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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 March 31, 2014

 

¨	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)

Not applicable

(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  x    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  x    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		x
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  x

As of April 24, 2014, 21,634,587 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 

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TABLE OF CONTENTS

 

				Page
		PART I — FINANCIAL INFORMATION			3
Item 1.		Consolidated Financial Statements			3
		Consolidated Balance Sheets as of December 31, 2013 and March 31, 2014			3
		Consolidated Statements of Operations for the three months ended March 31, 2013 and 2014			4
		Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2014			5
		Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2014			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			24
Item 4.		Controls and Procedures			25
		PART II — OTHER INFORMATION			25
Item 1.		Legal Proceedings			25
Item 1A.		Risk Factors			25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 6.		Exhibits			42
SIGNATURES					44

 

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PART I

 

Item 1.

Consolidated Financial Statements

Vocus, Inc. and Subsidiaries

Consolidated Balance Sheets

 

		December 31, 2013				March 31, 2014
						(Unaudited)
		(Dollars in thousands, except per share data)
Current assets:
Cash and cash equivalents		$	34,740			$	38,878
Accounts receivable, net of allowance for doubtful accounts of $234 and $206 at December 31, 2013 and March 31, 2014, respectively			28,862				18,826
Current portion of deferred income taxes			271				215
Prepaid expenses and other current assets			4,728				6,160
Total current assets			68,601				64,079
Property, equipment and software, net			20,134				19,326
Intangible assets, net			14,805				11,868
Goodwill			177,264				177,240
Deferred income taxes, net of current portion			105				—
Other assets			471				406
Total assets		$	281,380			$	272,919
Current liabilities:
Accounts payable		$	1,004			$	564
Accrued compensation			5,895				5,198
Accrued expenses			8,900				8,519
Current portion of notes payable and capital lease obligations			137				121
Current portion of deferred revenue			81,675				78,357
Total current liabilities			97,611				92,759
Notes payable and capital lease obligations, net of current portion			1,218				1,193
Other liabilities			6,371				6,285
Deferred income taxes			4,546				4,663
Deferred revenue, net of current portion			2,842				2,044
Total liabilities			112,588				106,944
Commitments and contingencies
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.01 par value, 1,000,000 shares designated from authorized preferred stock; issued and outstanding at December 31, 2013 and March 31, 2014			77,490				77,490
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 1,000,000 shares designated as Series A redeemable convertible preferred stock and issued and outstanding at December 31, 2013 and March 31, 2014; no other shares issued and outstanding at December 31, 2013 and March 31, 2014			—				—
Common stock, $0.01 par value, 90,000,000 shares authorized; 21,949,509 and 21,952,447 issued at December 31, 2013 and March 31, 2014, respectively; 20,207,652 and 20,450,457 shares outstanding at December 31, 2013 and March 31, 2014, respectively			219				219
Additional paid-in capital			227,699				231,773
Treasury stock, 1,741,858 and 1,501,991 shares at December 31, 2013 and March 31, 2014, respectively, at cost			(42,320	)			(43,252	)
Accumulated other comprehensive loss			(159	)			(250	)
Accumulated deficit			(94,137	)			(100,005	)
Total stockholders’ equity			91,302				88,485
Total liabilities, redeemable convertible preferred stock and stockholders’ equity		$	281,380			$	272,919

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Consolidated Statements of Operations

 

		Three months ended March 31,
		2013				2014
		(Unaudited)
		(Dollars in thousands, except per share data)
Revenues		$	46,247			$	45,659
Cost of revenues			9,752				10,180
Gross profit			36,495				35,479
Operating expenses:
Sales and marketing			26,835				25,460
Research and development			2,998				3,020
General and administrative			12,333				10,525
Amortization of intangible assets			2,020				1,880
Total operating expenses			44,186				40,885
Loss from operations			(7,691	)			(5,406	)
Other income (expense):
Interest and other income (expense)			54				(30	)
Interest expense			(49	)			(30	)
Total other income (expense)			5				(60	)
Loss before provision for income taxes			(7,686	)			(5,466	)
Provision for income taxes			439				402
Net loss		$	(8,125	)		$	(5,868	)
Net loss per share:
Basic and diluted		$	(0.41	)		$	(0.29	)
Weighted average shares outstanding used in computing per share amounts:
Basic and diluted			19,790,692				20,283,643

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

		Three months ended March 31,
		2013				2014
		(Unaudited)
		(Dollars in thousands)
Net loss		$	(8,125	)		$	(5,868	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment			(249	)			(91	)
Other comprehensive income (loss), net of taxes			(249	)			(91	)
Comprehensive loss		$	(8,374	)		$	(5,959	)

See accompanying notes.

 

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Vocus, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

		Three Months Ended March 31,
		2013				2014
		(Unaudited)
		(Dollars in thousands)
Cash flows from operating activities:
Net loss		$	(8,125	)		$	(5,868	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software			1,226				1,452
Amortization of intangible assets			3,071				2,929
(Gain) loss on disposal of assets			—				130
Stock-based compensation			3,690				4,017
Adjustment to fair value of accrued contingent consideration			3,453				—
Provision for doubtful accounts			195				108
Deferred income taxes			186				281
Changes in operating assets and liabilities:
Accounts receivable			7,903				9,948
Prepaid expenses and other current assets			(11	)			(1,354	)
Other assets			(478	)			(12	)
Accounts payable			457				(442	)
Accrued compensation			(289	)			(699	)
Accrued expenses			390				(388	)
Deferred revenue			(719	)			(4,170	)
Other liabilities			(126	)			(86	)
Net cash provided by operating activities			10,823				5,846
Cash flows from investing activities:
Purchases of property, equipment and software			(2,211	)			(753	)
Software development costs			(129	)			(109	)
Proceeds from disposal of assets			—				104
Sales of available-for-sale securities			1,328				—
Net cash used in investing activities			(1,012	)			(758	)
Cash flows from financing activities:
Repurchases of common stock			(413	)			(932	)
Proceeds from the exercise of stock options			—				27
Payments on notes payable and capital lease obligations			(729	)			(41	)
Net cash used in financing activities			(1,142	)			(946	)
Effect of exchange rate changes on cash and cash equivalents			(444	)			(4	)
Net increase in cash and cash equivalents			8,225				4,138
Cash and cash equivalents, beginning of period			32,107				34,740
Cash and cash equivalents, end of period		$	40,332			$	38,878

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 marketing and public relations software that enables businesses to acquire and retain customers. The Company offers products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness. The Company’s integrated suites address the key areas of digital marketing and public relations, including social marketing, search marketing, email marketing and publicity. The Company is headquartered in Beltsville, Maryland with sales and other offices in the United States, Europe and Asia.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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 GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The consolidated balance sheet at December 31, 2013 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, 2013 filed with the Securities and Exchange Commission on March 7, 2014.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, self-insurance, revenue recognition, fair value of stock-based awards and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.

Cash and Cash Equivalents

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

Fair Value Measurements

The Company measures certain financial assets at fair value 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.

 

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Long-Lived Assets

Long-lived assets include property, equipment and software and intangible assets with finite lives. Intangible assets consist of customer relationships, trade names and purchased technology acquired in business combinations. Intangible assets are amortized using the straight-line method over their estimated useful lives ranging from two to seven years. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets. There were no impairment charges for long-lived assets for the three months ended March 31, 2013 and 2014.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. The Company performs its annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. The Company operates under one reporting unit, and as a result, evaluates goodwill impairment based on the fair value of the Company as a whole. The Company did not record any impairment charges for goodwill during the three months ended March 31, 2013 and 2014.

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 the local currency. The financial statements of these subsidiaries are translated into U.S. dollars using exchange rates in effect at the balance sheet date for assets and liabilities and average exchange rates during the period for revenues and expenses. The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Transaction gains and losses in currencies other than the functional currency are included in other income (expense) in the consolidated statements of operations. Amounts resulting from foreign currency transactions were not material for the three months ended March 31, 2013 and 2014.

Accumulated Other 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. Amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2013 were not material.

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 fee to be paid by the customer is fixed or determinable. 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’s separate units of accounting consist of its subscription services, news distribution services and professional services. The Company’s subscription services generally include access to the Company’s cloud-based software, hosting services, content and content updates and customer support. 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. Subscription agreements do not provide customers the right to take possession of the software at any time.

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.

The Company’s professional services primarily consist of data migration, custom development and training. The Company’s cloud-based software does not require significant modification and customization services.

The Company established vendor-specific objective evidence (VSOE) of the fair value for the selling price for certain of its news distribution services as the selling price for a substantial majority of stand-alone sales fall within a narrow range around the median selling price. The Company determined third-party evidence (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. Therefore, the Company uses its estimated selling prices (ESP) for the remaining deliverables by analyzing multiple factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

 

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

Deferred Revenue

Deferred revenue consists of payments received from or billings to customers in advance of revenue recognition. Deferred revenue to be recognized in the succeeding twelve month period is included in current deferred revenue with the remaining amounts included in non-current deferred revenue.

Sales Commissions

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

Stock-Based Compensation

The Company’s outstanding share-based arrangements include stock option awards, restricted stock awards and restricted stock units. The Company recognizes compensation expense for its stock option and restricted stock 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 recognizes compensation expense for its restricted stock units over an accelerated expense attribution period, which separately recognizes compensation expense for each vesting tranche over its vesting period 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. Stock options granted have a 10-year term and generally vest annually over a 4-year period. Restricted stock awards generally vest annually over a four-year period. In February 2014, the Company granted restricted stock units to certain members of its executive team which are contingent upon achievement of pre-determined performance-based criteria. The number of units that will vest range from 0% to 200% of the target shares and is also based upon continued employment of the participant over the vesting period which is three years.

The Company uses the Black-Scholes option pricing model to measure the fair value of stock option awards. The Company uses the daily historical volatility of its stock price over the expected life of the options to calculate the expected volatility. The Company uses a combination of its historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term to determine the expected term of option awards. 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. 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. The Company estimates the fair value of restricted stock units at the date of grant using the quoted closing market price of its common stock on the grant date and the probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter the Company updates its assessment of the probability that the specified performance criteria will be achieved and adjusts the estimate of the fair value of the performance-based restricted stock units if necessary.

Income Taxes

Income taxes are determined utilizing the asset and liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences between the respective reported amounts and tax bases of assets and liabilities, as well as for operating loss and tax-credit carryforwards. 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.

As of December 31, 2013 and March 31, 2014, the Company maintained a full valuation allowance on its U.S. and certain of its foreign deferred tax assets because management determined that it was more likely than not that it will not realize the benefits of its foreign deferred tax assets.

The Company’s federal and state NOL carryforwards and tax credits are subject to annual limitations under Sections 382 and 383 of Internal Revenue Code. The limitations imposed under Sections 382 and 383 will not preclude the Company from realizing these NOLs and tax credits but may operate to limit their utilization of the NOLs and tax credits in any given tax year in the event that the Company’s federal and state taxable income exceeds the limitation imposed by Sections 382 and 383.

