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EXCEL - IDEA: XBRL DOCUMENT - SOUNDBITE COMMUNICATIONS INC | Financial_Report.xls |
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EX-31.2 - EX-31.2 - SOUNDBITE COMMUNICATIONS INC | b87818exv31w2.htm |
EX-31.1 - EX-31.1 - SOUNDBITE COMMUNICATIONS INC | b87818exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2011
OR
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: 001-33790
SoundBite Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 04-3520763 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
22 Crosby Drive Bedford, Massachusetts 01730 (Address of Principal Executive Offices) (Zip Code) |
(781) 897-2500
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days: Yes þ No 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 þ 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 o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 October 31, 2011, there were 16,449,397 shares of the registrants common stock, $.001 par
value per share, outstanding.
SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FORM 10-Q
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements |
SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,232 | $ | 34,157 | ||||
Short-term investments |
7,431 | | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $156 at September 30,
2011 and $197 at December 31, 2010 |
8,007 | 6,577 | ||||||
Prepaid expenses and other current assets |
1,669 | 1,183 | ||||||
Total current assets |
37,339 | 41,917 | ||||||
Property and equipment, net |
2,121 | 2,550 | ||||||
Intangible assets, net |
2,374 | 517 | ||||||
Goodwill |
4,016 | 762 | ||||||
Other assets |
148 | 229 | ||||||
Total assets |
$ | 45,998 | $ | 45,975 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 803 | $ | 1,067 | ||||
Accrued expenses |
3,742 | 3,297 | ||||||
Total current liabilities |
4,545 | 4,364 | ||||||
Other liabilities |
1,260 | 421 | ||||||
Total liabilities |
5,805 | 4,785 | ||||||
Commitments and contingencies (note 5) |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value 75,000,000
shares authorized; 16,656,731 and 16,576,701
shares issued at September 30, 2011 and
December 31, 2010, respectively; 16,448,752
and 16,381,316 shares outstanding at September
30, 2011 and December 31, 2010, respectively |
17 | 17 | ||||||
Additional paid-in capital |
70,386 | 69,454 | ||||||
Treasury stock, at cost 207,979 shares at
September 30, 2011 and 195,385 shares at
December 31, 2010 |
(163 | ) | (132 | ) | ||||
Accumulated other comprehensive loss |
(72 | ) | (72 | ) | ||||
Accumulated deficit |
(29,975 | ) | (28,077 | ) | ||||
Total stockholders equity |
40,193 | 41,190 | ||||||
Total liabilities and stockholders equity |
$ | 45,998 | $ | 45,975 | ||||
See notes to the unaudited condensed consolidated financial statements.
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Table of Contents
SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 10,956 | $ | 9,723 | $ | 29,671 | $ | 29,347 | ||||||||
Cost of revenues |
4,532 | 3,961 | 12,364 | 11,908 | ||||||||||||
Gross profit |
6,424 | 5,762 | 17,307 | 17,439 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
1,547 | 1,519 | 4,541 | 4,536 | ||||||||||||
Sales and marketing |
3,501 | 3,740 | 10,282 | 11,037 | ||||||||||||
General and administrative |
1,562 | 1,693 | 5,279 | 5,233 | ||||||||||||
Total operating expenses |
6,610 | 6,952 | 20,102 | 20,806 | ||||||||||||
Operating loss |
(186 | ) | (1,190 | ) | (2,795 | ) | (3,367 | ) | ||||||||
Interest and other (expense) income, net |
(10 | ) | 7 | (8 | ) | 11 | ||||||||||
Loss before income tax benefit |
(196 | ) | (1,183 | ) | (2,803 | ) | (3,356 | ) | ||||||||
Income tax benefit |
| | 905 | | ||||||||||||
Net loss |
$ | (196 | ) | $ | (1,183 | ) | $ | (1,898 | ) | $ | (3,356 | ) | ||||
Net loss per common share: |
||||||||||||||||
Basic and Diluted |
$ | (0.01 | ) | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.21 | ) | ||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic and Diluted |
16,455,800 | 16,359,705 | 16,424,722 | 16,334,603 |
See notes to the unaudited condensed consolidated financial statements.
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Table of Contents
SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,898 | ) | $ | (3,356 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating
activities: |
||||||||
Depreciation of property and equipment |
1,003 | 1,450 | ||||||
Adjustment to contingent consideration |
47 | | ||||||
Amortization of intangible assets |
501 | 50 | ||||||
Amortization of premiums paid on short-term investments |
2 | | ||||||
Provision for doubtful accounts |
41 | 60 | ||||||
Stock-based compensation |
883 | 1,016 | ||||||
Deferred taxes |
(905 | ) | | |||||
Gain on sale of equipment |
(3 | ) | | |||||
Change in operating assets and liabilities, net of effect of acquisition: |
||||||||
Accounts receivable |
(790 | ) | 271 | |||||
Prepaid expenses and other current assets |
(411 | ) | 297 | |||||
Other assets |
81 | (53 | ) | |||||
Accounts payable |
(402 | ) | 693 | |||||
Accrued expenses and other liabilities |
(341 | ) | 283 | |||||
Net cash (used in) provided by operating activities |
(2,192 | ) | 711 | |||||
Cash flows from investing activities: |
||||||||
Cash paid related to Mobile Collect acquisition |
(476 | ) | (344 | ) | ||||
Cash paid related to SmartReply acquisition |
(3,150 | ) | | |||||
Investments in capitalized software |
| (489 | ) | |||||
Proceeds from sale of equipment |
3 | | ||||||
Purchases of investments |
(7,433 | ) | | |||||
Purchases of property and equipment |
(695 | ) | (1,110 | ) | ||||
Net cash used in investing activities |
(11,751 | ) | (1,943 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
49 | 82 | ||||||
Treasury stock purchases |
(31 | ) | | |||||
Net cash provided by financing activities |
18 | 82 | ||||||
Net decrease in cash and cash equivalents |
(13,925 | ) | (1,150 | ) | ||||
Cash and cash equivalents, beginning of period |
34,157 | 36,322 | ||||||
Cash and cash equivalents, end of period |
$ | 20,232 | $ | 35,172 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for income taxes |
$ | 46 | $ | 11 | ||||
Supplemental disclosure of non-cash investing activities: |
||||||||
Property and equipment, included in accounts payable |
$ | 2 | $ | 271 | ||||
Contingent cash payment to Mobile Collect, included in accrued expenses |
$ | 216 | $ | 159 | ||||
Contingent consideration and consideration payable, included in
accrued expenses and other liabilities |
$ | 1,205 | $ | | ||||
See notes to the unaudited condensed consolidated financial statements.
5
Table of Contents
SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. NATURE OF BUSINESS
SoundBite Communications, Inc. (the Company) provides a cloud-based, multi-channel proactive
customer communications service that enables organizations to design, execute and measure
communication campaigns for a variety of marketing, customer care, payment and collection
processes. Clients use the SoundBite Engage platform to communicate with their customers through
automated voice messaging, predictive dialing, text and email messages. The Company was
incorporated in Delaware in 2000 and its principal operations are located in Bedford,
Massachusetts. The Companys clients are located principally in the United States, with a limited
number located in Europe.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial
information. Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, the unaudited interim financial statements include all adjustments, consisting of
normal and recurring adjustments, necessary for the fair statement of the Companys financial
position as of September 30, 2011 and its results of operations for the three and nine months ended
September 30, 2011 and 2010 and its cash flows for the nine months ended September 30, 2011 and
2010. The results for the three and nine months ended September 30, 2011 are not necessarily
indicative of the results to be expected for the year ending December 31, 2011. The Company
considers events or transactions that occur after the balance sheet date but before the financial
statements are issued to provide additional evidence relative to certain estimates or to identify
matters that require additional disclosure. Subsequent events have been evaluated through the date
of issuance of these financial statements. No subsequent events requiring adjustment or disclosure
were identified. These condensed consolidated financial statements should be read in conjunction
with the audited annual financial statements and notes thereto as of and for the year ended
December 31, 2010 included in the Companys Annual Report on Form 10-K filed with the SEC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Short-term Investments
The Company invests any excess cash balances in short-term marketable securities, primarily
securities management believes to be high-grade corporate notes and bonds. These investments are
classified as available-for-sale. The average remaining maturity of the marketable securities as of
September 30, 2011 was five months. Gains or losses on the sale of investments classified as
available-for-sale, if any, are recognized on the specific identification method. Unrealized gains
or losses are included in accumulated other comprehensive income (loss) as a separate component of
stockholders deficit until the security is sold or until a decline in fair value is determined to
be other than temporary. No unrealized gain or loss was recorded as of September 30, 2011.
Revenues
The Company derives substantially all of its revenues by providing its services for use by clients
in communicating with their customers through voice, text and email messages. The Company provides
its services principally under a usage-based pricing model, with prices calculated on a per-message
or per-minute basis in accordance with the terms of its pricing agreements with clients. The
Company primarily invoices its clients on a monthly basis. Its pricing agreements with many
clients do not require minimum levels of usage or payments.
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is
persuasive evidence of an arrangement; (2) the service has been provided to the client; (3) the
amount of fees to be paid by the client is fixed or determinable; and (4) the collection of fees
from the client is reasonably assured. Generally, this is when the services are performed.
The Companys client management organization provides ancillary services to assist clients in
selecting service features and adopting best practices that help clients make the best use of the
Companys on-demand service. The organization provides varying levels of support through these
ancillary services, from managing an entire campaign to supporting self-service clients. In some
cases, ancillary services may be billed to clients based upon a fixed fee or, more typically, a
fixed hourly rate. These billed services typically are of short duration, typically less than one
month. The billed services do not involve future obligations. The Company recognizes revenue from
these billed services within the calendar month in which the ancillary services are completed if
the four criteria set forth above are satisfied. Revenues attributable to ancillary services are
not material and accordingly were not presented as a separate line item in the statements of
operations.
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Basic and Diluted Loss per Common Share
Net loss per common share attributable to common stockholders has been computed using the weighted
average number of shares of common stock outstanding during each period. Basic and diluted shares
outstanding were the same for the periods presented as the impact of all potentially dilutive
securities outstanding was anti dilutive. The following table presents the potentially dilutive
securities outstanding that were excluded from the computation of diluted net loss per common share
because their inclusion would have had an anti dilutive effect:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock options |
3,342,400 | 3,325,320 | 3,342,400 | 3,350,866 | ||||||||||||
Restricted stock |
57,338 | 78,950 | 57,338 | 78,950 | ||||||||||||
Warrants |
| 14,487 | | 14,487 | ||||||||||||
Total |
3,399,738 | 3,418,757 | 3,399,738 | 3,444,303 | ||||||||||||
Comprehensive Loss
For the three and nine months ending September 30, 2011, comprehensive loss was equal to net loss.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued guidance to allow
entities to use a qualitative approach to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If after performing the
qualitative assessment an entity determines it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then performing the two-step impairment test is
unnecessary. However if an entity concludes otherwise, then it is required to perform the first
step of the two-step goodwill impairment test. The new guidance is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with
early adoption permitted. The Company is currently evaluating the impact of its pending adoption
on the financial statements.
In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure
that the fair value measurement and disclosure requirements are similar between U.S. Generally
Accepted Accounting Principles and International Financial Reporting Standards. This guidance
changes certain fair value measurement principles and enhances the disclosure requirements,
particularly for Level 3 fair value measurements. The new guidance is effective for interim and
annual periods beginning after December 15, 2011. The Company believes that adoption of this new
guidance will not have a material impact on its financial statements.
In October 2009, the FASB issued guidance to amend the accounting and disclosure requirements for
revenue recognition. The Company adopted the amendments beginning January 1, 2011. The new
guidance modifies the criteria for the separation of deliverables into units of accounting for
multiple element arrangements. The adoption of this new guidance did not have an impact on the
Companys financial statements.
4. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Accrued payroll related items |
$ | 1,102 | $ | 946 | ||||
Accrued telephony |
467 | 632 | ||||||
Accrued professional fees |
461 | 362 | ||||||
Accrued other |
1,712 | 1,357 | ||||||
Total accrued expenses |
$ | 3,742 | $ | 3,297 | ||||
5. COMMITMENTS AND CONTINGENCIES
From time to time and in the ordinary course of business, the Company may be subject to various
claims, charges, investigations and litigation. At September 30, 2011 and December 31, 2010, the
Company did not have any pending claims, charges, investigations or litigation.
