Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-51644

Vocus, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		58-1806705
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12051 Indian Creek Court

Beltsville, Maryland 20705

(301) 459-2590

(Address including zip code, and telephone number,

including area code, of principal executive offices)

4296 Forbes Boulevard, Lanham, Maryland 20706

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ        No  ¨

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  ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  ¨		Accelerated Filer  þ		Non-Accelerated Filer  ¨		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  ¨        No  þ

As of November 1, 2011, 20,008,317 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 

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Table of Contents

TABLE OF CONTENTS

 

				Page
PART I — FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements			3
		Consolidated Balance Sheets as of December 31, 2010 and September 30, 2011			3
		Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2011			4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2011			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			26
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 6.		Exhibits			41
SIGNATURES					42

 

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Table of Contents

PART I

 

Item 1.

Consolidated Financial Statements

Vocus, Inc. and Subsidiaries

Consolidated Balance Sheets

 

		December 31, 2010				September 30, 2011
						(Unaudited)
		(Dollars in thousands, except per share data)
Current assets:
Cash and cash equivalents		$	94,918			$	101,428
Short-term investments			5,496				5,207
Accounts receivable, net of allowance for doubtful accounts of $182 and $310 at December 31, 2010 and September 30, 2011, respectively			20,846				16,774
Current portion of deferred income taxes			365				365
Prepaid expenses and other current assets			3,790				2,044
Total current assets			125,415				125,818
Property, equipment and software, net			6,183				18,209
Intangible assets, net			7,534				5,704
Goodwill			26,278				38,306
Deferred income taxes, net of current portion			8,314				10,328
Other assets			156				1,112
Total assets		$	173,880			$	199,477
Current liabilities:
Accounts payable		$	652			$	2,479
Accrued compensation			3,375				3,092
Accrued expenses			5,429				9,328
Current portion of notes payable and capital lease obligations			152				184
Current portion of deferred revenue			55,722				54,460
Total current liabilities			65,330				69,543
Notes payable and capital lease obligations, net of current portion			192				895
Other liabilities			2,005				11,380
Deferred income taxes, net of current portion			1,065				980
Deferred revenue, net of current portion			854				730
Total liabilities			69,446				83,528
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2010 and September 30, 2011			—				—
Common stock, $0.01 par value, 90,000,000 shares authorized; 20,374,267 and 21,746,944 shares issued at December 31, 2010 and September 30, 2011, respectively; 17,982,425 and 18,906,869 shares outstanding at December 31, 2010 and September 30, 2011, respectively			204				217
Additional paid-in capital			166,985				197,338
Treasury stock, 2,391,842 and 2,840,075 shares at December 31, 2010 and September 30, 2011, respectively at cost			(28,417	)			(44,525	)
Accumulated other comprehensive loss			(175	)			(93	)
Accumulated deficit			(34,163	)			(36,988	)
Total stockholders’ equity			104,434				115,949
Total liabilities and stockholders’ equity		$	173,880			$	199,477

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Consolidated Statements of Operations

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2011				2010				2011
		(Unaudited)
		(Dollars in thousands, except per share data)
Revenues		$	24,701			$	28,886			$	70,753			$	84,355
Cost of revenues			4,906				5,367				14,064				16,120
Gross profit			19,795				23,519				56,689				68,235
Operating expenses:
Sales and marketing			12,341				14,181				36,236				42,422
Research and development			1,561				1,773				4,216				5,588
General and administrative			6,230				7,437				17,257				23,162
Amortization of intangible assets			620				442				1,682				1,693
Total operating expenses			20,752				23,833				59,391				72,865
Loss from operations			(957	)			(314	)			(2,702	)			(4,630	)
Other income (expense):
Interest and other income			52				10				130				249
Interest expense			(10	)			(5	)			(30	)			(20	)
Total other income (expense)			42				5				100				229
Loss before provision (benefit) for income taxes			(915	)			(309	)			(2,602	)			(4,401	)
Provision (benefit) for income taxes			(173	)			(97	)			676				(1,576	)
Net loss		$	(742	)		$	(212	)		$	(3,278	)		$	(2,825	)
Net loss per share:
Basic and diluted		$	(0.04	)		$	(0.01	)		$	(0.18	)		$	(0.15	)
Weighted average shares outstanding used in computing per share amounts:
Basic and diluted			17,836,960				19,289,740				17,950,905				18,745,508

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

		Nine Months Ended September 30,
		2010				2011
		(Unaudited)
		(Dollars in thousands)
Cash flows from operating activities:
Net loss		$	(3,278	)		$	(2,825	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software			1,377				1,779
Amortization of intangible assets			1,773				2,055
Loss on disposal of assets			—				68
Impairment of long-lived assets			—				100
Stock-based compensation			9,557				11,409
Adjustment to fair value of accrued contingent consideration			481				1,122
Provision for doubtful accounts			47				379
Deferred income taxes			(718	)			(2,178	)
Excess tax benefits from equity awards			(727	)			—
Payments of contingent consideration for business acquisitions in excess of fair value on acquisition date			—				(147	)
Changes in operating assets and liabilities:
Accounts receivable			5,803				3,738
Prepaid expenses and other current assets			(337	)			1,692
Other assets			(5	)			(177	)
Accounts payable			(538	)			1,814
Accrued compensation			(44	)			(291	)
Accrued expenses			821				1,886
Deferred revenue			(2,103	)			(1,494	)
Other liabilities			(61	)			5,886
Net cash provided by operating activities			12,048				24,816
Cash flows from investing activities:
Business acquisitions, net of cash acquired			(8,921	)			(6,947	)
Purchases of available-for-sale securities			(5,537	)			(16,094	)
Maturities of available-for-sale securities			18,695				16,384
Purchases of property, equipment and software			(1,393	)			(13,300	)
Proceeds from disposal of assets			—				14
Software development costs			(414	)			(230	)
Net cash provided by (used in) investing activities			2,430				(20,173	)
Cash flows from financing activities:
Repurchases of common stock			(13,503	)			(16,108	)
Proceeds from exercises of stock options			386				18,936
Excess tax benefits from equity awards			727				—
Proceeds from notes payable			—				440
Payments of contingent consideration for business acquisitions			—				(1,289	)
Payments on notes payable and capital lease obligations			(260	)			(139	)
Net cash provided by (used in) financing activities			(12,650	)			1,840
Effect of exchange rate changes on cash and cash equivalents			(152	)			27
Net increase in cash and cash equivalents			1,676				6,510
Cash and cash equivalents, beginning of period			85,817				94,918
Cash and cash equivalents, end of period		$	87,493			$	101,428
Supplemental disclosure of non-cash financing activities:
Assets acquired under capital leases and other financing arrangements		$	11			$	421

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

1.	Business Description

Organization and Description of Business

Vocus, Inc. (Vocus or the Company) is a provider of cloud-based marketing and PR software that allows organizations of all sizes to reach and influence buyers across social networks, online and through the media. The Company provides a suite of software for social media, content marketing and media relations, creating a comprehensive solution for its customers to generate awareness and build their reputation. The Company is headquartered in Beltsville, Maryland with sales and other offices in the United States, Europe, Asia and Morocco.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011.

Certain changes to prior year balance sheet amounts have been made in accordance with the accounting for business combinations to reflect adjustments made during the measurement period to preliminary amounts recorded for the estimated fair value of acquired net assets of BDL Media Ltd. (BDL Media) on April 16, 2010. Refer to Note 6 for additional information.

Principles of Consolidation

The consolidated financial statements include the accounts of Vocus, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Investments

The Company considers all highly liquid investments with maturity dates of three months or less at the time of purchase to be cash equivalents.

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

Management determines the appropriate classification of investments at the time of purchase and evaluates such determination as of each balance sheet date. The Company’s investments were classified as available-for-sale securities and were stated at fair value at December 31, 2010 and September 30, 2011. Realized gains and losses are included in other income (expense) based on the specific identification method. Realized gains and losses for the three and nine months ended September 30, 2010 and 2011 were not material. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income (loss), net of tax. As of December 31, 2010 and September 30, 2011, the net unrealized losses on available-for-sale securities were not material. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at September 30, 2011.

Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value, including cash equivalents, available-for-sale securities and accrued contingent consideration pursuant to a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

 

Level 1		—		Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2		—		Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3		—		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Business Combinations

The Company has completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. The Company recognizes all of the assets acquired, liabilities assumed and contingent consideration at their fair values based on significant estimates and judgments on the acquisition date. The Company refines those estimates that are provisional, as necessary, during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which new information may be gathered about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are recorded to the consolidated statements of operations. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. The Company determines the useful lives for definite-lived tangible and intangible assets and liabilities assumed using estimates and judgments.

Foreign Currency and Operations

The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is their local currency. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

adjustments are recognized in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized and unrealized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations. Amounts resulting from foreign currency transactions were not material for the three and nine months ended September 30, 2010 and 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) includes the Company’s net income (loss) as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. Other comprehensive income (loss) includes foreign currency translation adjustments and net unrealized gains and losses on investments classified as available-for-sale securities. For the three and nine months ended September 30, 2010 and 2011, the comprehensive income (loss) was determined as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2011				2010				2011
Net loss		$	(742	)		$	(212	)		$	(3,278	)		$	(2,825	)
Other comprehensive income (loss):
Change in foreign currency translation adjustment			868				(559	)			(279	)			82
Net change in unrealized net gain or loss on available-for-sale investments, net of tax			(1	)			(1	)			(6	)			—
Total comprehensive income (loss)		$	125			$	(772	)		$	(3,563	)		$	(2,743	)

Segment Data

The Company’s chief operating decision maker manages the Company’s operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company reports on one segment of its business.

Revenue Recognition

The Company derives its revenues from subscription arrangements and related services permitting customers to access and utilize the Company’s cloud-based software. The Company also derives revenues from news distribution services sold separately from its subscription arrangements. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable.

Subscription agreements generally contain multiple service elements and deliverables. These elements generally include access to the Company’s cloud-based software, hosting services, content and content updates, customer support and may also include news distribution services and professional services. The Company has determined that professional services are not essential to the functionality of the subscription software. Subscription agreements do not provide customers the right to take possession of the software at any time.

Prior to January 1, 2011, the Company determined that it did not have objective and reliable evidence of fair value of the undelivered elements in its arrangements. As a result, the Company considered all elements in its multiple element subscription arrangements as a single unit of accounting and recognized all revenue from its multiple element subscription arrangements ratably over the term of the subscription. The subscription term commences on the earlier of the start date specified in the subscription arrangement or the date access to the software is provided to the customer. Professional services sold separately from a subscription arrangement were

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

recognized as the services were performed. The Company’s subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if the Company materially breaches its obligations under the agreement.

In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting guidance for multiple-deliverable revenue arrangements to:

 

•

provide updates on whether multiple deliverables exist, how the deliverables in an arrangement should be separated and how the consideration should be allocated;

 

•

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

 

•

require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if it does not have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price.

On January 1, 2011, the Company adopted the provisions of the new accounting guidance for multiple-deliverable revenue arrangements entered into or materially modified on or after January 1, 2011 that contain subscription services sold with news distribution services or professional services on a prospective basis and determined the adoption did not have a material impact on its financial statements. The Company’s separate units of accounting consist of its subscription services, news distribution services and professional services. The Company allocates consideration to each deliverable in multiple element arrangements based on the relative selling prices and recognizes revenue as the respective services are delivered or performed.

The Company established VSOE of selling price for certain of its news distribution services as the selling price for a substantial majority of stand-alone sales falls within a narrow range around the median selling price. The Company determined TPE of selling price is not available for any of its services due to differences in the features and functionality compared to competitor’s products. The Company determined ESP for the remaining deliverables by analyzing factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

The Company also distributes individual news releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. The Company recognizes revenue on a per-transaction basis when the press releases are made available to the public.

Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenues.

Sales Commissions

Sales commissions are expensed when a subscription agreement is executed by the customer.

Stock-Based Compensation

The Company’s share-based arrangements include stock option awards and restricted stock awards. The Company recognizes compensation expense for its equity awards on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest and applies estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. The Company uses the quoted closing market price of its common stock on the grant date to measure the fair value of restricted stock awards and the Black-Scholes option pricing model to measure the fair value of stock option awards. The Company became a public entity in December 2005, and therefore has a limited history of

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

volatility. Accordingly, the expected volatility is based on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The historical volatilities of these entities have not differed significantly from the Company’s historical volatility. The expected term of option awards granted through March 31, 2011 was calculated using the simplified method, which is equal to the midpoint between the vesting date and the end of the contractual term of the award. Based on stock option exercise activity through the three months ended June 30, 2011, the Company determined that it had sufficient historical exercise data to estimate the expected term for option awards using a combination of its historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term for outstanding awards for all option awards granted after March 31, 2011. This change in estimate did not have a material impact on the Company’s financial statements. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero.

Income Taxes

Income taxes are determined utilizing the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions by recognizing and measuring tax benefits taken or expected to be taken on a tax return. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If the recognition threshold is met, only the portion of the tax benefit that is greater than 50 percent likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information) is recorded. The tax benefit that is not recorded is considered an unrecognized tax benefit. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. The Company files income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions. The Company is subject to U.S. federal tax, state and foreign tax examinations for years ranging from 2002 to 2010.

The Company’s effective tax rate differs from the U.S. Federal statutory rate primarily due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes and certain other non-deductible expenses. Additionally, in the nine months ended September 30, 2011, the Company recorded a tax benefit of $617,000 related to disqualifying dispositions of incentive stock options and federal and state tax credits.

Earnings Per Share

Basic net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Nonvested shares of restricted stock are not included in the computation of basic net income or loss per share until vested. The Company’s outstanding grants of restricted stock do not contain non-forfeitable dividend rights. Diluted net income or loss per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net income or loss per share includes the dilutive effect of nonvested shares of restricted stock.

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

For the three and nine months ended September 30, 2010 and 2011, the Company incurred net losses and, therefore, the effect of the Company’s outstanding stock options and nonvested shares of restricted stock was not included in the calculation of diluted loss per share as the effect would be anti-dilutive. Accordingly, basic and diluted net loss per share were identical. For the three and nine months ended September 30, 2010 and 2011, diluted earnings per share excluded 2,720,025 and 1,712,071 outstanding stock options, respectively, and 1,407,116 and 1,306,421 nonvested shares of restricted stock, respectively, as the result would be anti-dilutive.

Recent Accounting Pronouncements

In September 2011, the FASB issued additional guidance regarding the requirement to test goodwill for impairment on at least an annual basis. Existing guidance requires that the test be performed by quantitatively comparing the fair value of a reporting unit with its carrying amount, including goodwill (Step one). If the fair value of a reporting unit is less than its carrying amount, then Step two of the test must be performed to measure the amount of the impairment, if any. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, 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 impairment test. The guidance is effective for fiscal years, beginning after December 15, 2011 with early adoption permitted, and will be applied prospectively. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.

In June 2011, the FASB issued new guidance regarding the presentation of comprehensive income. The new guidance requires the presentation of the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in both net income and other comprehensive income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted, and will be applied retrospectively. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements. The updated guidance provides clarification on existing fair value measurement requirements, amends certain guidance primarily related to fair value measurements for financial instruments and requires enhanced disclosures about fair value measurements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted, and will be applied prospectively. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.

 

3.	Business Combinations

On February 24, 2011, the Company acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social), a provider of Facebook applications that enable users to create, manage and promote their business on Facebook. The Company expects that the acquisition of North Social will broaden its social media solution. The purchase price at the acquisition date consisted of approximately $7,000,000 in cash and $5,059,000 of contingent cash consideration for the achievement of certain financial milestones within the following 24 months. The contingent consideration could result in future payments of up to $18,000,000. The fair value of the contingent consideration was estimated using probability assessments of expected future cash flows over the period in which the obligation is to be settled and applied a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. During the three and

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

nine months ended September 30, 2011, the fair value of the contingent consideration was adjusted based on an updated assessment of the probability of achievement of the performance metrics and the discount factor reflecting the passage of time. The additional expense of $515,000 and $1,100,000 was included in general and administrative expenses in the consolidated statements of operations for three months and nine months ended September 30, 2011, respectively.