The Company’s estimates related to liabilities for uncertain tax positions require it to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If it determines it is more likely than not that a tax position will be sustained based on its technical merits, the Company records the impact of the position in its consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. The estimates are updated at each reporting date based on the facts, circumstances and information available. The Company is also required to assess at each reporting date whether it is reasonably possible that

 

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any significant increases or decreases to its unrecognized tax benefits will occur during the next twelve months. The Company files income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and is subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2013.

Earnings Per Share

Basic net income or loss per share attributable to common stockholders is computed by dividing net income or loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Nonvested shares of restricted stock and restricted stock units are not included in the computation of basic net income per share until vested. The Company’s outstanding grants of restricted stock do not contain non-forfeitable dividend rights. Diluted net income per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, nonvested shares of restricted stock and restricted stock units and shares of redeemable convertible preferred stock are considered to be common stock equivalents.

As the Company has issued shares of Series A redeemable convertible preferred stock that participate in dividends with the common stock, the Company is required to apply the two-class method to compute the net income per share attributable to common stockholders. In periods of sufficient earnings, the two-class method assumes an allocation of undistributed earnings to both participating stock classes.

For the three months ended March 31, 2013 and 2014, the Company incurred net losses and, therefore, the effect of the Company’s outstanding stock options, nonvested shares of restricted stock and restricted stock units and redeemable convertible preferred stock was not included in the calculation of diluted loss per share as the effect would be anti-dilutive. For the three months ended March 31, 2013 and 2014, diluted earnings per share excluded the impact of 3,225,334 and 3,060,396 outstanding stock options, respectively, and 1,005,310 and 1,153,268 nonvested shares of restricted stock, respectively and 1,000,000 shares of Series A redeemable convertible preferred stock as the result would be anti-dilutive. For the three months ended March 31, 2014, diluted earnings per share excluded the impact of 317,000 restricted stock units.

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 its business as one segment.

 

3.	Cash Equivalents

The components of cash equivalents at December 31, 2013 were as follows (in thousands):

 

						Unrealized								Fair Market Value
		Cost				Gains				Losses
Cash equivalents:
Money market funds		$	5,302			$	—			$	—			$	5,302
Certificates of deposit			6,907				—				—				6,907
Total		$	12,209			$	—			$	—			$	12,209

The components of cash equivalents at March 31, 2014 were as follows (in thousands):

 

						Unrealized								Fair Market Value
		Cost				Gains				Losses
Cash equivalents:
Money market funds		$	5,304			$	—			$	—			$	5,304
Certificates of deposit			6,884				—				—				6,884
Total		$	12,188			$	—			$	—			$	12,188

Cash equivalents have original maturity dates of three months or less.

 

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4.	Fair Value Measurements

The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis at December 31, 2013 were as follows (in thousands):

 

		Total				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	12,209			$	12,209			$	—			$	—
Total assets measured at fair value		$	12,209			$	12,209			$	—			$	—

The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis at March 31, 2014 were as follows (in thousands):

 

		Total				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	12,188			$	12,188			$	—			$	—
Total assets measured at fair value		$	12,188			$	12,188			$	—			$	—

Cash equivalents are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices or other readily available market information.

 

5.	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 were as follows (in thousands):

 

Balance at beginning of period		$	177,264
Effects of foreign currency translation			(24	)
Balance as of end of period		$	177,240

Intangible assets at December 31, 2013 consisted of the following (in thousands):

 

		Weighted- Average Amortization Period		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Customer relationships		3.7		$	23,376			$	(14,074	)		$	9,302
Trade names		5.9			5,695				(5,058	)			637
Purchased technology		3.1			13,496				(8,630	)			4,866
Total				$	42,567			$	(27,762	)		$	14,805

Intangible assets at March 31, 2014 consisted of the following (in thousands):

 

		Weighted- Average Amortization Period		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Customer relationships		3.7		$	23,362			$	(15,816	)		$	7,546
Trade names		5.9			5,694				(5,188	)			506
Purchased technology		3.1			13,493				(9,677	)			3,816
Total				$	42,549			$	(30,681	)		$	11,868

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.

 

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Amortization expense of intangible assets for the three months ended March 31, 2013 and 2014 was $3.1 million and $2.9 million, respectively. Future expected amortization of intangible assets at March 31, 2014 was as follows (in thousands):

 

The remainder of 2014		$	8,788
2015			2,349
2016			573
2017			158
2018 and thereafter			—
Total		$	11,868

 

6.

Debt

Revolving Credit Facility

On February 27, 2012, the Company established a $15.0 million revolving credit facility (Revolver) with a major lending institution which is available for use until June 30, 2014. The Revolver is intended to be used for general working capital purposes and to provide increased liquidity and financial flexibility and bears interest equal to the BBA LIBOR Daily Floating Rate plus 2.25%. In addition, the Company pays a monthly fee equal to 0.4% on any unused funds under the Revolver. As collateral for extension of this credit, the Company and certain of its subsidiaries granted security interests in favor of the institution of substantially all of their assets, and the Company pledged the stock of its directly owned domestic subsidiaries and 65% of the shares of its foreign subsidiaries. As of March 31, 2014, there were no outstanding borrowings, however, the Revolver was reduced by the Company’s outstanding letters of credit of $1.2 million. As such, the Company had $13.8 million available to borrow under the Revolver.

 

7.	Stockholders’ Equity

Preferred Stock

The Company’s Certificate of Incorporation authorizes 10,000,000 undesignated shares of preferred stock. The Company’s Board of Directors (Board) is authorized to establish one or more classes or series from the undesignated shares, to designate each share or class or series, and to fix the relative rights and preferences of each class or series, which rights and preferences may be superior to those of any of the common shares. In February 2012, the Board designated 1,000,000 shares of the Company’s authorized preferred stock as Series A convertible preferred stock in connection with the acquisition of iContact. On February 24, 2012, the Company issued 1,000,000 shares of Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock). In May 2013, the Board designated 100,000 shares of the Company’s authorized preferred stock as Series B Junior Participating Preferred Stock (Series B Preferred Stock), however, no shares of Series B Preferred Stock are issued and outstanding.

Series A Redeemable Convertible Preferred Stock

In connection with the acquisition of iContact in February 2012, the Company issued 1,000,000 shares of Series A Preferred Stock with a deemed fair value at issuance of $77.5 million. The Company does not adjust the carrying value to the redemption amount of the convertible preferred stock as the carrying amount exceeds the redemption amount. There have been no changes to the recorded amount of the Series A Preferred Stock since the issuance of the shares.

Each share of the Series A Preferred Stock has a liquidation preference equal to the greater of $77.30 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization affecting the Series A Preferred Stock) or the value of the shares of common stock that would be issued in respect thereof upon conversion of such share of Series A Preferred Stock. The Series A Preferred Stock does not provide for interest and is entitled to participate in any dividends declared on the Company’s common stock on an as-converted basis. On February 24, 2017, the Company will be required to redeem each issued and outstanding share of the Series A Preferred Stock for $77.30 per share from its legally available funds, or such lesser amount of shares as it may then redeem under Delaware law. Each share of the Series A Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder. For conversions occurring on or before February 24, 2017, each share of Series A Preferred Stock will be convertible into 3.0256 shares of common stock (subject to customary adjustments). On and after February 25, 2017, each share of the Series A Preferred Stock which has not been redeemed will be convertible into 3.3282 shares of common stock (subject to customary adjustments).

The holders of Series A Preferred Stock vote on an as-converted basis with the common stock, voting together as a single class, provided that the holders of the Series A Preferred Stock are entitled to vote separately as a class on certain matters affecting the Series A Preferred Stock. If any shares of Series A Preferred Stock are outstanding on or after February 24, 2017, the holders of the Series A Preferred Stock will have the right to vote separately as a class on additional actions by the Company related to acquisitions, redemptions, dividends, capital stock, and indebtedness. In addition, for so long as the outstanding shares of Series A Preferred Stock continue to represent at least 5% of the total

 

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outstanding shares of the Company’s common stock, calculated assuming the conversion of all outstanding shares of Series A Preferred Stock into shares of common stock, the holders of the Series A Preferred Stock, voting as a separate class, will have the exclusive right to elect one director to the Company’s Board of Directors (Series A Director).

In connection with the acquisition of iContact, the Company also entered into, on February 24, 2012, an Investor Rights Agreement (Investor Rights Agreement) whereby the holders of the Series A Preferred Stock have the right to nominate a director to the Company’s Board for as long as they hold 5% or more of the Company’s issued and outstanding capital stock (which nominee shall be the Series A Director for so long as the holders of Series A Preferred Stock have the right to elect the Series A Director pursuant to the Certificate of Designation). In addition, subject to the terms and conditions of the Investor Rights Agreement, the holders of the Series A Preferred Stock shall have demand and piggyback registration rights and the right to participate in certain repurchases of common stock by the Company.

Stockholder Rights Plan

On May 13, 2013, the Board authorized and declared a dividend distribution of one preferred stock purchase right (Right) for each outstanding share of the Company’s common stock and 3.0256 Rights for each outstanding share of the Company’s Series A Convertible Preferred Stock to stockholders of record at the close of business on May 13, 2013.

Each Right entitles registered holders to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock at a price of $46.00 per one one-thousandth of a share, subject to adjustment. The definitive terms of the Rights are set forth in a Rights Agreement, dated May 13, 2013. The Rights will be exercisable only if a person or group acquires 20% or more of the Company’s outstanding common stock (subject to certain exceptions), or if a person or group announces a tender or exchange offer, resulting in beneficial ownership of 20% or more of the outstanding common stock. The Rights also will be exercisable if a person or group that already beneficially owns or has the right to acquire on May 13, 2013, 20% or more of the Company’s outstanding common stock acquires additional shares equal to 1% or more of the Company’s then outstanding common stock (except in the case of a certain stockholder who, under limited circumstances, is permitted to beneficially own more than 20%, but less than 25%, of the Company’s outstanding common stock, subject to certain exceptions).

The Board can redeem the Rights for $0.0001 per Right at any time prior to the earlier of the occurrence of a “trigger event” or the expiration date. Additionally, prior to an acquisition of 50% or more of the Company’s common stock, the Board may direct the mandatory exchange of the Rights (other than Rights owned by the acquiring person) at an exchange ratio of one newly issued share of common stock for each right.

The Rights will expire on the earliest of May 13, 2016, 30 days after the Company’s 2014 annual meeting of stockholders if the continuation of the rights plan is not approved by the Company’s stockholders at its 2014 annual meeting, or the time immediately prior to the Effective Time as defined by the Merger Agreement, if not exercised or redeemed. For more information pertaining to the Merger Agreement, please refer to Note 10, Subsequent Events.

