UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 001-33790

 

SoundBite Communications, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Registrant’s telephone number, including area code:

(781) 897-2500

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 o

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

As of February 15, 2011, the aggregate market value of common stock (the only outstanding class of common equity of the registrant) held by non-affiliates of the registrant was $28.2 million based on a total of 9,844,854 shares of common stock held by non-affiliates and on a closing price of $2.86 on June 30, 2010 for the common stock as reported on The NASDAQ Global Market.

 

As of February 15, 2011, 16,385,146 shares of common stock were outstanding.

 

Documents Incorporated by Reference

 

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days after December 31, 2010. Portions of such proxy statement are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this annual report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

SOUNDBITE is our registered service mark in the United States, and SOUNDBITE AGENT PORTAL, SOUNDBITE DIALOG ENGINE and SOUNDBITE ENGAGE are our service marks. This annual report on Form 10-K also includes trademarks, trade names and service marks of other entities.

Forward-Looking Information

 

This annual report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, including information relating to revenues generated from our on-demand automated voice messaging service to businesses, governments and other organizations, our efforts to expand our presence in large in-house, or first-party, collection departments, and other functional departments, of organizations and in, expected increases in cost of revenues, our expected gross margins for future periods, our spending on research and development, our ability to remain competitive and achieve future growth, information with respect to other plans and strategies for our business and factors that may influence our revenues for 2011 and thereafter. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions are intended to identify our forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those described in “Item 1A. Risk Factors” and elsewhere in this annual report and that are otherwise described from time to time in our reports filed with the SEC after the filing of this annual report. The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any obligation to update these forward-looking statements in the future, except as specifically required by law or the rules of the SEC. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this annual report.

 

This annual report on Form 10-K also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.

 

 

Overview

 

We provide a cloud-based, multi-channel proactive customer communications, or PCC, service that enables organizations to design, execute and measure communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use our SoundBite Engage platform to communicate with their customers through automated voice messaging or AVM, predictive dialing, text and email messages that are relevant, timely, personalized and engaging.

 

Our service is provided using a multi-tenant, cloud architecture that enables a single platform to serve all of our clients cost-effectively. Our cloud architecture delivers our service on an on-demand, or software-as-a-service or SaaS, basis over the internet, eliminating the need for an organization to invest in or maintain new hardware or to hire and manage dedicated information technology staff. In addition, we are able to implement new features on our platform that become part of our service automatically and can benefit all clients immediately. Our secure platform is designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platform to scale reliably and cost-effectively.

 

In 2010 our service was used directly by more than 200 organizations, with an additional number of end-clients being served through our partnership channel. Direct sales were made principally to large business-to-consumer, or B2C, companies in the financial services, telecommunications and media, retail, and utilities industries, as well as companies in the collections industry. Our partnership channel helps us reach beyond our direct key verticals into other industries. In 2010, our service was used by 25 companies on the Fortune Global 500 list. In North America, our service is used by 7 of the 10 largest issuing banks, 5 of the 10 largest U.S. telecommunications and media providers, 4 of the 10 largest U.S. retailers, and 10 of the 20 largest U.S. utility providers. Our clients also include approximately 60 collections agencies. Our clients are located principally in the United States, with a limited number located in Europe.

 

We were founded in Delaware in April 2000. Our principal executive offices are located at 22 Crosby Drive, Bedford, Massachusetts 01730, and our telephone number is (781) 897-2500. Our website address is www.soundbite.com. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual report.

 

Industry Background and Trends

 

Improving customer communications is a key strategy by which businesses and other organizations can increase revenue, drive market share and control operational costs. In recent years, businesses have begun to implement PCC solutions in order to help them build trusted, long-term, profitable relationships with their customers. With a proactive customer communication, a timely message can be sent to a customer’s preferred access device using one or more communications channels. The customer is then able to respond immediately over its preferred communications channel.

 

Shift from Reactive to Proactive Customer Communications

 

Traditionally, businesses have focused their customer communications on responding quickly and effectively to customer inquiries and requests. These reactive communications are of limited effectiveness, however, in helping a business build strong customer relationships that will lead to further revenue opportunities.

 

In recent years, new technologies have made it feasible for businesses to communicate with their customers proactively, initiating outbound messages rather than waiting to respond to inbound customer inquiries. Proactive customer communications enable businesses to communicate more effectively and efficiently throughout the customer lifecycle as the customer considers, purchases and uses a product or service. By proactively communicating timely and relevant information to their customers, businesses can

increase customer satisfaction and loyalty to drive revenue and can reduce inbound communications, resulting in operational cost savings.

 

Initially, PCC solutions were adopted for collection campaigns and simple one-way notifications, where large numbers of communications needed to be delivered quickly and reliably. In collection applications, PCC solutions often supplant on-premise predictive dialers, which automatically dial batches of telephone numbers, detect how the calls are answered, screen busy signals and answering machines, and then pass live calls to contact center agents. Because on-premise predictive dialers are designed primarily for call handling by a live agent, they do not deliver the same cost savings as automated PCC applications. Unlike multi-channel PCC solutions, on-premise predictive dialers communicate only through voice messaging, which limits the ability of a business to personalize customer communications and to accommodate customer preferences for varied communications channels. Moreover, on-premise predictive dialers are typically limited in the flexibility they provide and lack the capability to scale quickly.

 

More recently, several consumer communications trends have been driving the implementation of PCC solutions for marketing, customer care, and payment applications:

 

 

Changing market dynamics — including increased competition, heightened expectations for customer service, rising costs of customer service, a dynamic regulatory environment, and a weak economy — have further heightened the need for businesses to shift from reactive to proactive customer communications. In order to increase customer loyalty and satisfaction and generate more revenue at a lower cost, businesses cannot simply wait for customers to contact them.

 

Requirements for PCC Solutions

 

Businesses increasingly require a comprehensive PCC solution that will enable them to communicate proactively throughout the customer life-cycle via marketing, customer care, payments and collections applications. Based on our review of third-party reports and other information, we estimate that the market for PCC solutions will have a long term growth rate of approximately 12%. A PCC solution must enable businesses to manage all digital communications through key channels such as voice, text and email, and be designed with the ability to add support for other channels as they emerge and become widely adopted. It must offer businesses the flexibility to use the most appropriate channel based on a customer’s communications preferences, the channel’s efficacy, the message content or other business goals. The PCC solution should provide a business with a unified view of its customers’ communications in order to facilitate consistent and personalized communications at every stage in the customer lifecycle. It should have the ability to capture and manage an increasing variety of both customer and client preferences related to the communication outreach. In addition, the PCC solution should increase contact center efficiencies not only by further increasing the productivity of contact center agents, but also by facilitating “agentless” communications where appropriate.

In order to support coherent, preference-based multi-channel communications, a PCC solution should be available as a cloud application delivered using a SaaS model. A cloud-based offering enables a PCC solution to be delivered and deployed to a business quickly and cost-effectively in order to meet the fast-changing requirements of the PCC market. Moreover, a cloud platform can provide the flexible, robust architecture needed to respond to — and take advantage of — current and future technological advances and consumer communication trends.

 

Our Solution

 

Clients can design, execute and measure proactive customer communications across the customer lifecycle using SoundBite Engage, our multi-channel communications platform. Our cloud-based offering and related client management services are designed to help clients communicate quickly with large numbers of customers through interactive dialogs that are relevant, timely, personalized and engaging.

 

Organizations use our service to initiate and manage communication campaigns for a variety of marketing, customer care, payment and collection processes. We assist clients in selecting service features and adopting best practices that will enable them to use our multi-channel PCC platform effectively. We offer performance analytical capabilities to assist clients in improving the design and execution of their campaigns. Our secure platform is designed to scale reliably and cost-effectively. Key benefits of our service for clients include:

 

Unified communications across multiple channels.  Using our service, clients can interact with their customers by AVM, predictive dialing, text or email, or by blending a combination of those channels. As a result, a client can select a channel or channels based on a combination of a customer’s channel preferences, the channel’s efficacy, the message content and other business goals.

 

Lower Total Cost of Ownership.  Our service, unlike an on-premise predictive dialer, does not require clients to invest in or maintain new hardware, or to hire and manage dedicated information technology staff. Because new features are implemented on our platform, they become part of our service automatically and benefit clients immediately.

 

Automation of Communications.  Clients can reduce their contact center expense by using our service to fully automate a variety of customer communications, ranging from simple one-way notifications to more sophisticated customer interactions such as surveys or payments.

 

Improvement of Contact Center Performance.  Our service automates many of the routine tasks otherwise handled by a contact center agent, thus reducing operating costs and freeing agents to focus on more significant tasks. By intelligently routing messages to the appropriate agent, our service provides those agents with access to customer data and alternative channels to interact with customers, thereby increasing agent productivity.

 

Burstable Capacity.  Our platform has the ability to initiate more than one million outbound messages each hour. This capacity enables clients to “burst” extremely large campaigns during short time periods, when customers are most likely to be responsive.

 

Rapid Initiation and Modification of Campaigns.  A new client can initiate its first campaign using our service in a period as short as a week, using only its existing contact center infrastructure and Internet connections. New clients avoid the delay associated with installing the hardware and software required for an on-premise predictive dialer. Using the performance analytics of our service, clients can improve the design and execution of existing campaign strategies immediately by self service or quickly through our professional services organization.

Our Strategy

 

Our objective is to become the leading global provider of cloud-based, multi-channel PCC solutions. To achieve this goal, we are pursuing the following:

 

Expand Internationally.  We have enhanced our service offering to enable us to deliver multi-channel proactive customer communications in countries outside North America. We will seek to invest and aggressively market our service internationally, both directly and through partners, in order to both broaden and deepen the international relationships we have established as well as expand our penetration into new clients and resellers. In 2010 we established a subsidiary and a new data center in the United Kingdom to support our international expansion.

 

Target mobile opportunities.  SoundBite Engage builds upon our award-winning technology by offering new features that facilitate interactive communications between clients and their customers, including automated and agent-assisted customer dialog over the text messaging channel. In 2010, we enhanced our Dialog Engine and Agent Text Portal, which powers our interactive mobile messaging capability. As mobile messaging becomes increasingly important to clients, we will seek to deepen our mobile penetration within our client base as well expand into new opportunities.

 

Extend Technology Leadership into Hosted Contact Centers.  In 2010 we released an update of Engage, which delivered full support for predictive dialing and further enhanced our voice channel offering. The addition of this capability gives us a compelling contact center offering for outbound communications and opens up opportunities to expand into organizations that previously have relied solely on on-premise dialers.

 

Increase Revenue from Indirect Channel.  We partner with resellers, solution providers, original equipment manufacturers or OEMs, and international distributors in order to broaden our distribution reach. Our Business Partner Program enables us to offer our service more broadly within our target markets, to enter new vertical markets, to augment our international expansion, and to sell cost effectively to smaller organizations. We will seek to increase our revenues from the indirect channel both by leveraging existing relationships and by selectively recruiting additional new partners.

 

Selectively Seek Strategic Acquisitions.  To complement and accelerate our internal growth, we will selectively pursue acquisitions of businesses, technologies and products that will expand the feature set of our service, provide access to new markets or clients, or otherwise complement our existing operations.