The
Company has agreed to indemnify certain customers in connection with its revenue arrangements.
These
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indemnifications require the Company to defend and satisfy any losses incurred by the customer
arising from the delivery of the Companys services arising from a violation of the law. In
October 2011, the Company received a notice from a customer
requesting indemnification in connection with a class action lawsuit
that asserts the customer
violated certain federal telecommunication laws as the result, in
part, of mobile termination text messages sent using the
Companys service. The Company is
evaluating this matter but, currently is unable to estimate the
amount of losses, if any, for which the Company may be responsible
under its indemnification obligations to the customer. The Company maintains insurance that, subject to deductibles, may be available to cover
all or a portion of losses that might arise as the result of such indemnification.
6. STOCK-BASED COMPENSATION
The following table presents stock-based compensation expense included in the condensed
consolidated statements of operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenues |
$ | 10 | $ | 11 | $ | 31 | $ | 31 | ||||||||
Research and development |
52 | 64 | 158 | 180 | ||||||||||||
Sales and marketing |
116 | 123 | 345 | 355 | ||||||||||||
General and administrative |
96 | 145 | 349 | 450 | ||||||||||||
Total stock-based compensation |
$ | 274 | $ | 343 | $ | 883 | $ | 1,016 | ||||||||
As of September 30, 2011, the total compensation cost related to stock-based awards granted to
employees and directors but not yet recognized was $1.3 million, net of estimated forfeitures.
These costs will be amortized on a straight-line basis over a weighted average period of 2.0 years.
7. GOODWILL AND INTANGIBLES
On February 26, 2008, the Company acquired substantially all of the assets of Mobile Collect, Inc.
(Mobile Collect). Mobile Collect was a privately held company that provided text messaging and
mobile communications solutions. The Company acquired these assets with the goal of supplementing
the Companys service capabilities to include Free-To-End-User text messaging. The acquisition
included cash payments of $500,000 upon closing and contingent cash payments of up to $2.0 million
payable through 2013 upon Mobile Collect achieving certain established financial targets. During
the three and nine months ended September 30, 2011, the Company recorded $216,000 and $528,000,
respectively, of contingent consideration and increased the carrying value of goodwill. As of
September 30, 2011, the Company had remaining contingent consideration related to this acquisition
of up to approximately $500,000, which will be recognized as additions to goodwill and subject to
future impairment considerations.
On June 7, 2011, the Company acquired key assets and assumed certain liabilities of SmartReply,
Inc., (SmartReply). See Note 9 below for further details of the transaction.
The change in the carrying amount of goodwill during the nine-month period ended September 30,
2011, which is subject to future impairment considerations, is as follows (in thousands):
Balance at January 1, 2011 |
$ | 762 | ||
Mobile Collect contingent payments |
528 | |||
SmartReply
acquisition (Note 9) |
2,726 | |||
Balance at September 30, 2011 |
$ | 4,016 | ||
8. FAIR VALUE
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. Observable inputs are obtained from
independent sources and can be validated by a third party, whereas unobservable inputs reflect
assumptions regarding what a third party would use in pricing an asset or liability. The fair
value hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. There are three levels of inputs that may be used to measure fair value as follows:
Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Other inputs that are directly or indirectly observable in the marketplace
Level 3Unobservable inputs that are supported by little or no market activity
The carrying value of the Companys financial instruments, including cash, short-term investments,
accounts receivable and accounts payable, approximate their fair value because of their short-term
nature. The Company measures cash equivalents, which are
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comprised of money market fund deposits, short-term investments, which are comprised of commercial
paper and U.S. government agency bonds, and a contingent liability at fair value. At September 30,
2011 and December 31, 2010, the money market funds and U.S. government agency bonds were valued
based upon quoted prices for the specific securities in an active market and therefore classified
as Level 1. At September 30, 2011, the commercial paper was valued on the basis of valuations
provided by third-party pricing services, as derived from such services pricing models. Inputs to
the models may include, but are not limited to, reported trades, executable bid and asked prices,
broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark
curves or information pertaining to the issuer, as well as industry and economic events. The
pricing services may use a matrix approach, which considers information regarding securities with
similar characteristics to determine the valuation for a security, and are therefore classified as
Level 2. The Level 3 liability consists of contingent consideration related to the SmartReply
acquisition in the form of an earn-out for a maximum of $8.9 million that may become payable in
annual installments over the next three years with contingencies based upon year-over-year revenue
growth relative to the Companys mobile services business. The fair value of the contingent
consideration was estimated by applying an income approach. The measure is based on significant
inputs that are unobservable in the market. Key assumptions include a discount rate of 18.5% and
probability weighted estimates of future revenues of the acquired business.
Assets and liabilities measured at fair value on a recurring basis consisted of the following types
of instruments as of September 30, 2011 and December 31, 2010 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | ||||||||||||||||
for Identical | Significant Other | Significant | ||||||||||||||
Instruments | Observable Inputs | Unobservable Inputs | ||||||||||||||
September 30, 2011 | (Level 1) | (Level 2) | (Level 3) | Total Balance | ||||||||||||
Assets: |
||||||||||||||||
Money market fund deposits |
$ | 19,791 | $ | | $ | | $ | 19,791 | ||||||||
Short-term investments: |
||||||||||||||||
Commercial paper |
| 4,797 | | 4,797 | ||||||||||||
U.S. government agency bonds |
2,634 | | | 2,634 | ||||||||||||
Liabilities: |
||||||||||||||||
Liability for contingent consideration |
| | $ | 1,205 | $ | 1,205 | ||||||||||
December 31, 2010 |
||||||||||||||||
Assets: |
||||||||||||||||
Money market fund deposits |
$ | 33,134 | | | $ | 33,134 |
The liability for contingent consideration increased $47,000 from $1,158,000 for the three months
ended September 30, 2011 due to a fair value adjustment based upon the passage of time and present
value considerations.
9. ACQUISITION
On June 7, 2011, the Company acquired key assets and assumed certain liabilities of SmartReply, a
mobile marketing company located in Irvine, California, through a series of transactions in which,
among other things, SmartReply contributed the targeted assets and liabilities to its newly formed
subsidiary and the Company subsequently acquired all of the capital stock of that newly formed
entity. SmartReply had been delivering mobile marketing solutions to approximately 40 companies,
including many of the top retail brands in North America. The purchase of SmartReply is consistent
with our strategy to expand our capabilities and customer base in mobile marketing and the excess
of the purchase price over the net assets acquired represents potential revenue
enhancements/synergies from our existing customer base and the assembled workforce of SmartReply.
We allocated the total purchase price to the tangible and identifiable intangible assets acquired
and liabilities assumed based on their estimated fair values on the closing date and recorded the
excess of purchase price over the aggregate fair values as goodwill. The goodwill balance is not
tax deductible. Revenues generated from clients acquired as part of the SmartReply asset
acquisition during the three and nine months ended September 30, 2011 were $1.2 million and $1.5
million, respectively.
The acquisition included cash payments of $2.6 million upon closing with the remaining $591,000
paid in the third quarter of 2011. Approximately $1.0 million of the purchase price has been
placed into escrow to secure the sellers representations and indemnifications and is expected to
be distributed to the selling shareholders over the next 24 months. Contingent consideration in
the form of an earn-out, for a maximum of $8.9 million, will be paid annually over the next three
years based upon year-over-year revenue growth relative to the Companys mobile services business.
Transaction costs related to the SmartReply acquisition totaled $550,000 and have been reported in
the Consolidated Statement of Operations within general and administrative expenses for the nine
month period ending September 30, 2011. The acquisition has been accounted for under the purchase
method of accounting and
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accordingly, the results of operations of SmartReply have been included in the accompanying
financial statements in the periods following the date of acquisition. The Company recorded
deferred tax liabilities of $905,000, primarily related to the intangible assets acquired with
SmartReply, and released a corresponding amount of its deferred tax asset valuation allowance. The
$905,000 release of the valuation allowance was recognized as a benefit for income taxes during the
nine month period ending September 30, 2011. Pro forma results of SmartReplys operations have not
been presented because the effect of this acquisition was not material to the Consolidated
Statement of Operations.
The purchase price has been allocated to the assets acquired and liabilities assumed based on fair
value, with any excess recorded as goodwill. None of the acquired intangible assets, including
goodwill, are deductible for tax purposes. The components of the purchase price allocation are as
follows (in thousands):
Purchase Price: |
||||
Cash paid |
$ | 3,150 | ||
Contingent consideration |
1,158 | |||
Total. |
$ | 4,308 | ||
Allocations: |
||||
Current assets |
$ | 756 | ||
Property and equipment |
50 | |||
Intangible assets: |
||||
Customer relationships |
2,330 | |||
Trade name |
28 | |||
Deferred tax liability |
(905 | ) | ||
Goodwill |
2,726 | |||
Total assets acquired |
4,985 | |||
Current liabilities assumed |
(677 | ) | ||
Total net assets acquired |
$ | 4,308 | ||
The Company is amortizing its identifiable intangible assets acquired in connection with the
SmartReply transaction over the estimated useful lives of two to three years using methods that
most closely relate to the depletion of these assets. Estimated annual amortization expense for the
next five years related to the intangible assets is as follows (in thousands):
Year ending December 31, | Amount | |||
2011 |
$ | 688 | ||
2012 |
907 | |||
2013 |
569 | |||
2014 |
194 | |||
2015 |
| |||
Total |
$ | 2,358 | ||
The Company has historically managed and presented its operations as a single reporting segment.
As a result of the above transaction, management is considering modifications to the management
structure and internal reporting to align with the integration of the new business. For the three
and nine months ended September 30, 2011, the Company has reported its business as a single
reporting segment, as the Companys chief decision maker, who is the Chief Executive Officer, only
evaluated the Company on a consolidated basis through September 30, 2011. As the management
structure and internal reporting structure are refined, the Company may re-assess its reporting
segments.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Investors should read the following discussion in conjunction with our financial statements and
related notes appearing elsewhere in this report. In addition to historical information, this
discussion contains forward-looking statements that involve risks, uncertainties and assumptions
that could cause our actual results to differ materially from our expectations. Factors that could
cause differences from our expectations include those described in Part II, Item 1A. Risk Factors
below and elsewhere in this report.
Overview
We provide a cloud-based, multi-channel proactive customer communications, or PCC, service that
enables organizations to design, execute and measure communication campaigns for a variety of
marketing, customer care, payment and collection processes. Clients use our SoundBite Engage
platform to communicate with their customers through automated voice messaging or AVM, predictive
dialing, text and email messages that are relevant, timely, personalized and engaging.
Our strategy for achieving long-term, sustained growth in our revenues and net income is focused on
building upon our leadership position in the proactive customer communications solutions market and
executing on our key initiatives. For example, one of our strategic initiatives is targeted on the
high growth area of mobile marketing, which leverages our text capabilities. In line with this
strategy, in June 2011 we acquired key assets and assumed certain liabilities of SmartReply, a
mobile marketing company located in Irvine, California.
Our service is provided using a multi-tenant, cloud architecture that enables a single platform to
serve all of our clients cost-effectively. Our cloud architecture delivers our service on an
on-demand, or software-as-a-service or SaaS, basis over the internet, eliminating the need for an
organization to invest in or maintain new hardware or to hire and manage dedicated information
technology staff. In addition, we are able to implement new features on our platform that become
part of our service automatically and can benefit all clients immediately. Our secure platform is
designed to serve increasing numbers of clients and growing demand from existing clients, enabling
the platform to scale reliably and cost-effectively.
Key Components of Results of Operations
Revenues
We currently derive substantially all of our revenues by providing our service for use by clients
in communicating with their customers through voice, text and email messages. We provide our
service principally under a usage-based pricing model, with prices calculated on a per-message or
per-minute basis in accordance with the terms of our pricing agreements with clients. We primarily
invoice our clients on a monthly basis.
Our pricing agreements with many of our clients do not require minimum levels of usage or payments.
Each executed message represents a transaction from which we derive revenues, and we therefore
recognize revenue based on actual usage within a calendar month. We do not recognize revenue until
we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable and we deem collection to be probable.
