Attached files
file | filename |
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EX-31.1 - EX-31.1 - Vocus, Inc. | w82684exv31w1.htm |
EX-32.1 - EX-32.1 - Vocus, Inc. | w82684exv32w1.htm |
EX-10.1 - EX-10.1 - Vocus, Inc. | w82684exv10w1.htm |
EX-31.2 - EX-31.2 - Vocus, Inc. | w82684exv31w2.htm |
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2011 | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number
000-51644
Vocus, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware (State or other jurisdiction of incorporation or organization) |
58-1806705 (I.R.S. Employer Identification No.) |
4296
Forbes Boulevard
Lanham, Maryland 20706
(301) 459-2590
(Address including zip code, and telephone number,
including area code, of principal executive offices)
Lanham, Maryland 20706
(301) 459-2590
(Address including zip code, and telephone number,
including area code, of principal executive offices)
Not
applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 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):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of May 2, 2011, 19,994,581 shares of common stock,
par value $0.01 per share, of the registrant were outstanding.
TABLE OF
CONTENTS
2
PART I
Item 1. | Consolidated Financial Statements |
Vocus,
Inc. and Subsidiaries
December 31, |
March 31, |
|||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands, except |
||||||||
per share data) | ||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 94,918 | $ | 91,543 | ||||
Short-term investments
|
5,496 | 7,535 | ||||||
Accounts receivable, net of allowance for doubtful accounts of
$182 and $213 at December 31, 2010 and March 31, 2011,
respectively
|
20,846 | 14,365 | ||||||
Current portion of deferred income taxes
|
365 | 365 | ||||||
Prepaid expenses and other current assets
|
3,790 | 3,098 | ||||||
Total current assets
|
125,415 | 116,906 | ||||||
Property, equipment and software, net
|
6,183 | 11,747 | ||||||
Intangible assets, net
|
7,534 | 7,152 | ||||||
Goodwill
|
26,278 | 38,529 | ||||||
Deferred income taxes, net of current portion
|
8,314 | 9,475 | ||||||
Other assets
|
156 | 841 | ||||||
Total assets
|
$ | 173,880 | $ | 184,650 | ||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 652 | $ | 747 | ||||
Accrued compensation
|
3,375 | 2,883 | ||||||
Accrued expenses
|
5,429 | 10,131 | ||||||
Current portion of notes payable and capital lease obligations
|
152 | 162 | ||||||
Current portion of deferred revenue
|
55,722 | 55,108 | ||||||
Total current liabilities
|
65,330 | 69,031 | ||||||
Notes payable and capital lease obligations, net of current
portion
|
192 | 257 | ||||||
Other liabilities
|
2,005 | 8,785 | ||||||
Deferred income taxes, net of current portion
|
1,065 | 1,130 | ||||||
Deferred revenue, net of current portion
|
854 | 687 | ||||||
Total liabilities
|
69,446 | 79,890 | ||||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding at
December 31, 2010 and March 31, 2011
|
| | ||||||
Common stock, $0.01 par value, 90,000,000 shares
authorized; 20,374,267 and 20,554,610 shares issued at
December 31, 2010 and March 31, 2011, respectively;
17,982,425 and 18,316,605 shares outstanding at
December 31, 2010 and March 31, 2011, respectively
|
204 | 206 | ||||||
Additional paid-in capital
|
166,985 | 171,802 | ||||||
Treasury stock, 2,391,842 and 2,238,005 shares at
December 31, 2010 and March 31, 2011, respectively at
cost
|
(28,417 | ) | (31,505 | ) | ||||
Accumulated other comprehensive income (loss)
|
(175 | ) | 278 | |||||
Accumulated deficit
|
(34,163 | ) | (36,021 | ) | ||||
Total stockholders equity
|
104,434 | 104,760 | ||||||
Total liabilities and stockholders equity
|
$ | 173,880 | $ | 184,650 | ||||
See accompanying notes.
3
Vocus,
Inc. and Subsidiaries
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands, except |
||||||||
per share data) | ||||||||
Revenues
|
$ | 22,271 | $ | 26,987 | ||||
Cost of revenues
|
4,435 | 5,452 | ||||||
Gross profit
|
17,836 | 21,535 | ||||||
Operating expenses:
|
||||||||
Sales and marketing
|
11,403 | 13,781 | ||||||
Research and development
|
1,314 | 2,015 | ||||||
General and administrative
|
5,199 | 8,228 | ||||||
Amortization of intangible assets
|
469 | 616 | ||||||
Total operating expenses
|
18,385 | 24,640 | ||||||
Loss from operations
|
(549 | ) | (3,105 | ) | ||||
Other income (expense):
|
||||||||
Interest and other income
|
68 | 182 | ||||||
Interest expense
|
(7 | ) | (16 | ) | ||||
Total other income
|
61 | 166 | ||||||
Loss before provision (benefit) for income taxes
|
(488 | ) | (2,939 | ) | ||||
Provision (benefit) for income taxes
|
91 | (1,081 | ) | |||||
Net loss
|
$ | (579 | ) | $ | (1,858 | ) | ||
Net loss per share:
|
||||||||
Basic and diluted
|
$ | (0.03 | ) | $ | (0.10 | ) | ||
Weighted average shares outstanding used in computing per share
amounts:
|
||||||||
Basic and diluted
|
18,062,306 | 18,145,461 |
See accompanying notes.
4
Vocus,
Inc. and Subsidiaries
Three Months Ended March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (579 | ) | $ | (1,858 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization of property, equipment and software
|
354 | 550 | ||||||
Amortization of intangible assets
|
469 | 736 | ||||||
Loss on disposal of assets
|
1 | 26 | ||||||
Stock-based compensation
|
2,902 | 4,261 | ||||||
Adjustment to fair value of accrued contingent consideration
|
| 62 | ||||||
Provision for doubtful accounts
|
64 | 90 | ||||||
Deferred income taxes
|
1 | (1,160 | ) | |||||
Excess tax benefits from equity awards
|
(91 | ) | | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
7,292 | 6,505 | ||||||
Prepaid expenses and other current assets
|
(425 | ) | 745 | |||||
Other assets
|
(199 | ) | (4 | ) | ||||
Accounts payable
|
(770 | ) | 69 | |||||
Accrued compensation
|
74 | (519 | ) | |||||
Accrued expenses
|
982 | 2,462 | ||||||
Deferred revenue
|
(1,926 | ) | (1,130 | ) | ||||
Other liabilities
|
21 | 3,005 | ||||||
Net cash provided by operating activities
|
8,170 | 13,840 | ||||||
Cash flows from investing activities:
|
||||||||
Business acquisitions, net of cash acquired
|
| (6,947 | ) | |||||
Purchases of
available-for-sale
securities
|
(2,598 | ) | (5,539 | ) | ||||
Maturities of
available-for-sale
securities
|
8,996 | 3,498 | ||||||
Purchases of property, equipment and software
|
(770 | ) | (6,008 | ) | ||||
Software development costs
|
(155 | ) | (40 | ) | ||||
Net cash provided by (used in) investing activities
|
5,473 | (15,036 | ) | |||||
Cash flows from financing activities:
|
||||||||
Repurchases of common stock
|
(8,309 | ) | (3,088 | ) | ||||
Proceeds from the exercise of stock options
|
19 | 555 | ||||||
Excess tax benefits from equity awards
|
91 | | ||||||
Borrowings on notes payable
|
| 40 | ||||||
Payments on notes payable and capital lease obligations
|
(138 | ) | (37 | ) | ||||
Net cash used in financing activities
|
(8,337 | ) | (2,530 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
|
(50 | ) | 351 | |||||
Net increase (decrease) in cash and cash equivalents
|
5,256 | (3,375 | ) | |||||
Cash and cash equivalents, beginning of period
|
85,817 | 94,918 | ||||||
Cash and cash equivalents, end of period
|
$ | 91,073 | $ | 91,543 | ||||
See accompanying notes.
5
Vocus,
Inc. and Subsidiaries
1. | Business Description |
Organization
and Description of Business
Vocus, Inc. (Vocus or the Company) is a provider of cloud-based
PR and marketing software for public relations management. The
Companys cloud-based software addresses the critical
functions of public relations including media relations, news
distribution, news monitoring and social media. The Company is
headquartered in Lanham, Maryland with sales and other offices
in the United States, Europe, Asia and Morocco.
2. | Summary of Significant Accounting Policies |
Basis
of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in
the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three
months ended March 31, 2011 are not necessarily indicative
of the results that may be expected for the year ending
December 31, 2011. The consolidated balance sheet at
December 31, 2010 has been derived from the audited
consolidated financial statements at that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Companys annual report on
Form 10-K
for the year ended December 31, 2010 filed with the
Securities and Exchange Commission on March 16, 2011.
Certain changes to prior year balance sheet amounts have been
made in accordance with the accounting for business combinations
to reflect adjustments made during the measurement period to
preliminary amounts recorded for the estimated fair value of
acquired net assets of BDL Media Ltd. (BDL Media) on
April 16, 2010. Refer to Note 6 for additional
information.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Vocus, Inc., and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
Equivalents and Investments
The Company considers all highly liquid investments with
maturity dates of three months or less at the time of purchase
to be cash equivalents.
Management determines the appropriate classification of
investments at the time of purchase and evaluates such
determination as of each balance sheet date. The Companys
investments were classified as
available-for-sale
securities and were stated at fair value at December 31,
2010 and March 31, 2011. Realized gains and losses are
included in other income (expense) based on the specific
identification method. Realized gains and losses for the three
months ended March 31, 2010 and 2011 were not material. Net
unrealized gains and losses on
6
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
available-for-sale
securities are reported as a component of other comprehensive
income (loss), net of tax. As of December 31, 2010 and
March 31, 2011, the net unrealized losses on
available-for-sale
securities were not material. The Company regularly monitors and
evaluates the fair value of its investments to identify
other-than-temporary
declines in value. Management believes no such declines in value
existed at March 31, 2011.
Fair
Value Measurements
The Company measures certain financial assets and liabilities at
fair value, including cash equivalents,
available-for-sale
securities and accrued contingent consideration pursuant to a
fair value hierarchy based on inputs to valuation techniques
that are used to measure fair value that are either observable
or unobservable. Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on
market data obtained from independent sources while unobservable
inputs reflect a reporting entitys pricing based upon its
own market assumptions. The fair value hierarchy consists of the
following three levels:
Level 1 | Inputs are quoted prices in active markets for identical assets or liabilities. |
Level 2 | Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
Level 3 | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
Business
Combinations
The Company has completed acquisitions of businesses that have
resulted in the recording of goodwill and identifiable
definite-lived intangible assets. The Company recognizes all of
the assets acquired, liabilities assumed and contingent
consideration at their fair values on the acquisition date. The
Company uses significant estimates and assumptions, including
fair value estimates, as of the acquisition date and refines
those estimates that are provisional, as necessary, during the
measurement period. The measurement period is the period after
the acquisition date, not to exceed one year, in which new
information may be gathered about facts and circumstances that
existed as of the acquisition date to adjust the provisional
amounts recognized. Measurement period adjustments are applied
retrospectively. All other adjustments are recorded to the
consolidated statements of operations. Acquisition-related costs
are recognized separately from the acquisition and expensed as
incurred in general and administrative expenses in the
consolidated statements of operations. The Company determines
the useful lives for definite-lived tangible and intangible
assets and liabilities assumed using estimates and judgments.