Common Stock Repurchases

The Board authorized a stock repurchase program for up to $60.0 million of the Company’s shares of common stock. The shares may be purchased from time to time in the open market. The Company did not purchase any shares of its common stock under the stock repurchase program for the three months ended March 31, 2013 and 2014. During the three months ended March 31, 2013 and 2014, the Company repurchased 29,678 and 70,901 shares of restricted stock that were withheld from employees to satisfy the minimum statutory tax withholding obligations of $413,000 and $932,000, respectively, related to the taxable income recognized by these employees upon the vesting of their restricted stock awards.

 

8.	Stock-Based Compensation

The following table sets forth the stock-based compensation expense for equity awards recorded in the consolidated statements of operations for the three months ended March 31, 2013 and 2014 (in thousands):

 

		Three Months Ended March 31,
		2013				2014
Cost of revenues		$	468			$	475
Sales and marketing			934				1,340
Research and development			623				494
General and administration			1,665				1,708
Total		$	3,690			$	4,017

 

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Stock Option Awards

The following weighted-average assumptions were used in calculating stock-based compensation for stock option awards granted during the three months ended March 31, 2013 and 2014:

 

		Three Months Ended March 31,
		2013				2014
Stock price volatility			58	%			60	%
Expected term (years)			6.0				6.6
Risk-free interest rate			1.1	%			1.8	%
Dividend yield			0	%			0	%

The summary of stock option activity for the three months ended March 31, 2014 was as follows:

 

		Number of Options				Weighted- Average Exercise Price per Share				Weighted- Average Contractual Term				Aggregate Intrinsic Value as of March 31, 2014
														(In thousands)
Balance outstanding at January 1, 2014			3,205,153			$	15.33
Granted			15,000				13.35
Exercised			(2,938	)			9.23
Forfeited or cancelled			(156,819	)			16.81
Balance outstanding at March 31, 2014			3,060,396			$	15.26				6.7			$	2,332
Options vested and expected to vest at March 31, 2014			2,993,502			$	15.29				6.7			$	2,296
Exercisable at March 31, 2014			1,847,715			$	15.81				5.6			$	1,868

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2013 and 2014 was $7.72 and $7.82, respectively. The fair value of stock options that vested during the three months ended March 31, 2013 and 2014 was $3.3 million and $4.7 million, respectively. As of March 31, 2014, $8.3 million of total unrecognized stock-based compensation cost is related to nonvested stock option awards and is expected to be recognized over a weighted-average period of 2.3 years.

The aggregate intrinsic value represents the difference between the exercise price of the underlying equity awards and the quoted closing price of the Company’s common stock at the last day of each respective quarter multiplied by the number of shares that would have been received by the option holders had all option holders exercised on the last day of each respective quarter. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2013 and 2014 was not material.

Restricted Stock Awards

The summary of restricted stock award activity for the three months ended March 31, 2014 was as follows:

 

		Number of Shares Underlying Stock Awards				Weighted-Average Grant-date Fair Value
Balance nonvested at January 1, 2014			937,536			$	15.18
Awarded			579,750				12.25
Vested			(310,768	)			15.80
Forfeited			(53,250	)			16.22
Balance nonvested at March 31, 2014			1,153,268			$	13.49

 

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As of March 31, 2014, $14.4 million of total unrecognized stock-based compensation cost is related to nonvested shares of restricted stock and is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock Units

The summary of restricted stock unit activity for the three months ended March 31, 2014 was as follows:

 

		Number of Shares Underlying Stock Awards				Weighted-Average Grant-date Fair Value
Balance nonvested at January 1, 2014			—			$	—
Awarded			317,000				12.13
Vested			—				—
Forfeited			—				—
Balance nonvested at March 31, 2014			317,000			$	12.13

As of March 31, 2014, $3.5 million of total unrecognized stock-based compensation cost is related to nonvested shares of restricted stock units and is expected to be recognized over a weighted-average period of 1.9 years.

 

9.	Commitments and Contingencies

Leases

The Company has various non-cancelable operating leases, primarily related to office real estate, that expire through 2023 and generally contain renewal options for up to five years. Lease incentives, payment escalations and rent holidays specified in the lease agreements are accrued or deferred as appropriate as a component of rent expense which is recognized on a straight-line basis over the terms of occupancy. As of March 31, 2014, deferred rent of $773,000 and $4.9 million is included in accrued expenses and other liabilities, respectively. As of March 31, 2014, minimum required payments in future years under these leases are $2.9 million, $4.0 million, $3.9 million, $2.7 million, $2.0 million and $8.6 million in the remainder of 2014 and in the years 2015, 2016, 2017, 2018, 2019 and thereafter, respectively.

The Company also leases computer and office equipment under non-cancelable capital leases and other financing arrangements that expire through 2017.

Purchase Commitments

The Company has entered into agreements with various vendors in the ordinary course of business. As of March 31, 2014, minimum required payments in future years under these arrangements are $5.5 million, $3.4 million and $1.0 million for the remainder of 2014 and in the years 2015 and 2016, respectively.

Letters of Credit

As of March 31, 2014, the Company had a total of $1.2 million in letters of credit outstanding substantially in favor of landlords for certain of its office spaces. These letters of credit expire at various dates through May 2023.

Litigation and Claims

On January 23, 2014, North Venture Partners, LLC (NVP) filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court for the Northern District of California (Civil Action No. C14-0337). The complaint, which was served to the Company on January 27, 2014, alleges that it failed to pay the full amount of the earn-out payment due under an Asset Purchase Agreement dated February 24, 2011 in which the Company acquired certain assets of NVP. NVP’s complaint seeks an award for damages of approximately $6.4 million. This litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit.

On April 28, 2014, a purported class action lawsuit was brought against the Company, the members of the Company’s Board of Directors, GTCR Valor Merger Sub, Inc. (Purchaser), GTCR Valor Companies, Inc. (Parent) and GTCR, LLC (GTCR), captioned TLC Foundation L.P. v. Vocus, Inc. et al., which we refer to as the (Delaware action). The Delaware action generally alleges that the individual director defendants breached their fiduciary duties to the Company’s public stockholders in connection with Parent and Purchaser’s proposed acquisition of the Company because, among other things, they allegedly failed to maximize value for the Company’s stockholders, including by allegedly pursuing a conflicted sales process, agreeing to unfair deal protections, failing to adequately consider other potential acquirors, and failing to fully disclose all material information necessary for Company stockholders to make an informed decision regarding the acquisition. The Delaware action also generally alleges that the Company, GTCR, Parent and Purchaser aided and abetted those alleged violations. The plaintiffs purport to bring the Delaware action on behalf of a class of Company stockholders, and seek, among other relief (i) to enjoin the acquisition of the Company by Parent and Purchaser, (ii) to rescind or, alternatively, award damages to the Company’s stockholders to the extent the acquisition has already been implemented, (iii) to require the individual director defendants to disclose all material information relating to the proposed transaction and (iv) to award plaintiff the fees and costs associated with Delaware action. The litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. The Company believes that the Delaware action is without merit and intends to defend vigorously against all claims asserted.

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. In the opinion of management based on all known facts, all other matters are either without merit or are of such kind, or involve such amounts that would not have a material effect on the financial position or results of operations of the Company if disposed of unfavorably.

 

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10.	Subsequent Events

Merger Agreement

On April 6, 2014, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with GTCR Valor Companies, Inc., a Delaware corporation (Parent), and GTCR Valor Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Purchaser). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Purchaser has agreed (i) to commence a tender offer (such offer, as amended from time to time as permitted by the Merger Agreement, the Offer) to purchase all of the outstanding shares of the Company’s common stock, par value $0.01 per share (Company Common Stock), including the associated rights to purchase Series B Junior Participating Preferred Stock, par value $0.01 per share, of the Company (collectively, the Shares), at a price per Share of $18.00, net to the holder of such Share, in cash, without interest and subject to any applicable tax withholding (the Offer Price) and (ii) following Purchaser’s acceptance of Shares tendered in the Offer, to be merged (the Merger) with and into the Company, with each outstanding share of Company Common Stock (other than shares owned by Purchaser, Parent or its subsidiaries or held in the Company’s treasury and shares as to which appraisal rights have been properly exercised and not withdrawn in accordance with the applicable provisions of the Delaware General Corporation Law) being converted into the right to receive the Offer Price in cash, and the Company surviving the Merger as a wholly owned subsidiary of Parent.

The Merger Agreement further provides for the acceleration of vesting and cash-out at the Offer Price of (i) all options to acquire shares of Company Common Stock (less the applicable exercise price) and (ii) all restricted stock units with respect to shares of Company Common Stock, in each case outstanding as of the time immediately prior to Purchaser’s acceptance of Shares tendered in the Offer. In addition, under the agreement, shares of restricted Company Common Stock outstanding as of the time immediately prior to Purchaser’s acceptance of Shares tendered in the Offer will vest as of such time and be treated in the Merger in the same manner as shares of Company Common Stock.

The Company has also granted to Parent and Purchaser an option (Top-up Option), which Purchaser will, in certain circumstances, be permitted to exercise at or after its acceptance of Shares tendered in the Offer, to purchase a number of newly issued shares of Company Common Stock at the Offer Price which, when added to the shares of Company Common Stock already owned by Parent and Purchaser following such acceptance, will constitute 90% of the shares of Company Common Stock then outstanding after giving effect to the issuance of shares pursuant to the Top-up Option. If Purchaser acquires at least 90% of the outstanding shares of Company Common Stock, including through exercise of the Top-up Option, Purchaser is required under the Merger Agreement to complete the Merger through the “short form” procedures available under Delaware law.

The Board of Directors of the Company approved the Merger Agreement and the transactions contemplated by the agreement, including the Offer and the Merger, and determined that the Merger Agreement and the transactions contemplated by the agreement, including the Offer and the Merger, are fair to, and advisable and in the best interests of the Company and its stockholders, and the Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the U.S. Securities and Exchange Commission (SEC) on April 18, 2014 recommending that holders of Company Common Stock tender their Shares into the Offer.

Purchaser’s acceptance of Shares tendered in the Offer is subject to customary conditions set forth in the Merger Agreement, including without limitation (i) that Company stockholders validly tender (and not properly withdraw) a minimum number of Shares — that number of Shares (without regard to Shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) which, together with the number of Shares, if any, then owned, directly or indirectly, by Parent or Purchaser or their respective subsidiaries (which does not include shares of Company Common Stock issuable upon conversion of the Company’s Series A Convertible Preferred Stock contemplated under the Merger Agreement to be purchased by Purchaser) represents at least 90% of the then outstanding shares of Company Common Stock (assuming the purchase of shares of Company Common Stock by Purchaser pursuant to the Top-up Option has occurred and including shares of Company Common Stock issuable upon exercise of Company stock options as to which valid notices of exercise have been received and shares of Company Common Stock have not yet been issued prior to the expiration time of the Offer), (ii) the expiration or termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) Parent (either directly or through its subsidiaries) having received the required amount of the proceeds of its debt financing or, alternatively, the debt financing lenders having confirmed the availability of the debt financing and (iv) certain conditions relating to Purchaser’s purchase of the outstanding Series A Convertible Preferred Stock from JMI Equity Fund VI, L.P. (JMI) immediately following Purchaser’s acceptance of Shares tendered in the Offer.