Cost of Revenues
Cost of revenues consists primarily of telephony charges, as well as depreciation expenses for our
telephony infrastructure and expenses related to hosting and providing support for our platform.
Cost of revenues also includes compensation expense for our operations personnel. As we continue
to grow our business and add features to our platform, we expect cost of revenues will continue to
increase on an absolute dollar basis. Our annual gross margin ranged from 59.6% to 61.4% during
the last three fiscal years. We currently are targeting a quarterly gross margin of 58% to 60% for
the foreseeable future. Our gross margin for a quarter may vary significantly from our target
range for a number of reasons, including the mix of types of messaging campaigns executed during
the quarter, as well as the extent to which we build our infrastructure through, for example,
significant acquisitions of hardware or material increases in leased data center facilities.
Operating Expenses
Research and Development. Research and development expenses consist primarily of compensation
expenses and depreciation expense of certain equipment related to the development of our service.
We have historically focused our research and development efforts on improving and enhancing our
platform, as well as developing new features and offerings.
Sales and Marketing. Sales and marketing expenses consist primarily of compensation for our
sales and marketing personnel, including sales commissions, as well as the costs of our marketing
programs. We expect to further invest in developing our marketing strategy and activities to
extend brand awareness and generate additional leads for our sales staff.
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General and Administrative. General and administrative expenses consist of compensation
expenses for executive, finance, accounting, administrative and management information systems
personnel, accounting and legal professional fees and other corporate expenses.
Recent Cost Saving Activities. In early May 2011, we eliminated two research and development
positions, five sales and marketing positions, and one general and administrative position in order
to lower our cost of operations. In addition to these reductions, we also reduced the use of
external contracting resources. This resulted in cost savings of approximately $250,000 in the
third quarter of 2011.
SmartReply Acquisition. As a result of the SmartReply acquisition on June 7, 2011, we
incurred an additional $900,000 in operating expenses, excluding costs related to the purchase
price, in the third quarter of 2011. We anticipate these operating expenses to remain at
approximately $900,000 for the fourth quarter of 2011.
Additional Key Measures of Financial Performance
We present information below with respect to cash flow from operating activities and free cash
flow. Free cash flow is a measure of financial performance calculated as cash flow from operating
activities, less payments of contingent purchase price, investments in capitalized software and
purchases of property and equipment.
Management uses these metrics to track business performance. Due to the current economic
environment, management decisions are based in part, on a goal of maintaining positive cash flow
from operating activities and free cash flow. We believe these metrics are useful measures of the
performance of our business because, in contrast to statement of operations metrics that rely
principally on revenue and profitability, cash flow from operating activities and free cash flow
capture the changes in operating assets and liabilities during the year and the effect of noncash
items such as depreciation and stock-based compensation. We believe that, for similar reasons,
these metrics are often used by security analysts, investors and other interested parties in the
evaluation of on-demand and other software companies.
The term free cash flow is not defined under U.S. generally accepted accounting principles, or
GAAP, and is not a measure of operating income, operating performance or liquidity presented in
accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary
expenditures. Free cash flow has limitations as an analytical tool and when assessing our
operating performance, you should not consider free cash flow in isolation from or as a substitute
for data, such as net income (loss), derived from financial statements prepared in accordance with
GAAP.
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash (used in) generated from operating activities |
$ | (2,192 | ) | $ | 711 | |||
Contingent purchase price payments to Mobile Collect |
(476 | ) | (344 | ) | ||||
Investments in capitalized software |
| (489 | ) | |||||
Purchases of property and equipment |
(695 | ) | (1,110 | ) | ||||
Free cash flow (non-GAAP) |
$ | (3,363 | ) | $ | (1,232 | ) | ||
Our operating activities used net cash in the amount of $2.2 million for the nine months ended
September 30, 2011 reflecting a net loss of $1.9 million and non-cash charges and changes in
working capital of $294,000 consisting primarily of (a) an increase in accrued expenses and
accounts payable of $743,000 due to the timing of payments, (b) an increase in accounts receivable
and prepaid expenses of $1.2 million, and (c) a deferred income tax benefit of $905,000, partially
offset by (d) depreciation and amortization expense of $1.5 million and (e) stock-based
compensation expense of $883,000.
Free cash flow in each of the nine-month periods presented reflects, in addition to the factors
driving cash flow from operating activities, our purchases of property and equipment, which
consists primarily of computer equipment and software, investments in
capitalized software and our payments of contingent purchase
price in connection with our acquisition of the assets of Mobile Collect in 2008. Our contingent
purchase price obligations to Mobile Collect extend through 2013.
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Results of Operations
The following table sets forth selected statements of operations data for the three and nine months
ended September 30, 2011 and 2010 indicated as percentages of revenues.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Statement of Operations Data: |
||||||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues |
41.4 | 40.7 | 41.7 | 40.6 | ||||||||||||
Gross margin |
58.6 | 59.3 | 58.3 | 59.4 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
14.1 | 15.6 | 15.3 | 15.4 | ||||||||||||
Sales and marketing |
31.9 | 38.5 | 34.7 | 37.6 | ||||||||||||
General and administrative |
14.3 | 17.4 | 17.7 | 17.8 | ||||||||||||
Total operating expenses |
60.3 | 71.5 | 67.7 | 70.8 | ||||||||||||
Operating loss |
(1.7 | ) | (12.2 | ) | (9.4 | ) | (11.4 | ) | ||||||||
Interest and other (expense) income |
(0.1 | ) | 0.0 | (0.0 | ) | 0.0 | ||||||||||
Loss before income tax benefit |
(1.8 | ) | (12.2 | ) | (9.4 | ) | (11.4 | ) | ||||||||
Income tax benefit |
| | 3.0 | | ||||||||||||
Net loss |
(1.8 | )% | (12.2 | )% | (6.4 | )% | (11.4 | )% | ||||||||
Comparison of Three Months Ended September 30, 2011 and 2010
Revenues
Three Months Ended September 30, | Quarter-to- | |||||||||||||||||||||||
2011 | 2010 | Quarter Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenues |
$ | 10,956 | 100.0 | % | $ | 9,723 | 100.0 | % | $ | 1,233 | 12.7 | % |
The $1.2 million increase in revenues for the three months ended September 30, 2011 as compared to
the same period in 2010 was mainly due to the acquisition of SmartReply in the second quarter of
2011. Revenues from new clients, including legacy clients of SmartReply, increased $1.6 million.
This was partially offset by a $324,000 decrease in revenues attributable to clients from which we
derived revenue in both periods.
Cost of Revenues and Gross Profit
Three Months Ended September 30, | Quarter-to- | |||||||||||||||||||||||
2011 | 2010 | Quarter Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of revenues |
$ | 4,532 | 41.4 | % | $ | 3,961 | 40.7 | % | $ | 571 | 14.4 | % | ||||||||||||
Gross profit |
6,424 | 58.6 | 5,762 | 59.3 | 662 | 11.5 |
The $571,000 increase in cost of revenues for the three months ended September 30, 2011 as compared
to the same period in 2010 reflected a $220,000 increase in telephony expense due to higher
delivery costs, a $148,000 increase in telephony expense due to higher client usage, a $124,000
increase in text and email costs primarily due to higher client usage, an $84,000 increase in
personnel related costs, a $42,000 increase in amortization expense relating to our internal use
software and a $35,000 increase in co-location costs due to the opening of a data center in the
United Kingdom in the fourth quarter of 2010. These increases were partially offset by an $80,000
decrease in depreciation expense due to a lower depreciable base of our property and equipment
infrastructure. The decrease in gross margin for the three months ended September 30, 2011 as
compared to the same period in 2010 reflected lower price structure agreements entered into with
some of our clients, as well as the vertical market and services mix.
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Operating Expenses
Three Months Ended September 30, | Quarter-to- | |||||||||||||||||||||||
2011 | 2010 | Quarter Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Research and development |
$ | 1,547 | 14.1 | % | $ | 1,519 | 15.6 | % | $ | 28 | 1.8 | % | ||||||||||||
Sales and marketing |
3,501 | 31.9 | 3,740 | 38.5 | (239 | ) | (6.4 | ) | ||||||||||||||||
General and administrative |
1,562 | 14.3 | 1,693 | 17.4 | (131 | ) | (7.7 | ) | ||||||||||||||||
Total operating expenses |
$ | 6,610 | 60.3 | % | $ | 6,952 | 71.5 | % | $ | (342 | ) | (4.9 | )% | |||||||||||
Research and Development. The $28,000 increase in research and development expenses for the three
months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable
to a $21,000 increase in personnel related and consulting costs.
Sales and Marketing. The $239,000 decrease in sales and marketing expenses for the three months
ended September 30, 2011 as compared to the same period in 2010 resulted primarily from a $259,000
decrease in personnel related costs, a $110,000 decrease in marketing costs, a $68,000 decrease in
consulting fees and a $67,000 decrease in travel and entertainment costs. These decreases were
partially offset by a $296,000 increase in amortization expense mainly related to customer lists
from the acquisition of intangible assets from SmartReply in the second quarter of 2011.
General and Administrative. The $131,000 decrease in general and administrative expenses for
the three months ended September 30, 2011 as compared to the same period in 2010 reflected an
$148,000 decrease in personnel related costs and an $88,000 decrease in professional services.
These decreases were partially offset by an $82,000 increase in consulting fees.
Operating Loss and Interest and Other (Expense) Income
Three Months Ended September 30, | Quarter-to- | |||||||||||||||||||||||
2011 | 2010 | Quarter Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Operating loss |
$ | (186 | ) | (1.7 | )% | $ | (1,190 | ) | (12.2 | )% | $ | 1,004 | 84.4 | % | ||||||||||
Interest and other (expense) income |
(10 | ) | (0.1 | ) | 7 | 0.0 | (17 | ) | (242.9 | ) | ||||||||||||||
Net loss |
$ | (196 | ) | (1.8 | )% | $ | (1,183 | ) | (12.2 | )% | $ | 987 | 83.4 | % | ||||||||||
The $17,000 decrease in interest and other (expense) income for the three months ended September
30, 2011 as compared to the same period in 2010 was mainly due to a foreign currency loss resulting
from the revaluation of accounts receivable and accounts payable balances denominated in foreign
currencies.
Comparison of Nine Months Ended September 30, 2011 and 2010
Revenues
Nine Months Ended September 30, | Nine Month | |||||||||||||||||||||||
2011 | 2010 | Period Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenues |
$ | 29,671 | 100.0 | % | $ | 29,347 | 100.0 | % | $ | 324 | 1.1 | % |
The $324,000 increase in revenues for the nine months ended September 30, 2011 as compared to the
same period in 2010 was mainly due to SmartReply revenues of $1.5 million and an increase in text
and client service revenues of $1.3 million, partially offset by a decrease in voice revenues,
excluding SmartReply, of $2.4 million. Revenues from new clients, including legacy clients of
SmartReply, increased $2.0 million. This was partially offset by a $1.7 million decrease in
revenues attributable to clients from which we derived revenue in both periods.
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Cost of Revenues and Gross Profit
Nine Months Ended September 30, | Nine Month | |||||||||||||||||||||||
2011 | 2010 | Period Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of revenues |
$ | 12,364 | 41.7 | % | $ | 11,908 | 40.6 | % | $ | 456 | 3.8 | % | ||||||||||||
Gross profit |
17,307 | 58.3 | 17,439 | 59.4 | (132 | ) | (0.8 | ) |
The $456,000 increase in cost of revenues for the nine months ended September 30, 2011 as compared
to the same period in 2010 reflected a $442,000 increase in telephony expense mainly due to higher
delivery costs, a $130,000 increase in text and email costs primarily due to higher client usage, a
$128,000 increase in co-location costs due to the opening of a data center in the United Kingdom in
the fourth quarter of 2010 and a $97,000 increase in amortization expense relating to our internal
use software. These increases were partially offset by a $341,000 decrease in depreciation expense
due to a lower depreciable base of our property and equipment. The decrease in gross margin for
the nine months ended September 30, 2011 as compared to the same period in 2010 reflected lower
price structure agreements entered into with some of our clients, as well as the industry and
service mix.