Foreign
Currency and Operations
The reporting currency for all periods presented is the
U.S. dollar. The functional currency for the Companys
foreign subsidiaries is their local currency. The translation of
each subsidiarys financial statements into
U.S. dollars is performed for assets and liabilities using
exchange rates in effect at the balance sheet date and for
revenue and expense accounts using an average exchange rate
during the period. The resulting translation adjustments are
recognized in accumulated other comprehensive income (loss), a
separate component of stockholders equity. Realized
foreign currency transaction gains and losses are included in
other income (expense) in the consolidated statements of
operations. Amounts resulting from foreign currency transactions
were not material for the three months ended March 31, 2010
and 2011.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes the Companys net
income (loss) as well as other changes in stockholders
equity that result from transactions and economic events other
than those with stockholders. Other
7
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
comprehensive income (loss) includes foreign currency
translation adjustments and net unrealized gains and losses on
investments classified as
available-for-sale
securities. For the three months ended March 31, 2010 and
2011, the comprehensive income (loss) was determined as follows
(in thousands):
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Net loss
|
$ | (579 | ) | $ | (1,858 | ) | ||
Other comprehensive income (loss):
|
||||||||
Foreign currency translation adjustment
|
89 | 455 | ||||||
Unrealized net loss on
available-for-sale
investments, net of tax
|
(4 | ) | (2 | ) | ||||
Comprehensive income (loss)
|
$ | (494 | ) | $ | (1,405 | ) | ||
Segment
Data
The Companys chief operating decision maker manages the
Companys operations on a consolidated basis for purposes
of assessing performance and making operating decisions.
Accordingly, the Company reports on one segment of its business.
Revenue
Recognition
The Company derives its revenues from subscription arrangements
and related services permitting customers to access and utilize
the Companys cloud-based software. The Company also
derives revenues from news distribution services sold separately
from its subscription arrangements. The Company recognizes
revenue when there is persuasive evidence of an arrangement, the
service has been provided to the customer, the collection of the
fee is probable and the amount of the fees to be paid by the
customer is fixed or determinable.
Subscription agreements generally contain multiple service
elements and deliverables. These elements generally include
access to the Companys cloud-based software, hosting
services, content and content updates, customer support and may
also include news distribution services and professional
services. The Company has determined that professional services
are not essential to the functionality of the subscription
software. Subscription agreements do not provide customers the
right to take possession of the software at any time.
Prior to January 1, 2011, the Company determined that it
did not have objective and reliable evidence of fair value of
the undelivered elements in its arrangements. As a result, the
Company considered all elements in its multiple element
subscription arrangements as a single unit of accounting and
recognized all revenue from its multiple element subscription
arrangements ratably over the term of the subscription. The
subscription term commences on the earlier of the start date
specified in the subscription arrangement or the date access to
the software is provided to the customer. Professional services
sold separately from a subscription arrangement were recognized
as the services were performed. The Companys subscription
agreements typically are non-cancelable, though customers have
the right to terminate their agreements for cause if the Company
materially breaches its obligations under the agreement.
In October 2009, the Financial Accounting Standards Board (FASB)
amended the accounting guidance for multiple-deliverable revenue
arrangements to:
| provide updates on whether multiple deliverables exist, how the deliverables in an arrangement should be separated and how the consideration should be allocated; | |
| eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and |
8
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
| require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if it does not have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price. |
On January 1, 2011, the Company adopted the provisions of
the new accounting guidance for multiple-deliverable revenue
arrangements entered into or materially modified on or after
January 1, 2011 that contain subscription services sold
with news distribution services or professional services on a
prospective basis and determined the adoption did not have a
material impact on its financial statements. The Companys
separate units of accounting consist of its subscription
services, news distribution services and professional services.
The Company allocates consideration to each deliverable in
multiple element arrangements based on the relative selling
prices and recognizes revenue as the respective services are
delivered or performed.
The Company established VSOE of selling price for certain of its
news distribution services as the selling price for a
substantial majority of stand-alone sales falls within a narrow
range around the median selling price. The Company determined
TPE of selling price is not available for any of its services
due to differences in the features and functionality compared to
competitors products. The Company determined ESP for the
remaining deliverables by analyzing factors such as historical
pricing trends, discounting practices, gross margin objectives
and other market conditions.
The Company also distributes individual news releases to the
Internet which are indexed by major search engines and
distributed directly to various news sites, journalists and
other key constituents. The Company recognizes revenue on a
per-transaction basis when the press releases are made available
to the public.
Sales and other taxes collected from customers to be remitted to
government authorities are excluded from revenues.
Sales
Commissions
Sales commissions are expensed when a subscription agreement is
executed by the customer.
Stock-Based
Compensation
The Companys share-based arrangements include stock option
awards and restricted stock awards. The Company recognizes
compensation expense for its equity awards on a straight-line
basis over the requisite service period of the award based on
the estimated portion of the award that is expected to vest and
applies estimated forfeiture rates based on analyses of
historical data, including termination patterns and other
factors. The Company uses the quoted closing market price of its
common stock on the grant date to measure the fair value of
restricted stock awards and the Black-Scholes option pricing
model to measure the fair value of stock option awards. The
Company became a public entity in December 2005, and therefore
has a limited history of volatility. Accordingly, the expected
volatility is based on the historical volatilities of similar
entities common stock over the most recent period
commensurate with the estimated expected term of the awards. The
historical volatilities of these entities have not differed
significantly from the Companys historical volatility. The
expected term of an award is equal to the midpoint between the
vesting date and the end of the contractual term of the award.
The risk-free interest rate is based on the rate on
U.S. Treasury securities with maturities consistent with
the estimated expected term of the awards. The Company has not
paid dividends and does not anticipate paying a cash dividend in
the foreseeable future and, accordingly, uses an expected
dividend yield of zero.
Income
Taxes
Income taxes are determined utilizing the asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax-credit
carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amount of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation
9
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
The Company accounts for uncertain tax positions by recognizing
and measuring tax benefits taken or expected to be taken on a
tax return. A tax benefit from an uncertain position may be
recognized only if it is more likely than not that the position
is sustainable, based solely on its technical merits and
consideration of the relevant taxing authoritys widely
understood administrative practices and precedents. If the
recognition threshold is met, only the portion of the tax
benefit that is greater than 50 percent likely to be
realized upon settlement with a taxing authority (that has full
knowledge of all relevant information) is recorded. The tax
benefit that is not recorded is considered an unrecognized tax
benefit and disclosed. Interest and penalties related to
uncertain tax positions are recognized as a component of income
tax expense. The Company files income tax returns in the
U.S. federal jurisdictions and various state and foreign
jurisdictions. The Company is subject to U.S. federal tax,
state and foreign tax examinations for years ranging from 2002
to 2009.
The Companys effective tax rate differs from the
U.S. Federal statutory rate primarily due to non-deductible
stock-based compensation, operating losses in foreign
jurisdictions for which no tax benefit is currently available
and to a lesser extent, state income taxes and certain other
non-deductible expenses. Additionally, in the three months ended
March 31, 2011 the Company recorded a tax benefit related
to tax credits related to prior years.
Earnings
Per Share
Basic net income or loss per share is computed by dividing net
income or loss by the weighted average number of common shares
outstanding for the period. Nonvested shares of restricted stock
are not included in the computation of basic net income or loss
per share until vested. The Companys outstanding grants of
restricted stock do not contain non-forfeitable dividend rights.
Diluted net income or loss per share includes the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common
stock. Diluted net income or loss per share includes the
dilutive effect of nonvested shares of restricted stock.
For the three months ended March 31, 2010 and 2011, the
Company incurred net losses and, therefore, the effect of the
Companys outstanding stock options and nonvested shares of
restricted stock was not included in the calculation of diluted
loss per share as the effect would be anti-dilutive.
Accordingly, basic and diluted net loss per share were
identical. For the three months ended March 31, 2010 and
2011, diluted earnings per share excluded 2,704,223 and
2,894,280 outstanding stock options, respectively, and 1,414,788
and 1,334,278 nonvested shares of restricted stock,
respectively, as the result would be anti-dilutive.
3. | Business Combinations |
On February 24, 2011, the Company acquired substantially
all of the assets and assumed certain liabilities of North
Venture Partners, LLC (North Social), a provider of Facebook
applications that enable users to create, manage and promote
their business on Facebook. The Company expects that the
acquisition of North Social will broaden its social media
solution. The purchase price at the acquisition date consisted
of approximately $7,000,000 in cash paid and $5,059,000 of
contingent cash consideration for the achievement of certain
financial milestones within the following 24 months. The
contingent consideration could result in future payments of up
to $18,000,000. The fair value of the contingent consideration
was estimated using probability assessments of expected future
cash flows over the period in which the obligation is to be
settled and applied a discount rate that appropriately captures
a market participants view of the risk associated with the
obligation. As of March 31, 2011, there were no changes to
the estimated fair value of the contingent consideration for
North Social.
In connection with the acquisition, the Company deposited
$700,000 of the purchase price into an escrow account as
security for breaches of representations and warranties,
covenants and certain other expressly enumerated matters by
North Social and its shareholders. The amount is excluded from
cash and cash equivalents
10
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
as the deposit is restricted in nature. As of March 31,
2011, $700,000 is included in other assets in the accompanying
consolidated balance sheet.
The Company recorded approximately $101,000 of identifiable
intangible assets and $11,880,000 of goodwill that is deductible
for tax purposes. Goodwill is primarily attributable to North
Socials knowledge of applications for Facebook and the
opportunity to expand into the rapidly growing social media
market. The acquisition was accounted for under the purchase
method of accounting, and operating results are included in the
Companys consolidated financial statements from the date
of acquisition. Transaction costs associated with the
acquisition were not material. The acquisition did not have a
material impact on results of operations for the three months
ended March 31, 2011.
4. | Cash Equivalents and Investments |
The components of cash equivalents and investments at
December 31, 2010 are as follows (in thousands):
Unrealized |
Fair |
|||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Cash equivalents:
|
||||||||||||||||
Money market funds
|
$ | 23,826 | $ | | $ | | $ | 23,826 | ||||||||
Commercial paper
|
31,294 | | | 31,294 | ||||||||||||
Government-sponsored agency debt securities
|
5,199 | | | 5,199 | ||||||||||||
Certificates of deposit
|
2,294 | | | 2,294 | ||||||||||||
Short-term investments:
|
||||||||||||||||
Government-sponsored agency debt securities
|
5,497 | | (1 | ) | 5,496 | |||||||||||
Total
|
$ | 68,110 | $ | | $ | (1 | ) | $ | 68,109 | |||||||
The components of cash equivalents and investments at
March 31, 2011 are as follows (in thousands):
Unrealized |
Fair |
|||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Cash equivalents:
|
||||||||||||||||
Money market funds
|
$ | 11,739 | $ | | $ | | $ | 11,739 | ||||||||
Commercial paper
|
28,973 | | | 28,973 | ||||||||||||
Government-sponsored agency debt securities
|
3,300 | | | 3,300 | ||||||||||||
Certificates of deposit
|
2,130 | | | 2,130 | ||||||||||||
Short-term investments:
|
||||||||||||||||
Government-sponsored agency debt securities
|
5,590 | | (4 | ) | 5,586 | |||||||||||
Commercial paper
|
1,948 | 1 | | 1,949 | ||||||||||||
Total
|
$ | 53,680 | $ | 1 | $ | (4 | ) | $ | 53,677 | |||||||
Cash equivalents have original maturity dates of three months or
less. Short-term investments have original maturity dates
greater than three months but less than one year.
11
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
5. | Fair Value Measurements |
The fair value measurements of the Companys financial
assets and liabilities measured on a recurring basis at
March 31, 2011 are as follows (in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets:
|
||||||||||||||||
Cash equivalents
|
$ | 46,142 | $ | 17,169 | $ | 28,973 | $ | | ||||||||
Short-term investments
|
7,535 | 5,586 | 1,949 | | ||||||||||||
Total assets measured at fair value
|
$ | 53,677 | $ | 22,755 | $ | 30,922 | $ | | ||||||||
Liabilities:
|
||||||||||||||||
Accrued contingent consideration
|
$ | 7,097 | $ | | $ | | $ | 7,097 | ||||||||
Total liabilities measured at fair value
|
$ | 7,097 | $ | | $ | | $ | 7,097 | ||||||||
Cash equivalents and investments are classified within
Level 1 or Level 2 of the fair value hierarchy since
they are valued using quoted market prices or alternative
pricing sources that utilize market observable inputs.
Contingent consideration liabilities are classified as
Level 3 of the fair value hierarchy since they are valued
using unobservable inputs. The contingent consideration
liability represents the estimated fair value of the additional
variable cash consideration payable in connection with the
acquisitions of Datapresse and BDL Media in 2010 and North
Social in 2011 that is contingent upon the achievement of
certain financial and performance milestones. The fair value was
estimated using expected future cash flows over the period in
which the obligation is expected to be settled, and applied a
discount rate that appropriately captures a market
participants view of the risk associated with the
obligation. The change in the estimated fair value of contingent
consideration is reported in general and administrative expenses
in the consolidated statements of operations. At March 31,
2011, contingent consideration of $3,069,000 and $4,028,000 was
included in accrued expenses and other liabilities in the
consolidated balance sheet, respectively.