The Company has made customary representations, warranties and covenants in the Merger Agreement, including, without limitation, covenants to provide required information to regulatory agencies, to provide other requested cooperation and assistance in connection with the Merger Agreement and the transactions contemplated by it and to conduct its business in all material respects in the ordinary course consistent with past practice, including not taking certain specified actions, prior to the earliest of the first date on which Purchaser’s designees are elected or appointed to the Company’s Board of Directors pursuant to the Merger Agreement, the consummation of the Merger and the termination of the Merger Agreement. Parent and Purchaser also have made customary representations, warranties and covenants in the Merger Agreement.

 

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The Company has also agreed not to solicit or initiate discussions with third parties regarding other acquisition proposals regarding the Company and has agreed to certain restrictions on its ability to respond to such proposals, provided that the Company may enter into discussions concerning, or provide confidential information to persons making, certain unsolicited proposals if the Company’s Board of Directors determines that it would be inconsistent with its fiduciary duties not to do so. The Merger Agreement contains certain termination rights for the Company and Parent, including the right of the Company, in certain circumstances, to terminate the Merger Agreement and accept a Superior Proposal, as that term is defined in the Merger Agreement. The Company will be required to pay Parent a termination fee equal to $13 million if, among other reasons, the Merger Agreement is terminated (i) by the Company to enter into an acquisition agreement that constitutes a Superior Proposal or (ii) by Parent because the Board of Directors of the Company adversely changes its recommendation to stockholders to accept the Offer and tender their Shares to Purchaser in the Offer. If the Company terminates the Merger Agreement under certain circumstances, Parent will be required to pay the Company a reverse termination fee equal to $29 million.

Concurrently with entering into the Merger Agreement, Parent and Purchaser entered into separate tender and support agreements (Support Agreements) with Okumus Fund Management Ltd., Richard Rudman, Chairman and Chief Executive Officer of the Company, and Stephen Vintz, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, together representing 27.7% of the outstanding Shares. Under the Support Agreements, Okumus Fund Management, Mr. Rudman and Mr. Vintz each agreed to tender all of their respective Shares in the Offer.

Also concurrently with entering into the Merger Agreement, Parent and Purchaser entered into a separate stock purchase, non-tender and support agreement (Series A Purchase Agreement) with JMI pursuant to which Purchaser agreed to purchase, following Purchaser’s acceptance of Shares tendered in the Offer, all of JMI’s shares of the Company’s Series A Convertible Preferred Stock, par value $0.01 per share, including the associated rights to purchase Series B Junior Participating Preferred Stock (Series A Purchase).

Parent and Purchaser have obtained equity and debt financing commitments which Parent and Purchaser have represented to the Company are sufficient for Purchaser to pay (and Parent to cause Purchaser to pay) the aggregate consideration in respect of the Shares in the Offer, the Series A Purchase and the Merger and all related fees and expenses. GTCR FUND X/A AIV LP (Fund) delivered to Parent a letter dated the date of the Merger Agreement in which the Fund committed, subject to the conditions set forth in the letter, to purchase equity or debt securities of Parent in an aggregate amount of up to $30 million to allow Parent, together with its debt financing, to pay the amounts required to be paid by Parent and Purchaser in connection with the consummation of the Offer, the Series A Purchase and the Merger. The Fund also irrevocably and unconditionally guaranteed the payment of the reverse termination fee and certain indemnification and reimbursement obligations under the Merger Agreement with respect to Parent’s debt financing.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 2.1, and is incorporated into this report by reference.

Rights Agreement Amendment

On April 6, 2014, prior to the execution of the Merger Agreement, the Board approved an amendment (Rights Amendment) to the Rights Agreement, dated as of May 13, 2013, by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (Rights Agreement). The Rights Amendment, among other things, (i) defines Parent, Purchaser and certain related parties as Exempt Persons, as that term is defined in the Rights Agreement, to the extent that any of them would become an Acquiring Person solely as a result of (A) the execution, delivery or performance of the Merger Agreement and the Series A Purchase Agreement, (B) their acquisition of Company stock as a result of the execution of the Merger Agreement and the Series A Purchase Agreement and (C) the consummation of the transactions contemplated by the Merger Agreement, including the Offer and the Merger and the Series A Purchase; and (ii) provides that none of the approval, execution, delivery or performance of the Merger Agreement and the Series A Purchase Agreement or the consummation of the Offer or the Merger would result in a Stock Acquisition Date or a Distribution Date, as those terms are defined in the Rights Agreement. The Rights Amendment also provides that the Rights Agreement shall expire and terminate immediately prior to the effective time of the Merger.

The foregoing description of the Rights Amendment does not purport to be complete and is qualified in its entirety by reference to the Rights Amendment, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 4.4, and is incorporated into this report by reference.

 

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, 2013. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. 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.

 

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Overview

We are a leading provider of cloud marketing and public relations software that enables businesses to acquire and retain customers. We offer products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness. Our cloud marketing solutions address key areas of digital marketing, including social media marketing, search marketing and news distribution, email marketing and publicity. Our sales organization is focused on adding new customers, renewing customer subscriptions and expanding relationships with existing customers. We deliver our solutions over the Internet using a secure, scalable application and system architecture that allows our customers to quickly deploy and adopt our software.

As of March 31, 2014, we had 16,060 active subscription customers who purchased our products and services. These customers represent a wide 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 to expand our cloud marketing suite, provide additional consulting services as part of our subscriptions, expand our marketing activities to continue to increase brand awareness and increase the presence of our cloud marketing solutions with mid-sized organizations.

On April 6, 2014, we entered into an Agreement and Plan of Merger (Merger Agreement) with GTCR Valor Companies, Inc., a Delaware corporation (Parent), and GTCR Valor Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Purchaser). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Purchaser has agreed (i) to commence a tender offer (such offer, as amended from time to time as permitted by the Merger Agreement, the Offer) to purchase all of the outstanding shares of our common stock, par value $0.01 per share (Company Common Stock), including the associated rights to purchase our Series B Junior Participating Preferred Stock, par value $0.01 per share (collectively, the Shares) at a price per Share of $18.00, net to the holder of such Share, in cash, without interest and subject to any applicable tax withholding (the Offer Price) and (ii) following Purchaser’s acceptance of Shares tendered in the Offer, to be merged (the Merger) with and into us, with each outstanding share of Company Common Stock (other than shares owned by Purchaser, Parent or its subsidiaries or held in our treasury and shares as to which appraisal rights have been properly exercised and not withdrawn in accordance with the applicable provisions of the Delaware General Corporation Law) being converted into the right to receive the Offer Price in cash, and we will survive the Merger as a wholly owned subsidiary of Parent.

The Merger Agreement further provides for the acceleration of vesting and cash-out at the Offer Price of (i) all options to acquire shares of Company Common Stock (less the applicable exercise price) and (ii) all restricted stock units with respect to shares of Company Common Stock, in each case outstanding as of the time immediately prior to Purchaser’s acceptance of Shares tendered in the Offer. In addition, under the agreement, shares of restricted Company Common Stock outstanding as of the time immediately prior to Purchaser’s acceptance of Shares tendered in the Offer will vest as of such time and be treated in the Merger in the same manner as shares of Company Common Stock.

We have also granted to Parent and Purchaser an option (Top-up Option), which Purchaser will, in certain circumstances, be permitted to exercise at or after its acceptance of Shares tendered in the Offer, to purchase a number of newly issued shares of Company Common Stock at the Offer Price which, when added to the shares of Company Common Stock already owned by Parent and Purchaser following such acceptance, will constitute 90% of the shares of Company Common Stock then outstanding after giving effect to the issuance of shares pursuant to the Top-up Option. If Purchaser acquires at least 90% of the outstanding shares of Company Common Stock, including through exercise of the Top-up Option, Purchaser is required under the Merger Agreement to complete the Merger through the “short form” procedures available under Delaware law.

Our Board of Directors approved the Merger Agreement and the transactions contemplated by the agreement, including the Offer and the Merger, and determined that the Merger Agreement and the transactions contemplated by the agreement, including the Offer and the Merger, are fair to, and advisable and in our best interests and the best interests of our stockholders, and we filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the U.S. Securities and Exchange Commission (SEC) on April 18, 2014 recommending that holders of Company Common Stock tender their Shares into the Offer.

Purchaser’s acceptance of Shares tendered in the Offer is subject to customary conditions set forth in the Merger Agreement, including without limitation (i) that our stockholders validly tender (and not properly withdraw) a minimum number of Shares — that number of Shares (without regard to Shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) which, together with the number of Shares, if any, then owned, directly or indirectly, by Parent or Purchaser or their respective subsidiaries (which does not include shares of Company Common Stock issuable upon conversion of our Series A Convertible Preferred Stock contemplated under the Merger Agreement to be purchased by Purchaser) represents at least 90% of the then outstanding shares of Company Common Stock (assuming the purchase of shares of Company Common Stock by Purchaser pursuant to the Top-up Option has occurred and

 

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including shares of Company Common Stock issuable upon exercise of our stock options as to which valid notices of exercise have been received and shares of Company Common Stock have not yet been issued prior to the expiration time of the Offer), (ii) the expiration or termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) Parent (either directly or through its subsidiaries) having received the required amount of the proceeds of its debt financing or, alternatively, the debt financing lenders having confirmed the availability of the debt financing and (iv) certain conditions relating to Purchaser’s purchase of the outstanding Series A Convertible Preferred Stock from JMI Equity Fund VI, L.P. (JMI) immediately following Purchaser’s acceptance of Shares tendered in the Offer.

We have made customary representations, warranties and covenants in the Merger Agreement, including, without limitation, covenants to provide required information to regulatory agencies, to provide other requested cooperation and assistance in connection with the Merger Agreement and the transactions contemplated by it and to conduct our business in all material respects in the ordinary course consistent with past practice, including not taking certain specified actions, prior to the earliest of the first date on which Purchaser’s designees are elected or appointed to our Board of Directors pursuant to the Merger Agreement, the consummation of the Merger and the termination of the Merger Agreement. Parent and Purchaser also have made customary representations, warranties and covenants in the Merger Agreement.

We have also agreed not to solicit or initiate discussions with third parties regarding other acquisition proposals and have agreed to certain restrictions on our ability to respond to such proposals, provided that we may enter into discussions concerning, or provide confidential information to persons making, certain unsolicited proposals if our Board of Directors determines that it would be inconsistent with its fiduciary duties not to do so. The Merger Agreement contains certain termination rights for us and Parent, including our right, in certain circumstances, to terminate the Merger Agreement and accept a Superior Proposal, as that term is defined in the Merger Agreement. We will be required to pay Parent a termination fee equal to $13.0 million if, among other reasons, the Merger Agreement is terminated (i) by us to enter into an acquisition agreement that constitutes a Superior Proposal or (ii) by Parent because our Board of Directors adversely changes its recommendation to stockholders to accept the Offer and tender their Shares to Purchaser in the Offer. If we terminate the Merger Agreement under certain circumstances, Parent will be required to pay us a reverse termination fee equal to $29.0 million.