The Company recorded approximately $101,000 of identifiable intangible assets and $11,880,000 of goodwill that is deductible for tax purposes. Goodwill is primarily attributable to North Social’s knowledge of applications for Facebook and the opportunity to expand into the rapidly growing social media market. The acquisition was accounted for under the purchase method of accounting, and operating results are included in the Company’s consolidated financial statements from the date of acquisition. Acquisition-related costs associated with the acquisition were not material.

In connection with the acquisition, the Company deposited $700,000 of the purchase price into an escrow account as security for breaches of representations and warranties, covenants and certain other expressly enumerated matters by North Social and its shareholders. The amount is excluded from cash and cash equivalents as the deposit is restricted in nature and is included in other assets in the accompanying consolidated balance sheet at September 30, 2011.

 

4.	Cash Equivalents and Investments

The components of cash equivalents and investments at December 31, 2010 are as follows (in thousands):

 

		Cost				Unrealized								Fair Value
						Gains				Losses
Cash equivalents:
Money market funds		$	23,826			$	—			$	—			$	23,826
Commercial paper			31,294				—				—				31,294
Government-sponsored agency debt securities			5,199				—				—				5,199
Certificates of deposit			2,294				—				—				2,294
Short-term investments:
Government-sponsored agency debt securities			5,497				—				(1	)			5,496
Total		$	68,110			$	—			$	(1	)		$	68,109

The components of cash equivalents and investments at September 30, 2011 are as follows (in thousands):

 

		Cost				Unrealized								Fair Value
						Gains				Losses
Cash equivalents:
Money market funds		$	16,255			$	—			$	—			$	16,255
Commercial paper			26,737				—				—				26,737
Government-sponsored agency debt securities			2,850				—				—				2,850
Certificates of deposit			3,131				—				—				3,131
Short-term investments:
Government-sponsored agency debt securities			1,200				—				—				1,200
Commercial paper			3,506				1				—				3,507
Corporate notes and bonds			500			$	—				—			$	500
Total		$	54,179			$	1			$	—			$	54,180

Cash equivalents have original maturity dates of three months or less. Short-term investments have original maturity dates greater than three months but less than one year.

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

5.	Fair Value Measurements

The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis at September 30, 2011 are as follows (in thousands):

 

		Total				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	48,973			$	22,236			$	26,737			$	—
Short-term investments			5,207				1,700				3,507				—
Total assets measured at fair value		$	54,180			$	23,936			$	30,244			$	—
Liabilities:
Accrued contingent consideration		$	6,718			$	—				—			$	6,718
Total liabilities measured at fair value		$	6,718			$	—				—			$	6,718

Cash equivalents and investments are classified within Level 1 or Level 2 of the fair value hierarchy since they are valued using quoted market prices or alternative pricing sources that utilize market observable inputs.

Contingent consideration liabilities are classified as Level 3 of the fair value hierarchy since they are valued using unobservable inputs. The contingent consideration liability represents the estimated fair value of the additional cash consideration payable in connection with the acquisitions of BDL Media in 2010 and North Social in 2011 that is contingent upon the achievement of certain financial and performance milestones. The fair value was estimated using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. The change in the estimated fair value of contingent consideration is reported in general and administrative expenses in the consolidated statements of operations. At September 30, 2011, contingent consideration of $2,993,000 and $3,725,000 was included in accrued expenses and other liabilities in the consolidated balance sheet, respectively.

The changes in the fair value of the Company’s acquisition related contingent consideration for the nine months ended September 30, 2011, were as follows (in thousands):

 

Balance as of January 1, 2011		$	1,937
Acquisition date fair value measurement			5,059
Payment of contingent consideration			(1,436	)
Adjustments to fair value measurements			1,122
Effects of foreign currency translation			36
Balance as of September 30, 2011		$	6,718

 

6.	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2011, were as follows (in thousands):

 

Balance as of January 1, 2011		$	26,278
Goodwill acquired in connection with North Social			11,880
Effects of foreign currency translation			148
Balance as of September 30, 2011		$	38,306

During the nine months ended September 30, 2011, the Company adjusted certain December 31, 2010 balance sheet amounts for revisions to the BDL Media purchase price allocation based on information identified that existed at the acquisition date related to an uncertain tax position identified in connection with the

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

acquisition. The adjustments resulted in a decrease to goodwill of $617,000 and corresponding decreases to accrued expenses of $70,000 and other liabilities of $547,000.

Intangible assets at December 31, 2010 consisted of the following (dollars in thousands):

 

		Weighted- Average Amortization Period				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Customer relationships			6.0			$	7,231			$	(3,241	)		$	3,990
Trade names			6.9				4,325				(2,529	)			1,796
Agreements not-to-compete			5.0				3,913				(3,456	)			457
Purchased technology			3.9				1,431				(140	)			1,291
Total						$	16,900			$	(9,366	)		$	7,534

Intangible assets at September 30, 2011 consisted of the following (dollars in thousands):

 

		Weighted- Average Amortization Period				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Customer relationships			6.7			$	4,304			$	(945	)		$	3,359
Trade names			6.9				4,372				(3,015	)			1,357
Purchased technology			3.8				1,489				(501	)			988
Total						$	10,165			$	(4,461	)		$	5,704

The Company’s goodwill and intangible assets for certain of its foreign subsidiaries are recorded in their functional currency, which is their local currency, and therefore are subject to foreign currency translation adjustments.

Amortization expense of intangible assets for the three months ended September 30, 2010 and 2011 was $669,000 and $562,000, respectively. Amortization expense of intangible assets for the nine months ended September 30, 2010 and 2011 was $1,768,000 and $2,055,000, respectively. Future expected amortization of intangible assets at September 30, 2011 was as follows (in thousands):

 

Remainder of 2011		$	447
2012			1,765
2013			1,208
2014			851
2015			694
2016			579
Thereafter			160
Total		$	5,704

 

7.	Stockholders’ Equity

Common Stock Repurchases

In November 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $30,000,000 of the Company’s shares of common stock, and in August 2011 authorized up to an additional $30,000,000. The shares may be purchased from time to time in the open market. During the nine months ended September 30, 2010 and 2011, the Company purchased an aggregate of 831,773 and 643,410 shares of its common stock for $12,203,000 and $12,970,000, respectively. During the nine months ended September 30, 2010 and 2011, the Company also repurchased 86,908 and 125,483 shares of restricted stock that were withheld

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

from employees to satisfy the minimum statutory tax withholding obligations of $1,300,000 and $3,138,000, respectively, related to the taxable income recognized by these employees upon the vesting of their restricted stock awards.

 

8.	Stock-Based Compensation

The following table sets forth the stock-based compensation expense for equity awards recorded in the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2011 (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2011				2010				2011
Cost of revenues		$	318			$	359			$	1,248			$	1,217
Sales and marketing			954				908				2,368				3,204
Research and development			363				495				1,154				1,568
General and administration			1,649				1,724				4,787				5,420
Total		$	3,284			$	3,486			$	9,557			$	11,409

Stock Option Awards

The following weighted-average assumptions were used in calculating the fair value of stock options awards granted during the three and nine months ended September 30, 2010 and 2011:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2011				2010				2011
Stock price volatility			58	%			57	%			59	%			57	%
Expected term (years)			6.3				5.5				6.3				6.2
Risk-free interest rate			1.9	%			1.3	%			2.6	%			2.3	%
Dividend yield			0	%			0	%			0	%			0	%

The summary of stock option activity for the nine months ended September 30, 2011 is as follows:

 

		Number of Options				Weighted- Average Exercise Price per Share				Weighted- Average Contractual Term				Aggregate Intrinsic Value as of September 30, 2011
														(In thousands)
Balance outstanding at January 1, 2011			2,478,923			$	15.09
Granted			535,147				24.01
Exercised			(1,216,374	)			15.57
Forfeited or cancelled			(85,625	)			17.32
Balance outstanding at September 30, 2011			1,712,071				17.42				7.3			$	4,471
Options vested and expected to vest at September 30, 2011			1,651,224			$	17.29				7.3			$	4,431
Exercisable at September 30, 2011			666,397			$	13.03				4.7			$	3,550

The weighted-average grant date fair value of stock options granted during the three months ended September 30, 2010 and 2011 was $8.48 and $11.96, respectively. The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2010 and 2011 was $8.56 and $13.31, respectively. The fair value of stock options that vested during the three months ended September 30, 2010 and

 

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Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

 

2011 was $596,000 and $78,000, respectively. The fair value of options that vested during the nine months ended September 30, 2010 and 2011 was $3,013,000 and $4,292,000, respectively. As of September 30, 2011, $9,335,000 of total unrecognized stock-based compensation cost is related to nonvested stock option awards and is expected to be recognized over a weighted-average period of 3.0 years.