The changes in the fair value of the Companys acquisition
related contingent consideration for the three months ended
March 31, 2011, were as follows (in thousands):
Balance as of January 1, 2011
|
$ | 1,937 | ||
Acquisition date fair value measurement
|
5,059 | |||
Adjustments to fair value measurements
|
62 | |||
Effects of foreign currency translation
|
39 | |||
Balance as of March 31, 2011
|
$ | 7,097 | ||
6. | Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill for the three
months ended March 31, 2011, were as follows (in thousands):
Balance as of January 1, 2011
|
$ | 26,278 | ||
Goodwill acquired in connection with North Social
|
11,880 | |||
Effects of foreign currency translation
|
371 | |||
Balance as of March 31, 2011
|
$ | 38,529 | ||
During the three months ended March 31, 2011, the Company
adjusted certain December 31, 2010 balance sheet amounts
for revisions to the BDL Media purchase price allocation based
on information identified that existed
12
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
at the acquisition date related to an uncertain tax position
identified in connection with the acquisition. The adjustments
resulted in decreases to goodwill, accrued expenses and other
liabilities of $617,000.
Intangible assets at December 31, 2010 consisted of the
following (dollars in thousands):
Weighted- |
||||||||||||||||
Average |
Gross |
|||||||||||||||
Amortization |
Carrying |
Accumulated |
Net Carrying |
|||||||||||||
Period | Amount | Amortization | Amount | |||||||||||||
Customer relationships
|
6.0 | $ | 7,231 | $ | (3,241 | ) | $ | 3,990 | ||||||||
Trade names
|
6.9 | 4,325 | (2,529 | ) | 1,796 | |||||||||||
Agreements
not-to-compete
|
5.0 | 3,913 | (3,456 | ) | 457 | |||||||||||
Purchased technology
|
3.9 | 1,431 | (140 | ) | 1,291 | |||||||||||
Total
|
$ | 16,900 | $ | (9,366 | ) | $ | 7,534 | |||||||||
Intangible assets at March 31, 2011 consisted of the
following (dollars in thousands):
Weighted- |
||||||||||||||||
Average |
Gross |
|||||||||||||||
Amortization |
Carrying |
Accumulated |
Net Carrying |
|||||||||||||
Period | Amount | Amortization | Amount | |||||||||||||
Customer relationships
|
6.0 | $ | 7,478 | $ | (3,531 | ) | $ | 3,947 | ||||||||
Trade names
|
6.9 | 4,381 | (2,689 | ) | 1,692 | |||||||||||
Agreements
not-to-compete
|
5.0 | 3,913 | (3,652 | ) | 261 | |||||||||||
Purchased technology
|
3.8 | 1,520 | (268 | ) | 1,252 | |||||||||||
Total
|
$ | 17,292 | $ | (10,140 | ) | $ | 7,152 | |||||||||
The Companys goodwill and intangible assets for certain of
its foreign subsidiaries are recorded in their functional
currency, which is their local currency, and therefore are
subject to foreign currency translation adjustments.
Amortization expense of intangible assets for the three months
ended March 31, 2010 and 2011 was $469,000 and $736,000,
respectively. Future expected amortization of intangible assets
at March 31, 2011 was as follows (in thousands):
Remainder of 2011
|
$ | 1,768 | ||
2012
|
1,792 | |||
2013
|
1,235 | |||
2014
|
878 | |||
2015
|
716 | |||
2016
|
598 | |||
Thereafter
|
165 | |||
$ | 7,152 | |||
7. | Stockholders Equity |
Common
Stock Repurchases
In November 2008, the Companys Board of Directors
authorized a stock repurchase program for up to $30,000,000 of
the Companys shares of common stock. The shares may be
purchased from time to time in the open market. During the three
months ended March 31, 2010, the Company purchased an
aggregate of 477,286 shares of its common stock for
$7,012,000. The Company did not purchase any shares of its
common stock under the stock
13
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
repurchase program for the three months ended March 31,
2011. During the three months ended March 31, 2010 and
2011, the Company also repurchased 86,708 and
123,784 shares of restricted stock that were withheld from
employees to satisfy the minimum statutory tax withholding
obligations of $1,296,000 and $3,088,000, respectively, related
to the taxable income recognized by these employees upon the
vesting of their restricted stock awards.
8. | Stock-Based Compensation |
The following table sets forth the stock-based compensation
expense for equity awards recorded in the consolidated
statements of operations for the three months ended
March 31, 2010 and 2011 (in thousands):
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Cost of revenues
|
$ | 579 | $ | 484 | ||||
Sales and marketing
|
437 | 1,183 | ||||||
Research and development
|
373 | 634 | ||||||
General and administration
|
1,513 | 1,960 | ||||||
Total
|
$ | 2,902 | $ | 4,261 | ||||
Stock
Option Awards
The following weighted-average assumptions were used in
calculating stock-based compensation for stock options awards
granted during the three months ended March 31, 2010 and
2011:
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Stock price volatility
|
60 | % | 57 | % | ||||
Expected term (years)
|
6.3 | 6.2 | ||||||
Risk-free interest rate
|
2.7 | % | 2.4 | % | ||||
Dividend yield
|
0 | % | 0 | % |
The summary of stock option activity for the three months ended
March 31, 2011 is as follows:
Weighted- |
Aggregate |
|||||||||||||||
Average |
Weighted- |
Intrinsic |
||||||||||||||
Exercise |
Average |
Value as of |
||||||||||||||
Number of |
Price per |
Contractual |
March 31, |
|||||||||||||
Options | Share | Term | 2011 | |||||||||||||
(In thousands) | ||||||||||||||||
Balance outstanding at January 1, 2011
|
2,478,923 | $ | 15.09 | |||||||||||||
Granted
|
484,147 | 23.84 | ||||||||||||||
Exercised
|
(32,540 | ) | 17.06 | |||||||||||||
Forfeited or cancelled
|
(36,250 | ) | 17.11 | |||||||||||||
Balance outstanding at March 31, 2011
|
2,894,280 | $ | 16.50 | 7.0 | $ | 27,444 | ||||||||||
Options vested and expected to vest at March 31, 2011
|
2,819,241 | $ | 16.41 | 6.9 | $ | 26,980 | ||||||||||
Exercisable at March 31, 2011
|
1,819,356 | $ | 14.58 | 5.6 | $ | 20,755 | ||||||||||
The weighted-average grant date fair value of stock options
granted during the three months ended March 31, 2010 and
2011 was $8.52 and $13.30, respectively. The fair value of stock
options that vested during the three months ended March 31,
2010 and 2011 was $2,861,000 and $3,960,000, respectively. As of
March 31, 2011,
14
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
$10.6 million of total unrecognized stock-based
compensation cost is related to nonvested stock option awards
and is expected to be recognized over a weighted-average period
of 3.4 years.
The aggregate intrinsic value represents the difference between
the exercise price of the underlying equity awards and the
quoted closing price of the Companys common stock at the
last day of each respective quarter multiplied by the number of
shares that would have been received by the option holders had
all option holders exercised on the last day of each respective
quarter. The aggregate intrinsic value of stock options
exercised during the three months ended March 31, 2010 and
2011 was $1,100,000 and $311,000, respectively.
Restricted
Stock Awards
The summary of restricted stock award activity for the three
months ended March 31, 2011 is as follows:
Number of Shares |
||||
Underlying |
||||
Stock Awards | ||||
Balance nonvested at January 1, 2011
|
1,418,731 | |||
Awarded
|
355,471 | |||
Vested
|
(425,424 | ) | ||
Forfeited
|
(14,500 | ) | ||
Balance nonvested at March 31, 2011
|
1,334,278 | |||
The weighted-average grant date fair value of restricted stock
awards granted during the three months ended March 31, 2010
and 2011 was $14.52 and $23.75, respectively.
As of March 31, 2011, $21.9 million of total
unrecognized stock-based compensation cost is related to
nonvested shares of restricted stock and is expected to be
recognized over a weighted-average period of 2.6 years.
9. | Commitments and Contingencies |
Leases
On March 30, 2010, the Company signed a twelve year lease
for approximately 93,000 square feet of office space in
Beltsville, Maryland. The Company plans to relocate its
corporate headquarters to the leased premises in the third
quarter of 2011. The aggregate minimum lease commitment is
approximately $21.5 million. In addition, under the terms
of the lease, the landlord will reimburse the Company
approximately $6.4 million for leasehold improvements which
will be recorded as a reduction in rent expense ratably over the
terms of the occupancy. As of March 31, 2011 the Company
recorded $3.4 million of construction in progress in
leasehold improvements relating to the tenant allowance.
The Company has various non-cancelable operating leases,
primarily related to office real estate, that expire through
2023, including the office space in Beltsville, Maryland, and
generally contain renewal options for up to five years. As of
March 31, 2011, minimum required payments in future years
under these leases are $1,657,000, $2,601,000, $2,672,000,
$2,665,000, $2,439,000, and $15,035,000 in 2011, 2012, 2013,
2014, 2015, and 2016 and thereafter, respectively.
15
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Purchase
Commitments
The Company has entered into agreements with various vendors in
the ordinary course of business. As of March 31, 2011,
minimum required payments in future years under these
arrangements are $3,147,000, $1,991,000, $1,109,000, and
$382,000 in 2011, 2012, 2013, and 2014, respectively.
Litigation
and Claims
The Company from time to time is subject to lawsuits,
investigations and claims arising out of the ordinary course of
business, including those related to commercial transactions,
contracts, government regulation and employment matters. The
Company is not currently subject to any material legal
proceedings that, in its opinion, would have a material effect
on the financial position, results of operations or cash flows
of the Company.
16
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes that appear elsewhere in this report and in our
annual report on
Form 10-K
for the year ended December 31, 2010.
This report includes forward-looking statements that are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
can be identified by the use of words such as
anticipate, believe,
estimate, may, intend,
expect, will, should,
seeks or other similar expressions. Forward-looking
statements reflect our plans, expectations and beliefs, and
involve inherent risks and uncertainties, many of which are
beyond our control. You should not place undue reliance on any
forward-looking statement, which speaks only as of the date
made. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this report, particularly in Risk
Factors in Item 1A of Part II.
Overview
We are a leading provider of cloud-based software for public
relations management. Our cloud-based software suite helps
organizations of all sizes fundamentally change the way they
communicate with both the media and the public, optimizing their
public relations and increasing their ability to measure its
impact. Our cloud-based software addresses the critical
functions of public relations including media relations, news
distribution, news monitoring and social media. We deliver our
solutions over the Internet using a secure, scalable application
and system architecture, which allows our customers to eliminate
expensive up-front hardware and software costs and to quickly
deploy and adopt our cloud-based software.
We sell access to our cloud-based software primarily through our
direct sales channel. As of March 31, 2011, we had 9,256
active subscription customers, including 1,900 customers
obtained from our acquisition of Datapresse in April 2010, from
a variety of industries, including financial and insurance,
technology, healthcare and pharmaceutical and retail and
consumer products, as well as government agencies,
not-for-profit
organizations and educational institutions. We define active
subscription customers as unique customer accounts that have an
annual active subscription and have not been suspended for
non-payment.
We are also a provider of news distribution services. We enable
our customers to achieve visibility on the Internet by
distributing search engine optimized press releases directly to
various news sites and the public. We offer on-demand solutions
which allow our customers to widely distribute press releases
containing important elements of content-rich media such as
images, podcasts and video messages designed to drive Internet
traffic to websites and increase brand awareness.
We plan to continue the expansion of our customer base by
expanding our direct distribution channels, expanding our
international market penetration, penetrating the small business
market and selectively pursuing strategic acquisitions. As a
result, we plan to hire additional personnel, particularly in
sales and marketing, and expand our domestic and international
selling and marketing activities, increase the number of
locations where we conduct business and develop our operational
and financial systems to manage a growing business. We also
intend to seek to identify and acquire companies which would
either expand our solutions functionality, provide access
to new customers or markets, or both.