 

Our Service

 

Clients use the SoundBite Engage platform to create and manage campaigns for a variety of marketing, customer care, payments and collections processes. A campaign is a series of communications with a targeted group of customers, typically for a defined period of time. The targeted group is identified by a contact list containing customer-specific attributes, including first and last names, telephone numbers, e-mail addresses and other information specific to the campaign. A campaign often encompasses multiple passes through the contact list. Campaigns can be conducted using contact center agents or on an agentless basis. Sample campaigns include:

 

 

Our service is provided using a multi-tenant architecture, which enables a single PCC platform to serve our clients cost-effectively. To use our service, an organization does not need to invest in or maintain new hardware or to hire and manage dedicated information technology staff. In addition, we are able to implement new features on our platform that become part of our service automatically and can benefit all clients immediately. As a result, a new client can begin using our service within a week and take advantage of new features as they become available.

Our secure platform is designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platform to scale reliably and cost-effectively. We provide our service under a usage-based pricing model. We will use our platform to introduce additional features, which we expect to offer using either a usage-based or subscription pricing model.

 

The following diagram illustrates the key elements of our SoundBite Engage platform, which we use to provide our service:

 

 

Client Access Layer.  Clients access our service using one of the following secure interfaces:

 

Client Web Interface enables a client, using a web browser, to upload contact lists, initiate and manage campaigns, and generate near real-time customized reports. All of our platform features can be accessed through this secure, easy-to-use interface, which makes our service available to clients on a self-service basis.

 

FTP Automation facilitates a client’s uploading of contact lists and other information by providing the ability for a client to transfer at a pre-determined time a file using a variety of transfer protocols. Protocols supported include FTP, FTPS and SFTP.

 

Web Services API allows a client’s systems to interact directly with our platform. Web Services API is an application programming interface that provides clients with the ability to load information directly from any customer information management system. This approach also enables additional applications, such as fraud notifications and enhanced computer telephony integrations that rely on real-time data exchange.

 

Agent Portal is a web-based user interface that enables automated and agent-assisted interactive customer communications over the voice and text messaging channels. Clients use Agent Portal to support messages that, because of message content or business rules, are best handled by a customer support agent. Agent Portal allows agents to log in and view message history and to interact with customers in near real-time. SoundBite Engage can seamlessly transition between fully automated and agent-assisted dialogs, and supervisors can monitor agent activity as well as overall campaign status.

 

CTI Connect bridges an organization’s contact center infrastructure to the SoundBite Engage Platform, enabling a high-quality customer service experience while reducing operational costs. Through computer telephony integration, or CTI, functionality, contact centers can match caller needs to agent resources and easily integrate functions such as screen pops, intelligent call routing and dynamic call pacing.

Enterprise Management.  This component provides a client with the ability to manage, using a single control panel, all campaigns in any of the client’s accounts. Accounts and privileges can be created and customized at the enterprise level for greater security. The Enterprise Management component allows a client to share interaction scripts and suppression lists across the client’s entire enterprise, and reports covering all of the client’s accounts can be provided on an enterprise-wide basis.

 

Core Components.  Our platform includes the following core components, each of which can be accessed via the web or by integrating a client’s customer management system with our platform:

 

Contact and Preference Management manages the importing and accessing of a client’s contact list. This component also manages contact suppression, which removes one or more contacts from a campaign either before the campaign begins or while the campaign is progressing. For example, contacts may be suppressed due to a customer that previously expressed a preference not to receive the proposed type of communication or a recipient that takes the requested action before all of the passes within a campaign are completed.

 

Campaign Strategy Manager defines the frequency and nature of the customer interactions to be employed to achieve the goals of a campaign. This component includes the following features:

 

 

Campaign and Contact Center Management supports the initiation and management of campaigns. For those campaigns that require agents, this component manages the routing of qualified customers to agents and seeks to maximize the use of agents’ time while minimizing customers’ wait time. This component includes the following features:

 

 

Analytics and Reporting produces reports, in a variety of formats that can be exported at any time during or after a campaign. We offer flexible report formatting, scheduling and delivery options. Reports typically contain details regarding contact attempts and outcomes. Reports are available for a specific campaign, or for all of the campaigns of a department, group or other client account. This component also includes performance analytics capabilities to assist clients in improving the design and execution of their campaigns. For example, a client might determine, based on our analysis of campaign data, that the client’s next campaign should be executed at a different time of day or should target wireless customers via text, rather than via voice.

 

Dialog Engine tests and manages any number of contact scripts to be used to determine the content presented during customer interactions. In a telephone call, for example, a script specifies the sequence of audio prompts that are played and the step or action to result when a customer takes a particular action, such as pressing a button on the telephone or saying “yes.” An individual customer interaction is supported by a flexible scripting

language and personalized messaging. Scripts can be modified and repurposed over time. Our personalized voice messages use professional voice talent recordings or text-to-speech technology to insert customer-specific information into an interaction. In a typical text interaction, a script may specify the action to be taken based upon a customer’s response to an initial outbound text message, such as requiring some form of authentication. This component supports the following activities:

 

 

Delivery Channels.   Our platform supports AVM, inbound voice, predictive dialing, outbound and inbound text (both standard and Free-to-End User, or FTEU), and outbound email communications. An outbound voice or text channel can be used for either a contact center agent-assisted or agentless campaign. An inbound channel is typically used in support of outbound campaigns or as part of an inbound-only agentless campaign. These delivery channels can be used individually or combined on our platform.

 

Security and Compliance.   Our platform includes a number of security features designed to keep customer data safe and confidential, such as encryption of sensitive data, secure transmission, audit trails, non-shared accounts, need-to-know access policies and formal incident response. Clients can elect to use supplemental security features such as e-mail and FTP address restrictions for report deliveries and encryption of reports. Compliance management provides a client with the ability to define a set of rules to control when a customer is contacted based on the customer’s location, which is determined by reference to either the phone number being contacted or the address of the customer.

 

In December 2010, we renewed our compliance status as a Payment Card Industry Data Security Standard, or PCI/DSS, compliant Level 1 Service Provider, which enables us to work closely and exchange extensive data with banks and credit card companies. We have registered with the U.S. Department of Commerce under the European Union Safe Harbor Principles relating to the protection of personal data. In addition, we have instituted periodic internal and third-party reviews of our security structure, including an annual voluntary external Type II audit of our information technology-related control activities for our platform under Statement on Auditing Standards No. 70, Reports on the Processing of Transactions by Service Organizations.

 

Our Client Management Services

 

Our Client Management organization helps clients select service features and adopt best practices that will enable the clients to use our multi-channel PCC platform effectively. The organization provides varying levels of support, such as managing entire campaigns, providing best practice recommendations and supporting self-service clients. It offers a range of services that includes script development, campaign strategy, professional voice talent recording, custom reporting and detailed analysis of campaign results. At February 15, 2011, our Client Management organization had 41 employees.

 

Our Client Management organization consists of three principal teams:

 

Enterprise Program Directors help key clients fully understand their customer communications needs and then assist those clients in designing solutions to meet defined goals. This team works with sales personnel to help design successful program strategies and ensure effective execution. The team also works directly with prospective and existing clients to determine the most effective use of our platform in their businesses. Demonstrations of our platform are used to highlight features and functionality that are available in current or will be available in future releases.

 

Professional Services members provide implementation services and project management, including detailed requirements gathering, test, design and setup script development, voice talent recording, and all aspects of file interchange. This team builds and maintains a library of best practices based upon experience gained in helping design and optimize campaigns.

Training, Documentation and General Help Desk members provide clients with training both initially and on a continuing basis, in order to assist the clients in using our service more effectively and efficiently. Training modules include self-paced tutorials, on-line job aids and live instructor led classes. Our help desk is available around-the-clock to provide immediate support to clients.

 

Business Segments and Geographic Information

 

We manage our operations on a consolidated, single operating segment basis for purposes of assessing performance and making operating decisions. Accordingly, we have only one reporting segment. Organizations in the United States accounted for substantially all of our revenues in each of 2010, 2009, and 2008.

 

Clients

 

In 2010 our service was used directly by more than 200 organizations, with an additional number of end-clients being served through our partnership channel. During the latter half of 2010, we instituted a program to move some of our smaller clients to the reseller channel and we expect the number of end-clients through that reseller channel to continue to grow. Our clients are located principally in the United States, with a limited number in Europe.

 

Direct sales are made principally to large B2C companies in the financial services, telecommunications and media, retail, and utilities industries, as well as companies in the collections industry. We target B2C companies in industries that are characterized by the need for regular interactions with large consumer bases throughout the phases of the customer lifecycle. Our service is used by approximately 60 collections agencies. Our partnership channel helps us reach beyond our direct key verticals into other industries.

 

Our service is used by a number of the largest B2C companies around the world. In 2010, 25 of the Global 500 (measured by revenue) used our service, and in North America, our service was used by clients in our targeted industries, including

 

 

We provide our service under a usage-based pricing model, and our pricing agreements with the significant majority of our clients do not require minimum levels of usage or payments.

 

T-Mobile USA, Inc., a provider of mobile telephone services, and NCO Group, a provider of business process outsourcing services, each accounted for more than ten percent of our revenues in each of 2010, 2009 and 2008. Neither T-Mobile USA, Inc. nor NCO Group accounted for twenty percent or more of our revenues in any of those years.

 

Sales and Marketing

 

We offer our service principally through our industry-aligned direct sales force. Sales leads are generated through cold calling, client and other referrals, and a variety of marketing programs. Once a lead is qualified, the sales process typically involves a web-based or in-person presentation and demonstration, together with pre-sales support from our Client Management organization. These presentations focus on explaining the benefits of our service offering, including the speed with which the service can be deployed and demonstrating the potential return on investment from the use of our service. We encourage prospective clients to engage in a pilot campaign to evaluate the efficacy of our service. As of February 15, 2011, our direct sales force consisted of 18 employees located in the United States and the United Kingdom.

 

In order to broaden our distribution reach, we also offer our service through an indirect channel comprised of resellers, solution providers, OEMs and international distributors. Using our Web Services API, OEMs can integrate their applications into the SoundBite Engage platform. In January 2009 we launched our

Business Partner Program to enable us to offer our service more broadly within our target markets, to enter new vertical markets, to augment our international expansion. During 2010, we successfully transitioned to selected partners a number of smaller clients that were better suited working with a channel partner and we added a number of resellers both in the United States and internationally.

 

Our marketing communications and programs strategy has been designed to increase awareness of our service, generate qualified sales leads and expand relationships with existing clients. We reinforce our brand identity through our website and public relations, which are intended to build market awareness of our company as a leading provider of PCC solutions. We host webinars, sponsor white papers, build relationships with leading analysts, and participate in industry events and associations. We distribute communications to existing and prospective clients through social media networks such as Twitter and Facebook. At February 15, 2011, our marketing group had 10 employees.

 

Our sales and marketing expenses totaled $14.2 million in 2010, $14.8 million in 2009 and $18.0 million in 2008.

 

Technology, Development and Operations

 

Technology

 

We launched our first multi-tenant on-demand service in 2000. Our service is provided through a secure, scalable platform written primarily in Java using the Java 2 Enterprise Edition, or J2EE, development framework. We use a combination of proprietary and commercially available software, including the Apache web server, the Oracle WebLogic and JBoss application servers, Nuance text-to-speech and automated speech recognition software, and the Oracle and MySQL databases. The software runs primarily on Linux servers.

 

Our service manages clients as separate tenants within our platform. As a result, we amortize the cost of delivering our service across our entire client base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our solution faster than on-premise solutions.

 

Our service enables clients to import and access data independent of format and to customize the script interaction and reporting output of their campaigns. The web user interface of our platform can be customized for a client that wishes to have a specific “look and feel” across its enterprise.