Operating Expenses
Nine Months Ended September 30, | Nine Month- | |||||||||||||||||||||||
2011 | 2010 | Period Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Research and development |
$ | 4,541 | 15.3 | % | $ | 4,536 | 15.4 | % | $ | 5 | 0.1 | % | ||||||||||||
Sales and marketing |
10,282 | 34.7 | 11,037 | 37.6 | (755 | ) | (6.8 | ) | ||||||||||||||||
General and administrative |
5,279 | 17.7 | 5,233 | 17.8 | 46 | 0.9 | ||||||||||||||||||
Total operating expenses |
$ | 20,102 | 67.7 | % | $ | 20,806 | 70.8 | % | $ | (704 | ) | (3.4 | )% | |||||||||||
Research and Development. Research and development expenses remained relatively flat for the nine
months ended September 30, 2011 as compared to the same period in 2010. This was primarily
attributable to a $136,000 increase in consulting services, offset by a$121,000 decrease in
personnel related costs and a $19,000 decrease in travel and entertainment costs.
Sales and Marketing. The $755,000 decrease in sales and marketing expenses for the nine months
ended September 30, 2011 as compared to the same period in 2010 resulted primarily from a $555,000
decrease in personnel related costs, a $263,000 decrease in marketing costs, a $165,000 decrease in
travel and entertainment costs and a $136,000 decrease in consulting fees. These decreases were
partially offset by $354,000 increase in amortization expense mainly related to customer lists from
the acquisition of intangible assets from SmartReply in the second quarter of 2011.
General and Administrative. The $46,000 increase in general and administrative expenses for
the nine months ended September 30, 2011 as compared to the same period in 2010 was primarily
attributable to a $566,000 increase in professional service costs relating to merger and
acquisition activities and an $85,000 increase in consulting fees, partially offset by a $300,000
decrease in personnel related costs, a $189,000 decrease in professional service costs and a
$104,000 decrease in depreciation expense.
Operating Loss and Other Income
Nine Months Ended September 30, | Nine Month | |||||||||||||||||||||||
2011 | 2010 | Period Change | ||||||||||||||||||||||
Percentage of | Percentage of | Percentage | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Operating loss |
$ | (2,795 | ) | (9.4 | )% | $ | (3,367 | ) | (11.4 | )% | $ | 572 | 17.0 | % | ||||||||||
Interest and other (expense) income |
(8 | ) | (0.0 | ) | 11 | 0.0 | (19 | ) | (172.7 | ) | ||||||||||||||
Loss before income tax benefit |
$ | (2,803 | ) | (9.4 | )% | $ | (3,356 | ) | (11.4 | )% | $ | 553 | 16.5 | % | ||||||||||
The $19,000 decrease in interest and other income for the nine months ended September 30, 2011 as
compared to the same period in 2010 was mainly due to a foreign currency loss resulting from the
revaluation of accounts receivable and accounts payable balances denominated in foreign currencies.
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Income Tax Benefit
The $905,000 increase in income tax benefit for the nine months ended September 30, 2011 as
compared to the same period in 2010 resulted from the release of valuation allowance against our
deferred tax assets primarily due to the recognition of deferred tax liabilities related to the
acquisition of intangibles from SmartReply in June 2011.
Liquidity and Capital Resources
Resources
Since our inception, we have funded our operations primarily with proceeds from private placements
of preferred stock and our initial public offering of common stock, borrowings under credit
facilities and, more recently, cash flow from operations.
We believe our existing cash and cash equivalents and short-term investments, our projected cash
flow from operating activities, and our borrowings available under our existing credit facility
will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our
future working capital requirements will depend on many factors, including the rates of our revenue
growth, our introduction of new features for our on-demand service, and our expansion of research
and development and sales and marketing activities. To the extent our cash and cash equivalents
and cash flow from operating activities are insufficient to fund our future activities, we may need
to raise additional funds through bank credit arrangements or public or private equity or debt
financings. We also may need to raise additional funds in the event we determine in the future to
effect one or more acquisitions of businesses, technologies and products. If additional funding is
required, we may not be able to obtain bank credit arrangements or to effect an equity or debt
financing on terms acceptable to us or at all.
Credit Facility Borrowings
On February 18, 2011 we renewed a credit facility with Silicon Valley Bank that provides a working
capital line of credit at an interest rate of 4.5% per annum for up to the lesser of (a) $1.5
million or (b) 80% of eligible accounts receivable, subject to specified adjustments. Accounts
receivable serve as collateral for any borrowings under the credit facility. There are certain
financial covenant requirements as part of the facility, including an adjusted quick ratio and
certain minimum quarterly revenue requirements, none of which are restrictive to our overall
operations. The credit facility will expire by its terms on February 18, 2013 and any amounts
outstanding must be repaid on that date.
As of September 30, 2011, no amounts were outstanding under the existing credit agreement. As of
September 30, 2011, letters of credit totaling $426,000 had been issued in connection with our
facility leases.
Operating Cash Flow
For a discussion of our cash flow from operating activities, see Additional Key Measures of
Financial Performance.
Working Capital
The following table sets forth selected working capital information:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents |
$ | 20,232 | $ | 34,157 | ||||
Short-term investments |
7,431 | | ||||||
Accounts receivable, net of allowance for doubtful accounts |
8,007 | 6,577 | ||||||
Working capital |
32,794 | 37,553 |
Our cash and cash equivalents at September 30, 2011 were unrestricted and held for working capital
purposes. These funds were invested primarily in money market funds. We do not enter into
investments for trading or speculative purposes.
Our accounts receivable balance fluctuates from period to period, which affects our cash flow from
operating activities. Fluctuations vary depending on cash collections, client mix and the volume of
monthly usage of our services.
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Requirements
Capital Expenditures
In recent years, we have made capital expenditures primarily to acquire computer hardware and
software and, to a lesser extent, furniture and leasehold improvements to support the growth of our
business. Our capital expenditures totaled $695,000 for the nine months ended September 30, 2011.
We intend to continue to invest in our infrastructure in an effort to ensure our continued ability
to enhance our platform, introduce new features and maintain the reliability of our network. We
also intend to continue to make investments in our computer equipment and systems. We expect our
capital expenditures for these purposes will approximate $300,000 for the last three months of
2011.
Stock Repurchase Program
On March 26, 2010, we announced that the board of directors had authorized the repurchase of up to
$2.5 million of common stock from time to time on the open market or in privately negotiated
transactions. We will determine the timing and amount of any shares repurchased based on an
evaluation of market conditions and other factors. Repurchases may be made under a Rule 10b5-1
plan, which would permit shares to be repurchased when we might otherwise be precluded from doing
so under insider trading laws. The repurchase program may be suspended or discontinued at any
time.
As of September 30, 2011, we repurchased 12,594 shares of our common stock at a cost of $31,000
under the program. For additional information, see Part II, Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Contractual Obligations and Requirements
On February 26, 2008, we acquired substantially all of the assets of Mobile Collect, a privately
held company that provided text messaging and mobile communications solutions. The acquisition
included cash payments of $500,000 upon closing and requires contingent cash payments of up to $2.0
million payable through 2013 in the event that certain established financial targets are satisfied
through the operation of the acquired assets. As of September 30, 2011, $216,000 of contingent
cash payments were payable to the stockholders of Mobile Collect and contingent cash payments of up
to $500,000 on future payments, if any, are due quarterly.
On June 7, 2011, we acquired key assets and assumed certain liabilities of SmartReply, a mobile
marketing company located in Irvine, California. The acquisition included cash payments of $3.2
million and requires contingent cash payments estimated at $1.7 million, but up to a maximum of
$8.9 million, in the form of an earn-out, which will be paid annually over the next three years
based upon year-over-year revenue growth relative to our mobile services business.
Except for the contingent cash payments that may be required in connection with the Mobile Collect
and SmartReply acquisitions, our contractual obligations have remained substantially unchanged from
those reported in our Annual Report on Form 10-K for the year ended December 31, 2010.
Off-Balance-Sheet Arrangements
As of September 30, 2011, we did not have any significant off-balance-sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC.
Critical Accounting Policies
We prepare our unaudited condensed consolidated financial statements in conformity with GAAP. The
preparation of these 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 reaffirm the critical accounting
policies and estimates as reported in our Annual Report on Form 10-K for the year ended December
31, 2010.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board, or FASB, issued guidance to allow
entities to use a qualitative approach to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If after performing the
qualitative assessment an entity determines it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then performing the two-step impairment test is
unnecessary. However if an entity concludes otherwise, then it is required to perform the first
step of the two-step goodwill impairment test. The new guidance is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with
early adoption permitted. We are currently evaluating the impact of its pending adoption on our
financial statements.
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In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure
that the fair value measurement and disclosure requirements are similar between GAAP and
International Financial Reporting Standards. This guidance changes certain fair value measurement
principles and enhances the disclosure requirements particularly for Level 3 fair value
measurements. The new guidance is effective for interim and annual periods beginning after
December 15, 2011. We believe that adoption of this new guidance will not have a material impact
on our financial statements.
In October 2009, the FASB issued guidance to amend the accounting and disclosure requirements for
revenue recognition. We adopted the amendments beginning January 1, 2011. The new guidance
modifies the criteria for the separation of deliverables into units of accounting for multiple
element arrangements. The adoption of this new guidance did not have a material impact on our
financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk exposure is primarily the result of
fluctuations in interest rates. We do not hold or issue financial instruments for trading
purposes.
At September 30, 2011, we had unrestricted cash and cash equivalents totaling $20.2 million. These
amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents
were held for working capital purposes. At September 30, 2011, we also had short-term investments
of $7.4 million, consisting primarily of commercial paper and U.S. government agency bonds, which
were all classified as available-for-sale. Due to the short-term nature of these investments, we
believe that we do not have any material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in interest rates, however, would
reduce future investment income.
Item 4. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the Companys management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 30, 2011, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the company have
been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Over time, control may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2011 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Investors should consider
carefully the risks and uncertainties described below and all of the other information contained in
this report before deciding whether to purchase our common stock. The market price of our common
stock could decline due to any of these risks and uncertainties, and investors might lose all or
part of their investments in our common stock.
Risks Related to Our Business and Industry
If the market for proactive customer communications, or PCC, solutions does not develop as we
anticipate, our revenues would decline or fail to grow and we could incur operating losses.
Our revenues totaled $29.7 million in the first nine months of 2011, $39.5 million in 2010, $40.2
million in 2009 and $43.2 million in 2008. We derive, and expect to continue to derive for the
foreseeable future, a substantial majority of our revenues by providing our on-demand PCC service
to businesses and other organizations. Since mid-2008, we have generated an increasing percentage
of our revenues from use of our service for text messaging. We expect that, in the future, a
growing percentage of our revenues will result from the use of our on-demand service for text,
e-mail messaging and our hosted predictive dialer offering. Due to advances in technology, the
market for PCC products and services continues to evolve, and it is uncertain whether our service
will achieve and sustain high levels of demand and market acceptance. In order to succeed, we must
increase the usage of our service by existing clients.
In addition, our success will depend on our ability to market our full range of PCC applications to
additional organizations. Some organizations may be reluctant or unwilling to use PCC services for
a number of reasons, including the perceived effectiveness of communications services based on
other delivery channels, such as direct mail and web, or other technologies, such as interactive
voice response systems and on-premise predictive dialers. In addition, organizations may lack
knowledge about the potential benefits that PCC services can provide. An organization may
determine that it can achieve the same, or a higher, level of performance and results from services
based on other delivery channels or technologies. Even if an organization determines that our PCC
service offers benefits superior to other customer communications products and services, it might
not use our service because it has previously invested in alternative products or services or in
internally developed messaging equipment, because it can obtain acceptable performance and results
from alternative products and services available at a lower cost, or because it is unwilling to
deliver customer information to a third-party vendor. Moreover, an organization may determine not
to use communications products and services due to the application, or potential application, of
one or more of a variety of laws and regulations, as described below under Risks Related to
Regulation of Use of Our Service.
If organizations do not perceive the potential and relative benefits of our PCC service or believe
that competing customer communications products and services offer a better value, the market for
our service may not continue to develop or may develop more slowly than we expect, either of which
would significantly adversely affect our business, financial condition and operating results.
Because the market for our service is still developing and the manner of this development is
difficult to predict, we could make errors in predicting and reacting to relevant business trends,
which could harm our operating results.