On February 24, 2011, we acquired substantially all of the
assets and assumed certain liabilities of North Venture
Partners, LLC (North Social) for a purchase price of
approximately $7.0 million cash paid at closing, and
$5.1 million of contingent consideration for the
achievement of certain financial milestones within the following
24 months. The contingent consideration could result in
future payments of up to $18.0 million. North Social
provides Facebook applications that enable users to create,
manage and promote their business on Facebook which we expect
will broaden our social media solution. As a result of the
acquisition, we recorded $101,000 of identifiable intangible
assets and $11.9 million of goodwill which is deductible
for tax purposes. The operating results of North Social are
included in the accompanying consolidated financial statements
from the acquisition date. Acquisition related costs incurred
for the acquisition were not material.
17
Sources
of Revenues
We derive our revenues from subscription agreements and related
services and from news distribution services. Our subscription
agreements contain multiple service elements and deliverables,
which generally include use of our cloud-based software, hosting
services, content and content updates, customer support and may
also include news distribution services and professional
services. The typical term of our subscription agreements is one
year; however, our customers may purchase subscriptions with
multi-year terms. We separately invoice our customers in advance
of their annual subscription, with payment terms that require
our customers to pay us generally within 30 days of
invoice. Our subscription agreements typically are
non-cancelable, though customers have the right to terminate
their agreements for cause if we materially breach our
obligations under the agreement. Our subscription agreements may
include amounts that are not yet contractually billable to
customers, and any such unbilled amounts are not recorded in
deferred revenue until invoiced. Our professional service
engagements are billed on a fixed fee basis with payment terms
requiring our customers to pay us within 30 days of
invoice. Revenues from professional services have not been
material to our business.
Additionally, we derive revenue on a per-transaction basis from
our news distribution services. We generally receive payment in
advance of the online distribution of the news release.
Cost of
Revenues and Operating Expenses
Cost of Revenues. Cost of revenues consists
primarily of compensation for training, editorial and support
personnel, hosting infrastructure, press release distribution,
acquisition, maintenance and amortization of the information
database, amortization of purchased technology from business
combinations, amortization of capitalized software development
costs, depreciation associated with computer equipment and
software and allocated overhead. We allocate overhead expenses
such as employee benefits, computer and office supplies,
management information systems and depreciation for computer
equipment based on headcount. As a result, indirect overhead
expenses are included in cost of revenues and each operating
expense category.
We believe content is an integral part of our solution and
provides our customers with access to broad, current and
relevant information critical to their public relations efforts.
We expect to continue to make investments in both our own
content as well as content acquired from third-parties and to
continue to enhance our proprietary information database and
enhance our news monitoring and social media monitoring
services. We expect that in 2011, cost of revenues will increase
in absolute dollars but will remain flat as a percentage of
revenues.
Sales and Marketing. Sales and marketing
expenses are our largest operating expense. Sales and marketing
expenses consist primarily of compensation for our sales and
marketing personnel, sales commissions and incentives, marketing
programs, including lead generation, promotional events,
webinars and other brand building expenses and allocated
overhead. We expense our sales commissions at the time a
subscription agreement is executed by the customer, and we
recognize substantially all of our revenues ratably over the
term of the corresponding subscription agreement. As a result,
we incur sales expense before the recognition of the related
revenues.
We plan to continue to invest in sales and marketing to add new
customers, increase sales to our existing customers and increase
sales of our online news release distribution services. Such
investments will include adding sales personnel and expanding
our marketing activities to build brand awareness and generate
additional sales leads. We expect in 2011, sales and marketing
expenses will increase in absolute dollars but will remain flat
as a percentage of revenues.
Research and Development. Research and
development expenses consist primarily of compensation for our
software application development personnel and allocated
overhead. We have historically focused our research and
development efforts on increasing the functionality and
enhancing the ease of use of our cloud-based software. Because
of our hosted, on-demand model, we are able to provide our
customers with a single, shared version of our most recent
application. As a result, we do not have to maintain legacy
versions of our software, which enables us to have relatively
low expenses as compared to traditional enterprise software
business models. We expect that in 2011, research and
development expenses will increase in absolute dollars but will
remain flat as a percentage of revenues.
18
General and Administrative. General and
administrative expenses consist of compensation and related
expenses for executive, finance, legal, human resources and
administrative personnel, as well as fees for legal, accounting
and other consulting services, including acquisition-related
transaction costs, third-party payment processing and credit
card fees, facilities rent, other corporate expenses and
allocated overhead. We expect that in 2011, general and
administrative expenses will increase in absolute dollars and as
a percentage of revenues.
Amortization of Intangible Assets. Amortized
intangible assets consist of customer relationships, trade names
and agreements
not-to-complete
acquired in business combinations.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these consolidated 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 Note 2 to the accompanying consolidated
financial statements and in our annual report on
Form 10-K
for the year ended December 31, 2010, the following
accounting policies involve a greater degree of judgment and
complexity. Accordingly, these are the policies we believe are
the most critical to aid in fully understanding and evaluating
our consolidated financial condition and results of operations.
Revenue Recognition. We recognize revenues
when there is persuasive evidence of an arrangement, the service
has been provided to the customer, the collection of the fee is
probable and the amount of the fees to be paid by the customer
is fixed or determinable. Our subscription agreements generally
contain multiple service elements and deliverables. These
elements include use of our cloud-based software, hosting
services, content and content updates, customer support and may
also include news distribution services and professional
services. We have determined that professional services are not
essential to the functionality of our subscription software. Our
subscription agreements do not provide customers the right to
take possession of the software at any time.
Prior to January 1, 2011, all elements in our multiple
element subscription agreements were considered a single unit of
accounting, and accordingly, we recognized all associated fees
over the subscription period, which is typically one year. We
determined that we did not have objective and reliable evidence
of the fair value of the undelivered elements in our
arrangements and, as a result, subscription revenues were
recognized ratably over the term of the subscription.
Professional services sold separately from a subscription
arrangement were recognized as the services were performed.
In October 2009, the Financial Accounting Standards Board (FASB)
amended the accounting guidance for multiple-deliverable revenue
arrangements to:
| provide updates on whether multiple deliverables exist, how the deliverables in an arrangement should be separated and how the consideration should be allocated; | |
| eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and | |
| require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if it does not have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price. |
On January 1, 2011, we adopted the provisions of the new
accounting guidance for multiple-deliverable revenue
arrangements entered into or materially modified on or after
January 1, 2011 that contain subscription services sold
with news distribution services or professional services on a
prospective basis and determined the adoption did not have a
material impact on our financial statements. Our separate units
of accounting consist of our subscription services, news
distribution services and professional services. We allocate
consideration to each deliverable in multiple element
arrangements based on the relative selling prices and recognize
revenue as the respective services are delivered or performed.
19
We have established VSOE of the selling price for certain of our
news distribution services as the selling price for a
substantial majority of stand-alone sales falls within a narrow
range around the median selling price. We determined TPE of the
selling prices for our services is not available due to
differences in the features and functionality of
competitors products. We determined ESP for the remaining
deliverables by analyzing factors such as historical pricing
trends, discounting practices, gross margin objectives and other
market conditions.
We also distribute individual press releases to the Internet
which are indexed by major search engines and distributed
directly to various news sites, journalists and other key
constituents. We recognize revenue on a per-transaction basis
when the press releases are made available to the public.
Sales Commissions. Sales commissions are
expensed when a subscription agreement is executed by the
customer. As a result, we incur incremental sales expense before
the recognition of the related revenues.
Stock-Based Compensation. We recognize
compensation expense for equity awards based on the fair value
of the award and on a straight-line basis over the requisite
service period of the award based on the estimated portion of
the award that is expected to vest. We apply estimated
forfeiture rates based on analyses of historical data, including
termination patterns and other factors. We use the quoted
closing market price of our common stock on the grant date to
measure the fair value of our restricted stock awards. We use
the Black-Scholes option pricing model to measure the fair value
of our option awards. We became a public entity in December
2005, and therefore have a limited history of volatility.
Accordingly, the expected volatility is based on the historical
volatilities of similar entities common stock over the
most recent period commensurate with the estimated expected term
of the awards. The historical volatilities of these entities
have not differed significantly from our historical volatility.
The expected term of an award is equal to the midpoint between
the vesting date and the end of the contractual term of the
award. The risk-free interest rate is based on the rate on
U.S. Treasury securities with maturities consistent with
the estimated expected term of the awards. We have not paid
dividends and do not anticipate paying a cash dividend in the
foreseeable future and, accordingly, use an expected dividend
yield of zero.
Business Combinations. We have completed
acquisitions of businesses that have resulted in the recording
of goodwill and identifiable definite-lived intangible assets.
Definite-lived intangible assets consist of acquired customer
relationships, trade names, agreements
not-to-compete
and purchased technology. Definite-lived intangible assets are
amortized on a straight-line basis over their estimated useful
lives ranging from two to seven years. We recognize all of the
assets acquired, liabilities assumed and contingent
consideration at their fair values on the acquisition date. We
use significant estimates and assumptions, including fair value
estimates, as of the acquisition date and refine those estimates
that are provisional, as necessary, during the measurement
period. The measurement period is the period after the
acquisition date, not to exceed one year, in which new
information may be gathered about facts and circumstances that
existed as of the acquisition date to adjust the provisional
amounts recognized. Measurement period adjustments are applied
retrospectively. All other adjustments are recorded to the
consolidated results of operations. Acquisition-related costs
are recognized separately from the acquisition and expensed as
incurred in general and administrative expenses in the
consolidated statements of operations. Accounting for these
acquisitions also requires us to make determinations about the
useful lives for definite-lived tangible and intangible assets
and liabilities assumed that involve estimates and judgments.
Goodwill and Long-Lived Assets. Goodwill is
not amortized, but rather is assessed for impairment at least
annually. Goodwill impairment is evaluated using a two step
process. The first step is to identify if a potential impairment
exists by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered to have a potential impairment
and the second step of the impairment test is not necessary.
However, if the carrying amount of a reporting unit exceeds its
fair value, the second step is performed to determine if
goodwill is impaired and to measure the amount of impairment
loss to recognize, if any. The second step compares the implied
fair value of goodwill with the carrying amount of goodwill. If
the implied fair value of goodwill exceeds the carrying amount,
then goodwill is not considered impaired. However, if the
carrying amount of goodwill exceeds the implied fair value, an
impairment loss is recognized in an amount equal to that excess.
We perform our annual impairment assessment on November 1,
or whenever events or circumstances indicate impairment may have
occurred. We use an income approach based on discounted cash
flows to determine the fair value of our reporting unit. Our
cash flow assumptions consider historical and forecasted
revenue, operating costs and other relevant factors which are
20
consistent with the plans used to manage our operations. The
results of our most recent annual assessment performed on
November 1, 2010 did not indicate any impairment of
goodwill, and as such, the second step of the impairment test
was not required. No events or circumstances occurred from the
date of the assessment through March 31, 2011 that would
impact this conclusion.
We assess impairment of definite-lived intangible and other
long-lived assets when events or changes in circumstances
indicate that the carrying value of an asset may no longer be
fully recoverable. We determine the impairment, if any, by
comparing the carrying value of the assets to future
undiscounted net cash flows expected to be generated by the
related assets. An impairment charge is recognized to the extent
the carrying value exceeds the estimated fair value of the
assets. Impairment charges for long-lived assets for the three
months ended March 31, 2011 were not material.
Income taxes. We use the asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax-credit
carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amount of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by the valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Our estimates related to liabilities for uncertain tax positions
require us to make judgments regarding the sustainability of
each uncertain tax position based on its technical merits. If we
determine it is more likely than not that a tax position will be
sustained based on its technical merits, we record the impact of
the position in our consolidated financial statements at the
largest amount that is greater than fifty percent likely of
being realized upon ultimate settlement. Our estimates are
updated at each reporting date based on the facts, circumstances
and information available. We are also required to assess at
each reporting date whether it is reasonably possible that any
significant increases or decreases to our unrecognized tax
benefits will occur during the next twelve months. In connection
with our acquisitions, we identified an uncertain tax position,
and as a result, $681,000 is included in other liabilities in
the consolidated balance sheet at March 31, 2011. We file
income tax returns in the U.S. federal jurisdictions and
various state and foreign jurisdictions and are subject to
U.S. federal, state, and foreign tax examinations for years
ranging from 2002 to 2009.