 

Research and Development

 

Our research and development organization is responsible for developing new features and other new offerings for our platform. The organization also is responsible for performing platform functionality and load testing, as well as quality assurance activities. The organization currently is working on a number of enhancements, including work related to enhanced predictive capabilities, enhanced mobile messaging, additional support for customer preferences, advanced channel support and the Web Services API. In addition the organization is continuing to enhance the scalability and reliability of our core platform. At February 15, 2011, our research and development organization had 33 employees.

 

Our research and development expenses totaled $5.9 million in 2010, 5.6 million in 2009 and $5.2 million in 2008.

 

Operations

 

We serve our clients from four third-party hosting facilities, which are located in Ashburn, Virginia, Somerville, Massachusetts, Toronto, Ontario, and Slough, United Kingdom.

 

All of these facilities provide around-the-clock security personnel, video surveillance and biometric access screening, and are serviced by uninterrupted power supplies, which are backed up by diesel-electrical generators for extended power loss. Each facility employs fire detection apparatus as well as dry-pipe pre-action fire suppression systems. We maintain insurance policies covering substantially all of the assets

deployed at our hosting facilities. For information regarding the facility locations, operators and agreement terms, see “Item 2. Properties.”

 

All of our facilities have multiple Tier 1 interconnects to the Internet and are connected by a SONET ring. We have multiple telecommunication carriers for voice termination, including Global Crossing, Level 3, Qwest and Equinix. We have selected our mix of telecommunication carriers to limit service interruptions, even in the event of a localized loss of a major provider.

 

We own all of the hardware deployed in support of our platform. We continuously monitor the performance and availability of our service. We designed our service infrastructure using load-balanced web server pools, redundant interconnected network switches and firewalls, clustered application servers and fault-tolerant storage devices. Production databases are backed up on a daily basis to ensure transactional integrity and restoration capability. During 2008, we completed the migration of our infrastructure to voice over Internet protocol, or VoIP.

 

We have deployed a security infrastructure that includes internal and perimeter firewalls, network intrusion detection, and host intrusion detection systems. We maintain on-site as well as off-site third party log-aggregation services for audits and forensics. All inter-site connectivity is either over private wide area networks or secure virtual private networks. We perform at least three internal vulnerability scans of our production equipment every week. See “— Our Service — Security and Compliance” above.

 

We have service level agreements or arrangements with a small number of clients under which we warrant certain levels of system reliability and performance. If we fail to meet those levels, those clients are entitled to either receive credits or terminate their agreements with us. We did not provide any material credits in 2010, 2009 or 2008 pursuant to any service level provisions.

 

At February 15, 2011, our operations organization had 8 employees.

 

Competition

 

To date, we have derived revenue principally from our voice and text services and, to a lesser extent, from email and client management services. The market for customer communications solutions is intensely competitive, changing rapidly and fragmented. The following summarizes the principal products and services that compete with our service.

 

On-Premise Predictive Dialers

 

Our voice service competes with on-premise predictive dialers from established vendors such as Aspect and Avaya as well as a number of smaller vendors. Our voice service competes with on-premise predictive dialers on the basis of both available features and delivery model, including:

 

 

A number of predictive dialer vendors offer forms of hosted solutions, which we believe are typically services in which predictive dialers are hosted by first-generation application service providers, or ASPs, rather than on a multi-tenant basis. We believe these ASP-hosted services are deployed on individual servers and application infrastructures, using dedicated predictive dialers. We compete with ASP-hosted predictive dialer services on the same basis as on-premise predictive dialers, except that deployment speed and required capital investment are less significant in differentiating our service from these ASP-hosted services.

 

Predictive dialers have been the basic method of automated customer communications for the last two decades, particularly for collections activity. The vast majority of telephony customer contact today is

completed using predictive dialer technology. Many organizations are likely to continue using on-premise predictive dialers that have been purchased and are still operative, despite the availability of new features and functionality in PCC services.

 

Some vendors of predictive dialers, particularly Aspect and Avaya, have significantly greater financial, technical, marketing, service and other resources than we have. Many of these vendors also have larger installed client bases and longer operating histories. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns.

 

Hosted Customer Communications Solutions

 

Our service also competes with a number of hosted customer communications solutions. Most vendors of hosted customer communications solutions focus on providing a basic service with limited features and compete principally on the basis of price. These vendors consist principally of a number of relatively small, privately held companies and a small number of larger, multi-product line companies such as CSG Systems, Nuance Communications and West Corporation. We compete with these vendors on the basis of the following:

 

 

We also compete directly with a small number of vendors, such as Adeptra and Varolii, that deliver services utilizing one or more channels on a SaaS delivery model similar to ours. These vendors focus on providing hosted services with a broader array of features, such as advanced reporting capabilities and supporting professional services. These vendors generally compete on the basis of return on investment and features, rather than price, and focus their principal selling efforts on differing groups of industries. We compete with these vendors based on the breadth of our multi-channel functionality, flexibility of our usage-based pricing model, the analytical capabilities of our platform and our referenceable client base.

 

In the past few years, there have been a number of new entrants in the hosted customer communications market. Most of these new entrants offer basic, price-oriented customer communications services hosted on an ASP model. We believe that companies wishing to target this portion of the market may seek to acquire existing vendors. It is likely any such acquiring companies would have greater financial, technical, marketing, service and other resources than we have and may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer.

 

Intellectual Property

 

Our success depends in part on our ability to protect our intellectual property and to avoid infringement of the intellectual property of third parties. We rely on a combination of trade secret laws, trademarks and copyrights in the United States and other jurisdictions, as well as contractual provisions and licenses, to protect our proprietary rights and brands. We cannot, however, be sure that steps we take to protect our proprietary rights will prevent misappropriation of our intellectual property.

 

We have adopted a strategy of seeking patent protection with respect to certain technologies used in or relating to our products. We have three issued U.S. patents, which relate to: (a) a voice message delivery method and system (patent number U.S. 6,785,363 B3) that was issued in August 2004 and will expire in January 2021; (b) an address book for a voice message delivery method and system (patent number U.S. 6,829,331 B2) that was issued in December 2004 and will expire in January 2022; and (c) answering machine detection for voice message delivery and system (patent number U.S. 7,054,419) that was issued in

May 2006 and will expire in April 2021. We have nine pending U.S. patent applications, six of which relate to the optimization of interactive communications campaigns and three of which relate to the provision of messages to mobile devices in an enterprise centric architecture. Additionally, we have two provisional filings related to our voice services offering. We evaluate ideas and inventions for patent protection with a team of engineers and product managers, in consultation with our outside patent counsel. We expect to file additional patent applications in the ordinary conduct of our business.

 

“SoundBite” is our sole registered service mark in the United States. We have unregistered service marks identifying some of our service offerings. None of our unregistered service marks is material to our business. We seek to protect our source code for our platform, as well as documentation and other written materials, under trade secret and copyright laws.

 

We may not receive competitive advantages from the rights granted under our intellectual property rights. Others may develop technologies that are similar or superior to our proprietary technologies or duplicate our proprietary technologies. Our pending and any future patent applications may not be issued with the scope of claims sought by us, if at all, or the scope of claims we are seeking may not be sufficiently broad to protect our proprietary technologies. Our issued patents and any future patents we are granted may be circumvented, blocked, licensed to others or challenged as to inventorship, ownership, scope, validity or enforceability. We may be advised of, or otherwise become aware of, prior art or other literature that could negatively affect the scope or enforceability of any patent. If our issued patents, any future patent we are granted, our current or any future patent application, or our service is found to conflict with any patents held by third parties, we could be prevented from selling our service, any current or future patent may be declared invalid, or our current or any future patent application may not result in an issued patent. In addition, in foreign countries, we may not receive effective patent and trademark protection. We may be required to initiate litigation in order to enforce any patents issued to us, or to determine the scope or validity of a third party’s patent or other proprietary rights. In addition, in the future we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights, as described in “Item 1A. Risk Factors — Our product development efforts could be constrained by the intellectual property of others, and we could be subject to claims of intellectual property infringement, which could be costly and time-consuming.”

 

We seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute nondisclosure and assignment of intellectual property agreements and by restricting access to our source code. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties.

 

Our service offering incorporates technology licensed from third-party providers. If these providers were no longer to allow us to use these technologies for any reason, we would be required to:

 

 

Any one of these outcomes could delay further sales of our service, impair the functionality of our service, delay the introduction of new features or offerings, result in our substituting inferior or more costly technologies, or injure our reputation. In addition, we may be required to license additional technology from third parties, and we cannot assure you that we could license that technology on commercially reasonable terms or at all. Because of the relative immateriality of this third-party licensed technology as well as the availability of alternative equivalent technology, we do not expect that our inability to license this technology in the future would have a material effect on our business or operating results.

 

Government Regulation

 

Our business operations are affected, directly or indirectly, by a wide range of U.S. federal and state and international laws and regulations, including laws and regulations that restrict customer communications

activities using our service, our handling of information and other aspects of our business. On the U.S. federal level, for example, regulatory measures include:

 

 

Many states and state agencies in the U.S, have also adopted and promulgated laws and regulations governing debt collection, contact with wireless, business and residential telephone numbers, telemarketing, and data privacy. These laws and regulations may, in certain cases, impose restrictions that are more stringent than the federal measures discussed above. To date, our employees have performed a significant portion of our activities in complying with U.S. federal and state laws and regulations and we have not incurred material out-of-pocket compliance costs.

 

Our foreign business operations are affected, directly or indirectly, by foreign laws and regulations. For example, our current telemarketing activities in the United Kingdom are subject to a comprehensive telemarketing regulation, which includes a prohibition on calls to numbers on the U.K.’s national do-not-call registry and Telephone Preference Service, as well as other regulations imposed by the U.K. regulatory authority, Ofcom. Furthermore, we may in the future determine to commence or expand our operations to other countries, and these countries may have laws or regulations comparable to or more stringent than those affecting our domestic business.

 

Our business, operating results and reputation may be significantly harmed if we violate, or are alleged to violate, U.S. federal, state or foreign laws or rules covering customer communications. In the pricing agreements they enter into with us, our clients typically agree to comply in all material respects with all applicable legal and regulatory requirements relating to their use of our service. We cannot be certain, however, that our clients comply with these obligations, and typically we cannot verify whether clients are complying with their obligations. Violations by our clients may subject us to costly legal proceedings and if we are found to be wholly or partially responsible for such violations, may subject us to damages, fines or other penalties. For a further description of some of the governmental regulations that may affect our business operations, see “Item 1A. Risk Factors — Risks Related to Regulation of Use of Our Service.”

 

Employees

 

As of February 15, 2011, we had a total of 128 employees, consisting of 41 employees in client management, 33 employees in research and development, 28 employees in sales and marketing, 8 employees in operations, and 18 employees in general and administrative. A total of 127 of our employees as of February 15, 2011 were based in the United States, of whom 115 were based at our headquarters in Bedford, Massachusetts.

From time to time we also employ independent contractors and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.

 

Our History

 

We were founded in Delaware in April 2000. Our principal executive offices are located at 22 Crosby Drive, Bedford, Massachusetts 01730, and our telephone number is (781) 897-2500. Our website address is www.soundbite.com, and we make available through the investor relations section of our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after such reports are electronically filed with the SEC. We also make our code of ethics and certain other governance documents and policies available through this site. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual report on Form 10-K.

