EBITDA was the result of the growth in our revenue and the improved productivity and scale of our business, combined with cost-saving measures we introduced in 2009 as a result of the economic slowdown. We expect Adjusted EBITDA on an annual basis to continue to grow in absolute dollars, but we expect its growth as a percentage of revenue to be slower. Adjusted EBITDA is not determined in accordance with GAAP and is not a substitute for or superior to financial measures determined in accordance with GAAP. For further discussion regarding Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Use of Non-GAAP Financial Measures” below.

·                  Growth and investment in Convio Go! and Common Ground. We introduced Convio Go!, our mid-market COM offering, in the first quarter of 2008 and Common Ground in the third quarter of 2008. We believe these solutions have been very well received by NPOs. Both Convio Go! and Common Ground are targeted primarily at mid-market NPOs and have had lower average pricing than our broader COM solution. Common Ground has higher gross margins than our COM solution because Common Ground is hosted on the Force.com platform and deployment services are typically provided by third parties. We intend to continue to invest significantly in Convio Go! and Common Ground research and development and sales and marketing. As a result, we expect the number of our mid-market clients to increase, and we expect our revenue from these clients to grow during 2010. However, these solutions are new, and it is difficult for us to predict whether NPOs will continue to adopt these solutions or what impact these solutions will have on our business. In addition, as we invest in significant upgrades or enhancements to our products to support these solutions, we may incur additional costs to develop internal use software that are capitalized under the applicable accounting guidance. Our capitalization of software development costs in future periods could cause our financial results to fluctuate and be more difficult to predict.

·                  Seasonality and fluctuations in usage revenue.  A significant portion of our usage revenue is derived from funds raised by our COM clients at special events. The growth and amount of usage revenue vary based on the number of events, the percent of funds raised online for these events, the growth and success of events and our signing of new clients for events. We recognize the usage revenue from these events when we bill our clients. Usage revenue is seasonal as events are typically held in the spring and fall. As a result, our usage revenue will be higher during the second and third quarters. In addition, period-over-period comparisons may be impacted significantly by the addition or loss of any special events of our enterprise clients.

18

Table of Contents

·                  Sales commissions expensed upon sale.  We expense sales commissions in the period in which we sign our agreements, but we generally recognize the related revenue over the terms of those agreements. We may report poor operating results due to higher sale commissions in a period in which we experience strong sales of our solutions, particularly sales to enterprise clients. Alternatively, we may report better operating results due to lower sales commissions in a period in which we experience a slowdown in sales. As a result, our sales and marketing expenses are difficult to predict and fluctuate as a percentage of revenue.

·                  Churn.  Our management uses churn to monitor the satisfaction of our clients, to evaluate the effectiveness of our business strategies and as a factor in executive compensation. We define churn as the amount of any lost software monthly recurring revenue and usage revenue in a period, divided by our software monthly recurring revenue at the beginning of the year plus our average usage revenue of the prior year. Despite the economic slowdown in 2009, we had annual churn of less than 10% which was lower than our churn in 2007 and 2008. However, our churn is variable especially on a quarterly basis, and accordingly we cannot predict our churn rate in future periods. Our use of churn has limitations as an analytical tool, and you should not consider it in isolation. Other companies in our industry may calculate churn differently, which reduces its usefulness as a comparative measure.

·                  Impact of economic conditions.  The downturn in economic conditions has caused many NPOs to be more cautious and to delay their purchases of technology and related services. During 2009, we faced increased pricing pressure on our COM solution, and sales of our COM solution to new clients declined. However, COM sales to existing clients increased. To incentivize NPOs to purchase our solutions, we invested heavily in the sales and marketing of our lower-priced Convio Go! and Common Ground solutions which resulted in higher sales of these solutions. We also offered short-term promotional sales programs. We will continue to evaluate our solutions and our sales and marketing programs based on general market conditions.

Critical accounting policies and estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are listed below:

·                  Revenue recognition;

·                  Allowance for doubtful accounts;

·                  Valuation of goodwill and identifiable intangible assets;

·                  Preferred stock warrants;

·                  Stock-based compensation; and

·                  Income taxes.