Our quarterly operating results can be difficult to predict and can fluctuate substantially, which
could result in volatility in the price of our common stock.
Our quarterly revenues and other operating results have varied in the past and are likely to
continue to vary significantly from quarter to quarter. Our agreements with clients typically do
not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the
actual usage of our service each quarter by existing and new clients. Quarterly fluctuations in
our operating results also might be due to numerous other factors, including:
| our ability to attract new clients, including the length of our sales cycles; | ||
| our ability to sell new applications and increased usage of existing applications to existing clients; | ||
| technical difficulties or interruptions in our on-demand service; | ||
| changes in privacy protection and other governmental regulations applicable to the communications industry; | ||
| changes in our pricing policies or the pricing policies of our competitors; | ||
| changes in the rates we incur for services provided by telecommunication or data carriers or by text or email aggregators; | ||
| the financial condition and business success of our clients; |
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| purchasing and budgeting cycles of our clients; | ||
| acquisitions of businesses and products by us or our competitors; | ||
| competition, including entry into the market by new competitors or new offerings by existing competitors; | ||
| our ability to hire, train and retain sufficient sales, client management and other personnel; | ||
| restructuring expenses, including severance and other costs attributable to terminations of employment; | ||
| timing of development, introduction and market acceptance of new communication services or service enhancements by us or our competitors; | ||
| concentration of marketing expenses for activities such as trade shows and advertising campaigns; | ||
| expenses related to any new or expanded data centers; | ||
| expenses related to merger and acquisition activities; and | ||
| general economic and financial market conditions. |
Many of these factors are beyond our control, and the occurrence of one or more of them could cause
our operating results to vary widely. Because of quarterly fluctuations, we believe that
quarter-to-quarter comparisons of our operating results are not necessarily meaningful.
We may fail to forecast accurately the behavior of existing and potential clients or the demand for
our service. Our expense levels are based, in significant part, on our expectations as to future
revenues and are largely fixed in the short term. As a result, we could be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in revenues.
Variability in our periodic operating results could lead to volatility in our stock price as equity
research analysts and investors respond to quarterly fluctuations. Moreover, as a result of any of
the foregoing or other factors, our operating results might not meet our announced guidance or
expectations of investors and analysts, in which case the price of our common stock could decrease
significantly.
Defects in our platform, disruptions in our on-demand service or errors in execution could diminish
demand for our PCC service and subject us to substantial liability.
Our on-demand platform is complex and incorporates a variety of hardware and proprietary and
licensed software. From time to time we have found and corrected defects in our platform.
Internet-based services such as ours frequently experience issues from undetected defects when
first introduced or when new versions or enhancements are released. Defects in our platform could
result in service disruptions for one or more clients. For example, in October 2008 we experienced
a partial outage of the SoundBite Platform, which precluded some clients from executing their
campaigns in their desired timeframes. Our clients might use our on-demand service in
unanticipated ways that cause a service disruption for other clients attempting to access their
contact list information and other data stored on our platform. In addition, a client may
encounter a service disruption or slowdown due to high usage levels of our service.
Clients engage our Client Management organization to assist them in creating and managing a
campaign. As part of this process, we typically construct and test a script, map the clients
input file into our platform and map our output files to a client-specific format. In order for a
campaign to be executed successfully, our Client Management staff must correctly design, implement,
test and deploy these work products. The performance of these tasks can require significant skill
and effort, and from time to time has resulted in errors that adversely affected a clients
campaign.
Because clients use our service for critical business processes, any defect in our platform, any
disruption in our service or any error in execution could cause existing or potential clients not
to use our service, could harm our reputation, and could subject us to litigation and significant
liability for damage to our clients businesses.
The insurers under our existing liability insurance policy could deny coverage of a future claim
that results from an error or defect in our platform or a resulting disruption in our service, or
our existing liability insurance might not be adequate to cover all of the
damages and other costs of such a claim. Moreover, we cannot assure you that our current liability
insurance coverage will continue to be available to us on acceptable terms or at all. The
successful assertion against us of one or more large claims that exceeds our insurance coverage, or
the occurrence of changes in our liability insurance policy, including an increase in premiums or
imposition of large deductible or co-insurance requirements, could have a material adverse effect
on our business, financial condition and operating
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results. Even if we succeed in litigation with
respect to a claim, we are likely to incur substantial costs and our managements attention will be
diverted from our operations.
Interruptions, delays in service or errors in execution from our key vendors would impair the
delivery of our service and could substantially harm our business and operating results.
In delivering our on-demand service, we rely upon a combination of hosting providers,
telecommunication and data carriers, and text and email aggregators. We serve our clients from
four third-party hosting facilities. One facility is located in Ashburn, Virginia, and is owned by
Equinix and operated by InterNap under an agreement that expires in March 2012. Another facility
is located in Somerville, Massachusetts, and is owned by CoreSite and operated by InterNap under an
agreement that expires in May 2012. Our agreements for these two facilities automatically renew
for one year periods unless written notification is made by either party 90 days prior to renewal.
Our third facility is located in Slough, United Kingdom and is owned and operated by Equinix (UK)
Limited under an agreement that automatically renews for twelve month periods unless written
notification is made by either party three months prior to the expiration date. Our fourth facility
is located in Las Vegas, Nevada and is owned and operated by Switch Communications under an
agreement that automatically renews for monthly periods unless written notification is made 30 days
prior to the expiration date. If we are unable to renew these agreements on commercially
reasonable terms following their termination, we will need to incur significant expense to relocate
our data center or agree to the terms demanded by the hosting provider, either of which could harm
our business, financial position and operating results.
Our clients campaigns are handled through a mix of telecommunication and data carriers as well as
text and email aggregators. We rely on these service providers to handle millions of customer
contacts each day. From time to time these service providers may fail to handle contacts
correctly, which could cause existing or potential clients not to use our service, could harm our
reputation, and could subject us to litigation and significant liability for damage to our clients
businesses for which we are not fully indemnified or insured. While we have entered into contracts
with multiple telecommunication carriers and text aggregators, we currently do not have fully
redundant data, text or email services. Our contracts with carriers and aggregators generally can
be terminated by either party at the end of the contract term upon written notice delivered by the
party a specified number of days before the end of the term. In addition, we generally can
terminate a contract at any time upon written notice delivered a specified number of days in
advance, subject to the payment of specified termination charges. If a contract is terminated, we
might be unable to obtain pricing on similar terms from another provider, which would affect our
gross margins and other operating results.
Our hosting facilities and the infrastructures of our service providers are vulnerable to damage or
interruption from floods, fires and similar natural events, as well as acts of terrorism,
break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such
a natural disaster or misconduct, a loss of power, a decision by a hosting provider to close a
facility without adequate notice or other unanticipated problems could result in lengthy
interruptions in our provision of our service. Any interruption or delay in providing our service,
even if for a limited time, could have an adverse effect on our business, financial condition and
operating results.
Actual or perceived breaches of our security measures could diminish demand for our service and
subject us to substantial liability.
Our on-demand service involves the storage and transmission of clients proprietary information.
Internet-based services such as ours are particularly subject to security breaches by third
parties. Breaches of our security measures also might result from employee error or malfeasance or
other causes, including as a result of adding new communications services and capabilities to our
platform. In the event of a security breach, a third party could obtain unauthorized access to our
clients contact list information and other data. Techniques used to obtain unauthorized access or
to sabotage systems change frequently, and they typically are not recognized until after they have
been launched against a target. As a result, we could be unable to anticipate, and implement
adequate preventative measures against, these techniques. Because of the critical nature of data
security, any actual or perceived breach of our security measures could subject us to litigation
and significant liability for damage to our clients businesses, could cause existing or potential
clients not to use our service, and could harm our reputation.
The global economic conditions and related credit crisis may continue to adversely affect our
business.
Recent global market and economic conditions have been negative, with tighter credit conditions in
most major economies continuing in 2009, 2010 and 2011. Continued concerns about the systemic
impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the
availability and cost of credit, and the global housing and mortgage markets have contributed to
increased market volatility, declining business and consumer confidence, increased unemployment,
and diminished economic expectations. These market conditions have led to a decrease in spending
by businesses and consumers. Continued turbulence in the United States and international markets
and economies and prolonged declines in business and consumer spending could result in
lower sales of our service, longer sales cycles, difficulties in collecting accounts receivable,
gross margin deterioration, slower adoption of new technologies, and increased price competition,
any of which may have a negative effect on our financial condition and results of operations.
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Many of our clients are not obligated to pay any minimum amount for our service on an on-going
basis, and if those clients discontinue use of our service or do not use our service on a regular
basis, our revenues would decline.
The agreements we enter into with many of our clients do not require minimum levels of usage or
payments and are terminable at will by our clients. The periodic usage of our service by an
existing client could decline or fluctuate as a result of a number of factors, including the
clients level of satisfaction with our service, the clients ability to satisfy its customer
contact processes internally, and the availability and pricing of competing products and services.
If our service fails to generate consistent business from existing clients, our business, financial
condition and operating results will be adversely affected.
We derive a significant portion of our revenues from the sale of our service for use in the
collections process, and any event that adversely affects the collection agencies industry or
in-house collection departments would cause our revenues to decline.
In recent years, we have focused our sales and marketing activities on the collection process and
have targeted large in-house collection departments, as well as collection agencies. Revenues from
these collection businesses represented 75% of our revenues in the first nine months of 2011, 75%
of our revenues in 2010, 77% of our revenues in 2009 and 80% of our revenues in 2008. We expect
that revenues from the collection businesses will continue to account for a substantial part of our
revenues for the foreseeable future.
Collection businesses are particularly subject to changes in the overall economy. In a sustained
economic downturn such as the recession experienced globally since 2009, collection agencies can be
affected adversely by declines in liquidation rates as a result of higher debt and lower disposable
income. A prolonged economic downturn will impact collections agencies as fewer loans are granted
due to the imposition by lenders of conditions on the extension of credit that are not acceptable
to potential borrowers. Collection businesses also can be affected adversely by a sustained
economic upturn, which may result in lower levels of consumer debt default rates. In addition,
collection businesses may be affected adversely by tightening of credit granting practices as well
as technological advances and regulatory changes that affect the collection of outstanding
indebtedness. Any such changes, conditions or events that adversely affect collection businesses
could cause us to lose some or all of the recurring business of our clients in the collections
business, which in turn could have a material adverse effect on our business, financial condition
and operating results.
Moreover, two clients accounted for a total of 24% of our revenues in the first nine months of
2011, 23% of our revenues in 2010, 29% of our revenues in 2009 and 31% of our revenues in 2008.
One of these clients is a collection agency and the other is a large in-house collection department
of a telecommunications business. In addition to the risks associated with collections businesses
in general, our business, financial condition and operating results would be negatively affected if
either of these clients were to significantly decrease the extent to which it uses our service.
Our business will be harmed if we fail to develop new features that keep pace with technological
developments and emerging consumer trends.
Organizations can use a variety of communication channels to reach their customers. Emerging
consumer trends have forced a greater focus on alternative channels, customer preferences and
communications via mobile devices and a failure to address these trends would be a threat to the
adoption of our service. Our business, financial condition and operating results will be adversely
affected if we are unable to complete and introduce, in a timely manner, new features for our
existing service that keep pace with technological developments. For example, because most of our
clients access our on-demand service using a web browser, we must modify and enhance our service
from time to time to keep pace with new browser technology.
We face intense competition, and our failure to compete successfully would make it difficult for us
to add and retain clients and would impede the growth of our business.
The market for on-demand, multi-channel proactive customer communication solutions is intensely
competitive, changing rapidly and highly fragmented. It is subject to rapidly developing
technology, shifting client requirements, frequent introductions of new products and services, and
increased marketing activities of industry participants. Increased competition could result in
pricing pressure, reduced sales or lower margins, and could prevent our current service or future
PCC solutions from achieving or maintaining broad market acceptance. If we are unable to compete
effectively, it will be difficult for us to add and retain clients and our business, financial
condition and operating results will be seriously harmed.