 

PART II.  OTHER INFORMATION

 

 

An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below and all of the other information contained in this report before deciding whether to purchase our common stock. The market price of our common stock could decline due to any of these risks and uncertainties, and investors might lose all or part of their investments in our common stock.

 

Risks Related to Our Business and Industry

 

If the market for proactive customer communications, or PCC, solutions does not develop as we anticipate, our revenues would decline or fail to grow and we could incur operating losses.

 

Our revenues totaled $39.5 million in 2010, $40.2 million in 2009 and $43.2 million in 2008. We derive, and expect to continue to derive for the foreseeable future, a substantial majority of our revenues by providing our on-demand PCC service to businesses and other organizations. Since mid-2008, we have generated an increasing percentage of our revenues from use of our service for text messaging. We expect that, in the future, a growing percentage of our revenues will result from the use of our on-demand service for text, e-mail messaging and our hosted predictive dialer offering. Due to advances in technology, the market for PCC products and services continues to evolve, and it is uncertain whether our service will achieve and sustain high levels of demand and market acceptance. In order to succeed, we must increase the usage of our service by existing clients.

 

In addition, our success will depend on our ability to market our full range of PCC applications to additional organizations. Some organizations may be reluctant or unwilling to use PCC services for a number of reasons, including the perceived effectiveness of communications services based on other delivery channels, such as direct mail and web, or other technologies, such as interactive voice response systems and on-premise predictive dialers. In addition, organizations may lack knowledge about the potential benefits that PCC services can provide. An organization may determine that it can achieve the same, or a higher, level of performance and results from services based on other delivery channels or technologies. Even if an organization determines that our PCC service offers benefits superior to other customer communications products and services, it might not use our service because it has previously invested in alternative products or services or in internally developed messaging equipment, because it can obtain acceptable performance and results from alternative products and services available at a lower cost, or because it is unwilling to deliver customer information to a third-party vendor. Moreover, an organization may determine not to use communications products and services due to the application, or potential application, of one or more of a variety of laws and regulations, as described below under “Risks Related to Regulation of Use of Our Service.”

If organizations do not perceive the potential and relative benefits of our PCC service or believe that competing customer communications products and services offer a better value, the market for our service may not continue to develop or may develop more slowly than we expect, either of which would significantly adversely affect our business, financial condition and operating results. Because the market for our service is still developing and the manner of this development is difficult to predict, we could make errors in predicting and reacting to relevant business trends, which could harm our operating results.

 

Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock.

 

Our quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. Our agreements with clients typically do not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the actual usage of our service each quarter by existing and new clients. Quarterly fluctuations in our operating results also might be due to numerous other factors, including:

 

 

Many of these factors are beyond our control, and the occurrence of one or more of them could cause our operating results to vary widely. Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful.

 

We may fail to forecast accurately the behavior of existing and potential clients or the demand for our service. Our expense levels are based, in significant part, on our expectations as to future revenues and are largely fixed in the short term. As a result, we could be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues.

 

Variability in our periodic operating results could lead to volatility in our stock price as equity research analysts and investors respond to quarterly fluctuations. Moreover, as a result of any of the foregoing or other

factors, our operating results might not meet our announced guidance or expectations of investors and analysts, in which case the price of our common stock could decrease significantly.

 

Defects in our platform, disruptions in our on-demand service or errors in execution could diminish demand for our PCC service and subject us to substantial liability.

 

Our on-demand platform is complex and incorporates a variety of hardware and proprietary and licensed software. From time to time we have found and corrected defects in our platform. Internet-based services such as ours frequently experience issues from undetected defects when first introduced or when new versions or enhancements are released. Defects in our platform could result in service disruptions for one or more clients. For example, in October 2008 we experienced a partial outage of the SoundBite Platform, which precluded some clients from executing their campaigns in their desired timeframes. Our clients might use our on-demand service in unanticipated ways that cause a service disruption for other clients attempting to access their contact list information and other data stored on our platform. In addition, a client may encounter a service disruption or slowdown due to high usage levels of our service.

 

Clients engage our Client Management organization to assist them in creating and managing a campaign. As part of this process, we typically construct and test a script, map the client’s input file into our platform and map our output files to a client-specific format. In order for a campaign to be executed successfully, our Client Management staff must correctly design, implement, test and deploy these work products. The performance of these tasks can require significant skill and effort, and from time to time has resulted in errors that adversely affected a client’s campaign.

 

Because clients use our service for critical business processes, any defect in our platform, any disruption in our service or any error in execution could cause existing or potential clients not to use our service, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses.

 

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our platform or a resulting disruption in our service, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceeds our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

 

Interruptions, delays in service or errors in execution from our key vendors would impair the delivery of our service and could substantially harm our business and operating results.

 

In delivering our on-demand service, we rely upon a combination of hosting providers, telecommunication and data carriers, and text and email aggregators. We serve our clients from four third-party hosting facilities. One facility is located in Ashburn, Virginia, and is owned by Equinix and operated by InterNap under an agreement that expires in March 2012. Another facility is located in Somerville, Massachusetts, and is owned by CoreSite and operated by InterNap under an agreement that expires in May 2011. Our agreements for these two facilities automatically renew for one year periods unless written notification is made by either party 90 days prior to renewal. Our third facility is located in Toronto, Ontario and is owned and operated by Pier 1 Network Enterprises under an agreement that automatically renews for one month periods unless written notification is made by either party 60 days prior to the expiration date. Our fourth facility is located in Slough, United Kingdom and is owned and operated by Equinix (UK) Limited under an agreement that automatically renews for twelve month periods unless written notification is made by either party three months prior to the expiration date. If we are unable to renew these agreements on commercially reasonable terms following their termination, we will need to incur significant expense to relocate our data center or agree to

the terms demanded by the hosting provider, either of which could harm our business, financial position and operating results.

 

Our clients’ campaigns are handled through a mix of telecommunication and data carriers as well as text and email aggregators. We rely on these service providers to handle millions of customer contacts each day. From time to time these service providers may fail to handle contacts correctly, which could cause existing or potential clients not to use our service, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses for which we are not fully indemnified or insured. While we have entered into contracts with multiple telecommunication carriers and text aggregators, we currently do not have fully redundant data, text or email services. Our contracts with carriers and aggregators generally can be terminated by either party at the end of the contract term upon written notice delivered by the party a specified number of days before the end of the term. In addition, we generally can terminate a contract at any time upon written notice delivered a specified number of days in advance, subject to the payment of specified termination charges. If a contract is terminated, we might be unable to obtain pricing on similar terms from another provider, which would affect our gross margins and other operating results.

 

Our hosting facilities and the infrastructures of our service providers are vulnerable to damage or interruption from floods, fires and similar natural events, as well as acts of terrorism, break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such a natural disaster or misconduct, a loss of power, a decision by a hosting provider to close a facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our provision of our service. Any interruption or delay in providing our service, even if for a limited time, could have an adverse effect on our business, financial condition and operating results.

 

Actual or perceived breaches of our security measures could diminish demand for our service and subject us to substantial liability.

 

Our on-demand service involves the storage and transmission of clients’ proprietary information. Internet-based services such as ours are particularly subject to security breaches by third parties. Breaches of our security measures also might result from employee error or malfeasance or other causes, including as a result of adding new communications services and capabilities to our platform. In the event of a security breach, a third party could obtain unauthorized access to our clients’ contact list information and other data. Techniques used to obtain unauthorized access or to sabotage systems change frequently, and they typically are not recognized until after they have been launched against a target. As a result, we could be unable to anticipate, and implement adequate preventative measures against, these techniques. Because of the critical nature of data security, any actual or perceived breach of our security measures could subject us to litigation and significant liability for damage to our clients’ businesses, could cause existing or potential clients not to use our service, and could harm our reputation.

 

The global recession and related credit crisis may continue to adversely affect our business.

 

Recent global market and economic conditions have become increasingly negative with tighter credit conditions and recession in most major economies continuing in 2009 and 2010. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility declining business and consumer confidence, increased unemployment, and diminished economic expectations. These market conditions have led to a decrease in spending by businesses and consumers. Continued turbulence in the United States and international markets and economies and prolonged declines in business and consumer spending could result in lower sales of our service, longer sales cycles, difficulties in collecting accounts receivable, gross margin deterioration, slower adoption of new technologies, and increased price competition, any of which may have a negative effect on our financial condition and results of operations.

Our clients are not typically obligated to pay any minimum amount for our service on an on-going basis, and if they discontinue use of our service or do not use our service on a regular basis, our revenues would decline.

 

The agreements we enter into with clients do not typically require minimum levels of usage or payments and are terminable at will by our clients. The periodic usage of our service by an existing client could decline or fluctuate as a result of a number of factors, including the client’s level of satisfaction with our service, the client’s ability to satisfy its customer contact processes internally, and the availability and pricing of competing products and services. If our service fails to generate consistent business from existing clients, our business, financial condition and operating results will be adversely affected.

 

We derive a significant portion of our revenues from the sale of our service for use in the collections process, and any event that adversely affects the collection agencies industry or in-house collection departments would cause our revenues to decline.

 

In recent years, we have focused our sales and marketing activities on the collection process and have targeted large in-house collection departments, as well as collection agencies. Revenues from these collection businesses represented approximately 75% of our revenues in 2010, 77% of our revenues in 2009 and 80% of our revenues in 2008. We expect that revenues from the collection businesses will continue to account for a substantial part of our revenues for the foreseeable future.

 

Collection businesses are particularly subject to changes in the overall economy. In a sustained economic downturn such as the recession experienced globally since 2009, collection agencies can be affected adversely by declines in liquidation rates as a result of higher debt and lower disposable income. A prolonged economic downturn will impact collections agencies as fewer loans are granted due to the imposition by lenders of conditions on the extension of credit that are not acceptable to potential borrowers. Collection businesses also can be affected adversely by a sustained economic upturn, which may result in lower levels of consumer debt default rates. In addition, collection businesses may be affected adversely by tightening of credit granting practices as well as technological advances and regulatory changes that affect the collection of outstanding indebtedness. Any such changes, conditions or events that adversely affect collection businesses could cause us to lose some or all of the recurring business of our clients in the collections business, which in turn could have a material adverse effect on our business, financial condition and operating results.

 

Moreover, two clients accounted for a total of 23% of our revenues in 2010, 29% of our revenues in 2009 and 31% of our revenues in 2008. These clients are in the collection agencies industry and a large in-house collection department of a telecommunications business. In addition to the risks associated with collections businesses in general, our business, financial condition and operating results would be negatively affected if these clients were to significantly decrease the extent to which they use our service.

 

Our business will be harmed if we fail to develop new features that keep pace with technological developments and emerging consumer trends.

 

Organizations can use a variety of communication channels to reach their customers. Emerging consumer trends have forced a greater focus on alternative channels, customer preferences and communications via mobile devices and a failure to address these trends would be a threat to the adoption of our service. Our business, financial condition and operating results will be adversely affected if we are unable to complete and introduce, in a timely manner, new features for our existing service that keep pace with technological developments. For example, because most of our clients access our on-demand service using a web browser, we must modify and enhance our service from time to time to keep pace with new browser technology.

 

We face intense competition, and our failure to compete successfully would make it difficult for us to add and retain clients and would impede the growth of our business.

 

The market for on-demand, multi-channel proactive customer communication solutions is intensely competitive, changing rapidly and highly fragmented. It is subject to rapidly developing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of

industry participants. Increased competition could result in pricing pressure, reduced sales or lower margins, and could prevent our current service or future PCC solutions from achieving or maintaining broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients and our business, financial condition and operating results will be seriously harmed.