The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2010 and 2011 was $256,000 and $3,782,000, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2010 and 2011 was $408,000 and $15,502,000 respectively.

Restricted Stock Awards

The summary of restricted stock award activity for the nine months ended September 30, 2011 is as follows:

 

		Number of  Shares Underlying Stock Awards
Balance nonvested at January 1, 2011			1,418,731
Awarded			394,971
Vested			(476,963	)
Forfeited			(30,318	)
Balance nonvested at September 30, 2011			1,306,421

The Company did not grant restricted stock awards during the three months ended September 30, 2010. The weighted-average grant date fair value of restricted stock awards granted during the three months ended September 30, 2011 was $19.72. The weighted-average grant date fair value of restricted stock awards granted during the nine months ended September 30, 2010 and 2011 was $14.68 and $23.65, respectively.

As of September 30, 2011, $17,710,000 of total unrecognized stock-based compensation cost is related to nonvested shares of restricted stock and is expected to be recognized over a weighted-average period of 2.4 years.

 

9.	Commitments and Contingencies

Leases

On March 30, 2010, the Company signed a twelve year lease for approximately 93,000 square feet of office space in Beltsville, Maryland. The Company relocated its corporate headquarters to the leased premises in the third quarter of 2011. The aggregate minimum lease commitment at the inception of the lease was approximately $21,496,000. In addition, under the terms of the lease, the landlord reimbursed the Company approximately $6,417,000 for leasehold improvements which is recorded as a reduction in rent expense ratably over the terms of the occupancy.

The Company has various non-cancelable operating leases, primarily related to office real estate, that expire through 2023, including the office space in Beltsville, Maryland, and generally contain renewal options for up to five years. As of September 30, 2011, minimum required payments in future years under these leases are $572,000, $2,649,000, $2,692,000, $2,673,000, $2,425,000, and $15,021,000 in 2011, 2012, 2013, 2014, 2015, and thereafter, respectively.

Purchase Commitments

The Company has entered into agreements with various vendors in the ordinary course of business. As of September 30, 2011, minimum required payments in future years under these arrangements are $2,001,000, $3,007,000, $1,149,000, and $399,000 in 2011, 2012, 2013, and 2014 and thereafter, respectively.

 

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Litigation and Claims

The Company from time to time is subject to lawsuits, investigations and claims arising out of the ordinary course of business, including those related to commercial transactions, contracts, government regulation and employment matters. The Company is not currently subject to any material legal proceedings that, in its opinion, would have a material effect on the financial position, results of operations or cash flows of the Company.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2010.

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” “will,” “should,” “seeks” or other similar expressions. Forward-looking statements reflect our plans, expectations and beliefs, and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Item 1A of Part II.

Overview

We are a leading provider of cloud-based marketing and PR software that allows organizations of all sizes to reach and influence buyers across social networks, online and through the media. We provide a suite of software for social media, content marketing and media relations, creating a comprehensive solution for our customers to generate awareness and build their reputation. We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our cloud-based software.

We sell access to our cloud-based software primarily through our direct sales channel. As of September 30, 2011, we had 10,855 active subscription customers from a variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an annual active subscription and have not been suspended for non-payment.

We plan to continue the expansion of our customer base by expanding our direct distribution channels, expanding our international market penetration, penetrating the small business market and selectively pursuing strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and marketing, and expand our domestic and international selling and marketing activities, increase the number of locations where we conduct business and develop our operational and financial systems to manage a growing business. We also intend to seek to identify and acquire companies which would either expand our solution’s functionality, provide access to new customers or markets, or both.

On February 24, 2011, we acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social), a provider of Facebook applications that enable users to create, manage and promote their business on Facebook. We expect that the acquisition will broaden our social media solution. The purchase price at the acquisition date consisted of approximately $7.0 million cash paid at closing and $5.1 million of contingent consideration for the achievement of certain financial milestones within the following 24 months. The contingent consideration could result in future payments of up to $18.0 million. The fair value of the contingent consideration was estimated using probability assessments of expected future cash flows over the period in which the obligation is to be settled and applied a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. During the three and nine months ended September 30, 2011, the fair value of the contingent consideration was adjusted based on an updated assessment

 

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of the probability of achievement of the performance metrics and the discount factor reflecting the passage of time. The additional expense of $515,000 and $1.1 million was included in general and administrative expenses in the consolidated statements of operations for three months and nine months ended September 30, 2011, respectively.

As a result of the acquisition, we recorded $101,000 of identifiable intangible assets and $11.9 million of goodwill which is deductible for tax purposes. The operating results of North Social are included in the accompanying consolidated financial statements from the acquisition date. Acquisition related costs incurred for the acquisition were not material.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, hosting services, content and content updates, customer support and may also include news distribution services and professional services. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We separately invoice our customers in advance of their annual subscription, with payment terms that require our customers to pay us generally within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us within 30 days of invoice. Revenues from professional services have not been material to our business.

Additionally, we derive revenue on a per-transaction basis from our news distribution services. We generally receive payment in advance of the online distribution of the news release.

Cost of Revenues and Operating Expenses

Cost of Revenues.    Cost of revenues consists primarily of compensation for training, editorial and support personnel, acquisition, maintenance and amortization of the information database, hosting infrastructure, press release distribution, amortization of purchased technology from business combinations, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their public relations efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect, that in the remainder of 2011, cost of revenues will increase in absolute dollars but will remain flat as a percentage of revenues.

Sales and Marketing.    Sales and marketing expenses are our largest operating expense. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.

We plan to continue to invest in sales and marketing to add new customers, increase sales to our existing customers and increase sales of our online news release distribution services. Such investments will include

 

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adding sales personnel and expanding our marketing activities to build brand awareness and generate additional sales leads. We expect, that in the remainder of 2011, sales and marketing expenses will increase in absolute dollars but will remain flat as a percentage of revenues.

Research and Development.    Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted, on-demand model, we are able to provide our customers with a single, shared version of our most recent application. As a result, we do not have to maintain legacy versions of our software, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect, that in the remainder of 2011, research and development expenses will increase in absolute dollars but will remain flat as a percentage of revenues.

General and Administrative.    General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, including acquisition-related transaction costs, third-party payment processing and credit card fees, facilities rent, other corporate expenses, fair value adjustments to contingent consideration and allocated overhead. We expect, that in the remainder of 2011, general and administrative expenses will increase in absolute dollars and as a percentage of revenues.

Amortization of Intangible Assets.    Amortized intangible assets consist of customer relationships, trade names and agreements not-to-complete acquired in business combinations.

Critical Accounting Policies

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

We believe that of our significant accounting policies, which are described in Note 2 to the accompanying consolidated financial statements and in our annual report on Form 10-K for the year ended December 31, 2010, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition.    We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Our subscription agreements generally contain multiple service elements and deliverables. These elements include use of our cloud-based software, hosting services, content and content updates, customer support and may also include news distribution services and professional services. We have determined that professional services are not essential to the functionality of our subscription software. Our subscription agreements do not provide customers the right to take possession of the software at any time.

Prior to January 1, 2011, all elements in our multiple element subscription agreements were considered a single unit of accounting, and accordingly, we recognized all associated fees over the subscription period, which is typically one year. We determined that we did not have objective and reliable evidence of the fair value of the undelivered elements in our arrangements and, as a result, subscription revenues were recognized ratably over the term of the subscription. Professional services sold separately from a subscription arrangement were recognized as the services were performed.

In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting guidance for multiple-deliverable revenue arrangements to:

 

•

provide updates on whether multiple-deliverables exist, how the deliverables in an arrangement should be separated and how the consideration should be allocated;

 

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•

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

 

•

require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if it does not have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price.