Predictive dialers have been the basic method of automated customer communications for the last two
decades, particularly for collections activity. The vast majority of telephony customer contact
today is completed using predictive dialer technology. Our service competes with on-premise
predictive dialers from a limited number of established vendors and a number of smaller vendors, as
well as predictive dialers hosted by some of those smaller vendors on an application service
provider basis. Many organizations have invested in on-premise predictive dialers and are likely
to continue using those dialers until the dialers are no longer operational, despite the
availability of additional functionality in our service.
Our service also competes with a number of hosted customer contact services. A limited number of
established vendors and a number of smaller, privately held companies offer these hosted services,
which compete principally on the basis of price rather than features. In addition, a small number
of vendors focus on providing hosted customer contact services with features more comparable to
ours. These vendors generally compete on the basis of return on investment and features, rather
than price. Other companies may enter the
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market by offering competing products or services based
on emerging technologies, such as open-source frameworks, and may compete on the basis of either
features or price. Clients could also potentially employ a multi-vendor strategy for risk
mitigation purposes.
We increasingly compete with companies providing PCC solutions focused on specific vertical
markets, such as healthcare, or on a single communications channel, such as text messaging.
Because these solutions are targeted to more narrowly defined markets and enable their providers to
develop targeted domain expertise, those providers may be able to develop and offer targeted
customer contact solutions than a company, such as ours, that seeks to offer a broad range of PCC
applications to organizations across a variety of vertical markets.
As a result of our acquisition of SmartReply in June 2011, we increasingly compete with mobile
marketing companies that provide text messaging services to the retail industry and to other
vertical markets in which mobile communications for marketing and customer care campaigns are
gaining traction.
Some of our competitors have significantly greater financial, technical, marketing, service and
other resources than we have. These vendors also have larger installed client bases and longer
operating histories. Competitors with greater financial resources might be able to offer lower
prices, additional products or services, or other incentives that we cannot match or offer. These
competitors could be in a stronger position to respond quickly to new technologies and could be
able to undertake more extensive marketing campaigns.
Mergers or other strategic transactions involving our competitors could weaken our competitive
position, which could harm our operating results.
Our industry is highly fragmented, and we believe it is likely that some of our existing
competitors will consolidate or will be acquired. For example, EasyLink Services International
Corporation, a global provider of comprehensive messaging services and e-commerce solutions,
acquired the PGiSend and PGiNotify advanced messaging businesses from Premiere Global Services,
Inc., through the purchase of its wholly-owned subsidiary, Xpedite Systems, LLC and its
subsidiaries in October 2010. In February 2011, West Corporation, a provider of voice and data
solutions, announced it had acquired Twenty First Century Communications, Inc., a provider of
automated alerts and notification solutions. In August 2011, Augme Technologies, Inc., a mobile
marketing service, acquired substantially all of the assets of Hipcricket, Inc, a mobile marketing
and advertising company.
In addition, some of our competitors may enter into new alliances with each other or may establish
or strengthen cooperative relationships with systems integrators, third-party consulting firms or
other parties. Any such consolidation, acquisition, alliance or cooperative relationship could
lead to pricing pressure and our loss of market share and could result in a competitor with greater
financial, technical, marketing, service and other resources, all of which could have a material
adverse effect on our business, operating results and financial condition.
The expansion of our business into international markets exposes us to additional business risks,
and failure to manage those risks could adversely affect our business and operating results.
Historically we targeted substantially all of our sales and marketing efforts principally to
organizations located in the United States. In recent years, however, we have focused on
increasing resources on organizations located in Europe. We anticipate that an increasing portion
of our revenue in future periods will be derived from outside the United States. The continued
expansion of our international operations will require substantial financial investment and
significant management efforts and will subject us to a number of risks and potential costs,
including:
| difficulty in establishing, staffing and managing sales and other operations in countries outside of the United States; | ||
| compliance with multiple, conflicting and changing laws and regulations, including employment and tax laws and regulations; | ||
| longer payment cycles in some countries; | ||
| currency exchange rate fluctuations; | ||
| limited protection of intellectual property in some countries outside of the United States; | ||
| challenges encountered under local business practices, which vary by country and often favor local competitors; | ||
| challenges caused by distance, language and cultural differences; and | ||
| difficulty in establishing and maintaining reseller relationships. |
Our failure to manage the risks associated with our international operations could limit the growth
of our business and adversely affect our operating results.
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Failure to maintain our direct sales force will impede our growth.
We are highly dependent on our direct sales force to obtain new clients and to generate repeat
business from our existing client base. It is therefore critical that our direct sales force
maintain regular contact with our clients, both to gauge client satisfaction with our service as
well as to highlight the value that use of our service adds to their enterprises. There is
significant competition for direct sales personnel. Our ability to achieve growth in revenues in
the future will depend in large part on our success in recruiting, training and retaining
sufficient numbers of direct sales personnel. New hires require significant training and typically
take more than a year before they achieve full productivity. Our recent and planned hires might
not achieve full productivity as quickly as intended, or at all. If we fail to keep, hire and
successfully train sufficient numbers of direct sales personnel, we will be unable to increase our
revenues and the growth of our business will be impeded.
Because competition for employees in our industry is intense, we might not be able to attract and
retain the highly skilled employees we need to execute our business plan.
To continue to execute our business plan, we must attract and retain highly qualified personnel.
Competition for these personnel is intense, especially for senior engineers and senior sales
executives. We might not be successful in attracting and retaining qualified personnel. We have
experienced from time to time in the past, and expect to continue to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many
of the companies with which we compete for experienced personnel have greater resources than we
have. In addition, in making employment decisions, particularly in technology-based industries,
job candidates often consider the value of the stock options they are to receive in connection with
their employment. Volatility in the price of our common stock could therefore, adversely affect
our ability to attract or retain key employees. Furthermore, the requirement to expense stock
options could discourage us from granting the size or type of stock options awards that job
candidates require to join our company. If we fail to attract new personnel or fail to retain and
motivate our current personnel, our business plan and future growth prospects could be severely
harmed.
If we are unable to protect our intellectual property rights, we would be unable to protect our
technology and our brand.
If we fail to protect our intellectual property rights adequately, our competitors could gain
access to our technology and our business could be harmed. We rely on trade secret, copyright and
trademark laws, and confidentiality and assignment of invention agreements with employees and third
parties, all of which offer only limited protection. The steps we have taken to protect our
intellectual property might not prevent misappropriation of our proprietary rights. We have three
issued patents and eleven patent applications pending in the United States. Our issued patents and
any patents issued in the future may not provide us with any competitive advantages or may be
successfully challenged by third parties. Furthermore, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights in other countries are
uncertain and might afford little or no effective protection of our proprietary technology.
Consequently, we could be unable to prevent our intellectual property rights from being exploited
abroad, which could diminish international sales or require costly efforts to protect our
technology. Policing the unauthorized use of intellectual property rights is expensive, difficult
and, in some cases, impossible. Litigation could be necessary to enforce or defend our
intellectual property rights, to protect our trade secrets, or to determine the validity and scope
of the proprietary rights of others. Any such litigation could result in substantial costs and
diversion of management resources, either of which could harm our business. Accordingly, despite
our efforts, we might not be able to prevent third parties from infringing upon or misappropriating
our intellectual property.
We are subject to risks associated with outsourcing services to third parties, and failure to
manage those risks could adversely affect our business and operating results.
We contract with several third-party vendors that provide services to us or to whom we delegate
selected functions. These third-party vendors supplement our internal engineering efforts and
off-hours application support. Our arrangements with these third-party vendors may make our
operations vulnerable if the third parties fail to satisfy their obligations to us:
| The failure of a third-party vendor to provide high-quality services that conform to required specifications or contractual arrangements could impair our ability to enhance our PCC solutions or to develop new solutions, could create exposure for non-compliance with our contractual commitments to our clients, or could otherwise adversely affect our business and operating results. In particular, a client may impose specific requirements on us, such as an obligation to provide our PCC solutions using only personnel in the United States, with which it may be difficult or impossible for a third-party vendor to comply or for which we may be unable to monitor compliance. | ||
| If a third-party vendor fails to maintain and protect the security and confidentiality of data to which it has access, we could be exposed to lawsuits or damage claims that, if upheld, could materially and adversely affect our profitability or we could be subject to substantial regulatory fines or other penalties. |
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| If a third-party vendor fails to comply with other applicable regulatory requirements, we may be held liable for the vendors failures or violations. We cannot assure you that our third-party vendors are, or will be, in full compliance with all applicable laws and regulations at all times or that our third-party vendors will be able to comply with any future laws and regulations. |
Our third-party vendor arrangements could be adversely impacted by changes in a vendors operations
or financial condition or other matters outside of our control. There is no assurance that our
third-party vendors will continue to provide services to us or that they will renew or not
terminate their arrangements with us. Any interruption in their services could adversely affect
our operations unless and until we can identify a new vendor or replace an existing vendors
services with internal resources at additional cost.
Our product development efforts could be constrained by the intellectual property of others, and we
could be subject to claims of intellectual property infringement, which could be costly and
time-consuming.
The customer communications industry and the telecommunications industry are characterized by the
existence of a large number of patents, trademarks and copyrights, and by frequent litigation based
upon allegations of infringement or other violations of intellectual property rights. We have in
the past been subject to litigation, now concluded, with a third party that alleged that our
service violated the third partys intellectual property rights. As we seek to extend and expand
our service, we could be constrained by the intellectual property rights of others.
We might not prevail in any future intellectual property infringement litigation given the complex
technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit,
could be time-consuming and distracting to management, result in costly litigation or settlement,
cause product development delays, or require us to enter into royalty or licensing agreements. If
our service violates any third-party proprietary rights, we could be required to re-engineer our
platform or seek to obtain licenses from third parties, which might not be available on reasonable
terms or at all. Any efforts to re-engineer our service, obtain licenses from third parties on
favorable terms or license a substitute technology might not be successful and, in any case, might
substantially increase our costs and harm our business, financial condition and operating results.
Further, our platform incorporates open source software components that are licensed to us under
various public domain licenses. While we believe we have complied with our obligations under the
various applicable licenses for open source software that we use, there is little or no legal
precedent governing the interpretation of many of the terms of certain of these licenses and
therefore the potential impact of such terms on our business is somewhat unknown.
Our platform relies on technology licensed from third parties, and our inability to maintain
licenses of this technology on similar terms or errors in the licensed technology could result in
increased costs or impair the implementation or functionality of our on-demand service, which would
adversely affect our business and operating results.
Our multi-tenant customer communication platform relies on technology licensed from third-party
providers. For example, we use the Apache web server, the Oracle WebLogic application server, the
JBoss Application server, Nuance Communications text-to-speech and automated speech recognition
software, the Oracle database, and the MySQL database. We anticipate that we will need to continue
to license technology from third parties in the future. There might not always be commercially
reasonable software alternatives to the third-party software that we currently license. Any such
software alternatives could be more difficult or costly to replace than the third-party software we
currently license, and integration of that software into our platform could require significant
work and substantial time and resources. Any undetected errors in the software we license could
prevent the implementation of our on-demand service, impair the functionality of our service, delay
or prevent the release of new features or offerings, and injure our reputation. Our use of
additional or alternative third-party software would require us to enter into license agreements
with third parties, which might not be available on commercially reasonable terms or at all.
We have in the past and may in the future enter into acquisitions; these acquisitions may be
difficult to integrate, disrupt our business, dilute stockholder value or divert management
attention.
We seek to identify and pursue acquisitions of businesses, technologies, and products that will
complement our existing operations. For example, in 2008 we acquired substantially all of the
assets of Mobile Collect, a privately held company that provided text messaging and mobile
communications solutions and in 2011 we acquired key assets of SmartReply, a mobile marketing
company located in Irvine, California. We cannot assure you that any acquisition we make in the
future will provide us with the benefits we anticipated in entering into the transaction.