 

Predictive dialers have been the basic method of automated customer communications for the last two decades, particularly for collections activity. The vast majority of telephony customer contact today is completed using predictive dialer technology. Our service competes with on-premise predictive dialers from a limited number of established vendors and a number of smaller vendors, as well as predictive dialers hosted by some of those smaller vendors on an application service provider basis. Many organizations have invested in on-premise predictive dialers and are likely to continue using those dialers until the dialers are no longer operational, despite the availability of additional functionality in our service.

 

Our service also competes with a number of hosted customer contact services. A limited number of established vendors and a number of smaller, privately held companies offer these hosted services, which compete principally on the basis of price rather than features. In addition, a small number of vendors focus on providing hosted customer contact services with features more comparable to ours. These vendors generally compete on the basis of return on investment and features, rather than price. Other companies may enter the market by offering competing products or services based on emerging technologies, such as open-source frameworks, and may compete on the basis of either features or price. Clients could also potentially employ a multi vendor strategy for risk mitigation purposes.

 

We increasingly compete with companies providing PCC solutions focused on specific vertical markets, such as healthcare, or on a single communications channel, such as text messaging. Because these solutions are targeted to more narrowly defined markets and enable their providers to develop targeted domain expertise, those providers may be able to develop and offer targeted customer contact solutions than a company, such as ours, that seeks to offer a broad range of PCC applications to organizations across a variety of vertical markets.

 

Some of our competitors have significantly greater financial, technical, marketing, service and other resources than we have. These vendors also have larger installed client bases and longer operating histories. Competitors with greater financial resources might be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors could be in a stronger position to respond quickly to new technologies and could be able to undertake more extensive marketing campaigns.

 

Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could harm our operating results.

 

Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or will be acquired. For example, EasyLink Services International Corporation, a global provider of comprehensive messaging services and e-commerce solutions, acquired the PGiSend and PGiNotify advanced messaging businesses from Premiere Global Services, Inc., through the purchase of its wholly-owned subsidiary, Xpedite Systems, LLC and its subsidiaries in October 2010. In February 2011, West Corporation, a provider of voice and data solutions, announced it had acquired Twenty First Century Communications, Inc., a provider of automated alerts and notification solutions.

 

In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could have a material adverse effect on our business, operating results and financial condition.

The expansion of our business into international markets exposes us to additional business risks, and failure to manage those risks could adversely affect our business and operating results.

 

Although historically we have targeted substantially all of our sales and marketing efforts principally to organizations located in the United States, more recently we have begun focusing more resources on organizations located in Europe. In April 2010, for example, we formed a subsidiary under UK law to target businesses located in the United Kingdom. We anticipate that an increasing portion of our revenue in future periods will be derived from outside the United States. The continued expansion of our international operations will require substantial financial investment and significant management efforts and will subject us to a number of risks and potential costs, including:

 

 

Our failure to manage the risks associated with our international operations could limit the growth of our business and adversely affect our operating results.

 

Failure to maintain our direct sales force will impede our growth.

 

We are highly dependent on our direct sales force to obtain new clients and to generate repeat business from our existing client base. It is therefore critical that our direct sales force maintain regular contact with our clients, both to gauge client satisfaction with our service as well as to highlight the value that use of our service adds to their enterprises. There is significant competition for direct sales personnel. Our ability to achieve growth in revenues in the future will depend in large part on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. New hires require significant training and typically take more than a year before they achieve full productivity. Our recent and planned hires might not achieve full productivity as quickly as intended, or at all. If we fail to keep, hire and successfully train sufficient numbers of direct sales personnel, we will be unable to increase our revenues and the growth of our business will be impeded.

 

Because competition for employees in our industry is intense, we might not be able to attract and retain the highly skilled employees we need to execute our business plan.

 

To continue to execute our business plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior engineers and senior sales executives. We might not be successful in attracting and retaining qualified personnel. We have experienced from time to time in the past, and expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in technology-based industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Volatility in the price of our common stock could therefore, adversely affect our ability to attract or retain key employees. Furthermore, the requirement to expense stock options could discourage us from granting the size or type of stock options awards that job candidates require to join

our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business plan and future growth prospects could be severely harmed.

 

If we are unable to protect our intellectual property rights, we would be unable to protect our technology and our brand.

 

If we fail to protect our intellectual property rights adequately, our competitors could gain access to our technology and our business could be harmed. We rely on trade secret, copyright and trademark laws, and confidentiality and assignment of invention agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property might not prevent misappropriation of our proprietary rights. We have only three issued patents and nine patent applications pending in the United States. Our issued patents and any patents issued in the future may not provide us with any competitive advantages or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and might afford little or no effective protection of our proprietary technology. Consequently, we could be unable to prevent our intellectual property rights from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of intellectual property rights is expensive, difficult and, in some cases, impossible. Litigation could be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we might not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

 

We are subject to risks associated with outsourcing services to third parties, and failure to manage those risks could adversely affect our business and operating results.

 

We contract with several third-party vendors that provide services to us or to whom we delegate selected functions. These third-party vendors supplement our internal engineering efforts and off-hours application support. Our arrangements with these third-party vendors may make our operations vulnerable if the third parties fail to satisfy their obligations to us:

 

 

Our third-party vendor arrangements could be adversely impacted by changes in a vendor’s operations or financial condition or other matters outside of our control. There is no assurance that our third-party vendors will continue to provide services to us or that they will renew or not terminate their arrangements with us. Any interruption in their services could adversely affect our operations unless and until we can identify a new vendor or replace an existing vendor’s services with internal resources at additional cost.

Our product development efforts could be constrained by the intellectual property of others, and we could be subject to claims of intellectual property infringement, which could be costly and time-consuming.

 

The customer communications industry and the telecommunications industry are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. We have in the past been subject to litigation, now concluded, with a third party that alleged that our service violated the third party’s intellectual property rights. As we seek to extend and expand our service, we could be constrained by the intellectual property rights of others.

 

We might not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If our service violates any third-party proprietary rights, we could be required to re-engineer our platform or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-engineer our service, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Further, our platform incorporates open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown.

 

Our platform relies on technology licensed from third parties, and our inability to maintain licenses of this technology on similar terms or errors in the licensed technology could result in increased costs or impair the implementation or functionality of our on-demand service, which would adversely affect our business and operating results.

 

Our multi-tenant customer communication platform relies on technology licensed from third-party providers. For example, we use the Apache web server, the Oracle WebLogic application server, the JBoss Application server, Nuance Communications text-to-speech and automated speech recognition software, the Oracle database, and the MySQL database. We anticipate that we will need to continue to license technology from third parties in the future. There might not always be commercially reasonable software alternatives to the third-party software that we currently license. Any such software alternatives could be more difficult or costly to replace than the third-party software we currently license, and integration of that software into our platform could require significant work and substantial time and resources. Any undetected errors in the software we license could prevent the implementation of our on-demand service, impair the functionality of our service, delay or prevent the release of new features or offerings, and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which might not be available on commercially reasonable terms or at all.

 

We have in the past and may in the future enter into acquisitions; these acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

 

We intend to pursue acquisitions of businesses, technologies, and products that will complement our existing operations. For example, in 2008 we acquired substantially all of the assets of Mobile Collect, Inc., a privately held company that provided text messaging and mobile communications solutions. We cannot assure you that any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including:

 

 

 

Acquisitions could result in the incurrence of debt, restructuring charges and large one-time write-offs, such as write-offs for acquired in-process research and development costs. Acquisitions could also result in goodwill and other intangible assets that are subject to impairment tests, which might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders would be diluted and earnings per share could decrease.

 

From time to time, we might enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we are unable to evaluate and execute acquisitions properly, we could fail to achieve our anticipated level of growth and our business and operating results could be adversely affected.

 

Industry consolidation could reduce the number of our clients and adversely affect our business.

 

Some of our significant clients from time to time may merge, consolidate or enter into alliances with each other. The surviving entity or resulting alliance may subsequently decide to use a different service provider or to manage customer contact campaigns internally. Alternatively, the surviving entity or resulting alliance may elect to continue using our service, but its strengthened financial position or enhanced leverage may lead to pricing pressure. Either of these results could have a material adverse effect on our business, operating results and financial condition. We may not be able to offset the effects of any such price reductions, and may not be able to expand our client base to offset any revenue declines resulting from such a merger, consolidation or alliance.

 

Our ability to use net operating loss carryforwards in the United States may be limited.

 

As of December 31, 2010, we had net operating loss carryforwards of $22.8 million for U.S. federal tax purposes and an additional $6.1 million for state tax purposes. These carryforwards expire between 2011 and 2030. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We experienced an ownership change for these purposes in 2007, which resulted in an annual limitation amount of approximately $8.0 million on the use of net operating loss carryforwards generated from November 29, 2001 through November 8, 2007. To the extent our use of net operating loss carryforwards is limited; our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

 

If we are unable to raise capital when needed in the future, we may be unable to execute our growth strategy, and if we succeed in raising capital, we may dilute investors’ percentage ownership of our common stock or may subject our company to interest payment obligations and restrictive covenants.

 

We may need to raise additional funds through public or private debt or equity financings in order to:

 

 

 

Any additional capital raised through the sale of equity may dilute investors’ percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all. A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations.

 

Risks Related to Regulation of Use of Our Service

 

We derive a significant portion of our revenues from the sale of our service for use in the collections process, and our business and operating results could be substantially harmed if new U.S. federal and state laws or regulatory interpretations in one or more jurisdictions either make our service unavailable or less attractive for use in the collections process or expose us to regulation as a debt collector.

 

Revenues from clients in the collections industry and large in-house, or first-party, collection departments represented approximately 75% of our revenues in 2010, 77% of our revenues in 2009 and 80% of our revenues in 2008. These clients’ use of our service is affected by an array of complex federal and state laws and regulations.

 

The U.S. Fair Debt Collection Practices Act, or FDCPA, limits debt collection communications by clients in the collection agencies industry, including third parties retained by creditors. For example, the FDCPA prohibits abusive, deceptive and other improper debt collection practices, restricts the timing and content of communications regarding a debt or a debtor’s location, and allows consumers to opt out of receiving debt collection communications. In general, the FDCPA also prohibits the use of debt collection calls to cause debtors to incur more debt. Many states impose additional requirements on debt collection communications, including limits on the frequency of debt collection calls, and some of those requirements may be more stringent than the comparable federal requirements. Moreover, debt collection calls are subject to new regulations, as well as changing regulatory interpretations that may be inconsistent among different jurisdictions. For example, the Federal Communications Commission, or FCC, is considering modifying its rules to require opt-in for all prerecorded calls made to mobile phones, which could limit our clients’ ability to use our service to call a mobile phone for the purposes of collections without having prior written consent from a customer. Our business, financial position and operating results could be substantially harmed by the adoption or interpretation of U.S. federal or state laws or regulations that make our service either unavailable or less attractive for debt collection communications by existing and potential clients.