On January 1, 2011, we adopted the provisions of the new accounting guidance for multiple-deliverable revenue arrangements entered into or materially modified on or after January 1, 2011 that contain subscription services sold with news distribution services or professional services on a prospective basis and determined the adoption did not have a material impact on our financial statements. Our separate units of accounting consist of our subscription services, news distribution services and professional services. We allocate consideration to each deliverable in multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.

We have established VSOE of the selling price for certain of our news distribution services as the selling price for a substantial majority of stand-alone sales falls within a narrow range around the median selling price. We determined TPE of the selling prices for our services is not available due to differences in the features and functionality of competitor’s products. We determined ESP for the remaining deliverables by analyzing factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

We also distribute individual press releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Sales Commissions.    Sales commissions are expensed when a subscription agreement is executed by the customer. As a result, we incur incremental sales expense before the recognition of the related revenues.

Stock-Based Compensation.    We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We became a public entity in December 2005, and therefore have a limited history of volatility. Accordingly, the expected volatility is based on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The historical volatilities of these entities have not differed significantly from our historical volatility. The expected term of option awards granted through March 31, 2011 was calculated using the simplified method, which is equal to the midpoint between the vesting date and the end of the contractual term of the award. Based on recent stock option exercise activity through the three months ended June 30, 2011, we determined that we had sufficient historical exercise data to estimate the expected term for option awards using a combination of our historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term for outstanding awards for option awards granted after March 31, 2011. This change in estimate did not have a material impact on our financial statements. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.

Business Combinations.    We have completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. Definite-lived intangible assets consist of acquired customer relationships, trade names, agreements not-to-compete and purchased technology. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from two to seven years. We recognize all of the assets acquired, liabilities assumed and contingent consideration at their fair values based on significant estimates and judgments on the acquisition date. We refine those estimates that are provisional, as necessary, during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which new information may be gathered about facts and

 

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circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are recorded to the consolidated results of operations. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. Accounting for these acquisitions also requires us to make determinations about the useful lives for definite-lived tangible and intangible assets and liabilities assumed that involve estimates and judgments.

Goodwill and Long-Lived Assets.    Goodwill is not amortized, but rather is assessed for impairment at least annually. Goodwill impairment is evaluated using a two step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We use an income approach based on discounted cash flows to determine the fair value of our reporting unit. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage our operations. The results of our most recent annual assessment performed on November 1, 2010 did not indicate any impairment of goodwill, and as such, the second step of the impairment test was not required. No events or circumstances occurred from the date of the assessment through September 30, 2011 that would impact this conclusion.

We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the nine months ended September 30, 2011 were not material.

Income taxes.    We use the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. In connection with our acquisitions, we identified an uncertain tax position, and as a result, $721,000 is included in other liabilities in the consolidated balance sheet at September 30, 2011. We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2002 to 2010.

 

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Results of Operations

The following tables set forth selected unaudited consolidated statements of operations data for each of the periods indicated as a percentage of total revenues for the periods indicated.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2011				2010				2011
Revenues			100	%			100	%			100	%			100	%
Cost of revenues			20				19				20				19
Gross profit			80				81				80				81
Operating expenses:
Sales and marketing			50				49				51				50
Research and development			6				6				6				7
General and administrative			25				26				25				27
Amortization of intangible assets			3				1				2				2
Total operating expenses			84				82				84				86
Loss from operations			(4	)			(1	)			(4	)			(5	)
Other income, net			—				—				—				—
Loss before provision (benefit) for income taxes			(4	)			(1	)			(4	)			(5	)
Provision (benefit) for income taxes			(1	)			—				1				(2	)
Net loss			(3	)%			(1	)%			(5	)%			(3	)%

Three Months Ended September 30, 2011 and 2010

Revenues.    Revenues for the three months ended September 30, 2011 were $28.9 million, an increase of $4.2 million, or 17%, over revenues of $24.7 million for the comparable period in 2010. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 10,855 as of September 30, 2011 from 7,752 as of September 30, 2010. Revenue growth from the increase in active subscription customers for the three months ended September 30, 2011 was $3.6 million. Total deferred revenue as of September 30, 2011 was $55.2 million, representing an increase of $7.6 million, or 16%, over total deferred revenue of $47.6 million as of September 30, 2010.

Cost of Revenues.    Cost of revenues for the three months ended September 30, 2011 was $5.4 million, an increase of $461,000, or 9%, over cost of revenues of $4.9 million for the comparable period in 2010. The increase in cost of revenues was primarily due to an increase of $175,000 in employee related costs and $207,000 in third-party license and royalty fees for content. We had 205 full-time employee equivalents in our professional and other support services group at September 30, 2011 compared to 202 full-time employee equivalents at September 30, 2010.

Sales and Marketing Expenses.    Sales and marketing expenses for the three months ended September 30, 2011 were $14.2 million, an increase of $1.9 million, or 15%, over sales and marketing expenses of $12.3 million for the comparable period in 2010. The increase in sales and marketing was primarily due to an increase of $944,000 in employee-related costs from additional personnel, $312,000 in sales commissions and incentive compensation and $284,000 in marketing program costs. We had 431 full-time employee equivalents in sales and marketing at September 30, 2011 compared to 330 full-time employee equivalents at September 30, 2010.

Research and Development Expenses.    Research and development expenses for the three months ended September 30, 2011 were $1.8 million, an increase of $212,000, or 14%, over research and development expenses of $1.6 million for the comparable period in 2010. The increase in research and development was primarily due to an increase of $114,000 in employee-related costs. For the three months ended September 30, 2011, we capitalized $179,000 of employee-related costs for internally developed software. For the three months

 

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ended September 30, 2010, we did not capitalize any employee-related costs for internally developed software. We had 45 full-time employee equivalents in research and development at September 30, 2011 compared to 43 full-time employee equivalents in research and development at September 30, 2010.

General and Administrative Expenses.    General and administrative expenses for the three months ended September 30, 2011 were $7.4 million, an increase of $1.2 million or 19%, over general and administrative expenses of $6.2 million for the comparable period in 2010. The increase in general and administrative expenses was primarily due to an increase of $365,000 in employee-related costs including increases in personnel and $639,000 in rents and facility costs relating to our expansion and relocation of certain offices and headquarters. We had 71 full-time employee equivalents in our general and administrative group at September 30, 2011 compared to 65 full-time employee equivalents at September 30, 2010.

Provision (Benefit) for Income Taxes.    The benefit for income taxes for the three months ended September 30, 2011 was $97,000, which reflects our estimated annual effective tax rate for the year. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes and certain other non-deductible expenses. Additionally, we recorded a tax benefit related to disqualifying dispositions of incentive stock options and federal and state tax credits.

The benefit for income taxes for the three months ended September 30, 2010 was $173,000, which reflected our actual income tax expense for the period rather than estimated income tax expense using an effective tax rate for 2010, as we could not reliably estimate such rate. Our effective tax rate differed from the U.S. Federal statutory rate primarily due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes and certain other non-deductible expenses.

Nine Months Ended September 30, 2011 and 2010

Revenues.    Revenues for the nine months ended September 30, 2011 were $84.4 million, an increase of $13.6 million, or 19%, over revenues of $70.8 million for the comparable period in 2010. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 10,855 as of September 30, 2011, including 1,900 from our acquisition of Datapresse in April 2010, from 7,752 as of September 30, 2010. Total revenue from active subscriptions through acquired companies contributed $2.4 million of incremental revenue in 2011. The remaining increase in active subscription customers was the result of additional sales and marketing personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers, excluding revenue from acquired companies, was $11.3 million. Total deferred revenue as of September 30, 2011 was $55.2 million, representing an increase of $7.6 million, or 16%, over total deferred revenue of $47.6 million as of September 30, 2010.

Cost of Revenues.    Cost of revenues for the nine months ended September 30, 2011 was $16.1 million, an increase of $2.0 million, or 15%, over cost of revenues of $14.1 million for the comparable period in 2010. The increase in cost of revenues was primarily due to an increase of $912,000 in employee-related costs including increases in personnel from our acquisitions, $431,000 in third-party license and royalty fees for content, $180,000 in application and data hosting fees and $276,000 in amortization of technology from our acquisitions in 2010 and 2011. We had 205 full-time employee equivalents in our professional and other support services group at September 30, 2011 compared to 202 full-time employee equivalents at September 30, 2010.