19

Table of Contents

During the three months ended March 31, 2010, there were no significant changes in our critical accounting policies or estimates. See our consolidated financial statements and footnotes and our Management’s Discussion and Analysis included in our Prospectus filed with the SEC on April 29, 2010, for additional information about these critical accounting policies, as well as a description of our significant accounting policies.

Use of Non-GAAP Financial Measures

We define Adjusted EBITDA as net income (loss) less interest income and gain (loss) on preferred stock warrant revaluation plus interest expense, provision for taxes, depreciation expense, amortization expense and stock-based compensation expense. We have included Adjusted EBITDA in this Form 10-Q because (i) we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in our industry as a measure of financial performance and (ii) our management uses Adjusted EBITDA to monitor the performance of our business.

We also believe Adjusted EBITDA facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures affecting interest income and expense, tax positions, such as the impact of changes in effective tax rates and the impact of depreciation and amortization expense.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

·                  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

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

·                  Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

·                  Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

·                  Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

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

20

Table of Contents

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:

Results of operations

The following table sets forth our results of operations for the periods indicated:

21

Table of Contents

The following table sets forth our results of operations expressed as a percentage of total revenue for each of the periods indicated:

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

The following discussion of our results of operations is based upon actual results of operations for each of the three months ended March 31, 2010 and 2009. Dollar information provided in the tables below is in thousands.

Revenue

Subscription and Services Revenue

Subscription and services revenue increased $1.1 million, or 8%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase in subscription and services revenue was attributable to revenue recognized from sales of our solutions to new clients and from sales of additional products and services to existing clients.

Usage Revenue

Usage revenue increased $953,000, or 69%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase was attributable to a $698,000 increase in revenue from special events and a $255,000 increase in additional fees for client usage above the levels included in monthly subscription fees. The increase in usage revenue from fees associated with client usage above the levels included in monthly subscription fees is primarily attributable to higher volumes of transactions related to online fundraising for disaster relief efforts.

22

Table of Contents

Cost of Revenue

Cost of revenue increased $101,000, or 2%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase was due primarily to a $117,000 increase in personnel costs and a $126,000 increase in transaction fees, offset by a $127,000 decrease in amortization of acquired technology. The increase in personnel costs was the result of increased IT and Services personnel. The increase in transaction fees was related to the corresponding increase in the volume of online transactions processed by outside service providers. Amortization of acquired technology decreased as a portion of the related intangible assets became fully amortized in February 2010. Gross margins for the three months ended March 31, 2010 were 62.3% compared to gross margins of 57.7% for the same period in the prior year.  This improvement in gross margins is driven primarily by the increase in usage revenue, which produces higher margins than our standard subscription and services revenue, in addition to the decrease in amortization of acquired technology.

Sales and Marketing

Sales and marketing expenses decreased $110,000, or 2% for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease was primarily attributable to a $219,000 decrease in personnel costs, offset by an $86,000 increase in marketing expenses. The decrease in personnel costs was attributable to a $149,000 decrease in commission expense and an $82,000 decrease in stock-based compensation partially offset by an increase in benefits costs. The decrease in commission expense is a direct result of an enterprise deal that was entered into during the first quarter of 2009.  As commissions are expensed at the time of sale, commission expenses are difficult to predict and fluctuate on a quarterly basis. The increase in marketing expense was related to an increase in market research and marketing programs in 2010 in order to drive new client acquisitions as well as marketing for Common Ground and Convio Go!.

Research and Development

Research and development expenses increased $30,000, or 1%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The increase was attributable to a $324,000 increase in personnel costs and a $41,000 increase in allocated overhead offset by a $116,000 decrease in contracting expenses all of which were a result of the decrease in our India-based contractors offset by a corresponding increase in full-time headcount. In addition, research and development expenses of $225,000 that were incurred to upgrade and enhance our internal use software during the three months ended March 31, 2010 were capitalized whereas there were no costs incurred during the three months ended March 31, 2009 that qualified for capitalization.