Concurrently with entering into the Merger Agreement, Parent and Purchaser entered into separate tender and support agreements (Support Agreements) with Okumus Fund Management Ltd., Richard Rudman, our Chairman and Chief Executive Officer, and Stephen Vintz, our Executive Vice President, Chief Financial Officer and Treasurer, together representing 27.7% of the outstanding Shares. Under the Support Agreements, Okumus Fund Management, Mr. Rudman and Mr. Vintz each agreed to tender all of their respective Shares in the Offer.

Also concurrently with entering into the Merger Agreement, Parent and Purchaser entered into a separate stock purchase, non-tender and support agreement (Series A Purchase Agreement) with JMI pursuant to which Purchaser agreed to purchase, following Purchaser’s acceptance of Shares tendered in the Offer, all of JMI’s shares of our Series A Convertible Preferred Stock, par value $0.01 per share, including the associated rights to purchase Series B Junior Participating Preferred Stock (Series A Purchase).

Parent and Purchaser have obtained equity and debt financing commitments which Parent and Purchaser have represented to us are sufficient for Purchaser to pay (and Parent to cause Purchaser to pay) the aggregate consideration in respect of the Shares in the Offer, the Series A Purchase and the Merger and all related fees and expenses. GTCR FUND X/A AIV LP (Fund) delivered to Parent a letter dated the date of the Merger Agreement in which the Fund committed, subject to the conditions set forth in the letter, to purchase equity or debt securities of Parent in an aggregate amount of up to $30.0 million to allow Parent, together with its debt financing, to pay the amounts required to be paid by Parent and Purchaser in connection with the consummation of the Offer, the Series A Purchase and the Merger. The Fund also irrevocably and unconditionally guaranteed the payment of the reverse termination fee and certain indemnification and reimbursement obligations under the Merger Agreement with respect to Parent’s debt financing.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 2.1, and is incorporated into this report by reference.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements are primarily for our marketing and public relations suites and iContact products. The subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, news distribution services, hosting services, content and content updates and customer support and may also include implementation and training services. The typical term of our subscription agreements of our marketing and public relations suites are one year; however, our customers may purchase subscriptions with multi-year terms. The typical term of our subscription agreements of our iContact products are monthly; however, our customers may purchase subscriptions with varying terms. We separately invoice our customers in advance of their subscription, with payment terms that generally require our customers to pay us 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.

 

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

Professional services revenue consists primarily of data migration, custom development and training. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us generally within 30 days of invoice.

Cost of Revenues and Operating Expenses

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

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their marketing 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 2014, cost of revenues will increase in absolute dollars and as a percentage of revenues.

Sales and Marketing. Sales and marketing costs 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 expect that in the remainder of 2014, sales and marketing expenses will decrease in absolute dollars and 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 solutions, we are able to provide our customers with a single, shared version of our most recent application, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in the remainder of 2014, research and development expenses will remain flat in absolute dollars and 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 expenses, 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 2014, general and administrative expenses will increase in absolute dollars and as a percentage of revenues as a result of the merger-related transaction costs associated with our Merger Agreement with GTCR Valor Companies, Inc.

Amortization of Intangible Assets. Amortized intangible assets consist of customer relationships and trade names acquired in business combinations.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, self-insurance, revenue recognition, fair value of stock-based awards and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.

 

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We believe that of our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2013, the following accounting policies involve a greater degree of judgment or 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. We allocate consideration to each deliverable in our multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.

Our separate units of accounting consist of subscription services, news distribution services and professional services. Our subscription agreements generally include the use of our cloud-based software, hosting services, content and content updates and customer support. 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 do not provide customers the right to take possession of the software at any time.

We also distribute 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. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Our professional services consist primarily of data migration, custom development and training. Our cloud-based software does not require significant modification and customization services.

We established vendor-specific objective evidence (VSOE) of 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 third-party evidence (TPE) of selling price is not available for any of our services due to differences in the features and functionality compared to competitor’s products. Therefore, we use the estimated selling prices (ESP) for the remaining deliverables by analyzing multiple factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.

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. As a result, we incur sales expense before the recognition of the related revenues.

Stock-Based Compensation. We recognize compensation expense for stock option and restricted stock 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 recognize compensation expense for our restricted stock units over an accelerated expense attribution period, which separately recognizes compensation expense for each vesting tranche over its vesting period 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. Stock options granted have a 10-year term and generally vest annually over a 4-year period. Restricted stock awards generally vest annually over a 4-year period. In February 2014, we granted restricted stock units to certain members of our executive team which are contingent upon achievement of pre-determined performance-based criteria. The number of units that will vest range from 0% to 200% of the target shares and is also based upon continued employment of the participant over the vesting period which is three years.

We use the Black-Scholes option pricing model to measure the fair value of stock option awards. We use the daily historical volatility of our stock price over the expected life of the options to calculate the expected volatility and a combination of our historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term to determine the expected term of option awards. 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. We use the quoted closing market price of our common stock on the grant date to measure the fair value of restricted stock awards and restricted stock units. We estimate the fair value of restricted stock units at the date of grant using the quoted closing market price of our common stock on the grant date and the probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we update our assessment of the probability that the specified performance criteria will be achieved and adjust the estimate of the fair value of the performance-based restricted stock units if necessary.

Goodwill and Long-Lived Assets. Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. We

 

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perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on our fair value as a whole. When assessing goodwill for impairment, 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. Based on the results of our most recent annual assessment performed on November 1, 2013, we concluded that the fair value of our reporting unit exceeded its carrying amount. We also review the carrying amount of our reporting unit to its fair value based on quoted market prices of our common stock, or market capitalization. Our market capitalization exceeded our carrying amount on November 1, 2013. No events or circumstances occurred from the date of the assessments through March 31, 2014 that would impact our conclusions.

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.

Income taxes. We use the asset and liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences between the respective reported amounts and tax bases of assets and liabilities, as well as for operating losses and tax-credit carryforwards. Net 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. We file income tax returns in 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 2003 to 2013.

Results of Operations

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

 

		Three Months Ended March 31,
		2013				2014
Revenues			100	%			100	%
Cost of revenues			21				22
Gross profit			79				78
Operating expenses:
Sales and marketing			58				56
Research and development			7				7
General and administrative			27				23
Amortization of intangible assets			4				4
Total operating expenses			96				90
Loss from operations			(17	)			(12	)
Interest and other income (expense), net			—				—
Loss before provision for income taxes			(17	)			(12	)
Provision for income taxes			1				1
Net loss			(18	)%			(13	)%

Three Months Ended March 31, 2014 and 2013

Revenues. Revenues for the three months ended March 31, 2014 were $45.7 million, a decrease of $588,000, or 1%, from revenues of $46.2 million for the comparable period in 2013. Revenues from our marketing suite product for the three months ended March 31, 2014 were $8.3 million, an increase of $5.5 million, or 192%, from $2.8 million for the comparable period in 2013. For the remainder of 2014, we

 

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anticipate revenues related to our marketing suite product will grow as a percentage of total revenues due to our continued emphasis on the product. This increase in revenues was offset by a decrease in revenues from our point products, which have been discontinued or deemphasized because they do not align with our current strategic direction. Revenues from our small business edition product (SBE) decreased $4.3 million from three months ended March 31, 2013 as it was discontinued in May 2013. Revenues from our North Social platform, a stand-alone product that provided Facebook applications for small businesses which was discontinued in February 2014, were $410,000 for the three months ended March 31, 2014, a decrease of $1.1 million from $1.5 million for the comparable period in 2013. Revenues for iContact, a stand-alone ecommerce email marketing product, for the three months ended March 31, 2014 were $11.0 million, a decrease of $1.0 million from $12.0 million for the comparable period in 2013. The decreases in revenues for the SBE product, North Social platform and iContact are due to our broader value creation strategy to focus on selling integrated suites to marketing and public relations professionals and move away from selling non-core point products. Total deferred revenue as of March 31, 2014 was $80.4 million, representing an increase of $2.3 million, or 3%, over total deferred revenue of $78.1 million as of March 31, 2013.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2014 was $10.2 million, an increase of $428,000, or 4%, over cost of revenues of $9.8 million for the comparable period in 2013. The increase in cost of revenues was primarily due to a net increase of $188,000 in employee-related and contracted labor costs, $120,000 in severance costs and $104,000 in depreciation expense. We had 345 full-time employee equivalents in our professional and other support services group at March 31, 2014 compared to 342 full-time employee equivalents at March 31, 2013.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2014 were $25.5 million, a decrease of $1.3 million, or 5%, from sales and marketing expenses of $26.8 million for the comparable period in 2013. The decrease in sales and marketing was primarily due to decreases of $624,000 in employee-related costs primarily related to the shutdown of our sales operations in the Philippines, $463,000 in sales commissions and incentive compensation and $1.2 million in marketing program costs, offset by increases of $490,000 in severance costs and $406,000 in stock-based compensation. We had 572 full-time employee equivalents in sales and marketing at March 31, 2014 compared to 856 full-time employee equivalents at March 31, 2013.

Research and Development Expenses. Research and development expenses for the three months ended March 31, 2014 were $3.0 million, an increase of $22,000, or 1%, over research and development expenses of $3.0 million for the comparable period in 2013. For the three months ended March 31, 2013 and 2014, we capitalized $148,000 and $139,000, respectively, of employee-related costs for internally developed software. We had 67 full-time employee equivalents in research and development at March 31, 2014 compared to 66 full-time employee equivalents at March 31, 2013.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2014 were $10.5 million, a decrease of $1.8 million, or 15%, from general and administrative expenses of $12.3 million for the comparable period in 2013. The decrease in general and administrative was primarily due to a decrease of $3.5 million in expense related to the fair value of the contingent consideration for the acquisition of North Social recorded during the three months ended March 31, 2013. There was no expense incurred during the three months ended March 31, 2014 as the contingent consideration was paid in full in 2013. The decrease was offset by increases of $141,000 in employee-related costs, $130,000 loss on disposal of assets, $1.1 million in merger-related transaction costs and $264,000 in other professional fees. We had 111 full-time employee equivalents in our general and administrative group at March 31, 2014 compared to 106 full-time employee equivalents at March 31, 2013.

Amortization of Intangible Assets. Amortization of intangible assets for the three months ended March 31, 2014 was $1.9 million, a decrease of $140,000, or 7%, compared to $2.0 million for the comparable period in 2013. The decrease in amortization expense is primarily attributable to the trade name from the acquisition of PRWeb in 2006 that was fully amortized in the third quarter of 2013.

Other Income (Expense). Other expense for the three months ended March 31, 2014 was $60,000, a decrease of $65,000, or 1,300%, compared to other income of $5,000 for the comparable period in 2013. The decrease is primarily due to changes in foreign currency exchange gains and losses and interest expense from fees for our revolving credit facility.