Results
of Operations
The following tables set forth selected unaudited consolidated
statements of operations data for each of the periods indicated
as a percentage of total revenues for the periods indicated.
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Revenues
|
100 | % | 100 | % | ||||
Cost of revenues
|
20 | 20 | ||||||
Gross profit
|
80 | 80 | ||||||
Operating expenses:
|
||||||||
Sales and marketing
|
51 | 51 | ||||||
Research and development
|
6 | 7 | ||||||
General and administrative
|
24 | 31 | ||||||
Amortization of intangible assets
|
2 | 2 | ||||||
Total operating expenses
|
83 | 91 | ||||||
Loss from operations
|
(3 | ) | (11 | ) | ||||
Other income, net
|
| | ||||||
Loss before provision (benefit) for income taxes
|
(3 | ) | (11 | ) | ||||
Provision (benefit) for income taxes
|
| (4 | ) | |||||
Net loss
|
(3 | )% | (7 | )% | ||||
21
Three
Months Ended March 31, 2011 and 2010
Revenues. Revenues for the three months ended
March 31, 2011 were $27.0 million, an increase of
$4.7 million, or 21%, over revenues of $22.3 million
for the comparable period in 2010. The increase in revenues was
primarily due to the increase in the number of total active
subscription customers to 9,256 as of March 31, 2011,
including 1,900 from our acquisition of Datapresse in April
2010, from 4,834 as of March 31, 2010. Total revenue from
active subscriptions through acquired companies contributed
$1.6 million of incremental revenue in 2011. The remaining
increase in active subscription customers was the result of
additional sales and marketing personnel focused on acquiring
new customers and renewing existing customers. Revenue growth
from the increase in active subscription customers, excluding
revenue from acquired companies, was $3.3 million. Total
deferred revenue as of March 31, 2011 was
$55.8 million, representing an increase of
$10.2 million, or 22%, over total deferred revenue of
$45.6 million as of March 31, 2010.
Cost of Revenues. Cost of revenues for the
three months ended March 31, 2011 was $5.5 million, an
increase of $1.1 million, or 23%, over cost of revenues of
$4.4 million for the comparable period in 2010. The
increase in cost of revenues was primarily due to an increase of
$556,000 in employee related costs from additional personnel
including increases in headcount from our acquisitions, $134,000
in third-party license and royalty fees for content and $120,000
in amortization of technology from our acquisitions in 2010 and
2011. We had 204 full-time employee equivalents in our
professional and other support services group at March 31,
2011 compared to
147 full-time
employee equivalents at March 31, 2010.
Sales and Marketing Expenses. Sales and
marketing expenses for the three months ended March 31,
2011 were $13.8 million, an increase of $2.4 million,
or 21%, over sales and marketing expenses of $11.4 million
for the comparable period in 2010. The increase in sales and
marketing was primarily due to an increase of $1.1 million
in employee-related costs from additional personnel including
increases in headcount from our acquisitions, $246,000 in sales
commissions and incentive compensation and $746,000 in
stock-based compensation. We had 367 full-time employee
equivalents in sales and marketing at March 31, 2011
compared to 266 full-time employee equivalents at
March 31, 2010.
Research and Development Expenses. Research
and development expenses for the three months ended
March 31, 2011 were $2.0 million, an increase of
$701,000, or 53%, over research and development expenses of
$1.3 million for the comparable period in 2010. The
increase in research and development was primarily due to an
increase of $251,000 in employee-related costs from additional
personnel including increases in headcount from our acquisitions
and $261,000 in stock-based compensation. For the three months
ended March 31, 2011, we capitalized $42,000 of
employee-related costs for internally developed software. For
the three months ended March 31, 2010, we capitalized
$185,000 of employee-related costs for internally developed
software. We had 44 full-time employee equivalents in
research and development at March 31, 2011 compared to
31 full-time employee equivalents at March 31, 2010.
General and Administrative Expenses. General
and administrative expenses for the three months ended
March 31, 2011 were $8.2 million, an increase of
$3.0 million or 58%, over general and administrative
expenses of $5.2 million for the comparable period in 2010.
The increase in general and administrative expenses was
primarily due to an increase of $481,000 in employee-related
costs including increases in headcount from our acquisitions,
$447,000 in stock-based compensation and $1.2 million in
non-recurring professional fees and transaction costs from the
termination of a potential acquisition. We had 66 full-time
employee equivalents in our general and administrative group at
March 31, 2011 compared to 46 full-time employee
equivalents at March 31, 2010.
Amortization of Intangible
Assets. Amortization of intangible assets for the
three months ended March 31, 2011 was $616,000, an increase
of $147,000, or 31%, compared to $469,000 for the comparable
period in 2010. The increase in amortization expense is
primarily attributable to the intangible assets related to the
acquisitions in 2010 and 2011.
Other Income (Expense). Other income for the
three months ended March 31, 2011 was $166,000, an increase
of $105,000, or 172%, compared to $61,000 for the comparable
period in 2010.
Provision (Benefit) for Income Taxes. The
benefit for income taxes for the three months ended
March 31, 2011 was $1.1 million, which reflects our
estimated annual effective tax rate for the year. Our effective
tax rate
22
differs from the U.S. Federal statutory rate primarily due
to non-deductible stock-based compensation, operating losses in
foreign jurisdictions for which no tax benefit is currently
available and to a lesser extent, state income taxes and certain
other non-deductible expenses. Additionally, we recorded a tax
benefit related to tax credits related to prior years.
The provision for income taxes for the three months ended
March 31, 2010 was $91,000, which reflects our actual
income tax expense for the period rather than our estimated
effective tax rate for 2010, as we could not reliably estimate
such rate. Our effective tax rate differs from the
U.S. Federal statutory rate primarily due to non-deductible
stock-based compensation, operating losses in foreign
jurisdictions for which no tax benefit is currently available
and to a lesser extent, state income taxes and certain other
non-deductible expenses.
Liquidity
and Capital Resources
At March 31, 2011, our principal sources of liquidity were
cash and cash equivalents totaling $91.5 million,
investments totaling $7.5 million and net accounts
receivable of $14.4 million.
Net cash provided by operating activities for the three months
ended March 31, 2011 was $13.8 million reflecting a
net loss of $1.9 million, non-cash charges for depreciation
and amortization of $1.3 million and stock-based
compensation expense of $4.3 million and a net change of
$5.4 million in accounts receivable and deferred revenue
primarily due to collections from the seasonally high amounts
invoiced under our subscription agreements in the fourth quarter
of 2010. Net cash provided by operating activities is also
impacted by changes in other working capital accounts in the
ordinary course of business.
Net cash used in investing activities for the three months ended
March 31, 2011 was $15.0 million, which primarily
resulted from net purchases of investments of $2.0 million,
the acquisition of North Social of $6.9 million and
investments in property, equipment and software of
$6.0 million.
Net cash used in financing activities for the three months ended
March 31, 2011 was $2.5 million, which primarily
resulted from our purchase of 123,784 shares of our common
stock at an aggregate cost of $3.1 million for shares
withheld from employees to satisfy the minimum statutory tax
withholding obligations related to the taxable income recognized
by these employees upon the vesting of their restricted stock
awards, offset by proceeds received from the exercises of stock
option awards of $555,000.
We intend to fund our operating expenses and capital
expenditures primarily through cash flows from operations. We
believe that our current cash, cash equivalents and investments
together with our expected cash flows from operations will be
sufficient to meet our anticipated cash requirements for working
capital and capital expenditures, contractual obligations,
commitments and other liquidity requirements associated with our
operations for at least the next 12 months.
Off-balance
Sheet Arrangements and Contractual Obligations
As of March 31, 2011, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. Other than our
operating leases for office space and equipment, we do not
engage in off-balance sheet financing arrangements. In addition,
we do not engage in trading activities involving non-exchange
traded contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
On March 30, 2010, we signed a twelve year lease for
approximately 93,000 square feet of office space in
Beltsville, Maryland. We plan to relocate our corporate
headquarters to the leased premises in the third quarter of
2011. Rental payments began on April 1, 2011. The aggregate
minimum lease commitment for twelve years is approximately
$21.5 million. In addition, under the terms of the lease,
the landlord will reimburse us approximately $6.4 million
for leasehold improvements, which will be recorded as a
reduction to rent expense ratably over the term of the lease. We
anticipate capital expenditures of approximately
$3.0 million, net of landlord contributions, specifically
for the remaining construction, build-out and furnishing of our
corporate headquarters in the remainder of 2011.
23
We have various non-cancelable operating leases, primarily
related to office real estate including the office space in
Beltsville, MD, that expire through 2023 and generally contain
renewal options for up to five years. As of March 31, 2011,
minimum required payments in future years under these leases are
$1,657,000, $2,601,000, $2,672,000, $2,665,000, $2,439,000, and
$15,035,000 in 2011, 2012, 2013, 2014, 2015, and 2016 and
thereafter, respectively.
Purchase
Commitments
We have entered into agreements with various vendors in the
ordinary course of business. As of March 31, 2011, minimum
required payments in future years under these arrangements are
$3,147,000, $1,991,000, $1,109,000, and $382,000 in 2011, 2012,
2013, and 2014, respectively.
There were no other material changes outside the normal course
of business to our contractual obligations and commercial
commitments since December 31, 2010.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
For quantitative and qualitative disclosures about market risk,
see Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, of our annual report on
Form 10-K
for the year ended December 31, 2010. Our exposure to
interest rate risk has not changed materially since
December 31, 2010.
Foreign
Currency Exchange Risk
Our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates,
particularly changes in the British pound sterling, euro, Hong
Kong dollar and Chinese yuan. As a result, we are exposed to
movements in the exchange rates of currencies against the
U.S. Dollar. Revenues denominated in a foreign currency
were approximately 11% of our total revenues in the year ended
2010 and 14% of our total revenues for the three months ended
March 31, 2011. Exchange rate fluctuations have not
significantly impacted our results of operations and cash flows.
Our future results of operations and cash flows may be affected
by changes in foreign currency exchange rates. Historically, we
have not utilized derivative financial instruments to hedge our
foreign exchange exposure; however, we may choose to use such
contracts in the future.
Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered
by this report. Based on the evaluation of our disclosure
controls and procedures, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure
controls and procedures were effective to ensure that the
information required to be disclosed by us in the reports that
we file or submit under the Exchange Act was recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such
information required to be disclosed is accumulated and
communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Changes
in Internal Controls
There were no changes in our internal controls over financial
reporting that occurred during the quarter ended March 31,
2011 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
24
PART II
Item 1. | Legal Proceedings |
From time to time, however, we are named as a defendant in legal
actions arising from our normal business activities. We are not
currently subject to any material legal proceedings, that in our
opinion will have a material effect on our financial positions,
operating results or cash flows.
Item 1A. | Risk Factors |
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. This
discussion highlights some of the risks which may affect future
operating results. These are the risks and uncertainties we
believe are most important for you to consider. Additional risks
and uncertainties not presently known to us, which we currently
deem immaterial or which are similar to those faced by other
companies in our industry or business in general, may also
impair our business operations. If any of the following risks or
uncertainties actually occurs, our business, financial condition
and operating results would likely suffer.
Risks
Related to Our Business and Industry
Our
quarterly results of operations may fluctuate in the future. As
a result, we may fail to meet or exceed the expectations of
investors or securities analysts which could cause our stock
price to decline.
Our quarterly revenue and results of operations may fluctuate as
a result of a variety of factors, many of which are outside of
our control. If our quarterly revenue or results of operations
fall below the expectations of investors or securities analysts,
the price of our common stock could decline substantially.