General and Administrative

23

Table of Contents

General and administrative expenses decreased $122,000, or 7%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease was due primarily to a $181,000 decrease in bad debt expense and a $131,000 decrease in personnel costs primarily related to stock-based compensation expense, partially offset by a $123,000 increase in contracting expense and a $35,000 increase in charitable donations. The decrease in bad debt expense was the result of an improvement in the aging of our accounts receivable. The increase in contracting expense was primarily related to increased legal and accounting fees. The increase in charitable donations was a result of a program the Company put in place during the first quarter of 2010 to match donations to Haitian relief efforts made by our employees.

Amortization of Other Intangibles

These amounts represent the amortization of intangibles recorded in connection with our acquisition of GetActive in February 2007 and are being amortized on a straight-line basis over the estimated useful lives. Amortization of other intangibles decreased as a portion of the related intangible assets became fully amortized in February 2010.

Interest Income (Expense)

Interest income (expense), net decreased $79,000, or 56% for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease was due to a decrease in our average outstanding debt.

Other Income (Expense)

We issued warrants exercisable for our convertible preferred stock in 2005. In the three months ended March 31, 2010, we recorded expense of $469,000 as the liability with respect to the warrants increased, and we recorded the corresponding increase in fair value. In the three months ended March 31, 2009, we recorded expense of $164,000 as the liability with respect to the warrants increased and we recorded the corresponding increase in fair value. Immediately prior to the effectiveness of our initial public offering we recorded a final fair value adjustment based upon the offering price of $9.00 per share and recorded other income of $454,000. Upon the closing of the offering, all outstanding preferred stock warrants were converted into warrants to purchase common stock and, accordingly, the liability was reclassified to additional paid-in capital during the second quarter of 2010.

Income Taxes

We recorded a provision for federal alternative minimum taxes and state income taxes totaling $24,000 and $25,000 for the three months ended March 31, 2010 and 2009, respectively. Our effective tax rate varies from the U.S. federal tax rate primarily due to our recorded valuation allowance against our deferred tax assets. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, we have provided a full valuation allowance against our deferred tax assets as we believe the objective and verifiable evidence of our historical pretax net losses outweighs the positive evidence of our pre-tax income for the three months ended March 31, 2010 and forecasted future results.

24

Table of Contents

Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. We will continue to monitor the positive and negative evidence and we will adjust the valuation allowance as sufficient objective positive evidence becomes available.

Net Income (Loss)

We generated net income of $182,000 for the three months ended March 31, 2010, compared to a net loss of $1.8 million for the three months ended March 31, 2009. The increase in net income arose principally from an increase in revenues.

Liquidity and capital resources

Prior to our initial public offering, we financed our operations and met our capital expenditure requirements primarily through the private sale of equity securities and debt financings as well as cash flows from operations in 2009 and the three months ended March 31, 2010. As of March 31, 2010, we had $16.2 million of cash and cash equivalents and $20.2 million of working capital excluding deferred revenue. As of March 31, 2010, we had an accumulated deficit of $18.1 million. We funded this deficit from $47.4 million in net proceeds raised from the sale of our preferred stock. We last sold shares of our preferred stock in April 2007. On May 4, 2010, we completed an initial public offering of our stock which included 3,789,527 shares sold by us. In addition, the underwriters exercised their option to purchase an additional 769,909 shares from us to cover over-allotments. After deducting the payment of underwriters’ discounts and commissions, the net proceeds from the sale of shares were approximately $38.2 million.

The following table sets forth a summary of our cash flows for the periods indicated:

Net Cash Provided By (Used In) Operating Activities

During the three months ended March 31, 2010, we generated $451,000 of cash from operating activities, which consisted of our net income of $182,000 and non-cash charges of $2.0 million. These amounts were partially offset by $1.7 million of cash outflows from changes in operating assets and liabilities. The cash outflows were primarily attributable to a $1.1 million increase in prepaid expenses as a result of deferred stock offering costs paid during the three months ended March 31, 2010, a decrease in accounts payable and accrued liabilities of $121,000 due to the timing of payments and a decrease in deferred revenue of $440,000 as a result of the timing of transactions and various sales promotions offered during 2009 which resulted in deferred payments.