Provision for Income Taxes. The provision for income taxes for the three months ended March 31, 2014 was $402,000 compared to $439,000 for the comparable period in 2013. Our effective tax rate differs from the U.S. federal statutory rate primarily due to operating losses in U.S. and foreign jurisdictions for which no tax benefit is currently available, an increase in a U.S. deferred tax liability that cannot serve as a source of taxable income for the recognition of a deferred tax asset, non-deductible stock-based compensation, non-deductible merger-related transaction costs and to a lesser extent, state income taxes and certain other non-deductible expenses.

 

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Liquidity and Capital Resources

As of March 31, 2014, our principal sources of liquidity were cash and cash equivalents totaling $38.9 million and net accounts receivable totaling $18.8 million. Our cash equivalents consist of money market funds and certificates of deposit. Cash and cash equivalents held by our international operations totaled $11.0 million at March 31, 2014. Based on our business plan, we expect that cash held overseas will continue to be used for our international operations and therefore do not anticipate repatriating these funds. If we were to repatriate these amounts, we do not believe that the resulting withholding taxes payable would have a material impact on our liquidity.

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2014 was $5.9 million, reflecting a net loss of $5.9 million, non-cash charges for depreciation and amortization of $4.4 million, stock-based compensation of $4.0 million and a net change of $5.8 million in accounts receivable and deferred revenue due to our subscription agreements invoiced in 2014. Net cash provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.

Investing Activities. Net cash used in investing activities for the three months ended March 31, 2014 was $758,000, which resulted from investments in property, equipment and software of $862,000, offset by proceeds from disposal of assets of $104,000.

Financing Activities. Net cash used in financing activities for the three months ended March 31, 2014 was $946,000, which primarily resulted from our purchase of 70,901 shares of our common stock at an aggregate cost of $932,000.

We have various non-cancelable operating leases, primarily related to office real estate, that expire through 2023 and generally contain renewal options for up to five years. As of March 31, 2014, minimum required payments in future years under these leases are $2.9 million, $4.0 million, $3.9 million, $2.7 million, $2.0 million and $8.6 million in the remainder of 2014 and in the years 2015, 2016, 2017, 2018, 2019 and thereafter, respectively. As of March 31, 2014, we have a total of $1.2 million in letters of credit outstanding substantially in favor of landlords for certain of our office spaces. These letters of credit expire at various dates through May 2023.

On February 27, 2012, we established a $15.0 million revolving credit facility (Revolver) with a major lending institution which will be available for use until June 30, 2014. The Revolver is intended to be used for general working capital purposes and to provide increased liquidity and financial flexibility. The Revolver has a one-year term, renewable annually and bears interest equal to the BBA LIBOR Daily Floating Rate plus 2.25%. In addition, we pay a monthly fee equal to 0.4% on any unused funds under the revolving credit facility. As collateral for extension of credit under the facility, we granted security interests in favor of the institution of substantially all of our assets and pledged the stock of our directly owned domestic subsidiaries and 65% of the shares of our foreign subsidiaries. As of March 31, 2014, the Revolver was reduced by our outstanding letters of credit of $1.2 million. As such, we had $13.8 million available to borrow under the Revolver.

As of March 31, 2014, $20.0 million remains available for purchases under our stock repurchase program. Although we repurchased stock during the years ended December 31, 2010 and 2011, we may or may not do so in future periods, and our revolving credit facility limits our ability to engage in stock repurchases.

As of March 31, 2014, 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 computer equipment, we do not engage in off-balance sheet financing arrangements. 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.

We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our cash and cash equivalents 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 twelve months. Our cash requirements in the future may also be financed through our revolving credit facility or additional equity financing. There can be no assurance that financing would come at favorable terms, if at all. In addition, the Merger Agreement includes certain covenants that limit our ability to undertake financing transactions prior to the earlier to occur of the consummation of the Merger or the termination of the Merger Agreement.

In February 2014, we made a decision to shut-down our sales operations in our Philippines office. As a result, during the next three to six months, we expect to incur estimated expenses totaling $5.0 million for costs relating to the termination of the lease, impairment of assets and severance from the reduction in the workforce.

 

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, 2013. Our exposure to interest rate risk has not changed materially since December 31, 2013.

 

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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 and Philippine peso. 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 10% and 11% of our total revenues for the year ended December 31, 2013 and for the three months ended March 31, 2014, respectively. Exchange rate fluctuations have not significantly impacted our results of operations and cash flows. Our future results of operations and cash flows may be affected by changes in foreign currency exchange rates. Historically, we have not utilized derivative financial instruments to hedge our foreign exchange exposure; however, we may choose to use such contracts in the future.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the 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 during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

Item 1.

Legal Proceedings

On January 23, 2014, North Venture Partners, LLC (NVP) filed a complaint that named us as a defendant in a lawsuit in the U.S. District Court for the Northern District of California (Civil Action No. C14-0337). The complaint, which was served to us on January 27, 2014, alleges that we failed to pay the full amount of the earn-out payment due under an Asset Purchase Agreement dated February 24, 2011 in which we acquired certain assets of NVP. NVP’s complaint seeks an award for damages of approximately $6.4 million. This litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. We believe we have meritorious defenses and intend to vigorously defend the lawsuit.

On April 28, 2014, a purported class action lawsuit was brought against us, the members of our Board of Directors, GTCR Valor Merger Sub, Inc. (Purchaser), GTCR Valor Companies, Inc. (Parent) and GTCR, LLC (GTCR), captioned TLC Foundation L.P. v. Vocus, Inc. et al., which we refer to as the (Delaware action). The Delaware action generally alleges that the individual director defendants breached their fiduciary duties to our public stockholders in connection with Parent and Purchaser’s proposed acquisition of us because, among other things, they allegedly failed to maximize value for our stockholders, including by allegedly pursuing a conflicted sales process, agreeing to unfair deal protections, failing to adequately consider other potential acquirors, and failing to fully disclose all material information necessary for our stockholders to make an informed decision regarding the acquisition. The Delaware action also generally alleges that we, GTCR, Parent and Purchaser aided and abetted those alleged violations. The plaintiffs purport to bring the Delaware action on behalf of a class of our stockholders, and seek, among other relief (i) to enjoin the acquisition of us by Parent and Purchaser, (ii) to rescind or, alternatively, award damages to our stockholders to the extent the acquisition has already been implemented, (iii) to require the individual director defendants to disclose all material information relating to the proposed transaction and (iv) to award plaintiff the fees and costs associated with Delaware action. The litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. We believe that the Delaware action is without merit and intend to defend vigorously against all claims asserted.

From time to time, we are named as a defendant in other legal actions arising from our normal business activities. We are not currently subject to any other 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 that 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:

 

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

 

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changes in our target market;

 

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changes in the volume and mix of our solutions sold in a particular quarter;

 

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

 

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

 

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the discontinuance of existing products by us or our competitors;

 

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costs associated with acquisitions of technologies and businesses;

 

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the rate of expansion and productivity of our sales force;

 

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changes in our pricing policies or those of our competitors;

 

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changes in the payment terms for our products and services;

 

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

 

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changes in accounting policies or the adoption of new accounting standards;

 

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

 

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

 

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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;

 

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foreign currency exchange rates;

 

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the timing of customer payments and payment defaults by customers;

 

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the purchasing and budgeting cycles of our customers; and

 

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extraordinary expenses such as litigation or other dispute-related settlement payments.

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 marketing software are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.

The market for cloud-based software specifically designed for marketing is relatively new and emerging, making our business and future prospects difficult to evaluate. We have three distinct types of customers: small business owners, marketing professionals and PR professionals. These professionals work at companies of all sizes with PR professionals generally concentrated in large and mid-sized organizations and marketing professionals and small business owners generally concentrated in small and mid-sized organizations. Many large and mid-sized companies have often invested substantial personnel and financial resources in their PR departments, and may be reluctant or unwilling to migrate to cloud-based software and services specifically designed to address the marketing market. Many small businesses may

 

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have a single individual fulfilling multiple roles for marketing, if they have any marketing resource at all. Our success will depend to a substantial extent on the willingness of companies of every size to increase their use of or begin using cloud-based solutions in general and for cloud marketing 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 cloud marketing solutions. These challenges, risks and difficulties include the following:

 

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generating sufficient revenue to attain or, if attained, maintain profitability;

 

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managing growth in our operations;

 

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managing the risks associated with developing new services and modules and discontinuing existing product and services;

 

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attracting and retaining customers; and

 

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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 cloud-based 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 solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements, renew these agreements for fewer modules or users, or renew these agreements for less expensive services, our business, financial condition and results of operations will be adversely affected.

A portion of our solutions are sold pursuant to 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 or for less expensive services 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 or PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

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

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

We are subject to risks related to credit card payments we accept. If we fail to be in compliance with applicable credit card rules and regulations, we may incur additional fees, fines and ultimately the revocation of the right to accept credit card payments, which would have a material adverse effect on our business, financial condition or results of operations.

Some of the customers of our services pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating expenses and adversely affect our net income. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted making it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers which could have an adverse effect on our business, revenue, financial condition and results of operations.

 

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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 services to our existing customers. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.

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

Our business continues to evolve, expanding into new markets and new service areas, and is therefore subject to additional risk and uncertainty. For example, in 2008 we began offering solutions specifically for small businesses, in June 2010, we began providing social media monitoring services to our customers, in October 2011 we began offering a marketing suite targeted at small to mid-sized businesses, and in February 2012, we acquired iContact Corporation (iContact) which provides email marketing services. We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of our cloud marketing and public relations suites.

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

We sell some of our services to small organizations, including small businesses, associations and non-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 be more likely to spend the limited funds that they have on items other than our solutions. Additionally, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, which would negatively affect demand for our solutions, increase customer attrition and adversely affect our business, revenue, financial condition and results of operations.

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

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

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

Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. If we further expand our direct sales force and marketing efforts, it may 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 and marketing efforts if we are unable to hire and develop talented 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 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.

 

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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 cloud-based software. If our internally-developed content does not maintain market acceptance, current customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new customers.

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

We rely on third-parties to provide or make available certain data for our information databases, our news monitoring service and our social media monitoring service. These third-parties may not renew agreements to provide content to us or may increase the price they charge for their content. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third-parties. In the event we are unable to use such third-party content or are unable to enter into agreements with third-parties, current customers may not renew their subscription agreements with us or continue purchasing solutions from us, and it may be difficult to acquire new 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 service 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.

If the delivery of our customers’ emails is limited or blocked, customers may cancel their accounts.

Internet service providers (ISP) can block emails from reaching their users. The implementation of new or more restrictive policies by ISPs may make it more difficult to deliver our customers’ emails. If ISPs materially limit or halt the delivery of our customers’ emails, or if we fail to deliver our customers’ emails in a manner compatible with ISPs’ email handling, authentication technologies or other policies, then customers may cancel their accounts which could harm our business and financial performance.