Sales and Marketing Expenses.    Sales and marketing expenses for the nine months ended September 30, 2011 were $42.4 million, an increase of $6.2 million, or 17%, over sales and marketing expenses of $36.2 million for the comparable period in 2010. The increase was primarily due to an increase of $3.1 million in employee-related costs from additional personnel including increases in headcount from our acquisitions, $829,000 in sales commissions and incentive compensation, $605,000 in marketing program costs and $836,000 in stock-based compensation. We had 431 full-time employee equivalents in sales and marketing at September 30, 2011 compared to 330 full-time employee equivalents at September 30, 2010.

 

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Research and Development Expenses.    Research and development expenses for the nine months ended September 30, 2011 were $5.6 million, an increase of $1.4 million, or 33%, over research and development expenses of $4.2 million for the comparable period in 2010. The increase in research and development was primarily due to an increase of $472,000 in employee-related costs from additional personnel including increases in headcount from our acquisitions and $414,000 in stock-based compensation. For the nine months ended September 30, 2011, we capitalized $251,000 of employee-related costs for internally developed software. For the nine months ended September 30, 2010, we capitalized $477,000 of employee-related costs for internally developed software. We had 45 full-time employee equivalents in research and development at September 30, 2011 compared to 43 full-time employee equivalents in research and development at September 30, 2010.

General and Administrative Expenses.    General and administrative expenses for the nine months ended September 30, 2011 were $23.2 million, an increase of $5.9 million, or 34%, over general and administrative expenses of $17.3 million for the comparable period in 2010. The increase in general and administrative expenses was primarily due to an increase of $1.3 million in employee-related costs including increases in headcount from our acquisitions, $1.0 million in rents and facility costs relating to expansion and relocations of certain of our offices and headquarters, $641,000 of expense related to the fair value adjustments of contingent consideration for our business acquisitions in 2011 and 2010, $633,000 in stock-based compensation and $700,000 in transaction costs from the termination of a potential acquisition. We had 71 full-time employee equivalents in our general and administrative group at September 30, 2011 compared to 65 full-time employee equivalents at September 30, 2010.

Provision (Benefit) for Income Taxes.    The benefit for income taxes for the nine months ended September 30, 2011 was $1.6 million which reflects our estimated annual effective tax rate for the year. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes and certain other non-deductible expenses. Additionally, we recorded a tax benefit related to disqualifying dispositions of incentive stock options and federal and state tax credits.

The provision for income taxes for the nine months ended September 30, 2010 of $676,000 reflected our actual income tax rate for the period rather than our estimated annual effective tax rate for 2010, as we could not reliably estimate such rate. Our effective tax rate differed from the U.S. Federal statutory rate primarily due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes and certain other non-deductible expenses.

Liquidity and Capital Resources

At September 30, 2011, our principal sources of liquidity were cash and cash equivalents totaling $101.4 million, investments totaling $5.2 million and net accounts receivable of $16.8 million.

Net cash provided by operating activities for the nine months ended September 30, 2011 was $24.8 million reflecting a net loss of $2.8 million, non-cash charges for depreciation and amortization of $3.8 million and stock-based compensation expense of $11.4 million, $5.9 million increase in other liabilities primarily due to an increase in the long-term portion of the leasehold incentive obligation from our new headquarters lease, and a net change of $2.2 million in accounts receivable and deferred revenue from amounts invoiced to our increased subscription customer base. Net cash provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.

Net cash used in investing activities for the nine months ended September 30, 2011 was $20.2 million, which primarily resulted from net investments in property, equipment and software of $13.5 million primarily related to our new headquarters in the third quarter of 2011 and the acquisition of North Social of $6.9 million.

Net cash provided by financing activities for the nine months ended September 30, 2011 was $1.8 million, which primarily resulted from proceeds received from the exercises of stock option awards of $18.9 million offset by our purchase of 768,893 shares of our common stock at an aggregate cost of $16.1 and $1.3 million for payments of contingent cash consideration for our acquisition of Datapresse and BDL Media in 2010.

 

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We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our current cash, cash equivalents and investments together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures, contractual obligations, commitments and other liquidity requirements associated with our operations for at least the next 12 months.

Off-balance Sheet Arrangements and Contractual Obligations

As of September 30, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and equipment, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

On March 30, 2010, we signed a twelve year lease for approximately 93,000 square feet of office space in Beltsville, Maryland. We relocated our corporate headquarters to the leased premises in the third quarter of 2011. Rental payments began on April 1, 2011. The aggregate minimum lease commitment at the inception of the lease was approximately $21.5 million. In addition, under the terms of the lease, the landlord reimbursed us approximately $6.4 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease.

We have various non-cancelable operating leases, primarily related to office real estate including the office space in Beltsville, MD, that expire through 2023 and generally contain renewal options for up to five years. As of September 30, 2011, minimum required payments in future years under these leases are $572,000, $2.6 million, $2.7 million, $2.7 million, $2.4 million, and $15.0 million in 2011, 2012, 2013, 2014, 2015, and thereafter, respectively.

Purchase Commitments

We have entered into agreements with various vendors in the ordinary course of business. As of September 30, 2011, minimum required payments in future years under these arrangements are $2.0 million, $3.0 million, $1.1 million, and $399,000 in 2011, 2012, 2013, and 2014 and thereafter, respectively.

There were no other material changes outside the normal course of business to our contractual obligations and commercial commitments since December 31, 2010.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our annual report on Form 10-K for the year ended December 31, 2010. Our exposure to interest rate risk has not changed materially since December 31, 2010.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling, euro, Hong Kong dollar and Chinese Yuan. As a result, we are exposed to movements in the exchange rates of currencies against the U.S. Dollar. Revenues denominated in a foreign currency were approximately 11% of our total revenues in the year ended 2010 and 14% of our total revenues for the nine months ended September 30, 2011. Exchange rate fluctuations have not significantly impacted our results of operations and cash flows. Our future results of operations and cash flows may be affected by changes in foreign currency exchange rates. Historically, we have not utilized derivative financial instruments to hedge our foreign exchange exposure; however, we may choose to use such contracts in the future.

 

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Interest Rate Sensitivity

Our cash equivalents and investments consist primarily of money market funds, corporate notes and bonds, government-sponsored agency securities and other debt securities. Our interest income is subject to interest rate risk. For the nine months ended September 30, 2011 a fluctuation in interest rates of 1 percentage point would change interest income by approximately $1.0 million.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II

 

Item 1.

Legal Proceedings

From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. We are not currently subject to any material legal proceedings, that in our opinion, will have a material effect on our financial positions, operating results or cash flows.

 

Item 1A.

Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

Risks Related to Our Business and Industry

Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:

 

•

our ability to retain and increase sales to existing customers and attract new customers;

 

•

changes in the volume and mix of subscriptions sold and press releases distributed in a particular quarter;

 

•

seasonality of our business cycle, given that our subscription volumes are normally lowest in the first quarter and highest in the fourth quarter;

 

•

the timing and success of new product introductions or upgrades by us or our competitors;

 

•

changes in our pricing policies or those of our competitors;

 

•

changes in the payment terms for our products and services;

 

•

the amount and timing of non-recurring charges or expenditures related to expanding our operations;

 

•

changes in accounting policies or the adoption of new accounting standards, including guidance on revenue arrangements with multiple deliverables;

 

•

our policy of expensing sales commissions at the time our customers execute a subscription agreement, while the majority of our revenue is recognized ratably over future periods;

 

•

changes in the estimates and assumptions used to determine the fair value of contingent consideration associated with our acquisitions;

 

•

fluctuations in our effective tax rate including changes in the mix of earnings in the various jurisdictions in which we operate, the valuation of deferred tax assets and liabilities and the deductibility of certain expenses and changes in uncertain tax positions;

 

•

foreign currency exchange rates; and

 

•

the purchasing and budgeting cycles of our customers.

 

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Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.

Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

The markets for our cloud-based software and solutions are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.