Fluctuations in our results of operations may be due to a number
of factors, including, but not limited to, those listed below
and identified throughout this Risk Factors section:
| our ability to retain and increase sales to existing customers and attract new customers; | |
| changes in the volume and mix of subscriptions sold and press releases distributed in a particular quarter; | |
| seasonality of our business cycle, given that our subscription volumes are normally lowest in the first quarter and highest in the fourth quarter; | |
| the timing and success of new product introductions or upgrades by us or our competitors; | |
| changes in our pricing policies or those of our competitors; | |
| changes in the payment terms for our products and services; | |
| the amount and timing of non-recurring charges or expenditures related to expanding our operations; | |
| changes in accounting policies or the adoption of new accounting standards, including guidance on revenue arrangements with multiple deliverables; | |
| our policy of expensing sales commissions at the time our customers execute a subscription agreement, while the majority of our revenue is recognized ratably over future periods; | |
| changes in the estimates and assumptions used to determine the fair value of contingent consideration associated with our acquisitions; | |
| fluctuations in our effective tax rate including changes in the mix of earnings in the various jurisdictions in which we operate, the valuation of deferred tax assets and liabilities and the deductibility of certain expenses and changes in uncertain tax positions; | |
| foreign currency exchange rates; and | |
| the purchasing and budgeting cycles of our customers. |
25
Most of our expenses, such as salaries and third-party hosting
co-location costs, are relatively fixed in the short-term, and
our expense levels are based in part on our expectations
regarding future revenue levels. As a result, if revenue for a
particular quarter is below our expectations, we may not be able
to proportionally reduce operating expenses for that quarter,
causing a disproportionate effect on our expected results of
operations for that quarter.
Due to the foregoing factors, and the other risks discussed in
this report, you should not rely on
quarter-to-quarter
comparisons of our results of operations as an indication of our
future performance.
The
markets for our cloud-based software and solutions are emerging,
which makes it difficult to evaluate our business and future
prospects and may increase the risk of your
investment.
The market for software specifically designed for public
relations is relatively new and emerging, making our business
and future prospects difficult to evaluate. Many companies have
invested substantial personnel and financial resources in their
PR departments, and may be reluctant or unwilling to migrate to
cloud-based software and services specifically designed to
address the public relations market. Our success will depend to
a substantial extent on the willingness of companies to increase
their use of on-demand solutions in general and for on-demand
public relations software and services in particular. You must
consider our business and future prospects in light of the
challenges, risks and difficulties we encounter in the new and
rapidly evolving market of on-demand public relations management
solutions. These challenges, risks and difficulties include the
following:
| generating sufficient revenue to maintain profitability; | |
| managing growth in our operations; | |
| managing the risks associated with developing new services and modules; | |
| attracting and retaining customers; and | |
| attracting and retaining key personnel. |
We may not be able to successfully address any of these
challenges, risks and difficulties, including the other risks
related to our business and industry described below. Further,
if businesses do not perceive the benefits of our on-demand
solutions, then the market may not develop further, or it may
develop more slowly than we expect, either of which would
adversely affect our business, financial condition and results
of operations.
A
majority of our on-demand solutions are sold pursuant to
subscription agreements, and if our existing subscription
customers elect either not to renew these agreements or renew
these agreements for fewer modules or users, our business,
financial condition and results of operations will be adversely
affected.
A majority of our on-demand solutions are sold pursuant to
annual subscription agreements and our customers have no
obligation to renew these agreements. As a result, we may not be
able to consistently and accurately predict future renewal
rates. Our subscription customers renewal rates may
decline or fluctuate or our subscription customers may renew for
fewer modules or users as a result of a number of factors,
including their level of satisfaction with our solutions,
budgetary or other concerns, and the availability and pricing of
competing products. Additionally, we may lose our subscription
customers due to the high turnover rate in the PR departments of
small and mid-sized organizations. If large numbers of existing
subscription customers do not renew these agreements, or renew
these agreements on terms less favorable to us, and if we cannot
replace or supplement those non-renewals with new subscription
agreements generating the same or greater level of revenue, our
business, financial condition and results of operations will be
adversely affected.
Because
we recognize subscription revenue over the term of the
applicable subscription agreement, the lack of subscription
renewals or new subscription agreements may not be immediately
reflected in our operating results.
We recognize revenue from our subscription customers over the
terms of their subscription agreements. The majority of our
quarterly revenue usually represents deferred revenue from
subscription agreements entered into during previous quarters.
As a result, a decline in new or renewed subscription agreements
in any one quarter will not necessarily be fully reflected in
the revenue for the corresponding quarter but will negatively
affect our revenue in future quarters. Additionally, the effect
of significant downturns in sales and market acceptance of our
solutions may not be fully reflected in our results of
operations until future periods. Our subscription model also
makes it
26
difficult for us to rapidly increase our revenue through
additional sales in any period, as revenue from
new customers must be recognized over the applicable
subscription term.
We
might not generate increased business from our current
customers, which could limit our revenue in the
future.
The success of our strategy is dependent, in part, on the
success of our efforts to sell additional modules and services
to our existing customers and to increase the number of users
per subscription customer. These customers might choose not to
expand their use of or make additional purchases of our
solutions. If we fail to generate additional business from our
current customers, our revenue could grow at a slower rate or
decrease.
Our
business model continues to evolve, which may cause our results
of operations to fluctuate or decline.
Our business continues to evolve, expanding into new markets and
new service areas, and is therefore subject to additional risk
and uncertainty. For example, in 2008 we began offering
solutions specifically for small businesses, and in June 2010,
we began providing social media monitoring services to our
customers. We anticipate that our future financial performance
and revenue growth will depend, in part, upon the growth of
these services and expansion beyond public relations automation
into broader marketing solutions.
As
more of our sales efforts are targeted at small business
customers that are more substantively affected by economic
conditions than the large and medium-size business sectors,
economic downturns may cause potential and existing small
business customers to fail to purchase our solutions, which
could limit our revenue in the future.
We have increased sales of our services to small organizations,
including small businesses, associations and not-for-profits
that frequently have limited budgets and may be more likely to
be significantly affected by economic downturns than their
larger, more established counterparts. Small organizations may
choose to spend the limited funds that they have on items other
than our services. Additionally, if small organizations
experience economic hardship, they may be unwilling or unable to
expend resources on marketing or public relations, which would
negatively affect demand for our solutions, increase customer
attrition and adversely affect our business, financial condition
and results of operations.
We
depend on search engines to attract new customers, and if those
search engines change their listings or our relationship with
them deteriorates or terminates, we may be unable to attract new
customers and our business may be harmed.
We rely on search engines to attract new customers, and many of
our customers locate our websites by clicking through on search
results displayed by search engines such as Google and Yahoo!.
Search engines typically provide two types of search results,
algorithmic and purchased listings. Algorithmic search results
are determined and organized solely by automated criteria set by
the search engine and a ranking level cannot be purchased.
Advertisers can also pay search engines to place listings more
prominently in search results in order to attract users to
advertisers websites. We rely on both algorithmic and
purchased listings to attract customers to our websites. Search
engines revise their algorithms from time to time in an attempt
to optimize their search result listings. If search engines on
which we rely for algorithmic listings modify their algorithms,
then our websites may not appear at all or may appear less
prominently in search results which could result in fewer
customers clicking through to our websites, requiring us to
resort to other potentially costly resources to advertise and
market our services. If one or more search engines on which we
rely for purchased listings modifies or terminates its
relationship with us, our expenses could rise, or our revenue
could decline and our business may suffer. Additionally, the
cost of purchased search listing advertising is rapidly
increasing as demand for these channels grows, and further
increases could greatly increase our expenses.
Failure
to effectively develop and expand our sales and marketing
capabilities could harm our ability to increase our customer
base and achieve broader market acceptance of our
solutions.
Increasing our customer base and achieving broader market
acceptance of our solutions will depend to a significant extent
on our ability to expand our sales and marketing operations. We
plan to continue to expand our direct sales force, both
domestically and internationally. This expansion will require us
to invest significant financial and other resources. Our
business will be seriously harmed if our efforts do not generate
a corresponding
27
significant increase in revenue. We may not achieve anticipated
revenue growth from expanding our direct sales force if we are
unable to hire and develop talented direct sales personnel, if
our new direct sales personnel are unable to achieve desired
productivity levels in a reasonable period of time or if we are
unable to retain our existing direct sales personnel. We also
may not achieve anticipated revenue growth from our existing
third-party channel partners if we are unable to maintain or
renew such relationships, if any existing third-party channel
partners fail to successfully market, resell, implement or
support our solutions for their customers, or if they represent
multiple providers and devote greater resources to market,
resell, implement and support competing products and services.
If we
fail to develop our brands, our business may
suffer.
We believe that developing and maintaining awareness of our
brands is critical to achieving widespread acceptance of our
existing and future services and is an important element in
attracting new customers. Successful promotion of our brands
will depend largely on the effectiveness of our marketing
efforts and on our ability to provide reliable and useful
solutions. Brand promotion activities may not yield increased
revenue, and even if they do, any increased revenue may not
offset the expenses we incurred in building our brands. If we
fail to successfully promote and maintain our brands, or incur
substantial expenses in an unsuccessful attempt to promote and
maintain our brands, we may fail to attract new customers or
retain our existing customers to the extent necessary to realize
a sufficient return on our brand-building efforts, and our
business could suffer.
If our
information databases do not maintain market acceptance, our
business, financial condition and results of operations could be
adversely affected.
We have developed our own content that is included in the
information databases that we make available to our customers
through our on-demand software. If our internally-developed
content does not maintain market acceptance, current
subscription customers may not continue to renew their
subscription agreements with us, and it may be more difficult
for us to acquire new subscription customers.
We
rely on third-parties to provide certain content for our
solutions, and if those third-parties discontinue providing
their content, our business, financial condition and results of
operations could be adversely affected.
We rely on third-parties to provide or make available certain
data for our information databases, our news monitoring service
and our social media monitoring service. These third-parties may
not renew agreements to provide content to us or may increase
the price they charge for their content. Additionally, the
quality of the content provided to us may not be acceptable to
us and we may need to enter into agreements with additional
third-parties. In the event we are unable to use such
third-party content or are unable to enter into agreement with
third-parties, current subscription customers may not renew
their subscription agreements with us, and it may be difficult
to acquire new subscription customers.
We
depend on search engines for the placement of our
customers online news releases, and if those search
engines change their listings or our relationship with them
deteriorates or terminates, our reputation will be harmed and we
may lose customers or be unable to attract new
customers.
Our news distribution business depends upon the placement of our
customers online press releases. If search engines on
which we rely modify their algorithms or purposefully block our
content, then information distributed via our news distribution
service may not be displayed or may be displayed less
prominently in search results, and as a result we could lose
customers or fail to attract new customers and our results of
operations could be adversely affected.
We
have incurred operating losses in the past and may incur
operating losses in the future.
We have incurred operating losses in the past and we may incur
operating losses in the future. Although we had operating income
in 2009, we incurred operating losses of $3.6 million for
2010 and $3.1 million for the three months ended
March 31, 2011. We expect our operating expenses to
increase as we expand our operations, and if our increased
operating expenses exceed our revenue growth, we may not be able
to generate operating income. You should not consider recent
quarterly revenue growth as indicative of our future
performance. In fact, in future quarters, we may not have any
revenue growth or our revenue could decline.
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Unanticipated
changes in our effective tax rate could adversely affect our
future results.
We are subject to income taxes in the United States and various
foreign jurisdictions, and our domestic and international tax
liabilities are subject to the allocation of expenses in
differing jurisdictions.
Our effective tax rate could be adversely affected by changes in
the mix of earnings and losses in jurisdictions with differing
statutory tax rates, certain non-deductible expenses, the
valuation of deferred tax assets and liabilities and changes in
federal, state or international tax laws and accounting
principles. Changes in our effective tax rate could materially
affect our net results.
In addition, we are subject to income tax audits by certain tax
jurisdictions throughout the world. Although we believe our
income tax liabilities are reasonably estimated and accounted
for in accordance with applicable laws and principles, an
adverse resolution of one or more uncertain tax positions in any
period could have a material impact on the results of operations
for that period.
We
face competition, and our failure to compete successfully could
make it difficult for us to add and retain customers and could
reduce or impede the growth of our business.