Various private spam blacklists may interfere with the effectiveness of our products and our ability to conduct business.

We depend on email to market to and communicate with our customers, and our customers rely on email to communicate with journalists, social media influencers, and their customers and members. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that exceed legal requirements and classify certain email solicitations that comply with legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and Internet protocol addresses associated with those entities or individuals. If a company’s Internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist. If our services are blacklisted our customers may be unable to effectively use our services, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.

Our customers’ use of our services and websites to transmit negative messages or links to harmful websites or applications could damage our reputation, and subject us to liability.

Our customers could use our services or websites to transmit negative messages or links to harmful websites or applications, reproduce and distribute copyrighted and trademarked material without permission, or report inaccurate or fraudulent data or information. Any such use of our services could damage our reputation and we could face claims for damages, infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our services may not comply with federal, state and foreign laws. Facilitating these activities may expose us to liability including fines or penalties, or expend resources to remedy any damages caused by such actions.

 

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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. Our recent operating losses were $4.2 million for 2011, $21.9 million for 2012 and $20.3 million for 2013. We expect our operating expenses to increase as we continue to expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to generate operating income.

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if we experience a change in ownership, or if taxable income does not reach sufficient levels.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We may experience ownership changes in the future. As a result, we may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. Federal and state income tax purposes and the utilization of other tax attributes to reduce our Federal and state income tax expense.

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.

If we are required to collect sales and use or other taxes on our solutions, we may be subject to liability for past sales and our business, financial condition and results of operations may be adversely affected.

Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services and ecommerce transactions in general in various jurisdictions is a complex and evolving issue. It is possible that we could face sales tax audits and an assertion that we should be collecting sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes. The imposition of Internet usage taxes or enhanced enforcement of sales tax laws could result in substantial tax liabilities for past sales or could have an adverse effect on our business, financial condition and results of operations.

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 market for marketing solutions 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:

 

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

 

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marketing solution providers offering products specifically designed for marketing;

 

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outsourced marketing service providers;

 

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custom-developed solutions;

 

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software companies offering social media solutions;

 

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•

email marketing providers; and

 

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press release distribution providers.

Many of our current and potential competitors have longer operating histories, a larger presence in the marketing 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 cloud marketing market with competing products as the cloud marketing 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.

Traditional press release distribution providers now 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 competitors could rapidly acquire significant market share.

We expect that many companies will offer solutions designed to help businesses promote themselves across social media channels. Given the rapid adoption of social media and the dynamic nature of the vendors in this market, it is possible that these new competitors could rapidly acquire significant market share.

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

The market for our solutions is characterized by changes in customer requirements, changes in protocols, new technologies 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 or new 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 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 U.S. 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 third-party data center facilities, have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. Any or all of these events could cause our customers to lose access to our cloud-based 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.

 

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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, that we would not be exposed to unknown liabilities, or that such an acquisition will be viewed positively by our customers, stockholders, analysts or the financial markets. In connection with one or more of these transactions, we may:

 

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

 

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

 

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be unable to achieve the anticipated benefits from our acquisitions;

 

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

 

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incur large charges or substantial liabilities;

 

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

 

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encounter problems arising from differences in the revenue, licensing or support of the acquired business; and

 

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

In 2011, we acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social). In 2012, we acquired all of the outstanding shares of iContact, an email marketing company.

The consideration paid in connection with an acquisition also affects our financial results. If we should proceed with one or more significant acquisitions in which the consideration includes cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition. For example, the purchase price of the iContact acquisition included approximately $90.5 million in cash. To the extent that we issue shares of stock or other rights to purchase stock, existing stockholders may be diluted and earnings per share may decrease. For example, as part of the purchase price for iContact, we issued 406,554 shares of our common stock and 1,000,000 shares of preferred stock that are initially convertible into 3,025,600 shares of our common stock.

In addition, acquisitions may result in our incurring additional debt, material one-time write-offs, or purchase accounting adjustments and restructuring charges. They may also result in recording goodwill and other intangible assets in our financial statements which may be subject to future impairment charges or ongoing amortization costs, thereby reducing future earnings. In addition, from time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as incurring expenses that may impact operating results.

We may dispose of or discontinue existing products and services, which may adversely affect our business, financial condition and results of operations.

We continually evaluate our various products and services in order to determine whether any should be discontinued or, to the extent possible, divested. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the right products or services to dispose of or discontinue, or that our decision to dispose of or discontinue various investments, products or services is prudent. There are no assurances that the discontinuance of various products or services will reduce our operating expenses or will not cause us to incur material charges with such a decision. The disposal or discontinuance of existing solutions presents various risks, including, but not limited to the

 

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inability to find a purchaser for a product or service or the purchase price obtained will not be equal to at least the book value of the net assets for the product or service, managing the expectations of, and maintaining good relations with, our customers who previously purchased discontinued solutions, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with our disposal or discontinuance of solutions, including, but not limited to employee severance costs and excess facilities costs, all of which could have an adverse effect on our business, financial condition and results of operations.

We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.

The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party data center facilities to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.

Moreover, because our solutions are cloud-based, the amount of data that we store for our customers on our servers is ever-increasing. Any systems failure or compromise of our security that results in the release of our customers’ data could seriously limit the adoption of our solutions and harm our reputation causing our business to suffer. In addition, any person who circumvents our security measures could steal proprietary or confidential customer information or cause interruptions in our operations. We incur significant costs to protect against security breaches, and may incur significant additional costs to alleviate problems caused by any breaches. Customers’ concerns about security could deter them from using the Internet to conduct transactions that involve confidential information, so our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business and financial results.

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, and our customers rely on our email services to communicate with journalists, social media influencers, and their customers and members. 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, reproduce and distribute copyrighted and trademarked material without permission, or report inaccurate or fraudulent data or information, our reputation could be harmed, even though we are not responsible for the content distributed via our services. Additionally, if our services are blacklisted, our customers may be unable to effectively use our services, and as a result, we could lose customers or fail to attract new customers and our results of operations could be adversely affected.

 

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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 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 changes could limit the growth of Internet-related commerce or communications which could 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.

U.S. federal legislation and the laws of many foreign countries impose certain obligations on the senders of commercial emails, which could minimize the effectiveness of our products, particularly our email marketing product, and establishes financial penalties for noncompliance, which could increase the costs of our business.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our products. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email such as the laws of Canada and the United Kingdom, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our business, and our reputation would suffer.

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.

 

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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.

Source code, the detailed program commands for our software programs, is critical to our business. Although we take measures to protect our source code, unauthorized disclosure or reverse engineering of a significant portion of our source code could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our business.

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. We cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties, as currently pending patent applications are not publicly available. 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:

 

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divert management’s attention;

 

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result in costly and time-consuming litigation;

 

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

 

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require us to redesign our solutions to avoid infringement.

We may be liable or alleged to be liable to third parties for software or content that we provide to our customers if the software or content violates a third party’s intellectual property rights, or if our customers violate such rights by providing content using our solutions.

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, 2011 and December 31, 2013, the number of our full-time equivalent employees increased from 655 to 1,356. We anticipate that additional growth may 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 growth in our headcount, other than occasional office space constraints. However, 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 new employees as needed, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the 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 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.

 

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

Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an 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 10% of our 2013 revenues, our business is susceptible to risks associated with international operations.

Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:

 

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fluctuations in currency exchange rates;

 

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unexpected changes in foreign regulatory requirements;

 

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difficulties in managing and staffing international operations;

 

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

 

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

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

Our debt covenants restrict our operational flexibility.

Our revolving credit facility contains a number of operational covenants, which, among other things, impose certain limitations on us with respect to expansion of our lines of business, effecting mergers, investments and acquisitions, incurring additional indebtedness, paying dividends or distributions, repurchasing shares of our common stock, entering into guarantees, and incurring liens and encumbrances. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets and of our subsidiaries, by a pledge of our and certain of our subsidiaries’ stock and by a guarantee of our subsidiaries. If the amounts outstanding under the credit facility were accelerated due to an event of default, the lender could proceed against such available collateral by forcing the sale of all or some of these assets.

We might require additional capital to support business growth or to meet our stock redemption obligations, 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. We may also require additional funds to pay the redemption price of our Series A convertible

 

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preferred stock, which is subject to mandatory redemption in February 2017. 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:

 

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

 

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declines in demand for our solutions;

 

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decreases in collections of our customer receivables;

 

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insolvency of our key vendors and suppliers; and

 

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volatility in interest rates and decreases in investment income.

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

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

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

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

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

This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of 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.

Failure to maintain effective internal control over financial reporting and disclosure controls and procedures would have a material adverse effect on our business.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In order to comply with Section 404 of the Sarbanes-Oxley Act’s requirements relating to internal control over financial reporting, we incur substantial accounting expense and expend significant management time on compliance-related issues. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material, the market price of our stock may decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities.

 

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Litigation could have a material adverse impact on our results of operations, financial condition and liquidity.

From time to time we have been, and may be in the future, subject to litigation. We are currently subject to the lawsuit described in Item 1 of this Form 10-Q. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. While we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim or may not provide coverage at all, and there can be no assurance as to the continued availability of this insurance. Any such proceedings may result in substantial costs and divert management’s attention and resources.

Risks Related to our Pending Merger

The announcement and pendency of the Offer and the Merger could adversely affect our business, financial results and operations.

As described above under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview,” on April 6, 2014, We entered into the Merger Agreement, pursuant to which Purchaser has commenced a tender offer to purchase all of the outstanding Shares, at a price per Share of $18.00, net to the holder of such Share, in cash, without interest and subject to any applicable tax withholding. Following Purchaser’s acceptance of Shares tendered in the Offer, Purchaser will be merged with and into us, and we will survive the Merger as a wholly owned subsidiary of Parent.

The announcement and pendency of the Offer and the Merger could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, vendors and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the Offer and Merger are completed. In particular, we could potentially lose key employees if such employees decide to pursue other opportunities in light of the proposed transaction. We could also potentially lose customers or vendors, new customer or vendor contracts could be delayed or decreased and we may have difficulty in hiring new employees. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

Additionally, we are subject to restrictions set forth in the Merger Agreement on the conduct of our business prior to the consummation of the Merger, including, among other things, certain restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, transfer or dispose of our assets, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing otherwise attractive business opportunities, limit our ability to respond effectively to competitive pressures, industry developments and future opportunities and otherwise harm our business, financial results and operations.

Failure to consummate the Merger, or a delay in its consummation, could adversely affect our business and the market price of our common stock.

There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including the absence of laws or judgments prohibiting or restraining the Merger and the receipt of certain regulatory approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied.