The market for software specifically designed for marketing and public relations is relatively new and emerging, making our business and future prospects difficult to evaluate. Many companies have invested substantial personnel and financial resources in their marketing and PR departments, and may be reluctant or unwilling to migrate to cloud-based software and services specifically designed to address the marketing and public relations market. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand solutions in general and for on-demand marketing and public relations software and services in particular. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market of on-demand marketing and public relations management solutions. These challenges, risks and difficulties include the following:

 

•

generating sufficient revenue to maintain profitability;

 

•

managing growth in our operations;

 

•

managing the risks associated with developing new services and modules;

 

•

attracting and retaining customers; and

 

•

attracting and retaining key personnel.

We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Further, if businesses do not perceive the benefits of our on-demand solutions, then the market may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.

A majority of our on-demand solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements or renew these agreements for fewer modules or users, our business, financial condition and results of operations will be adversely affected.

A majority of our on-demand solutions are sold pursuant to annual subscription agreements and our customers have no obligation to renew these agreements. As a result, we may not be able to consistently and accurately predict future renewal rates. Our subscription customers’ renewal rates may decline or fluctuate or our subscription customers may renew for fewer modules or users as a result of a number of factors, including their level of satisfaction with our solutions, budgetary or other concerns, and the availability and pricing of competing products. Additionally, we may lose our subscription customers due to the high turnover rate in the marketing and PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

 

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Because we recognize subscription revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.

We recognize revenue from our subscription customers over the terms of their subscription agreements. The majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

We might not generate increased business from our current customers, which could limit our revenue in the future.

The success of our strategy is dependent, in part, on the success of our efforts to sell additional modules and services to our existing customers and to increase the number of users per subscription customer. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.

Our business continues to evolve, which may cause our results of operations to fluctuate or decline.

We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of our existing services, the creation of new services, and expansion beyond public relations automation into broader marketing and social media solutions. As our business continues to evolve, and we expand into new markets and new service areas, we are subject to additional risk and uncertainty. For example, in 2008 we began offering solutions specifically for small businesses, in June 2010, we began providing social media monitoring services to our customers, and in February 2011 we began providing Facebook applications to our customers. As public relations evolves to include aspects of marketing and social media, we must continue to develop cloud-based marketing and PR software that allows organizations of all sizes to reach and influence buyers across social networks, online and through the media.

As more of our sales efforts are targeted at small business customers that are more substantively affected by economic conditions than the large and medium-size business sectors, economic downturns may cause potential and existing small business customers to fail to purchase our solutions, which could limit our revenue in the future.

We have increased sales of our services to small organizations, including small businesses, associations and not-for-profits that frequently have limited budgets and may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may choose to spend the limited funds that they have on items other than our services. Additionally, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing or public relations, which would negatively affect demand for our solutions, increase customer attrition and adversely affect our business, financial condition and results of operations.

We depend on search engines to attract new customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers and our business may be harmed.

We rely on search engines to attract new customers, and many of our customers locate our websites by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are

 

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determined and organized solely by automated criteria set by the search engine and a ranking level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers’ websites. We rely on both algorithmic and purchased listings to attract customers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, then our websites may not appear at all or may appear less prominently in search results which could result in fewer customers clicking through to our websites, requiring us to resort to other potentially costly resources to advertise and market our services. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. Additionally, the cost of purchased search listing advertising is rapidly increasing as demand for these channels grows, and further increases could greatly increase our expenses.

Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue to expand our direct sales force, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our existing third-party channel partners if we are unable to maintain or renew such relationships, if any existing third-party channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.

If we fail to develop our brands, our business may suffer.

We believe that developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

If our information databases do not maintain market acceptance, our business, financial condition and results of operations could be adversely affected.

We have developed our own content that is included in the information databases that we make available to our customers through our on-demand software. If our internally-developed content does not maintain market acceptance, current subscription customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new subscription customers.

We rely on third-parties to provide certain content for our solutions, and if those third-parties discontinue providing their content, our business, financial condition and results of operations could be adversely affected.

We rely on third-parties to provide or make available certain data for our information databases, our news monitoring service and our social media monitoring service. These third-parties may not renew agreements to provide content to us, may increase the price they charge for their content or begin charging for content that was

 

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previously free, or may cease to operate or restrict their operations with companies like ours. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third-parties. In the event we are unable to use such third-party content or are unable to enter into agreements with third-parties, current subscription customers may not renew their subscription agreements with us, and it may be difficult to acquire new subscription customers.

We depend on search engines for the placement of our customers’ online news releases, and if those search engines change their listings or our relationship with them deteriorates or terminates, our reputation will be harmed and we may lose customers or be unable to attract new customers.

Our news distribution business depends upon the placement of our customers’ online press releases. If search engines on which we rely modify their algorithms or purposefully block our content, then information distributed via our news distribution service may not be displayed or may be displayed less prominently in search results, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.

We have incurred operating losses in the past and may incur operating losses in the future.

We have incurred operating losses in the past and we may incur operating losses in the future. Although we had operating income in 2009, we incurred operating losses of $3.6 million for 2010 and $4.6 million for the nine months ended September 30, 2011. We expect our operating expenses to increase as we expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to generate operating income. You should not consider recent quarterly revenue growth as indicative of our future performance. In fact, in future quarters, we may not have any revenue growth or our revenue could decline.

Unanticipated changes in our effective tax rate could adversely affect our future results.

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions.

Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in jurisdictions with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles. Changes in our effective tax rate could materially affect our net results.

In addition, we are subject to income tax audits by certain tax jurisdictions throughout the world. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

We face competition, and our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.

The marketing and public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition from:

 

•

generic desktop software and other commercially available software not specifically designed for marketing and PR;

 

•

marketing and PR solution providers offering products specifically designed for marketing and PR;

 

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•

outsourced marketing and PR service providers;

 

•

custom-developed solutions; and

 

•

press release distribution providers.

Many of our current and potential competitors have longer operating histories, a larger presence in the general marketing and PR market, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential customer, that customer may be unwilling to switch vendors due to existing time and financial commitments with our competitors.

We also expect that new competitors, such as enterprise software vendors and cloud-based service providers that have traditionally focused on enterprise resource planning or back office applications, will enter the on-demand marketing and public relations management market with competing products as the on-demand marketing and public relations management market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third-parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.

We expect that the traditional press release distribution providers will offer press release distribution services through the Internet. We had or continue to have partnerships with these providers to co-market and sell our press release distribution services. It is possible that these new competitors could rapidly acquire significant market share.

If we fail to respond to evolving industry standards, our on-demand solutions may become obsolete or less competitive.

The market for our on-demand solutions is characterized by changes in customer requirements, changes in protocols and evolving industry standards. If we are unable to enhance or develop new features for our existing solutions or develop acceptable new solutions that keep pace with these changes, our cloud-based software and services may become obsolete, less marketable and less competitive and our business will be harmed. The success of any enhancements, new modules and cloud-based software and services depends on several factors, including timely completion, introduction and market acceptance of our solutions. Failure to produce acceptable new offerings and enhancements may significantly impair our revenue growth and reputation.

If there are interruptions or delays in providing our on-demand solutions due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with customers and subject us to liability.

Our solutions reside on hardware that we own or lease and operate. Our hardware is currently located in various third-party data center facilities maintained and operated in the United States and Europe. Our third-party facility providers do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility providers’ ability to protect systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangements are terminated, or there is a lapse of service or damage to such third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.

Our disaster recovery computer hardware and systems which are located at a third-party data center facility, have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. Any or all of these events could cause our

 

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customers to lose access to our on-demand software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in such service or impede our ability to scale our operations.

We architect the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could reduce our revenue, subject us to liability, and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.

Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.

One of our business strategies is to selectively acquire companies which either expand our solutions’ functionality, provide access to new customers or markets, or both. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from subscription customers obtained through acquisitions than our typical renewal rates. Moreover, we cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:

 

•

issue additional equity securities that would dilute the ownership of our stockholders;

 

•

use cash that we may need in the future to operate our business;

 

•

incur or assume debt on terms unfavorable to us or that we are unable to repay;

 

•

incur large charges or substantial liabilities;

 

•

encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and

 

•

become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

In 2010 and 2011, we acquired substantially all of the assets of Two Cats and a Cup of Coffee LLC (dba HARO), Boxxet, Inc. (dba Engine140) and North Social. In 2010, we also acquired all of the outstanding shares of Data Presse SAS in France and substantially all of the assets of BDL Media Ltd in China. Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements, if our security measures are compromised, or if our websites are subject to attacks that degrade or deny the ability of customers to access our solutions.