 

We provide our service for use by creditors and debt collectors, but we do not believe that we are a debt collector for purposes of these U.S. federal or state regulations. An allegation by one or more jurisdictions that we are a debt collector for purposes of their regulations could cause existing or potential clients not to use our service, harm our reputation, subject us to administrative proceedings, or result in our incurring significant legal fees and other costs. If it were to be determined that we are a debt collector for purposes of the regulations of one or more jurisdictions, we could be exposed to government enforcement actions and regulatory penalties and would be subject to additional rules, including licensing and bonding requirements. The costs of complying with these rules could be substantial, and we might be unable to continue to offer our service for debt collection communications in those jurisdictions, which would have a material adverse effect on our business, financial condition and operating results. In addition, if clients use our service in violation of limits on the content, timing and frequency of their debt collection communications, we could be subject to claims by consumers that result in costly legal proceedings and that lead to civil damages, fines or other penalties.

We could be subject to significant penalties or damages if our clients violate U.S. federal or state restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.

 

Under the U.S. Telephone Consumer Protection Act, it is unlawful to use an automatic telephone dialing system or an artificial or prerecorded message to contact any cellular or other wireless telephone number, unless the recipient previously has consented to receiving this type of message. For example, the FCC is considering modifying its rules to require opt-in for all prerecorded calls made to mobile phones, which could limit our clients’ ability to use our service to call a mobile phone for the purposes of information, customer care or telemarketing without having prior written consent from a customer. Our service involves the use of artificial and prerecorded messages. Although our service are designed to enable a client to screen a contact list to remove wireless telephone numbers, a client may determine that voice or text messages to certain wireless telephone numbers are permitted because the recipients previously have consented to receiving artificial or prerecorded messages. We cannot ensure that, in using our service for a campaign, a client removes from its contact list the names of all persons who are associated with wireless telephone numbers and who have not consented to receiving artificial or prerecorded messages or, in particular, that the client properly interprets and applies the exemption for recipients who have consented to receiving such messages. Many states have enacted restrictions on using automatic dialing systems and artificial and prerecorded messages to contact wireless telephone numbers, and some of those state requirements may be more stringent than the comparable federal requirements.

 

In May 2008, a federal district court in California held that the Telemarketing and Consumer Fraud and Abuse Prevention Act prohibits any autodialed or prerecorded telephone call to a consumer’s cell phone unless the consumer had specifically consented to such calls. The same provision of such Act also applies to the sending of commercial text messages to cell phones. The ruling overturned an earlier FCC interpretation that permitted autodialed and prerecorded calls to the cell phone of any consumer who had provided the cell phone number in connection with requesting a product or service. The ruling applied only in California and was subsequently overturned but, as a result of the initial decision, some existing or potential clients may decide to limit their use of our service to reach consumers on wireless numbers, which could materially adversely affect our revenues and other operating results.

 

If clients use our service in a manner that violates any of these governmental regulations, federal or state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our service. If clients use our service to screen for wireless telephone numbers and our screening mechanisms fail, we may be subject to regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed.

 

Regulatory restrictions on artificial and prerecorded messages present particular problems for businesses in the collection agencies industry. These third-party collection agencies and debt buyers do not have direct relationships with the consumer debtors and therefore typically do not have the ability to obtain from a debtor the consent required to permit the use of artificial or prerecorded messages in contacting a debtor at a wireless telephone number. These businesses’ lack of a direct relationship with debtors also makes it more difficult for them to evaluate whether a debtor has provided such consent. For example, a collection agency frequently must evaluate whether past actions taken by a debtor, such as providing a cellular telephone number in a loan application, constitute consent sufficient to permit the agency to contact the debtor using artificial or prerecorded messages. Moreover, a significant period of time elapses between the time at which a loan is made and the time at which a collection agency or debt buyer seeks to contact the debtor for repayment, which further complicates the determination of whether the collection agency or debt buyer has the required consent to use artificial or prerecorded messages. The difficulties encountered by these third-party collection businesses are becoming increasingly problematic as the percentage of U.S. consumers using cellular telephones continues to increase. If these third-party collection businesses are unable to use artificial or prerecorded messages to contact a substantial portion of their debtors, our service will be less useful to them. If our clients in the collection agencies industry significantly decrease their use of our service, our business, financial position and operating results would be substantially harmed.

We could be subject to penalties if we or our clients violate federal or state telemarketing restrictions due to a failure of our service or otherwise, which could harm our financial position and operating results.

 

The use of our service for marketing communications is affected by extensive federal and state telemarketing regulation. The Telemarketing and Consumer Fraud and Abuse Prevention Act and Telephone Consumer Protection Act, among other U.S. federal laws, empower both the Federal Trade Commission, or FTC, and the FCC to regulate interstate telephone sales calling activities. The FTC’s Telemarketing Sales Rule and analogous FCC rules require us to, for example, transmit Caller ID information, disclose certain information to call recipients, and retain certain business records. FTC and FCC rules proscribe misrepresentations, prohibit the abandonment of telemarketing calls and limit the timing of calls to consumers. Both the FTC and FCC also prohibit telemarketing calls to persons who have placed their numbers on the national Do-Not-Call Registry, except for calls made with an existing business relationship, or EBR, or subject to other limited exceptions. If we fail to comply with applicable FTC and FCC telemarketing regulations, we may be subject to substantial regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed. The FTC’s Telemarketing Sales Rule, for example, imposes fines of up to $16,000 per violation. The FCC may also impose forfeitures of up to $16,000 per violation of its telemarketing rules. If clients use our service in a manner that violates any of these telemarketing regulations, the FTC or FCC may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our service.

 

In addition, in 2008 the FTC adopted an amendment to the Telemarketing Sales Rule requiring that “express written consent” be obtained for all pre-recorded sales calls that are delivered as of September 1, 2009. Thus, organizations that attempt to sell goods or services through the use of pre-recorded messages will need to take the extra step to obtain “opt-in” from their consumers before pre-recorded sales calls can be delivered, even with respect to consumers with whom the organization has an EBR. We cannot ensure that, in using our service for a campaign, a client will obtain appropriate “opt-in” authorization before placing prerecorded telemarketing calls or that the client properly interprets and applies the “opt-in” requirement. If clients use our service to place unauthorized calls or in a manner that otherwise violates FTC or FCC restrictions on prerecorded telemarketing calls, U.S. federal or state authorities may seek to subject us to substantial regulatory fines or other penalties, even if the violation did not result from a failure of our screening mechanisms.

 

Many states have enacted prohibitions or restrictions on telemarketing calls into their states, specifically covering the use of automatic dialing systems and predictive dialing techniques. Some of those state requirements are more stringent than the comparable federal requirements. If clients use our service in a manner that violates any of these telemarketing regulations, state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our service.

 

To the extent that our service is used to send text or email messages, our clients will be, and we may be, affected by regulatory requirements in the United States. Organizations may determine not to use these channels because of prior consent, or opt-in, requirements or other regulatory restrictions, which could harm our future business growth.

 

Our failure to comply with numerous and overlapping information security and privacy requirements could subject us to fines and other penalties as well as claims by our clients for damages, any of which could harm our reputation and business.

 

Our collection, use and disclosure of personal information are affected by numerous privacy, security and data protection regulations. We are subject to the Gramm-Leach-Bliley Privacy Act when we receive nonpublic personal information from clients that are treated as financial institutions under those rules. These rules restrict disclosures of consumer information and limit uses of such information to certain purposes that are disclosed to consumers. The related Gramm-Leach-Bliley Safeguards Rule requires our financial institution clients to impose administrative, technical and physical data security measures in their contracts with us. Compliance with these contractual requirements can be costly, and our failure to satisfy these requirements could lead to regulatory penalties or contractual claims by clients for damages.

In some instances our service requires us to receive consumer information that is protected by the Fair Credit Reporting Act, which defines permissible uses of consumer information furnished to or obtained from consumer reporting agencies. We generally rely on our clients’ assurances that any such information is requested and used for permissible purposes, but we cannot be certain that our clients comply with these restrictions. We could incur costs or could be subject to fines or other penalties if the FTC determines that we have mishandled protected information.

 

Many jurisdictions, including the majority of states, have data security laws including data security breach notification laws. When our clients operate in industries that have specialized data privacy and security requirements, they may be subject to additional data protection restrictions. For example, the federal Health Insurance Portability and Accountability Act, or HIPAA, regulates the maintenance, use and disclosure of personally identifiable health information by certain health care-related entities. States may adopt privacy and security regulations that are more stringent than federal rules, and we may be required by such regulations to establish comprehensive data security programs that could be costly. If we experience a breach of data security, we could be subject to costly legal proceedings that could lead to civil damages, fines or other penalties. We or our clients could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could damage our reputation or harm our business, financial position and operating results.

 

Since 2007 we have been certified as compliant with the Payment Card Industry, or PCI, Data Security Standard, which mandates a set of comprehensive requirements for protecting payment account data. Our continuing PCI compliance is essential for many of our PCC offerings, such as fully-automated payment transactions and payment authorizations, and is particularly important for financial institutions, credit card issuers and retailers. We must seek and receive certification of PCI compliance on an annual basis. PCI compliance measures are rigorous and subject to change, and our implementation of new PCC platform technology and solutions could adversely affect our ability to be re-certified. As a result, we cannot assure you that we will be able to maintain our certification for PCI compliance. Our loss of PCI certification could make our PCC solutions less attractive to potential customers, particularly those in the financial and retail industries, which in turn could have an adverse effect on our revenue and other operating results.

 

We may record certain of our calls for quality assurance, training or other purposes. Many states require both parties to consent to such recording, and may adopt inconsistent standards defining what type of consent is required. Violations of these rules could subject us to fines or other penalties, criminal liability, or claims by clients for damages, any of which could hurt our reputation or harm our business, financial position and operating results.

 

It may be impossible for us to comply with the different data protection regulations that affect us in different jurisdictions. For example, the USA PATRIOT Act provides U.S. law enforcement authorities certain rights to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. Some foreign laws, including some in the European Union, prohibit such disclosures. Such conflicts could subject us and clients to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

 

The expansion of our business into international markets requires us to comply with additional debt collection, telemarketing, data privacy or similar regulations, which may make it costly or difficult to operate in these markets.

 

Although historically we have targeted substantially all of our sales and marketing efforts principally to organizations located in the United States, more recently we have begun focusing more resources on organizations located in Europe. In April 2010, for example, we formed a subsidiary under UK law to target businesses located in the United Kingdom. Countries other than the United States may have laws and regulations governing debt collection, telemarketing, data privacy or other communications activities comparable in purpose to the U.S. and state laws and regulations described above. Compliance with these requirements may be costly and time consuming, and may limit our ability to operate successfully in one or more foreign jurisdictions.

For example, our current telemarketing activities in the United Kingdom are affected by a comprehensive telemarketing regulation, including a prohibition on calls to numbers on the UK’s national do-not-call registry, the Telephone Preference Service.

 

Outside of the United States, our business is likely to be subject to more stringent data protection regulations. For example, the European Union Directive on Data Protection and national implementing laws restrict collection, use and disclosure of personal data in European Union member countries and prohibits transfers of this information to the United States unless specified precautions are implemented. Moreover, individual members of the European Union may have additional data protection regulations, such as the U.K. Data Protection Act 1998.

 

Risks Related to Ownership of Our Common Stock

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock depends in part on the research and reports that equity research analysts publish about our company and business. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about our company and business.

 

Future sales of our common stock by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. The market price of shares of our common stock could drop significantly if our officers, directors or other stockholders decide to sell shares of our common stock into the market.

 

Our directors, executive officers and their affiliated entities will continue to have substantial control over us and could limit the ability of other stockholders to influence the outcome of key transactions, including changes of control.