Acquisitions are typically accompanied by a number of risks, including:
| difficulties in integrating the operations and personnel of the acquired companies; | ||
| maintenance of acceptable standards, controls, procedures and policies; | ||
| potential disruption of ongoing business and distraction of management; | ||
| impairment of relationships with employees and clients as a result of any integration of new management and other personnel; |
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| inability to maintain relationships with suppliers and clients of the acquired business; | ||
| difficulties in incorporating acquired technology and rights into our service and platform; | ||
| unexpected expenses resulting from the acquisition; | ||
| potential unknown liabilities associated with acquired businesses; and | ||
| unanticipated expenses related to acquired technology and its integration into our existing technology. |
We currently are seeking to migrate legacy SmartReply clients, many of which operate in the retail
industry, from SmartReplys mobile marketing solutions to our SoundBite Engage platform. We also
are integrating certain former SmartReply employees into our newly formed mobile services business
units. We acquired the SmartReply assets in order to broaden our client base, and we will be
unable to recognize the anticipated benefits of the acquisition if we are unable to transition
legacy SmartReply clients to our platform in a timely manner or if we fail to maintain and
incentivize the former SmartReply employees in a manner that enables us to add additional retail
clients. Moreover, challenges or difficulties in migrating or expanding the legacy SmartReply
client base may distract our managements attention from focusing on our other business operations
and may result in our recognizing a lower level of revenues than we expected when we entered into
the transaction.
Acquisitions could result in the incurrence of debt, restructuring charges and large one-time
write-offs. Acquisitions could also result in goodwill and other intangible assets that are
subject to impairment tests, which might result in future impairment charges. Furthermore, if we
finance acquisitions by issuing convertible debt or equity securities, our existing stockholders
would be diluted and earnings per share could decrease.
From time to time, we might enter into negotiations for acquisitions that are not ultimately
consummated. Those negotiations could result in diversion of management time and significant
out-of-pocket costs. If we are unable to evaluate and execute acquisitions properly, we could fail
to achieve our anticipated level of growth and our business and operating results could be
adversely affected.
Industry consolidation could reduce the number of our clients and adversely affect our business.
Some of our significant clients from time to time may merge, consolidate or enter into alliances
with each other. The surviving entity or resulting alliance may subsequently decide to use a
different service provider or to manage customer contact campaigns internally. Alternatively, the
surviving entity or resulting alliance may elect to continue using our service, but its
strengthened financial position or enhanced leverage may lead to pricing pressure. Either of these
results could have a material adverse effect on our business, operating results and financial
condition. We may not be able to offset the effects of any such price reductions, and may not be
able to expand our client base to offset any revenue declines resulting from such a merger,
consolidation or alliance.
Our ability to use net operating loss carryforwards in the United States may be limited.
As of December 31, 2010, we had net operating loss carryforwards of $22.8 million for U.S. federal
tax purposes and an additional $6.1 million for state tax purposes. These carryforwards expire
between 2011 and 2030. To the extent available, we intend to use these net operating loss
carryforwards to reduce the corporate income tax liability associated with our operations. Section
382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net
operating loss carryforwards that may be used to offset taxable income when a corporation has
undergone significant changes in stock ownership. We experienced an ownership change for these
purposes in 2007, which resulted in an annual limitation amount of approximately $8.0 million on
the use of net operating loss carryforwards generated from November 29, 2001 through November 8,
2007. To the extent our use of net operating loss carryforwards is limited, our income could be
subject to corporate income tax earlier than it would if we were able to use net operating loss
carryforwards, which could result in lower profits.
If we are unable to raise capital when needed in the future, we may be unable to execute our growth
strategy, and if we succeed in raising capital, we may dilute investors percentage ownership of
our common stock or may subject our company to interest payment obligations and restrictive
covenants.
We may need to raise additional funds through public or private debt or equity financings in
order to:
| fund ongoing operations; | ||
| take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; | ||
| develop new services and products; and | ||
| respond to competitive pressures. |
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Any additional capital raised through the sale of equity may dilute investors percentage ownership
of our common stock. Capital raised through debt financing would require us to make periodic
interest payments and may impose potentially restrictive covenants on the conduct of our business.
Furthermore, additional financings may not be available on terms favorable to us, or at all. A
failure to obtain additional funding could prevent us from making expenditures that may be required
to grow or maintain our operations.
Risks Related to Regulation of Use of Our Service
We derive a significant portion of our revenues from the sale of our service for use in the
collections process, and our business and operating results could be substantially harmed if new
U.S. federal and state laws or regulatory interpretations in one or more jurisdictions either make
our service unavailable or less attractive for use in the collections process or expose us to
regulation as a debt collector.
Revenues from clients in the collections industry and large in-house, or first-party, collection
departments represented 75% of our revenues in the first nine months of 2011, 75% of our revenues
in 2010, 77% of our revenues in 2009 and 80% of our revenues in 2008. These clients use of our
service is affected by an array of complex federal and state laws and regulations. The U.S. Fair
Debt Collection Practices Act, or FDCPA, limits debt collection communications by clients in the
collection agencies industry, including third parties retained by creditors. For example, the
FDCPA prohibits abusive, deceptive and other improper debt collection practices, restricts the
timing and content of communications regarding a debt or a debtors location, and allows consumers
to opt out of receiving debt collection communications. In general, the FDCPA also prohibits the
use of debt collection communications to cause debtors to incur more debt. Many states impose
additional requirements on debt collection communications, including limits on the frequency of
debt collection calls, and some of those requirements may be more stringent than the comparable
federal requirements. Moreover, debt collection communications are subject to new regulations, as
well as changing regulatory interpretations that may be inconsistent among different jurisdictions.
For example, the Federal Communications Commission, or FCC, is considering modifying its rules to
require opt-in for all prerecorded calls made to mobile phones, which could limit our clients
ability to use our service to call a mobile phone for the purposes of collections without having
prior written consent from a customer. Our business, financial position and operating results
could be substantially harmed by the adoption or interpretation of U.S. federal or state laws or
regulations that make our service either unavailable or less attractive for debt collection
communications by existing and potential clients.
We provide our service for use by creditors and debt collectors, but we do not believe that we are
a debt collector for purposes of these U.S. federal or state regulations. An allegation by one or
more jurisdictions that we are a debt collector for purposes of their regulations could cause
existing or potential clients not to use our service, harm our reputation, subject us to
administrative proceedings, or result in our incurring significant legal fees and other costs. If
it were to be determined that we are a debt collector for purposes of the regulations of one or
more jurisdictions, we could be exposed to government enforcement actions and regulatory penalties
and would be subject to additional rules, including licensing and bonding requirements. The costs
of complying with these rules could be substantial, and we might be unable to continue to offer our
service for debt collection communications in those jurisdictions, which would have a material
adverse effect on our business, financial condition and operating results. In addition, if clients
use our service in violation of limits on the content, timing and frequency of their debt
collection communications, we could be subject to claims by consumers that result in costly legal
proceedings and that lead to civil damages, fines or other penalties.
We could be subject to significant penalties or damages if our clients violate U.S. federal or
state restrictions on the use of artificial or prerecorded messages or automatic telephone dialing
systems to contact wireless telephone numbers, and our business and operating results could be
substantially harmed if those restrictions make our service unavailable or less attractive.
Under the U.S. Telephone Consumer Protection Act, it is unlawful to use an automatic telephone
dialing system or an artificial or prerecorded message to contact any cellular or other wireless
telephone number, unless the recipient previously has consented to receiving this type of
communication. For example, the FCC is considering modifying its rules to require opt-in for all
autodialed or prerecorded calls made to mobile phones, which could limit our clients ability to
use our service to call a mobile phone for the purposes of information, customer care or
telemarketing without having prior written consent from a customer. Our service involves the use
of automatic telephone dialing systems, which includes capability for transmitting artificial and
prerecorded messages. Although our service are designed to enable a client to screen a contact
list to remove wireless telephone numbers, a client may determine that autodialed or prerecorded
communication to certain wireless telephone numbers are permitted because the recipients previously
have consented to receiving such communication. We cannot ensure that, in using our service for a
campaign, a client removes from its contact list the names of all persons who are associated with
wireless telephone numbers and who have not consented to receiving autodialed or prerecorded
communication, in particular, that the client properly interprets and applies the exemption for
recipients who have consented to receiving such communication. Many states have enacted
restrictions on using
automatic dialing systems and artificial and prerecorded messages to contact wireless telephone
numbers, and some of those state requirements may be more stringent than the comparable federal
requirements.
In May 2008, a federal district court in California held that the Telemarketing and Consumer Fraud
and Abuse Prevention Act prohibits any autodialed or prerecorded telephone call to a consumers
cell phone unless the consumer had specifically consented to such calls. The same provision of
such Act also applies to the sending of commercial text messages to cell phones. The ruling
overturned an earlier FCC interpretation that permitted autodialed and prerecorded calls to the
cell phone of any consumer who had
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provided the cell phone number in connection with requesting a
product or service. The ruling applied only in California and was subsequently overturned but, as
a result of the initial decision, some existing or potential clients may decide to limit their use
of our service to reach consumers on wireless numbers, which could materially adversely affect our
revenues and other operating results.
If clients use our service in a manner that violates any of these governmental regulations, federal
or state authorities may seek to subject us to regulatory fines or other penalties, even if the
violation did not result from a failure of our service. If clients use our service to screen for
wireless telephone numbers and our screening mechanisms fail, we may be subject to regulatory fines
or other penalties as well as contractual claims by clients for damages, and our reputation may be
harmed.
Regulatory restrictions on automatic telephone dialing systems and prerecorded messages present
particular problems for businesses in the collection agencies industry. These third-party
collection agencies and debt buyers do not have direct relationships with the consumer debtors and
therefore typically do not have the ability to obtain from a debtor the consent required to permit
the use of autodialed or prerecorded messages in contacting a debtor at a wireless telephone
number. These businesses lack of a direct relationship with debtors also makes it more difficult
for them to evaluate whether a debtor has provided such consent. For example, a collection agency
frequently must evaluate whether past actions taken by a debtor, such as providing a cellular
telephone number in a loan application, constitute consent sufficient to permit the agency to
contact the debtor using autodialed or prerecorded messages. Moreover, a significant period of
time elapses between the time at which a loan is made and the time at which a collection agency or
debt buyer seeks to contact the debtor for repayment, which further complicates the determination
of whether the collection agency or debt buyer has the required consent to use an automatic
telephone dialing system or prerecorded messages. The difficulties encountered by these
third-party collection businesses are becoming increasingly problematic as the percentage of U.S.
consumers using cellular telephones continues to increase. If these third-party collection
businesses are unable to use an automatic telephone dialing system or prerecorded messages to
contact a substantial portion of their debtors, our service will be less useful to them. If our
clients in the collection agencies industry significantly decrease their use of our service, our
business, financial position and operating results would be substantially harmed.
We could be subject to penalties if we or our clients violate U.S. federal or state telemarketing
restrictions due to a failure of our service or otherwise, which could harm our financial position
and operating results.
The use of our service for marketing communications is affected by extensive federal and state
telemarketing regulation. The Telemarketing and Consumer Fraud and Abuse Prevention Act and
Telephone Consumer Protection Act, among other U.S. federal laws, empower both the Federal Trade
Commission, or FTC, and the FCC to regulate interstate telephone sales calling activities. The
FTCs Telemarketing Sales Rule and analogous FCC rules require us to, for example, transmit Caller
ID information, disclose certain information to call recipients, and retain certain business
records. FTC and FCC rules proscribe misrepresentations, prohibit the abandonment of telemarketing
calls and limit the timing of calls to consumers. Both the FTC and FCC also prohibit telemarketing
calls to persons who have placed their numbers on the national Do-Not-Call Registry, except for
calls made with an existing business relationship, or EBR, or subject to other limited exceptions.
If we fail to comply with applicable FTC and FCC telemarketing regulations, we may be subject to
substantial regulatory fines or other penalties as well as contractual claims by clients for
damages, and our reputation may be harmed. The FTCs Telemarketing Sales Rule, for example,
imposes fines of up to $16,000 per violation. The FCC may also impose forfeitures of up to $16,000
per violation of its telemarketing rules. If clients use our service in a manner that violates any
of these telemarketing regulations, the FTC or FCC may seek to subject us to regulatory fines or
other penalties, even if the violation did not result from a failure of our service.