The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party

 

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data center facilities to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.

Moreover, because our solutions are cloud-based, the amount of data that we store for our customers on our servers is ever-increasing. Additionally, our solutions involve the transmission of customers’ information, some of which may be private. All websites, including our websites, are vulnerable to computer viruses, break-ins, phishing attacks, and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information. Any systems failure or compromise of our security that results in the release of our customers’ data, website performance or availability problems or the complete shutdown of our website could seriously limit the adoption of our solutions, result in potential liability or litigation, and harm our reputation causing our business to suffer.

Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on acceptable terms, or at all. In addition, we cannot provide assurance that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.

Our cloud-based software may contain undetected errors or defects that may result in product failures or otherwise cause our solutions to fail to perform in accordance with customer expectations. Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing subscription customers could elect to not renew. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ failure or defect. We do not currently maintain any warranty reserves.

Product liability claims could require us to spend significant time and money in litigation or arbitration/dispute resolution or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claim successfully brought against us could cause our business to suffer.

Our news distribution service is a trusted information source. To the extent we were to distribute an inaccurate or fraudulent press release or our customers used our services to transmit negative messages or website links to harmful applications, our reputation could be harmed, even though we are not responsible for the content distributed via our services.

 

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Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our solution and adversely affect our business.

We provide contact information to our customers and our customers can use our service to store contact and other personal or identifying information regarding their marketing and public relations contacts. Federal, state and foreign government agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from individuals. Other proposed legislation could, if enacted, prohibit or limit the use of certain technologies that track individuals’ activities on web pages, in emails or on the Internet. In addition to government activity, privacy advocacy groups and the technology and marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us or our customers which could reduce demand for our solutions.

The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to us and to the businesses of our customers may reduce demand for our solutions, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws and could negatively impact our ability to effectively market our solutions. Even the perception of privacy concerns, whether or not valid, could cause our business to suffer.

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium and the use of email and social media for marketing or other consumer communications. In addition, certain government agencies or private organizations have begun to impose taxes, fees or other charges for accessing the Internet or for sending commercial email. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based services such as ours and reduce the demand for our products.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business.

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our solutions. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise infringing on our intellectual property rights. Existing laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed do not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

 

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If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third-parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties. We expect that the number of infringement claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:

 

•

divert management’s attention;

 

•

result in costly and time-consuming litigation;

 

•

require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or

 

•

require us to redesign our solutions to avoid infringement.

As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third-parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between January 1, 2005 and December 31, 2010, the number of our full-time equivalent employees increased from 146 to 655. We anticipate that additional growth will be required to address increases in our customer base, as well as expansion into new geographic areas.

Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

We are dependent on our executive officers and other key personnel, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.

Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that

 

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require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services. The loss of one or more of our key employees could seriously harm our business.

We may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing software. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options and awards they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Because we conduct operations in foreign jurisdictions, which accounted for approximately 11% of our 2010 revenues and 14% of our revenues in the nine months ended September 30, 2011, and because our business strategy includes expanding our international operations, our business is susceptible to risks associated with international operations.

We have small but growing international operations and our business strategy includes expanding these operations. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:

 

•

fluctuations in currency exchange rates;

 

•

unexpected changes in foreign regulatory requirements;

 

•

difficulties in managing and staffing international operations;

 

•

potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

 

•

the burdens of complying with a wide variety of foreign laws and different legal standards;

 

•

laws and business practices favoring local competitors;

 

•

different pricing environments;

 

•

regional economic and political conditions;

 

•

localization of our products, including translation into foreign languages and associated expenses; and

 

•

longer payment cycles, higher levels of payment fraud and other collection difficulties.

The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally.

 

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We might require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in further equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Economic and market conditions may adversely affect our business, financial condition and results of operations.

Economic downturns, which have resulted in declines in corporate spending, decreases in consumer confidence and tightening in the credit markets, may adversely affect our financial condition and the financial condition and liquidity of our customers and suppliers. Among other things, these economic and market conditions may result in:

 

•

reductions in the corporate budgets, including technology spending of our customers and potential customers;

 

•

declines in demand for our solutions;

 

•

decreases in collections of our customer receivables;

 

•

insolvency of our key vendors and suppliers; and

 

•

volatility in interest rates and decreases in investment income.

Any of these events, which are outside of our scope of control, would likely have an adverse effect on our business, financial condition, results of operations and cash flows.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive.

Many new laws, regulations and standards have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices and have created uncertainty for public companies. These new laws, regulations and standards are subject to interpretations due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by varying regulatory bodies. This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to

 

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disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities. Any unanticipated difficulties in implementing these reforms could result in material delays in complying with these new laws, regulations and standards or significantly increase our operating costs.

Risks Related to our Common Stock and the Securities Markets

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.

Volatility of our stock price could adversely affect stockholders.

The market price of our common stock could fluctuate significantly as a result of:

 

•

quarterly variations in our operating results;

 

•

seasonality of our business cycle;

 

•

interest rate changes;

 

•

changes in the market’s expectations about our operating results;

 

•

our operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

•

changes in financial estimates and recommendations by securities analysts concerning our company or the on-demand software industry in general;

 

•

operating and stock price performance of other companies that investors deem comparable to us;

 

•

news reports relating to trends in our markets;

 

•

changes in laws and regulations affecting our business;

 

•

material announcements by us or our competitors including new product or service introductions;

 

•

sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur;

 

•

economic conditions including a slowdown in economic growth and uncertainty in equity and credit markets; and

 

•

general political conditions such as acts of war or terrorism.

 

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Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

•

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

•

provide that directors may only be removed “for cause” and only with the approval of 66 2/3 percent of our stockholders;

 

•

require super-majority voting to amend our bylaws or specified provisions in our amended and restated certificate of incorporation;

 

•

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

•

limit the ability of our stockholders to call special meetings of stockholders;

 

•

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

•

provide that the board of directors is expressly authorized to adopt, amend, or repeal our bylaws; and

 

•

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

Our directors and officers hold shares of our common stock that they generally are currently able to sell in the public market. We have also registered shares of our common stock that are subject to outstanding stock options, or reserved for issuance under our stock option plan, which shares can generally be freely sold in the public market upon issuance. Moreover, from time to time, our executive officers and directors have established trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

None.

Use of Proceeds

Not applicable.

 

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Issuer Purchases of Equity Securities

The following table sets forth a summary of our purchases of our common stock during the three months ended September 30, 2011, of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

 

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan				Maximum Dollar Value of Shares That May Yet be Purchased Under the Plan
July 1 — July 30
Share repurchase program(1)			—				—				—			$	6,797,116
Employee transactions(2)			—				—				—				N/A
August 1 — August 31
Share repurchase program(1)			377,286			$	21.23				377,286			$	28,785,819
Employee transactions(2)			—				—				—				N/A
September 1 — September 30
Share repurchase program(1)			266,124			$	18.63				266,124			$	23,827,592
Employee transactions(2)			—				—				—				N/A

 

 

(1)

All shares were purchased though our publicly announced share repurchase program. On November 25, 2008, our Board of Directors authorized us to purchase up to $30,000,000 shares of our common stock. On August 18, 2011, our Board of Directors authorized us to purchase up to an additional $30,000,000 shares of our common stock under the share repurchase program. There is no expiration date specified for the program.

 

(2)	All shares were delivered to us by employees to satisfy the minimum statutory tax withholding obligations with respect to the taxable income recognized by these employees upon the vesting of their stock awards.

 

Item 6.

Exhibits

 

Exhibit Number		Exhibit
3.1		Fifth Amended and Restated Certificate of Incorporation.(1)
3.2		Amended and Restated Bylaws.(2)
31.1*		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*		Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith

 

**

In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and 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, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

(1)	Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006.

 

(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on October 29, 2010.

 

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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.

 

Date: November 8, 2011

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit Number		Exhibit
3.1		Fifth Amended and Restated Certificate of Incorporation.(1)
3.2		Amended and Restated Bylaws.(2)
31.1*		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*		Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*	Filed herewith

 

**

In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and 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, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

(1)	Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006.

 

(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on October 29, 2010.

 

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