In addition, the Merger Agreement contains certain termination rights for us and Parent, including our right, in certain circumstances, to terminate the Merger Agreement and accept a Superior Proposal, as that term is defined in the Merger Agreement. We will be required to pay Parent a termination fee equal to $13.0 million if, among other reasons, the Merger Agreement is terminated (i) by us to enter into an acquisition agreement that constitutes a Superior Proposal or (ii) by Parent because our Board of Directors adversely changes its recommendation to stockholders to accept the Offer and tender their Shares to Purchaser in the Offer. If we terminate the Merger Agreement under certain circumstances, Parent will be required to pay us a reverse termination fee equal to $29.0 million.

If the Merger is not consummated, and if there are no other parties willing and able to acquire us on terms acceptable to us, our stock price may decline. A failed transaction may result in negative publicity and a negative impression of us in the investment community. Additionally, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Offer and the Merger, as well as the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. Many of the fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than in connection with the Offer and the Merger.

The occurrence of any of these events individually or in combination could have a material adverse impact on our results of operations and our stock price.

 

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The Merger Agreement contains provisions that could discourage a third party from making an acquisition proposal, or otherwise make it difficult for a third party to acquire us, prior to the consummation of the Merger.

We have agreed not to solicit or initiate discussions with third parties regarding other acquisition proposals and have agreed to certain restrictions on our ability to respond to such proposals, provided that we may enter into discussions concerning, or provide confidential information to persons making, certain unsolicited proposals if our Board of Directors determines that it would be inconsistent with its fiduciary duties not to do so. These provisions may discourage an otherwise-interested third party from considering or proposing to acquire us, even pursuant to a transaction that may be deemed of greater value to our stockholders than the Merger. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party offering a lower value to our stockholders than such third party might otherwise have offered.

If the Offer and Merger are not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties.

If the Offer and Merger are not completed, the Board of Directors may review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure, or attempting to implement a sale of all or a portion of our business to either a financial or a strategic buyer. Such alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the Merger, our ability to consummate any such alternative transaction, the valuation assigned to our business in any such alternative transaction, and other variables which may adversely affect our operations.

Stockholder litigation could prevent or delay the closing of the Offer and consummation of the Merger or otherwise negatively impact our business and operations.

We may incur additional costs in connection with the defense or settlement of any stockholder litigation that may arise in connection with the Offer and the Merger. Such litigation may adversely affect our ability to consummate the Merger, and could also have a material adverse effect on our financial condition or results of operations.

Risks Related to our Common Stock and the Securities Markets

JMI Equity’s significant ownership interest dilutes the interests of our common stockholders, may discourage, delay or prevent a change in control of our company and grants important rights to JMI Equity.

The 1,000,000 shares of Series A convertible preferred stock that we issued in February 2012 to JMI Equity Fund VI, L.P. (JMI Equity) were immediately convertible into shares of our common stock at an initial conversion rate of 3.0256 shares of common stock per share of Series A convertible preferred stock (subject to customary adjustments, and subject to increase if we fail to fulfill our obligation to redeem the preferred stock on February 24, 2017). The investment currently equates to an ownership interest of approximately 12%, assuming the full conversion of each share of preferred stock into our common stock. Any sales in the public market of the shares of common stock issuable upon such conversion after that date could adversely affect prevailing market prices of our common stock.

On February 24, 2017, we will be required to redeem each issued and outstanding share of Series A convertible preferred stock for $77.30 per share from our legally available funds, or such lesser amount of shares as we may then redeem under Delaware law. The shares of preferred stock will vote on an as-converted basis with the common stock, voting together as a single class, provided that the holders of the preferred stock shall vote separately as a class on certain matters affecting the preferred stock. If any shares of preferred stock are outstanding on or after February 24, 2017, the holders of the preferred stock will have the right to vote separately as a class on additional actions by Vocus related to acquisitions, redemptions, dividends, capital stock, and indebtedness. In addition, for so long as the outstanding shares of Series A convertible preferred stock continue to represent at least 5% of the total outstanding shares of our common stock, calculated assuming the conversion of all outstanding shares of Series A convertible preferred stock into shares of common stock, the holders of the Series A convertible preferred stock, voting as a separate class, will have the exclusive right to elect one director to our board of directors (the Series A Director). Furthermore, pursuant to an Investor Rights Agreement with JMI Equity, the holders of the preferred stock have the right to nominate a director to the board of directors for as long as they hold 5% or more of our issued and outstanding capital stock (which nominee shall be the Series A Director for so long as the holders of preferred stock have the right to elect the Series A Director). These provisions, as well as other terms of the Series A convertible preferred stock, may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company.

There can be no assurance that the interests of JMI Equity or any subsequent holders of the Series A convertible preferred stock are or will be aligned with those of our other stockholders. Investor interests can differ from each other and from other corporate interests and it is possible that this significant stockholder may have interests that differ from management and those of other stockholders. If JMI Equity or any subsequent holders of the preferred stock were to sell, or otherwise transfer, all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities.

 

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A portion of the voting power of our stock is concentrated in a limited number of stockholders, and their interests may be different from yours.

A significant portion of the voting power of our stock is concentrated in the hands of a few stockholders. As a result, if such persons act together, they may have substantial control over matters submitted to our stockholders for approval, including the election and removal of directors, changes in our capital structure, governance, stockholder approvals and the approval of any merger, consolidation or sales of all or substantially all of our assets. These stockholders may have different interests than the other holders of our stock and may make decisions that are adverse to your interests.

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:

 

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quarterly variations in our operating results;

 

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seasonality of our business cycle;

 

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interest rate changes;

 

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

 

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

 

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

 

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

 

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news reports relating to trends in our markets;

 

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changes in laws and regulations affecting our business;

 

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threatened or actual litigation;

 

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material announcements by us or our competitors including new product or service introductions, changes in business strategy and financial estimates, and acquisitions or divestitures of businesses, products, technologies or services;

 

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

 

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any major change in our board of directors or management;

 

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

 

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general political conditions such as acts of war or terrorism.

 

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In addition, the stock market in general, and the market for cloud-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

Provisions in our amended and restated certificate of incorporation and bylaws, our stockholders’ rights plan 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:

 

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

 

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

 

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

 

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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;

 

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

 

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

 

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

 

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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 to the above, in May 2013, the Board adopted a stockholders rights plan and declared a dividend distribution of one preferred stock purchase right (Right) for each outstanding share of our common stock and 3.0256 Rights for each outstanding share of our Series A Convertible Preferred Stock to stockholders of record at the close of business on May 13, 2013. Our rights plan is intended to protect stockholders in the event of an unfair or coercive offer to acquire our Company and to provide our Board with adequate time to evaluate unsolicited offers. The rights plan may discourage, delay or prevent a change of control or the acquisition of a substantial amount of our common stock and may make any future unsolicited acquisition attempts more difficult. Under the rights plan:

 

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each Right entitles registered holders to purchase one one-thousandth of a share of our Series B Junior Participating Preferred Stock at a price of $46.00 per one one-thousandth of a share, subject to adjustment;

 

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the Rights will be exercisable only if a person or group acquires 20% or more of our outstanding common stock (subject to certain exceptions), or if a person or group announces a tender or exchange offer, resulting in beneficial ownership of 20% or more of the outstanding common stock. The Rights also will be exercisable if a person or group that already beneficially owns or has the right to acquire 20% or more of our outstanding common stock acquires additional shares equal to 1% or more of our then outstanding common stock (except in the case of a certain stockholder who, under limited circumstances, is permitted to beneficially own more than 20%, but less than 25%, of our outstanding common stock, subject to certain exceptions); and

 

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the rights plan will cause substantial dilution to a person or group that attempts to acquire us on terms that our Board does not believe are in our best interests and those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.

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

 

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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 award 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.

Issuer Purchases of Equity Securities

In November 2008, our Board of Directors authorized a stock repurchase program for up to $30.0 million of our shares of common stock, and in August 2011 authorized up to an additional $30.0 million. The shares may be purchased from time to time in the open market, and there is no expiration date specified for the program. During the three months ended March 31, 2014, we did not purchase any shares of our common stock under the program. As of March 31, 2014, $20.0 million remained available for purchases under the program; however, the terms of our revolving credit facility limit the dollar value of shares that we may purchase.

The following table sets forth a summary of our purchases of our common stock during the three months ended March 31, 2014, 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
January 1 – January 31
Share repurchase program(1)			—				—				—			$	20,000,520
Employee transactions(2)			4,077			$	12.22				—				N/A
February 1 – February 28
Share repurchase program(1)			—				—				—			$	20,000,520
Employee transactions(2)			42,919			$	13.09				—				N/A
March 1 – March 31
Share repurchase program(1)			—				—				—			$	20,000,520
Employee transactions(2)			23,905			$	13.40				—				N/A

 

(1)	There were no shares purchased though our publicly announced share repurchase program during the three months ended March 31, 2014.

(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
2.1		Agreement and Plan of Merger by and among GTCR Valor Companies, Inc., GTCR Valor Merger Sub, Inc. and Vocus, Inc., dated as of April 6, 2014.(6)
3.1		Fifth Amended and Restated Certificate of Incorporation.(1)
3.2		Second Amended and Restated Bylaws.(2)
3.3		Amendment to Second Amended and Restated Bylaws.(5)

 

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4.1		Certificate of Designation of Series A Convertible Preferred Stock as of February 24, 2012.(3)
4.2		Certificate of Designation of Series B Junior Participating Preferred Stock as of May 13, 2013.(4)
4.3		Rights Agreement, dated May 13, 2013, between Vocus, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent.(4)
4.4		First Amendment to Rights Agreement, dated April 6, 2014, between Vocus, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent.(6)
4.5		Letter Agreement, dated May 13, 2013, between Vocus, Inc. and JMI Equity Fund VI, L.P.(4)
31.1*		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*		Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith

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

(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on December 18, 2012.

(3)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on February 28, 2012.

(4)	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 May 13, 2013.

(5)	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 August 30, 2013.

(6)	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 April 7, 2014.

 

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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: April 29, 2014

 

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INDEX TO EXHIBITS

 

Exhibit Number		Exhibit
2.1		Agreement and Plan of Merger by and among GTCR Valor Companies, Inc., GTCR Valor Merger Sub, Inc. and Vocus, Inc., dated as of April 6, 2014.(6)
3.1		Fifth Amended and Restated Certificate of Incorporation.(1)
3.2		Amended and Restated Bylaws.(2)
3.3		Amendment to Second Amended and Restated Bylaws.(5)
4.1		Certificate of Designation of Series A Convertible Preferred Stock as of February 24, 2012.(3)
4.2		Certificate of Designation of Series B Junior Participating Preferred Stock as of May 13, 2013.(4)
4.3		Rights Agreement, dated May 13, 2013, between Vocus, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent.(4)
4.4		First Amendment to Rights Agreement, dated April 6, 2014, between Vocus, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent.(6)
4.5		Letter Agreement, dated May 13, 2013, between Vocus, Inc. and JMI Equity Fund VI, L.P.(4)
31.1*		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*		Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith

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

(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on December 18, 2012.

(3)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on February 28, 2012.

(4)	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 May 13, 2013.

(5)	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 August 30, 2013.

(6)	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 April 7, 2014.

 

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