The public relations market is fragmented, competitive and
rapidly evolving, and there are limited barriers to entry to
some segments of this market. We expect the intensity of
competition to increase in the future as existing competitors
develop their capabilities and as new companies enter our
market. Increased competition could result in pricing pressure,
reduced sales, lower margins or the failure of our solutions to
achieve or maintain broad market acceptance. If we are unable to
compete effectively, it will be difficult for us to maintain our
pricing rates and add and retain customers, and our business,
financial condition and results of operations will be seriously
harmed. We face competition from:
| generic desktop software and other commercially available software not specifically designed for PR; | |
| PR solution providers offering products specifically designed for PR; | |
| outsourced PR service providers; | |
| custom-developed solutions; and | |
| press release distribution providers. |
Many of our current and potential competitors have longer
operating histories, a larger presence in the general PR market,
access to larger customer bases and substantially greater
financial, technical, sales and marketing, management, service,
support and other resources than we have. As a result, our
competitors may be able to respond more quickly than we can to
new or changing opportunities, technologies, standards or
customer requirements or devote greater resources to the
promotion and sale of their products and services than we can.
To the extent our competitors have an existing relationship with
a potential customer, that customer may be unwilling to switch
vendors due to existing time and financial commitments with our
competitors.
We also expect that new competitors, such as enterprise software
vendors and cloud-based service providers that have
traditionally focused on enterprise resource planning or back
office applications, will enter the on-demand public relations
management market with competing products as the on-demand
public relations management market develops and matures. Many of
these potential competitors have established or may establish
business, financial or strategic relationships among themselves
or with existing or potential customers, alliance partners or
other third-parties or may combine and consolidate to become
more formidable competitors with better resources. It is
possible that these new competitors could rapidly acquire
significant market share.
We expect that the traditional press release distribution
providers will offer press release distribution services through
the Internet. We had or continue to have partnerships with these
providers to co-market and sell our press release distribution
services. It is possible that these new competitors could
rapidly acquire significant market share.
If we
fail to respond to evolving industry standards, our on-demand
solutions may become obsolete or less competitive.
The market for our on-demand solutions is characterized by
changes in customer requirements, changes in protocols and
evolving industry standards. If we are unable to enhance or
develop new features for our existing solutions or develop
acceptable new solutions that keep pace with these changes, our
cloud-based software and
29
services may become obsolete, less marketable and less
competitive and our business will be harmed. The success of any
enhancements, new modules and cloud-based software and services
depends on several factors, including timely completion,
introduction and market acceptance of our solutions. Failure to
produce acceptable new offerings and enhancements may
significantly impair our revenue growth and reputation.
If
there are interruptions or delays in providing our on-demand
solutions due to third-party error, our own error or the
occurrence of unforeseeable events, delivery of our solutions
could become impaired, which could harm our relationships with
customers and subject us to liability.
Our solutions reside on hardware that we own or lease and
operate. Our hardware is currently located in various
third-party data center facilities maintained and operated in
the United States and Europe. Our third-party facility providers
do not guarantee that our customers access to our
solutions will be uninterrupted, error-free or secure. Our
operations depend, in part, on our third-party facility
providers ability to protect systems in their facilities
against damage or interruption from natural disasters, power or
telecommunications failures, criminal acts and similar events.
In the event that our third-party facility arrangements are
terminated, or there is a lapse of service or damage to such
third-party facilities, we could experience interruptions in our
service as well as delays and additional expense in arranging
new facilities and services.
Our disaster recovery computer hardware and systems which are
located at a third-party data center facility, have not been
tested under actual disaster conditions and may not have
sufficient capacity to recover all data and services in the
event of an outage occurring at our third-party facilities. Any
or all of these events could cause our customers to lose access
to our on-demand software. In addition, the failure by our
third-party facilities to meet our capacity requirements could
result in interruptions in such service or impede our ability to
scale our operations.
We architect the system infrastructure and procure and own or
lease the computer hardware used for our services. Design and
mechanical errors, spikes in usage volume and failure to follow
system protocols and procedures could cause our systems to fail,
resulting in interruptions in our service. Any interruptions or
delays in our service, whether as a result of third-party error,
our own error, natural disasters or security breaches, whether
accidental or willful, could harm our relationships with
customers and our reputation. Also, in the event of damage or
interruption, our insurance policies may not adequately
compensate us for any losses that we may incur. These factors in
turn could reduce our revenue, subject us to liability, and
cause us to issue credits or cause customers to fail to renew
their subscriptions, any of which could adversely affect our
business, financial condition and results of operations.
Acquisitions
could prove difficult to integrate, disrupt our business, dilute
stockholder value and consume resources that are necessary to
sustain our business.
One of our business strategies is to selectively acquire
companies which either expand our solutions functionality,
provide access to new customers or markets, or both. An
acquisition may result in unforeseen operating difficulties and
expenditures. In particular, we may encounter difficulties
assimilating or integrating the technologies, products,
personnel or operations of the acquired organizations,
particularly if the key personnel of the acquired company choose
not to work for us, and we may have difficulty retaining the
customers of any acquired business due to changes in management
and ownership. Acquisitions may also disrupt our ongoing
business, divert our resources and require significant
management attention that would otherwise be available for
ongoing development of our business. We also may experience
lower rates of renewal from subscription customers obtained
through acquisitions than our typical renewal rates. Moreover,
we cannot provide assurance that the anticipated benefits of any
acquisition, investment or business relationship would be
realized or that we would not be exposed to unknown liabilities.
In connection with one or more of these transactions, we may:
| issue additional equity securities that would dilute the ownership of our stockholders; | |
| use cash that we may need in the future to operate our business; | |
| incur or assume debt on terms unfavorable to us or that we are unable to repay; | |
| incur large charges or substantial liabilities; |
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| encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and | |
| become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. |
In 2010 and 2011, we acquired substantially all of the assets of
Two Cats and a Cup of Coffee LLC (dba HARO), Boxxet, Inc. (dba
Engine140) and North Social. In 2010, we also acquired all of
the outstanding shares of Data Presse SAS in France and
substantially all of the assets of BDL Media Ltd in China.
Foreign acquisitions involve risks in addition to those
mentioned above, including those related to integration of
operations across different cultures and languages, currency
risks and the particular economic, political and regulatory
risks associated with specific countries.
We may
be liable to our customers and may lose customers if we provide
poor service, if our solutions do not comply with our agreements
or if there is a loss of data.
The information in our databases may not be complete or may
contain inaccuracies that our customers regard as significant.
Our ability to collect and report data may be interrupted by a
number of factors, including our inability to access the
Internet, the failure of our network or software systems or
failure by our third-party data center facilities to meet our
capacity requirements. In addition, computer viruses and
intentional or unintentional acts of our employees may harm our
systems causing us to lose data we maintain and supply to our
customers or data that our customers input and maintain on our
systems, and the transmission of computer viruses could expose
us to litigation. Our subscription agreements generally give our
customers the right to terminate their agreements for cause if
we materially breach our obligations. Any failures in the
services that we supply or the loss of any of our
customers data that we cannot rectify in a certain time
period may give our customers the right to terminate their
agreements with us and could subject us to liability. As a
result, we may also be required to spend substantial amounts to
defend lawsuits and pay any resulting damage awards. In addition
to potential liability, if we supply inaccurate data or
experience interruptions in our ability to supply data, our
reputation could be harmed and we could lose customers.
Moreover, because our solutions are cloud-based, the amount of
data that we store for our customers on our servers is
ever-increasing. Any systems failure or compromise of our
security that results in the release of our customers data
could seriously limit the adoption of our solutions and harm our
reputation causing our business to suffer.
Although we maintain general liability insurance, including
coverage for errors and omissions, this coverage may be
inadequate, or may not be available in the future on acceptable
terms, or at all. In addition, we cannot provide assurance that
this policy will cover any claim against us for loss of data or
other indirect or consequential damages and defending a suit,
regardless of its merit, could be costly and divert
managements attention.
If our
solutions fail to perform properly or if they contain technical
defects, our reputation will be harmed, our market share would
decline and we could be subject to product liability
claims.
Our cloud-based software may contain undetected errors or
defects that may result in product failures or otherwise cause
our solutions to fail to perform in accordance with customer
expectations. Because our customers use our solutions for
important aspects of their business, any errors or defects in,
or other performance problems with, our solutions could hurt our
reputation and may damage our customers businesses. If
that occurs, we could lose future sales or our existing
subscription customers could elect to not renew. Product
performance problems could result in loss of market share,
failure to achieve market acceptance and the diversion of
development resources. If one or more of our solutions fail to
perform or contain a technical defect, a customer may assert a
claim against us for substantial damages, whether or not we are
responsible for our solutions failure or defect. We do not
currently maintain any warranty reserves.
Product liability claims could require us to spend significant
time and money in litigation or arbitration/dispute resolution
or to pay significant settlements or damages. Although we
maintain general liability insurance, including coverage for
errors and omissions, this coverage may not be sufficient to
cover liabilities resulting from such product liability claims.
Also, our insurer may disclaim coverage. Our liability insurance
also may not continue to be available to us on reasonable terms,
in sufficient amounts, or at all. Any product liability claim
successfully brought against us could cause our business to
suffer.
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Our news distribution service is a trusted information source.
To the extent we were to distribute an inaccurate or fraudulent
press release or our customers used our services to transmit
negative messages or website links to harmful applications, our
reputation could be harmed, even though we are not responsible
for the content distributed via our services.
Privacy
concerns and laws or other domestic or foreign regulations may
reduce the effectiveness of our solution and adversely affect
our business.
We provide contact information to our customers and our
customers can use our service to store contact and other
personal or identifying information regarding their marketing
and public relations contacts. Federal, state and foreign
government agencies have adopted or are considering adopting
laws and regulations regarding the collection, use and
disclosure of personal information obtained from individuals.
Other proposed legislation could, if enacted, prohibit or limit
the use of certain technologies that track individuals
activities on web pages, in emails or on the Internet. In
addition to government activity, privacy advocacy groups and the
technology and marketing industries are considering various new,
additional or different self-regulatory standards that may place
additional burdens on us or our customers which could reduce
demand for our solutions.
The costs of compliance with, and other burdens imposed by, such
laws and regulations that are applicable to us and to the
businesses of our customers may reduce demand for our solutions,
or lead to significant fines, penalties or liabilities for any
noncompliance with such privacy laws and could negatively impact
our ability to effectively market our solutions. Even the
perception of privacy concerns, whether or not valid, could
cause our business to suffer.
Changes
in laws and/or regulations related to the Internet or changes in
the Internet infrastructure itself may cause our business to
suffer.
The future success of our business depends upon the continued
use of the Internet as a primary medium for commerce,
communication and business applications. Federal, state or
foreign government bodies or agencies have in the past adopted,
and may in the future adopt, laws or regulations affecting the
use of the Internet as a commercial medium and the use of email
and social media for marketing or other consumer communications.
In addition, certain government agencies or private
organizations have begun to impose taxes, fees or other charges
for accessing the Internet or for sending commercial email.
These laws or charges could limit the growth of
Internet-related
commerce or communications generally, result in a decline in the
use of the Internet and the viability of Internet-based services
such as ours and reduce the demand for our products.
The Internet has experienced, and is expected to continue to
experience, significant user and traffic growth, which has, at
times, caused user frustration with slow access and download
times. If Internet activity grows faster than Internet
infrastructure or if the Internet infrastructure is otherwise
unable to support the demands placed on it, or if hosting
capacity becomes scarce, our business growth may be adversely
affected.
If we
are unable to protect our proprietary technology and other
intellectual property rights, it will reduce our ability to
compete for business.
If we are unable to protect our intellectual property, our
competitors could use our intellectual property to market
products similar to our products, which could decrease demand
for our solutions. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as licensing
agreements, third-party nondisclosure agreements and other
contractual provisions and technical measures, to protect our
intellectual property rights. These protections may not be
adequate to prevent our competitors from copying our solutions
or otherwise infringing on our intellectual property rights.
Existing laws afford only limited protection for our
intellectual property rights and may not protect such rights in
the event competitors independently develop solutions similar or
superior to ours. In addition, the laws of some countries in
which our solutions are or may be licensed do not protect our
solutions and intellectual property rights to the same extent as
do the laws of the United States.
To protect our trade secrets and other proprietary information,
we require employees, consultants, advisors and collaborators to
enter into confidentiality agreements. These agreements may not
provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information.