During the three months ended March 31, 2009, we utilized $570,000 of cash from operating activities, which consisted of our net loss of $1.8 million, offset by non-cash charges of $2.2 million. In addition, cash outflows from changes in operating assets included an increase in accounts receivable of $2.3 million driven by sales activities and usage revenue growth during the three months ended March 31, 2009 and an increase in prepaid expenses of $616,000 due to the timing of payments for software term licenses and maintenance, insurance premiums and marketing programs or events that occur in or cover future periods. These cash outflows were partially offset by cash inflows from changes in operating liabilities which included an increase in deferred revenue of $2.4 million resulting from the timing of transactions and a large annual prepayment which was partially offset by a decrease in accounts payable and accrued liabilities of $367,000 due to the timing of payments.

25

Table of Contents

Net Cash Used In Investing Activities

Net cash used in investing activities increased $595,000 for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 as a result of a $370,000 increase in capital expenditures and the capitalization of $225,000 of software development costs incurred to upgrade and enhance our internal use software during the three months ended March 31, 2010. Net cash used in investing activities for the three months ended March 31, 2009 was comprised solely of capital expenditures.

Net Cash Used In Financing Activities

Net cash used in financing activities decreased $666,000 for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 as a result of a $580,000 decrease in payments made on long-term debt and capital leases and an $86,000 increase in proceeds received from the issuance of common stock upon the exercise of stock options.

On May 4, 2010, we closed our initial public offering raising net proceeds of approximately $38.2 million after deducting underwriting discounts and commissions. We believe that our cash flows from operations and our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. However, we may elect to raise additional capital through the sale of additional equity or debt securities or obtain a credit facility to develop or enhance our services, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If we elect, additional financing may not be available in amounts or on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.

Contractual Obligations and Commitments

During the three-month period ended March 31, 2010, there were no material changes to our contractual obligations and commitments disclosures as set forth under the caption, “Contractual Obligations and Commitments” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, as reported in our Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on April 29, 2010.

Credit Facilities

On July 31, 2009, we amended our credit facility with Comerica Bank to a $10.0 million revolving line of credit plus an existing term loan. As of March 31, 2010, we had $975,000 outstanding under the revolving line of credit and $936,000 outstanding under the term loan. Under our revolving line of credit, $1.0 million is available on a non-formula basis. The remaining $9.0 million is formula-based and capped at 80% of eligible accounts receivable. Amounts outstanding under this revolving line of credit bear interest at the greater of the daily adjusting LIBOR (floor of 2%) plus 300 basis points or the daily adjusted LIBOR plus 325 basis points. Any amounts borrowed under this facility may be repaid and reborrowed at any time prior to April 26, 2011, at which time the entire principal balance outstanding becomes due and payable. The term loan bears interest at the same rate as the revolving line of credit above. This facility is secured by substantially all of our assets, including intellectual property.

On May 12, 2010, we paid approximately $1.9 million to our principal lender, Comerica Bank, in satisfaction of the balance outstanding on our line of credit and term loan utilizing proceeds from our initial public offering. As a result, we have the ability to borrow $5.1 million under our revolving line of credit. We are in compliance with all the related financial covenants and restrictions included in these agreements.

In conjunction with the April 3, 2009 execution of our Washington D.C. operating lease, we were required to provide a $350,000 standby letter of credit with Comerica for the benefit of the landlord to secure the office space per the lease agreement. In addition, we still have a standby letter of credit in the amount of $2.3 million for the benefit of the landlord of our Austin, Texas facility, resulting in a total standby letter of credit of $2.6 million of the formula-based $9.0 million line of credit.

26

Table of Contents

In addition to the above agreement, we entered into a capital lease agreement with ATEL Ventures on March 15, 2006 to fund certain purchases of equipment. The ability to borrow under this lease agreement expired on March 31, 2007. As of March 31, 2010, our outstanding capital lease obligation was $5,000 and the final payment was made on this lease during April 2010.

Off-Balance Sheet Arrangements