In addition, in 2008 the FTC adopted an amendment to the Telemarketing Sales Rule requiring that
express written consent be obtained for all pre-recorded sales calls that are delivered as of
September 1, 2009. Thus, organizations that attempt to sell goods or services through the use of
prerecorded messages will need to take the extra step to obtain opt-in from their consumers
before pre-recorded sales calls can be delivered, even with respect to consumers with whom the
organization has an EBR. We cannot ensure that, in using our service for a campaign, a client will
obtain appropriate opt-in authorization before placing prerecorded telemarketing calls or that
the client properly interprets and applies the opt-in requirement. If clients use our service to
place unauthorized calls or in a manner that otherwise violates FTC or FCC restrictions on
prerecorded telemarketing calls, U.S. federal or state authorities may seek to subject us to
substantial regulatory fines or other penalties, even if the violation did not result from a
failure of our screening mechanisms.
Many states have enacted prohibitions or restrictions on telemarketing calls into their states,
specifically covering the use of automatic dialing system and predictive dialing techniques. Some
of those state requirements are more stringent than the comparable federal requirements. If
clients use our service in a manner that violates any of these telemarketing regulations, state
authorities may seek to subject us to regulatory fines or other penalties, even if the violation
did not result from a failure of our service.
To the extent that our service is used to send text or email messages, our clients will be, and we
may be, affected by regulatory requirements in the United States. Organizations may determine not
to use these channels because of prior consent, or opt-in, requirements or other regulatory
restrictions, which could harm our future business growth.
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Our failure to comply with numerous and overlapping information security and privacy requirements
could subject us to fines and other penalties as well as claims by our clients for damages, any of
which could harm our reputation and business.
Our collection, use and disclosure of personal information are affected by numerous privacy,
security and data protection regulations. We are subject to the Gramm-Leach-Bliley Privacy Act
when we receive nonpublic personal information from clients that are treated as financial
institutions under those rules. These rules restrict disclosures of consumer information and limit
uses of such information to certain purposes that are disclosed to consumers. The related
Gramm-Leach-Bliley Safeguards Rule requires our financial institution clients to impose
administrative, technical and physical data security measures in their contracts with us.
Compliance with these contractual requirements can be costly, and our failure to satisfy these
requirements could lead to regulatory penalties or contractual claims by clients for damages.
In some instances our service requires us to receive consumer information that is protected by the
Fair Credit Reporting Act, which defines permissible uses of consumer information furnished to or
obtained from consumer reporting agencies. We generally rely on our clients assurances that any
such information is requested and used for permissible purposes, but we cannot be certain that our
clients comply with these restrictions. We could incur costs or could be subject to fines or other
penalties if the FTC determines that we have mishandled protected information.
Many jurisdictions, including the majority of states, have data security laws including data
security breach notification laws. When our clients operate in industries that have specialized
data privacy and security requirements, they may be subject to additional data protection
restrictions. For example, the federal Health Insurance Portability and Accountability Act, or
HIPAA, regulates the maintenance, use and disclosure of personally identifiable health information
by certain health care-related entities. States may adopt privacy and security regulations that
are more stringent than federal rules, and we may be required by such regulations to establish
comprehensive data security programs that could be costly. If we experience a breach of data
security, we could be subject to costly legal proceedings that could lead to civil damages, fines
or other penalties. We or our clients could be required to report such breaches to affected
consumers or regulatory authorities, leading to disclosures that could damage our reputation or
harm our business, financial position and operating results.
Since 2007 we have been certified as compliant with the Payment Card Industry, or PCI, Data
Security Standard, which mandates a set of comprehensive requirements for protecting payment
account data. Our continuing PCI compliance is essential for many of our PCC offerings, such as
fully-automated payment transactions and payment authorizations, and is particularly important for
financial institutions, credit card issuers and retailers. We must seek and receive certification
of PCI compliance on an annual basis. PCI compliance measures are rigorous and subject to change,
and our implementation of new PCC platform technology and solutions could adversely affect our
ability to be re-certified. As a result, we cannot assure you that we will be able to maintain our
certification for PCI compliance. Our loss of PCI certification could make our PCC solutions less
attractive to potential customers, particularly those in the financial and retail industries, which
in turn could have an adverse effect on our revenue and other operating results.
We may record certain of our calls for quality assurance, training or other purposes. Many states
require both parties to consent to such recording, and may adopt inconsistent standards defining
what type of consent is required. Violations of these rules could subject us to fines or other
penalties, criminal liability, or claims by clients for damages, any of which could hurt our
reputation or harm our business, financial position and operating results.
It may be impossible for us to comply with the different data protection regulations that affect us
in different jurisdictions. For example, the USA PATRIOT Act provides U.S. law enforcement
authorities certain rights to obtain personal information in the control of U.S. persons and
entities without notifying the affected individuals. Some foreign laws, including some in the
European Union, prohibit such disclosures. Such conflicts could subject us and clients to costs,
liabilities or negative publicity that could impair our ability to expand our operations into some
countries and therefore limit our future growth.
When using our service for text messaging, companies provide for the use of mobile termination
text messages, which are transmitted automatically when a company receives a text message
indicating that the sender wishes to opt out of further text communications from the company. A
mobile termination text message confirms that the company received the opt-out message and will not
send any additional text messages. The transmission of mobile termination text messages is
identified as a best practice in the U.S. Consumer Best Practices Manual of the Mobile Marketing
Association, a leading global trade association, and is required by the terms of our agreement with
our data aggregators. Over the past several months, class action litigation has been initiated
against a number of banks and retailers, including some of our clients, alleging that mobile
termination text messages violate the U.S. Telephone Consumer Protection Act, which seeks to
protect the privacy interests of residential telephone subscribers. On October 21,
2011, we received a notice from one of our clients requesting indemnification in connection with a
class action initiated against the client based in part on mobile termination text messages. We
are investigating this matter to evaluate the extent, if any, to which we are required to indemnify
the client for damages, losses and fees resulting from the lawsuit. At this time it is not
possible for us to estimate the amount, if any, for which we may be responsible under our
indemnification obligations to this client or our potential exposure to any other current or future
class action litigation launched in relation to mobile termination text messages, but it is
possible that such an amount may be substantial.
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The expansion of our business into international markets requires us to comply with additional debt
collection, telemarketing, data privacy or similar regulations, which may make it costly or
difficult to operate in these markets.
Although historically we have targeted substantially all of our sales and marketing efforts
principally to organizations located in the United States, more recently we have begun focusing
more resources on organizations located in Europe. In April 2010, for example, we formed a
subsidiary under UK law to target businesses located in the United Kingdom. Countries other than
the United States have laws and regulations governing debt collection, telemarketing, data privacy
or other communications activities comparable in purpose to the U.S. and state laws and regulations
described above. Compliance with these requirements may be costly and time consuming, and may
limit our ability to operate successfully in one or more foreign jurisdictions.
Many of the regulations governing our activities in the European Union result from EU legislation
on privacy and data protection. As a result, the principal lawmakers for our purposes are European
institutions the European Commission, the European Parliament and the Council of Ministers. We
take into account developments in the European Union as well as developments in the United Kingdom.
Because our primary international business is driven from the United Kingdom, our regulatory due
diligence to date has been focused on this member State. In terms of enforcement, the UK
regulators of primary importance to us are:
| Ofcom, the independent regulator and competition authority for the UK communications industry; | ||
| the Information Commissioner, an independent authority whose role is to uphold information rights in the public interest, promoting openness by public bodies and data privacy for individuals; and | ||
| the Office of Fair Trading, an independent authority that enforces consumer protection and competition laws and reviews proposed mergers. |
The Communications Act of 2003 gives Ofcom the power to issue and enforce notifications when it has
reasonable grounds to believe a person has persistently misused an electronic communications
network or service in such a manner, or otherwise engage in conduct that has either the effect, or
likely effect, of causing another person unnecessarily to suffer annoyance, inconvenience or
anxiety. The other sector-specific legislation governing our UK operations consists of The Privacy
and Electronic Communications (EC Directive) (Amendment) Regulations (2003) as amended in 2011 to
implement the new e-privacy EU Directive. These regulations contain marketing rules governing
businesses that send marketing and advertising by electronic means such as telephone, fax, email,
text message and picture (including video) message and by using an automated calling system. These
regulations also cover related areas such as telephone directories, traffic and location data, and
the use of cookies.
Risks Related to Ownership of Our Common Stock
If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that equity
research analysts publish about our company and business. The price of our common stock could
decline if one or more equity research analysts downgrade our common stock or if those analysts
issue other unfavorable commentary or cease publishing reports about our company and business.
Future sales of our common stock by existing stockholders could cause our stock price to decline.
If our existing stockholders sell substantial amounts of our common stock in the public market, the
market price of our common stock could decrease significantly. The perception in the public market
that our stockholders might sell shares of common stock could also depress the market price of our
common stock. The market price of shares of our common stock could drop significantly if our
officers, directors or other stockholders decide to sell shares of our common stock into the
market.
Our directors, executive officers and their affiliated entities will continue to have substantial
control over us and could limit the ability of other stockholders to influence the outcome of key
transactions, including changes of control.
As of September 30, 2011, our executive officers and directors and their affiliated entities, in
the aggregate, beneficially owned 45% of our common stock. In particular, affiliates of North
Bridge Ventures Partners, including James A. Goldstein, one of our directors,
in the aggregate, beneficially owned 29% of our common stock. Our executive officers, directors
and their affiliated entities, if acting together, are able to control or significantly influence
all matters requiring approval by our stockholders, including the election of directors and the
approval of mergers or other significant corporate transactions. These stockholders may have
interests that differ from those of other investors, and they might vote in a way with which other
investors disagree. The concentration of ownership of our common stock could have the effect of
delaying, preventing, or deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as part of a sale of our
company, and could negatively affect the market price of our common stock.
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Our corporate documents and Delaware law make a takeover of our company more difficult, which could
prevent certain changes in control and limit the market price of our common stock.
Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions
that could enable our management to resist a takeover of our company. These provisions could
discourage, delay, or prevent a change in the control of our company or a change in our management.
They could also discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. The existence of these provisions could limit the
price that investors are willing to pay in the future for shares of our common stock. Some
provisions in our charter and by-laws could deter third parties from acquiring us, which could
limit the market price of our common stock.
We do not intend to pay dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our common stock. We currently intend to
retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Accordingly, investors are not likely to receive any dividends on their common stock in the
foreseeable future, and their ability to achieve a return on their investment will therefore depend
on appreciation in the price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information about purchases of our common stock that were made by us
during the quarter ended September 30, 2011.
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares (or Units) | Value) of Shares | |||||||||||||||
Purchased as Part | (or Units) that May | |||||||||||||||
Total Number of | of Publicly | Yet Be Purchased | ||||||||||||||
Shares (or Units) | Average Price Paid | Announced Plans or | Under the Plans or | |||||||||||||
Period | Purchased | per Share (or Unit) | Programs | Programs | ||||||||||||
July 1 to 31, 2011 |
| $ | | | ||||||||||||
August 1, to 31, 2011 |
| | | |||||||||||||
September 1 to 30, 2011 |
12,594 | 2.42 | 12,594 | |||||||||||||
Total |
12,594 | $ | 2.42 | 12,594 | $ | 719,496 | ||||||||||
Item 6. Exhibits
Exhibit | ||
Number | Description of Exhibit | |
31.1
|
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 | |
101.INS#
|
XBRL Instance Document | |
101.SCH#
|
XBRL Taxonomy Extension Schema Document | |
101.CAL#
|
XBRL Taxonomy Calculation Linkbase Document | |
101.LAB#
|
XBRL Taxonomy Label Linkbase Document | |
101.PRE#
|
XBRL Taxonomy Extension Presentation Linkbase Document |
# | Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections. |
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Table of Contents
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.
SoundBite Communications, Inc. |
||||
Date: November 7, 2011 | By: | /s/ James A. Milton | ||
James A. Milton | ||||
President and Chief Executive Officer | ||||
Date: November 7, 2011 | By: | /s/ Robert C. Leahy | ||
Robert C. Leahy | ||||
Chief Operating Officer and Chief Financial Officer (Principal Financial and Chief Accounting Officer) |
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Table of Contents
EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibit | |
31.1
|
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 | |
101.INS#
|
XBRL Instance Document | |
101.SCH#
|
XBRL Taxonomy Extension Schema Document | |
101.CAL#
|
XBRL Taxonomy Calculation Linkbase Document | |
101.LAB#
|
XBRL Taxonomy Label Linkbase Document | |
101.PRE#
|
XBRL Taxonomy Extension Presentation Linkbase Document |
# | Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections. |
33