 

As of February 15, 2011, our executive officers and directors and their affiliated entities, in the aggregate, beneficially owned 43% of our common stock. In particular, affiliates of North Bridge Ventures Partners, including James A. Goldstein, one of our directors, in the aggregate, beneficially owned 29% of our common stock. Our executive officers, directors and their affiliated entities, if acting together, are able to control or significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These stockholders may have interests that differ from those of other investors, and they might vote in a way with which other investors disagree. The concentration of ownership of our common stock could have the effect of delaying, preventing, or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and could negatively affect the market price of our common stock.

 

Our corporate documents and Delaware law make a takeover of our company more difficult, which could prevent certain changes in control and limit the market price of our common stock.

 

Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions that could enable our management to resist a takeover of our company. These provisions could discourage, delay, or prevent a change in the control of our company or a change in our management. They could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. Some provisions in our charter and by-laws could deter third parties from acquiring us, which could limit the market price of our common stock.

We do not intend to pay dividends on our common stock in the foreseeable future.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Accordingly, investors are not likely to receive any dividends on their common stock in the foreseeable future, and their ability to achieve a return on their investment will therefore depend on appreciation in the price of our common stock.

 

 

None.

 

 

In May 2007 we entered into a lease for 37,000 square feet of office space for our headquarters in Bedford, Massachusetts. The term of the lease commenced as of September 17, 2007 and will expire in September 2013. We have the option to extend the lease term through September 2018 by providing written notice. In addition, in May 2008 we entered into a lease for a single sales office in Grapevine, Texas. This lease is for a seven month term and automatically renews for an additional seven months unless written notification is made at least 60 days prior to the expiration of the renewal.

 

We also serve our clients from four third-party hosting facilities. One facility is located in Ashburn, Virginia under an agreement that expires in March 2012. Another facility is located in Somerville, Massachusetts, and is leased under an agreement that expires in May 2011. Our agreements for these two facilities automatically renew for one month periods under current terms unless written notification is made by either party 90 days prior to renewal. Our third hosting facility is located in Toronto, Ontario and leased under an agreement that automatically renews for one month periods unless written notification is made by either party 60 days prior to the expiration date. In August 2010, we entered into an agreement with our fourth hosting facility located in the United Kingdom, which automatically renews for a twelve month period unless written notification is made by either party three months prior to the expiration date.

 

 

We are not currently a party to any material litigation. The customer communications industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various legal proceedings from time to time.

 

[Reserved.]

 

 

Market Price of Common Stock

 

Our common stock has been traded on The NASDAQ Global Market under the symbol “SDBT” since November 6, 2007. Prior to that time, there was no established public trading market for our common stock.

The following table presents the high and low sale prices of our common stock as reported by The NASDAQ Global Market, for the periods indicated.

 

 

 

The last sale price of the common stock on February 15, 2011, as reported by The NASDAQ Global Market, was $2.85 per share. As of February 15, 2011, there were 46 holders of record of the common stock.

 

We have never declared or paid any cash dividends on our common stock and currently expect to retain future earnings for use in our business for the foreseeable future.

 

Issuer Purchases of Equity Securities

 

There were no repurchases made by us or on our behalf, or by any “affiliated purchasers,” of shares of our common stock in 2010.

 

The following table summarizes selected financial data for our business and is derived from our historical consolidated financial statements. You should read the selected financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and our consolidated financial statements and related notes included elsewhere herein.

 

 

 

 

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Item 1A. Risk Factors” and elsewhere in this report.

 

Overview

 

SoundBite Communications provides an on-demand, multi-channel proactive customer communications service that enables organizations to design, execute and measure communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use our SoundBite Engage platform to communicate with their customers through voice, text and email messages that are relevant, timely, personalized and engaging.

 

We derive, and expect to continue to derive for the foreseeable future, substantially all of our revenues by providing our PCC service to businesses and other organizations. Our strategy to achieve long-term, sustained growth in our revenues and earnings is focused on building upon our leadership in the PCC market and using our on-demand platform to extend our service by, for example, offering key new features, supporting additional communications channels and expanding our support for preference management.

 

We market our service to large business-to-consumer, or B2C, companies in the financial services, telecommunications and media, retail and utility industries, as well as to companies in the collection industries. Our clients are located principally in the United States, but we have enhanced our service offering to enable us to deliver multi-channel proactive customer communications in countries outside the United States and we plan to begin marketing our service internationally, both directly and through our partners, commencing in Europe.

 

We sell our service primarily through our direct sales force. We are seeking to increase our revenues from resellers, solution providers, original equipment manufacturers and international distributors both by leveraging existing relationships and by selectively recruiting additional new partners.

 

Key Components of Results of Operations

 

Revenues

 

We currently derive substantially all of our revenues by providing our service for use by clients in communicating with their customers through voice, text and email messages. We provide our service under a usage-based pricing model, with prices calculated on a per-message or per-minute basis in accordance with the terms of our pricing agreements with clients. We invoice clients on a monthly basis.

 

Our pricing agreements with clients typically do not require minimum levels of usage or payments. Each executed message represents a transaction from which we derive revenues, and we therefore recognize revenue based on actual usage within a calendar month. We do not recognize revenue until we can determine that

persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable.

 

Cost of Revenues

 

Cost of revenues consists primarily of delivery costs from our service providers, as well as depreciation expense for our infrastructure and expenses related to hosting and providing support for our platform. Cost of revenues also includes compensation expense for our operations personnel. As we continue to grow our business and add features to our platform, we expect cost of revenues will continue to increase on an absolute dollar basis. Our annual gross margin ranged from 59.6% to 61.4% during the last three fiscal years. We currently are targeting a quarterly gross margin of 58% to 61% for the foreseeable future. Our gross margin for a quarter may vary significantly from our target range for a number of reasons, including the mix of types of messaging campaigns executed during the quarter, as well as the extent to which we build our infrastructure through, for example, significant acquisitions of hardware or material increases in leased data center facilities.

 

Operating Expenses

 

Research and Development.  Research and development expenses consist primarily of compensation expenses and depreciation expense of certain equipment related to the development of our service. We have historically focused our research and development efforts on improving and enhancing our platform, as well as developing new features and offerings.

 

Sales and Marketing.  Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We expect to further invest in developing our marketing strategy and activities to extend brand awareness and generate additional leads for our sales staff.

 

General and Administrative.  General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, accounting and legal professional fees and other corporate expenses.

 

Additional Key Measures of Financial Performance

 

We present information below with respect to cash flow from operating activities and free cash flow. Free cash flow is a measure of financial performance calculated as cash flow from operating activities plus proceeds from the sale of equipment, less payments of contingent purchase price, investments in capitalized software and purchases of property and equipment.

 

Management uses these metrics to track business performance. Due to the current economic environment, management decisions are based in part, on a goal of maintaining positive cash flow from operating activities and free cash flow. We believe these metrics are useful measures of the performance of our business because, in contrast to statement of operations metrics that rely principally on revenue and profitability, cash flow from operating activities and free cash flow capture the changes in operating assets and liabilities during the year and the effect of noncash items such as depreciation and stock-based compensation. We believe that, for similar reasons, these metrics are often used by security analysts, investors and other interested parties in the evaluation of on-demand and other software companies.

 

The term “free cash flow” is not defined under U.S. generally accepted accounting principles, or GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary expenditures. Free cash flow has limitations as an analytical tool and when assessing our operating performance, you should not consider

free cash flow in isolation from or as a substitute for data, such as net income (loss), derived from financial statements prepared in accordance with GAAP.

 

 

Our operating activities generated net cash in the amount of $313,000 for the year ended December 31, 2010 reflecting a net loss of $3.3 million, which was offset by non-cash charges and changes in working capital of $3.5 million consisting primarily of (a) depreciation expense of $1.8 million, (b) stock-based compensation expense of $1.4 million, and (c) a decrease in accounts receivable, prepaid expenses and other assets of $302,000 due to the timing of receipts from our clients and the advance payments of certain operating costs.

 

Our operating activities used net cash in the amount of $294,000 for the year ended December 31, 2009 reflecting a net loss of $4.0 million and an increase in accounts receivable, prepaid expenses and other assets of $460,000, mainly due to the timing of receipts from our clients. These changes were partially offset by non-cash charges of $3.8 million, which consisted primarily of depreciation expense of $2.5 million, as well as an increase in accrued expenses and accounts payable of $429,000 due to the timing of payments to our vendors.

 

Our operating activities generated net cash in the amount of $3.8 million for the year ended December 31, 2008 reflecting (a) a net loss of $1.3 million, (b) non-cash charges of $4.5 million, which consisted primarily of depreciation expense of $3.2 million, and (c) a decrease in accounts receivable, prepaid expenses and other assets of $799,000. These changes were partially offset by a decrease in accrued expenses and accounts payable of $182,000 due to the timing of payments to our vendors. The net loss of $1.3 million includes $4.6 million received in connection with the settlement of the lawsuit with Universal Recovery Systems, offset in part by $1.9 million of related expenses.

 

Free cash flow in each of the years presented reflects, in addition to the factors driving cash flow from operating activities, our purchases of property and equipment, which consists primarily of computer equipment and software, investments in capitalized software, proceeds from the sale of our equipment, and our payments of contingent purchase price in connection with our acquisition of the assets of Mobile Collect in 2008. Our contingent purchase price obligations to Mobile Collect extend through 2013.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

 

We believe that of our significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that both is material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Valuation of Goodwill

 

We have recognized goodwill from a 2008 asset acquisition in which a significant portion of the consideration is contingent on the future revenues of the acquired assets. Because of the uncertainties with respect to future revenues, the contingent consideration is recognized as additional purchase price as the consideration is determined and becomes payable. We have remaining contingent consideration totaling $1.0 million at December 31, 2010, which will increase the recorded carrying value of our goodwill if the contingencies result in additional payments. Recorded goodwill at December 31, 2010 totaled $762,000. Goodwill is not amortized, but instead is reviewed for impairment annually or more frequently if impairment indicators arise. We evaluate goodwill on an annual basis for impairment and have selected November 1 as the annual impairment testing date. The Company operates as a single operating segment and has concluded that the Company is comprised of one reporting unit.

 

As a result of the economic environment impacting the Company’s business and operating results coupled with a material decline of the Company’s stock price, the Company determined that impairment triggering events had occurred that would require interim impairment evaluations which resulted in impairment charges totaling $121,000 and $248,000 in the years ended December 31, 2009 and 2008, respectively. The fair value of the reporting unit was determined using a market approach, which utilized the Company’s market capitalization as a basis for estimating fair value. The fair value of the Company’s assets and liabilities used in Step 2 includes certain identifiable intangible assets, for which fair value is typically measured using an analysis of discounted cash flows.

 

The quoted market capitalization of the Company exceeded its carrying value by approximately 10% at November 1, 2010, the Company’s most recent annual impairment assessment date. As such, no indications of impairment were noted, however, our stock price is volatile and future changes in the quoted price of our stock and other judgments that underlay the fair value estimates, including an estimated control premium, may indicate that the fair value of the reporting unit is less than the carrying value, which may result in future impairment charges.

 

Income Taxes

 

We are subject to federal and various state income taxes in the United States, and we use estimates in determining our provision for these income taxes. In addition, we are subject to Canadian and UK taxes for profits generated from our wholly owned subsidiaries. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. At December 31, 2010, our deferred tax assets consisted primarily of federal net operating loss carryforwards and state research and development credit carryforwards. 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. At December 31, 2010, we had a full valuation allowance against our deferred tax assets, which totaled approximately $10.1 million, due to the current uncertainty related to when, if ever, these assets will be realized. In the event that we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase earnings in the period in which such a determination is made.