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If a
third-party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to
costly and time-consuming litigation or expensive licenses, and
our business may be harmed.
The software and Internet industries are characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Third-parties may assert patent and other intellectual
property infringement claims against us in the form of lawsuits,
letters, or other forms of communication. As currently pending
patent applications are not publicly available, we cannot
anticipate all such claims or know with certainty whether our
technology infringes the intellectual property rights of
third-parties. We expect that the number of infringement claims
in our market will increase as the number of solutions and
competitors in our industry grows. These claims, whether or not
successful, could:
| divert managements attention; | |
| result in costly and time-consuming litigation; | |
| require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or | |
| require us to redesign our solutions to avoid infringement. |
As a result, any third-party intellectual property claims
against us could increase our expenses and adversely affect our
business. In addition, many of our customer agreements require
us to indemnify our customers for third-party intellectual
property infringement claims, which would increase the cost to
us resulting from an adverse ruling in any such claim. Even if
we have not infringed any third-parties intellectual
property rights, we cannot be sure our legal defenses will be
successful, and even if we are successful in defending against
such claims, our legal defense could require significant
financial resources and managements time, which could
adversely affect our business.
Our
growth could strain our personnel and infrastructure resources,
and if we are unable to implement appropriate controls and
procedures to manage our growth, we may not be able to
successfully implement our business plan.
Rapid growth in our headcount and operations may place a
significant strain on our management, administrative,
operational and financial infrastructure. Between
January 1, 2005 and December 31, 2010, the number of
our full-time equivalent employees increased from 146 to 655. We
anticipate that additional growth will be required to address
increases in our customer base, as well as expansion into new
geographic areas.
Our success will depend in part upon the ability of our senior
management to manage growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. To
date, we have not experienced any significant problems as a
result of the rapid growth in our headcount, other than
occasional office space constraints. However, our anticipated
future growth may place greater strains on our resources. For
instance, if our new hires perform poorly, or if we are
unsuccessful in hiring, training, managing and integrating these
new employees as needed, or if we are not successful in
retaining our existing employees, our business may be harmed. To
manage the expected growth of our operations and personnel, we
will need to continue to improve our operational, financial and
management controls and our reporting systems and procedures.
The additional headcount and capital investments we expect to
add will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by
offsetting expense reductions in the short term. If we fail to
successfully manage our growth, we will be unable to execute our
business plan.
We are
dependent on our executive officers and other key personnel, and
the loss of any of them may prevent us from implementing our
business plan in a timely manner if at all.
Our success depends largely upon the continued services of our
executive officers. We are also substantially dependent on the
continued service of our existing development personnel because
of the complexity of our service and technologies. We do not
have employment agreements with any of our development personnel
that require them to remain our employees nor do the employment
agreements we have with our executive officers require them to
remain our employees and, therefore, they could terminate their
employment with us at any time without penalty. We do not
currently maintain key man life insurance on any of our
executives, and such insurance, if obtained in the future, may
not be sufficient to cover the costs of recruiting and hiring a
replacement or the loss of an executives services. The
loss of one or more of our key employees could seriously harm
our business.
33
We may
not be able to attract and retain the highly skilled employees
we need to support our planned growth.
To execute our business strategy, we must attract and retain
highly qualified personnel. Competition for these personnel is
intense, especially for senior sales executives and engineers
with high levels of experience in designing and developing
software. We may not be successful in attracting and retaining
qualified personnel. We have from time to time in the past
experienced, and we 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 us. In addition, in making employment decisions,
particularly in the Internet and high-technology industries, job
candidates often consider the value of the stock options and
awards they are to receive in connection with their employment.
Significant volatility in the price of our stock may, therefore,
adversely affect our ability to attract or retain key employees.
If we fail to attract new personnel or fail to retain and
motivate our current personnel, our business and future growth
prospects could be severely harmed.
Because
we conduct operations in foreign jurisdictions, which accounted
for approximately 11% of our 2010 revenues and 14% of our
revenues in the first quarter of 2011, and because our business
strategy includes expanding our international operations, our
business is susceptible to risks associated with international
operations.
We have small but growing international operations and our
business strategy includes expanding these operations.
Conducting international operations subjects us to new risks
that we have not generally faced in the United States. These
include:
| fluctuations in currency exchange rates; | |
| unexpected changes in foreign regulatory requirements; | |
| difficulties in managing and staffing international operations; | |
| potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; and | |
| the burdens of complying with a wide variety of foreign laws and different legal standards. |
The occurrence of any one of these risks could negatively affect
our international operations and, consequently, our results of
operations generally.
We
might require additional capital to support business growth, and
this capital might not be available.
We intend to continue to make investments to support our
business growth and may require additional funds to respond to
business challenges, including the need to develop new solutions
or enhance our existing solutions, enhance our operating
infrastructure and acquire complementary businesses and
technologies. Accordingly, we may need to engage in further
equity or debt financings to secure additional funds. If we
raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to
those of holders of our common stock. Any debt financing secured
by us in the future could involve restrictive covenants relating
to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to
obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be
able to obtain additional financing on terms favorable to us, if
at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us, when we require it, our
ability to continue to support our business growth and to
respond to business challenges could be significantly limited.
Economic
and market conditions may adversely affect our business,
financial condition and results of operations.
Economic downturns, which have resulted in declines in corporate
spending, decreases in consumer confidence and tightening in the
credit markets, may adversely affect our financial condition and
the financial condition and liquidity of our customers and
suppliers. Among other things, these economic and market
conditions may result in:
| reductions in the corporate budgets, including technology spending of our customers and potential customers; | |
| declines in demand for our solutions; |
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| decreases in collections of our customer receivables; | |
| insolvency of our key vendors and suppliers; and | |
| volatility in interest rates and decreases in investment income. |
Any of these events, which are outside of our scope of control,
would likely have an adverse effect on our business, financial
condition, results of operations and cash flows.
Our
reported financial results may be adversely affected by changes
in accounting principles generally accepted in the United
States.
Generally accepted accounting principles in the United States
are subject to interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified
Public Accountants, the SEC and various bodies formed to
promulgate and interpret appropriate accounting principles. A
change in these principles or interpretations could have a
significant effect on our reported financial results, and could
affect the reporting of transactions completed before the
announcement of a change.
Compliance
with new regulations governing public company corporate
governance and reporting is uncertain and
expensive.
Many new laws, regulations and standards have increased the
scope, complexity and cost of corporate governance, reporting
and disclosure practices and have created uncertainty for public
companies. These new laws, regulations and standards are subject
to interpretations due to their lack of specificity, and as a
result, their application in practice may evolve over time as
new guidance is provided by varying regulatory bodies. This may
cause continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and
governance practices. Our implementation of these reforms and
enhanced new disclosures may result in increased general and
administrative expenses and a significant diversion of
managements time and attention from revenue- generating
activities. Any unanticipated difficulties in implementing these
reforms could result in material delays in complying with these
new laws, regulations and standards or significantly increase
our operating costs.
Risks
Related to our Common Stock and the Securities Markets
If
securities analysts do not publish research or reports about our
business or if they downgrade our stock, the price of our stock
could decline.
The trading market for our common stock relies in part on the
research and reports that industry or financial analysts publish
about us or our business. We do not control these analysts.
There are many large, well-established publicly traded companies
active in our industry and market, which may mean it will be
less likely that we receive widespread analyst coverage.
Furthermore, if one or more of the analysts who do cover us
downgrade our stock, our stock price would likely decline
rapidly. If one or more of these analysts cease coverage of us,
we could lose visibility in the market, which in turn could
cause our stock price to decline.
Volatility
of our stock price could adversely affect
stockholders.
The market price of our common stock could fluctuate
significantly as a result of:
| quarterly variations in our operating results; | |
| seasonality of our business cycle; | |
| interest rate changes; | |
| changes in the markets expectations about our operating results; | |
| our operating results failing to meet the expectation of securities analysts or investors in a particular period; | |
| changes in financial estimates and recommendations by securities analysts concerning our company or the on-demand software industry in general; | |
| operating and stock price performance of other companies that investors deem comparable to us; | |
| news reports relating to trends in our markets; | |
| changes in laws and regulations affecting our business; |
35
| material announcements by us or our competitors including new product or service introductions; | |
| sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; | |
| economic conditions including a slowdown in economic growth and uncertainty in equity and credit markets; and | |
| general political conditions such as acts of war or terrorism. |
Provisions
in our amended and restated certificate of incorporation and
bylaws or Delaware law might discourage, delay or prevent a
change of control of our company or changes in our management
and, therefore, depress the trading price of our
stock.
Our amended and restated certificate of incorporation and bylaws
contain provisions that could depress the trading price of our
common stock by acting to discourage, delay or prevent a change
in control of our company or changes in our management that the
stockholders of our company may deem advantageous. These
provisions:
| establish a classified board of directors so that not all members of our board of directors are elected at one time; | |
| provide that directors may only be removed for cause and only with the approval of 662/3 percent of our stockholders; | |
| require super-majority voting to amend our bylaws or specified provisions in our amended and restated certificate of incorporation; | |
| authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt; | |
| limit the ability of our stockholders to call special meetings of stockholders; | |
| prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; | |
| provide that the board of directors is expressly authorized to adopt, amend, or repeal our bylaws; and | |
| establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a change in
control of our company.
Future
sales, or the availability for sale, of our common stock may
cause our stock price to decline.
Our directors and officers hold shares of our common stock that
they generally are currently able to sell in the public market.
We have also registered shares of our common stock that are
subject to outstanding stock options, or reserved for issuance
under our stock option plan, which shares can generally be
freely sold in the public market upon issuance. Moreover, from
time to time, our executive officers and directors have
established trading plans under
Rule 10b5-1
of the Securities Exchange Act of 1934, as amended, for the
purpose of effecting sales of our common stock. Sales of
substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock and
could materially impair our future ability to raise capital
through offerings of our common stock.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Sale of
Unregistered Securities
None.
Use of
Proceeds
Not applicable.
36
Issuer
Purchases of Equity Securities
In November 2008, our Board of Directors authorized a stock
repurchase program for up to $30,000,000 of our shares of common
stock. The shares may be purchased from time to time in the open
market, and there is no expiration date specified for the
program. We did not purchase any of our common stock during the
first quarter of 2011 under the stock repurchase program. As of
March 1, 2011, $6.8 million remained available for
purchases under the program.
Item 6. | Exhibits |
Exhibit |
||||
Number
|
Exhibit
|
|||
2 | .1 | Asset Purchase Agreement Among Vocus, Inc. as Buyer and North Social Venture Partners, LLC as Seller and Alex Bernstein and David Brody as Members of Seller.(3) | ||
3 | .1 | Fifth Amended and Restated Certificate of Incorporation.(1) | ||
3 | .2 | Amended and Restated Bylaws.(2) | ||
10 | .1* | Vocus Inc. Compensation Policy for Non-Employee Directors. | ||
31 | .1* | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | ||
31 | .2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. | ||
32 | .1* | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith | |
(1) | Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006. | |
(2) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on October 29, 2010. | |
(3) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on March 1, 2011. |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VOCUS, INC.
By: |
/s/ Richard
Rudman
|
Richard Rudman
Chief Executive Officer,
President and Chairman
By: |
/s/ Stephen
Vintz
|
Stephen Vintz
Executive Vice President and Chief
Financial Officer
Date: May 10, 2011
38
INDEX TO
EXHIBITS
Exhibit |
||||
Number
|
Exhibit
|
|||
2 | .1 | Asset Purchase Agreement Among Vocus, Inc. as Buyer and North Social Venture Partners, LLC as Seller and Alex Bernstein and David Brody as Members of Seller.(3) | ||
3 | .1 | Fifth Amended and Restated Certificate of Incorporation.(1) | ||
3 | .2 | Amended and Restated Bylaws.(2) | ||
10 | .1* | Vocus Inc. Compensation Policy for Non-employee Directors. | ||
31 | .1* | Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. | ||
31 | .2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. | ||
32 | .1* | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith | |
(1) | Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006. | |
(2) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on October 29, 2010. | |
(3) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on March 1, 2011. |