Results of Operations

 

The following table sets forth selected statements of operations data for 2010, 2009 and 2008 indicated as percentages of revenues.

 

 

Comparison of Years Ended December 31, 2010 and 2009

 

Revenues

 

 

The $689,000 decrease in revenues in 2010 as compared to 2009 reflected a decrease in voice revenues of $3.8 million, which was partially offset by an increase in non-voice revenues of $3.1 million. The decrease in voice revenues was mainly due to lower calling volume in the large business to consumer market. Revenues from clients from which we derived revenue in both periods decreased $1.8 million, which was partially offset by revenues from new clients of $1.1 million.

 

Cost of Revenues and Gross Profit

 

 

The $56,000 increase in cost of revenues in 2010 as compared to 2009 reflected a $759,000 increase in text and email costs, as well as increased telephony expense of $254,000 due to higher client usage, increased equipment related costs of $176,000, and increased co-location costs of $140,000. These increases were partially offset by a $732,000 decrease in telephony expense related to lower delivery and circuit costs and a $573,000 decrease in depreciation expense due to a lower depreciable base of our property and equipment

infrastructure. The decrease in gross margin in 2010 as compared to the same period in 2009 reflected lower price structure agreements entered into with some of our clients, as well as the vertical market and services mix.

 

Operating Expenses

 

 

Research and Development.  The $258,000 increase in research and development expenses in 2010 as compared to 2009 was primarily attributable to a $171,000 increase in personnel related costs and a $41,000 increase in consulting services.

 

Sales and Marketing.  The $613,000 decrease in sales and marketing expenses in 2010 as compared to 2009 resulted primarily from a $420,000 decrease in personnel related costs, a $344,000 decrease in travel and entertainment costs, partially offset by a $131,000 increase in consulting and professional service costs.

 

General and Administrative.  The $1.0 million decrease in general and administrative expenses in 2010 as compared to 2009 reflected a $500,000 decrease in professional service costs, as well as a $462,000 decrease in personnel related costs, primarily as a result of executive separation pay due to the resignation of our president and chief executive officer during the second quarter of 2009.

 

Impairment of Goodwill.  The $121,000 decrease in impairment of goodwill in 2010 as compared to 2009 resulted from no impairment related charges in 2010 versus 2009.

 

Operating Loss and Other Income

 

 

The $68,000 decrease in other income in 2010 as compared to 2009 primarily resulted from a decrease in interest income due to a decline in the interest rates on the funds in which we invested our cash balance.

 

Net Loss

 

We recognized a net loss of $3.3 million in 2010 and $4.0 million in 2009. This difference principally reflects a decrease in our operating expenses of $1.5 million, partially offset by a decrease in revenues of

689,000. An income tax benefit of $30,000 was recorded in 2010 as compared to a tax provision of $16,000 in 2009. Our tax benefit relates primarily to the carryback of net operating losses to recover prior-year alternative minimum tax from the federal government. Because of our history of losses, we have provided a full valuation allowance against all deferred tax assets.

 

Comparison of Years Ended December 31, 2009 and 2008

 

Revenues

 

 

The $3.0 million decline in revenues in 2009 reflected a decrease of $4.8 million in revenues from clients in which we derived revenue in both periods. This decreased revenue was primarily due to lower calling volume in the collections industry, and was partially offset by an increase of $1.8 million in revenues from new clients.

 

Cost of Revenues and Gross Profit

 

 

The $796,000 decrease in cost of revenues in 2009 as compared to 2008 reflected a $1.4 million decrease in delivery and circuit costs, a $780,000 decrease in depreciation expense due to a lower depreciable base of our property and equipment infrastructure, and a $728,000 decrease in telephony expense due to lower client usage. These decreases were partially offset by an increase in text messaging and other channel delivery costs of $1.7 million due to higher volumes of messages sent, an increase in payroll expense of $232,000 due to a larger number of billable client management projects worked on during the current year, and a $166,000 increase in support and maintenance fees. The decrease in gross margin in 2009 as compared to 2008 reflected an overall revenue decline from 2008 to 2009, as well as lower price structure agreements entered into with some of our clients.

 

Operating Expenses

 

 

Research and Development.  The $477,000 increase in research and development expenses in 2009 as compared to 2008 was primarily attributable to a $218,000 increase in personnel related costs, as well as a $247,000 increase in outside consulting service fees and temporary help.

 

Sales and Marketing.  The $3.2 million decrease in sales and marketing expenses in 2009 as compared to 2008 resulted from a $2.0 million decrease in personnel related costs, an $826,000 decrease in travel and

entertainment costs, and a $141,000 decrease in recruiting fees primarily as a result of fewer sales and marketing personnel.

 

General and Administrative.  The $2.1 million decrease in general and administrative expenses in 2009 as compared to 2008 consisted principally of a $1.9 million decrease in legal fees incurred in conjunction with our lawsuit with URS during the second quarter of 2008. Additionally, recruiting costs decreased $196,000, outside consulting services fees decreased $157,000, and outside professional services decreased $91,000. This was partially offset by an increase in employee compensation costs of $376,000 primarily as a result of executive separation pay due to the resignation of our president and chief executive officer during the second quarter of 2009.

 

Impairment of Goodwill.  The $127,000 decrease in impairment of goodwill in 2009 as compared to 2008 resulted from fewer impairment related charges in 2009 versus 2008. Please see “— Critical Accounting Policies — Valuation of Goodwill” above and Note 9 to the financial statements appearing elsewhere herein.

 

Operating Loss and Other Income

 

 

The $5.5 million decrease in other income in 2009 as compared to 2008 primarily resulted from $4.6 million received in connection with the settlement of our lawsuit with Universal Recovery Systems (URS) during 2008. The remaining decrease is a result of a decline in the interest rates on the funds in which we invest our cash balance.

 

Net Loss

 

We recognized a net loss of $4.0 million in 2009 and $1.3 million in 2008. This difference principally reflected the settlement of our lawsuit with URS during 2008, as discussed above. An income tax provision of $16,000 was recorded in 2009 as compared to $21,000 in 2008. Our tax provision consists primarily of state income taxes in states where we did not have net operating loss carryforwards to offset taxable income. Because of our history of losses, we have provided a full valuation allowance against all deferred tax assets.

 

Liquidity and Capital Resources

 

Resources

 

Since our inception, we have funded our operations primarily with proceeds from private placements of preferred stock and our initial public offering of common stock, borrowings under credit facilities and, more recently, cash flow from operations.

 

We believe our existing cash and cash equivalents, our projected cash flow from operating activities, and our borrowings available under our existing credit facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rates of our revenue growth, our introduction of new features for our on-demand service, and our expansion of research and development and sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need

to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

 

Credit Facility Borrowings

 

On February 18, 2011 we renewed a credit facility with Silicon Valley Bank that provides a working capital line of credit at an interest rate of 4.5% per annum for up to the lesser of (a) $1.5 million or (b) 80% of eligible accounts receivable, subject to specified adjustments. Accounts receivable serve as collateral for any borrowings under the credit facility. There are certain financial covenant requirements as part of the facility, including an adjusted quick ratio and certain minimum quarterly revenue requirements, none of which are restrictive to our overall operations. The credit facility will expire by its terms on February 18, 2013 and any amounts outstanding must be repaid on that date.

 

As of December 31, 2010, no amounts were outstanding under the existing credit agreement. As of December 31, 2010, letters of credit totaling $426,000 had been issued in connection with our facility leases.

 

Operating Cash Flow

 

For a discussion of our cash flow from operating activities, please see “— Additional Key Elements of Financial Performance.”

 

Working Capital

 

The following table sets forth selected working capital information:

 

 

Our cash and cash equivalents at December 31, 2010 were unrestricted and held for working capital purposes. They were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes.

 

Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix and the volume of monthly usage of our service. We use days’ sales outstanding, or DSO, calculated on an annual basis, as a measurement of the quality and status of our receivables. We define DSO as (a) accounts receivable, net of allowance for doubtful accounts, divided by revenues for the most recent year, multiplied by (b) the number of days in the year. Our DSO was 61 days at December 31, 2010, 63 days at December 31, 2009 and 58 days at December 31, 2008.

 

Requirements

 

Capital Expenditures

 

In recent years, we have made capital expenditures primarily to acquire computer hardware and software and, to a lesser extent, furniture and leasehold improvements, to support the growth of our business. Our capital expenditures totaled $1.6 million in 2010, $900,000 in 2009 and $1.5 million in 2008. Internally capitalized software totaled $500,000 in 2010. We intend to continue to invest in our infrastructure to ensure our continued ability to enhance our platform, introduce new features and maintain the reliability of our network. We also intend to make investments in computer equipment and systems, as well as fixed assets as we continue to grow our business and add additional personnel. We expect our capital expenditures for these

purposes will approximate $1.7 million in 2011. We are not currently party to any purchase contracts related to future capital expenditures.

 

Contractual Obligations and Requirements

 

The following table sets forth our commitments to settle contractual obligations as of December 31, 2010:

 

 

Our operating leases include a lease for our headquarters in Bedford, Massachusetts. A majority of our leases related to hosting facilities are cancelable with a sixty day notice.

 

Effects of Inflation

 

Inflation and changing prices have not had a material effect on our business since January 1, 2007, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, the impact of inflation on replacement costs of equipment, cost of revenues and operating expenses, primarily employee compensation costs, may not be readily recoverable in the pricing of our service.

 

Off-Balance-Sheet Arrangements

 

As of December 31, 2010, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC.

 

Recent Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board issued guidance to amend the accounting and disclosure requirements for revenue recognition. These amendments are effective for fiscal years beginning on or after June 15, 2010 and early adoption is permitted. We adopted the amendments beginning January 1, 2011. The new guidance modifies the criteria for the separation of deliverables into units of accounting for multiple element arrangements. We believe that adoption of this new guidance will not have a material impact on our financial statements.

 

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.

 

At December 31, 2010, we had unrestricted cash and cash equivalents totaling $34.2 million. These amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe 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. A hypothetical ten percent change in interest rates would not have a material effect on our financial statements.

 

 

The information required by this item is presented beginning at page F-1 appearing immediately after “Signatures” below.

 

None.

 

 

Management’s Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our management, including our chief executive officer and chief financial officer, concluded that as of December 31, 2010, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

 

 

Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

 

Based on this assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.

 

Changes in Internal Control over Financial Reporting

 

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

None.

 

 

The information required under this Item will be incorporated by reference to our definitive proxy statement for our 2011 annual meeting of stockholders.

 

 

The information required under this Item will be incorporated by reference to our definitive proxy statement for our 2011 annual meeting of stockholders.

 

 

The information required under this Item will be incorporated by reference to our definitive proxy statement for our 2011 annual meeting of stockholders.

 

 

The information required under this Item will be incorporated by reference to our definitive proxy statement for our 2011 annual meeting of stockholders.

 

 

The information required under this Item will be incorporated by reference to our definitive proxy statement for our 2011 annual meeting of stockholders.

 

 

All schedules are omitted because they are not required or the required information is shown in the consolidated financial statements or notes thereto.

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SOUNDBITE COMMUNICATIONS, INC.

 

James A. Milton

President and Chief Executive Officer

Date: March 1, 2011

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons as of March 1, 2011 on behalf of the registrant in the capacities indicated.

 

SOUNDBITE COMMUNICATIONS, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS