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Vocus 10-Q 2006
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D)
For the Quarter Ended March 31, 2006
Commission File Number
000-51644
4296 Forbes Boulevard
Lanham, Maryland 20706
(301) 459-2590
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of May 5, 2006, 15,080,147 shares of common stock,
par value $0.01 per share, of the registrant were
outstanding.
Vocus,
Inc. and Subsidiaries
Consolidated
Balance Sheets
See accompanying notes.
Vocus,
Inc. and Subsidiaries
Consolidated Statements of Operations
See accompanying notes.
Vocus,
Inc. and Subsidiaries
See accompanying notes.
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
Vocus, Inc. (Vocus or the Company) is a leading provider of
on-demand software for corporate communications and public
relations. The Company’s principal operations are located
in Lanham, Maryland.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information and with the instructions to
Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by accounting
principles generally accepted in the United States for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2006
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. The
consolidated balance sheet at December 31, 2005 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, 2005.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The Company considers all highly liquid investments purchased
with an original maturity date of three months or less to be
cash equivalents. Cash equivalents are recorded at cost, which
approximates fair value.
Management determines the appropriate classification of
short-term investments at the time of purchase and evaluates
such determination as of each balance sheet date.
Available-for-sale securities are stated at fair value based on
quoted market rates. The net unrealized gains and losses on
available-for-sale securities are reported as a component of
comprehensive income (loss), net of tax. As of March 31,
2006, the net unrealized gains on available-for-sale securities
were not material. The Company owns no investments that are
considered to be trading or held-to-maturity securities.
The Company regularly monitors and evaluates the fair value of
its investments to identify other than temporary declines in
value. Management believes no such declines in value existed at
March 31, 2006.
The Company derives its revenues principally from subscription
arrangements permitting customers to access and utilize the
Company’s on-demand software and from providing related
professional services. The Company recognizes revenue when there
is persuasive evidence of an arrangement, the service has been
provided to the
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
customer, the collection of the fee is probable and the amount
of the fee to be paid by the customer is fixed or determinable.
Subscription agreements generally contain multiple service
elements and deliverables. These elements include access to the
Company’s on-demand software and often specify initial
services including implementation and training. Subscription
agreements do not provide customers the right to take possession
of the software at any time.
The Company considers all elements in its multiple element
subscription arrangements as a single unit of accounting and
recognizes all associated fees over the subscription period. In
applying the guidance in Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21),
the Company determined that it does not have objective and
reliable evidence of the fair value of the subscription fees
after delivery of specified initial services. The Company
therefore accounts for its subscription arrangements and its
related service fees as a single unit of accounting. As a
result, all revenue from multiple element subscription
arrangements is recognized ratably over the term of the
subscription. The subscription term commences on the later of
the start date specified in the subscription arrangement or the
date access to the software is provided to the customer.
The Company recognizes revenue from professional services sold
separately from subscription arrangements as the services are
performed. The Company also has entered into a royalty agreement
with a reseller of its application service. The Company
recognizes this revenue over the term of the end-user
subscription upon obtaining persuasive evidence, which includes
monthly notification from the reseller, that the service has
been sold and delivered.
In connection with the acquisitions of Gnossos Software, Inc.
(Gnossos) and Public Affair Technologies (PAT), the Company
acquired corporate communications and government relations
software. The Company does not enter into new licenses for the
Gnossos and PAT software, but continues to provide maintenance
and support under contracts generally with a term of one year.
Revenue is recognized ratably over the service period.
Deferred revenue consists of billings to customers in advance of
revenue recognition. Deferred revenue to be recognized in the
succeeding
12-month
period is included in current deferred revenue with the
remaining amounts included in non-current deferred revenue.
Sales commissions, including commissions related to deferred
revenue, are expensed when a subscription agreement is executed
by the customer.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation using the intrinsic value method of
accounting under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). The Company’s stock-based
compensation awards have generally been granted with an exercise
price equal to the estimated fair value of the underlying common
stock on the grant date, and accordingly, any stock-based
compensation related to stock option grants has not been
material. The Company applied the disclosure provisions under
Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation and related
interpretations (SFAS No. 123) as if the fair value method
had been applied in measuring compensation expense. As a result,
stock-based compensation expense, based upon the fair value
method, was included as a pro forma disclosure in the notes to
the Company’s financial statements.
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
The following illustrates the effect on the Company’s net
loss attributable to common stockholders as if the Company had
applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation during the three months
ended March 31, 2005 (dollars in thousands, except per
share data):
On January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 123(R),
Share-Based Payment (SFAS No. 123R), using the
modified-prospective transition method for the unvested portion
of stock-based compensation awards granted after the Company
became a public entity. Because the Company did not complete its
initial public offering until December 2005, the Company has
applied the prospective method to the unvested portion of
stock-based compensation awards granted prior to June 15,
2005, the date the Company first filed a registration statement
with the Securities and Exchange Commission (SEC). Accordingly,
the Company has not restated its financial results for prior
periods. Under the prospective method, the Company will continue
to account for stock-based compensation awards granted before
June 15, 2005 using the intrinsic value method as
prescribed by APB No. 25. Under the modified prospective
method, stock-based compensation expense for all stock-based
compensation awards granted after June 15, 2005, but not
vested as of December 31, 2005, is based on the grant date
fair value estimated in accordance with the provisions of SFAS
No. 123. Stock-based compensation expense for all
stock-based compensation awards granted after January 1,
2006 is based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123R. The
Company recognizes compensation expense for stock-based
compensation awards on a straight-line basis over the requisite
service period of the award.
Income taxes are provided utilizing the liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax-credit carryforwards, and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amount of assets and liabilities and their tax
bases. Deferred tax assets are reduced by the valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
The Company incurred losses for all periods presented. A
valuation allowance has been recorded to completely offset the
carrying value of the Company’s net deferred tax asset
because of the inability to predict future taxable income. For
the three months ended March 31, 2006, the Company recorded
an income tax provision of $32,000 to reflect the increase in
the valuation allowance for Alternative Minimum Tax (AMT)
credits related to estimated 2006 AMT payments.
Basic net loss attributable to common stockholders per share is
computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted net
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
loss attributable to common stockholders per share includes the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock.
The following summarizes the potential outstanding common stock
of the Company as of the end of each period:
If the Company’s outstanding common stock equivalents were
exercised or converted into common stock, the result would be
anti-dilutive and, accordingly, basic and diluted net loss
attributable to common stockholders per share are identical for
all periods presented in the accompanying consolidated
statements of operations.
Comprehensive loss includes the Company’s net loss as well
as other changes in stockholders’ equity that result from
transactions and economic events other than those with
stockholders. Other comprehensive income or loss includes
foreign currency translation adjustments and unrealized gains
and losses on short-term investments classified as
available-for-sale
securities. There were no material differences between net loss
and comprehensive net loss for the three months ended
March 31, 2005 and 2006.
Initial
Public Offering of Common Stock
In December 2005, the Company completed the sale of 5,000,000
shares of common stock, at a public offering price of $9.00 per
share. A total of $45,000,000 in gross proceeds was raised in
the initial public offering. After deducting the
underwriters’ commissions and offering expenses of
$4,979,000, net proceeds of the offering were $40,021,000. All
of the outstanding shares of the Company’s redeemable
convertible preferred stock were converted into shares of common
stock, on a
one-for-one
basis, at the closing of the offering. In addition, warrants to
acquire shares of Series B redeemable convertible preferred
stock were converted, on a one-for-one basis, into warrants to
acquire common stock.
Reverse
Stock Split
In October 2005, the Company effected a 3-for-1 reverse stock
split. Accordingly, all share and per share amounts have been
retroactively adjusted to give effect to this event.
The Company’s 1999 Stock Option Plan and the 2005 Stock
Award Plan (the “Plans”) provide for the grant of
stock options, restricted stock, stock appreciation rights and
other equity awards to employees, consultants, officers and
directors. The 2005 Stock Award Plan was adopted by the Board of
Directors and stockholders in November 2005 in conjunction with
the Company’s initial public offering. Under the 2005 Stock
Award Plan, 2,600,000 shares have been reserved for future
issuance, subject to annual increases. The Plans are
administered by the
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Compensation Committee of the Board of Directors, which has the
authority, among other things, to determine which individuals
receive awards pursuant to the Plans, and the terms of the
awards. At March 31, 2006, only grants of stock options
have been made under the Plans. Options granted under the Plans
have a 10-year term and generally vest annually over a three or
four-year period. At March 31, 2006, 1,318,750 shares were
available for future grants. All shares available for future
grant are restricted to the 2005 Stock Award Plan.
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123R requiring the recognition of compensation
expense based upon the fair value of its stock-based
compensation awards. The following table sets forth the
incremental stock-based compensation expense related to the
adoption of SFAS No. 123R that is recorded in the
consolidated statement of operations for the three months ended
March 31, 2006 (in thousands):
The effect of adopting SFAS No. 123R was an increase to net
loss of $295,000 or $0.02 per basic and diluted share.
During 2004, the Company granted certain options with an
estimated fair value of the underlying stock that was greater
than the exercise price, resulting in deferred compensation.
Stock-based compensation from these awards for the three months
ended March 31, 2005 and 2006 was $4,000 and $3,000,
respectively. Upon the adoption of SFAS No. 123R, the
related deferred compensation of $19,000 was reclassified to
additional paid-in-capital.
In accordance with SFAS No. 123R, the Company used the
Black-Scholes option pricing model to measure the fair value of
its option awards granted after June 15, 2005. The
Black-Scholes model requires the input of highly subjective
assumptions including volatility, expected term, risk-free
interest rate and dividend yield. In 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB No. 107) which
provides supplemental implementation guidance for SFAS
No. 123R. The Company recently became a public entity, and
therefore has a limited history of volatility. Accordingly, the
expected volatility is based on the historical volatilities of
similar entities’ common stock over the most recent period
commensurate with the estimated expected term of the awards. The
expected term of an award is based on the “simplified”
method allowed by SAB No. 107, whereby the expected term is
equal to the midpoint between the vesting date and the end of
the contractual term of the award. The risk-free interest rate
is based on the rate on U.S. Treasury securities with maturities
consistent with the estimated expected term of the awards. The
Company has not paid dividends and does not anticipate paying a
cash dividend in the foreseeable future and accordingly, uses an
expected dividend yield of zero.
The following weighted-average assumptions were used in
calculating stock-based compensation for options granted during
the three months ended March 31, 2006:
The weighted-average grant date fair value of options granted
during the three months ended March 31, 2006 was $7.16.
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
Stock-based compensation expense recognized is based on the
estimated portion of the awards that are expected to vest. The
Company applies estimated forfeiture rates based on analyses of
historical data, including termination patterns and other
factors.
Stock option activity for the three months ended March 31,
2006 is as follows:
The following details the outstanding options at March 31,
2006:
The aggregate intrinsic value represents the difference between
the exercise price of the underlying awards and the quoted
closing price of the Company’s common stock at
March 31, 2006 multiplied by the number of shares that
would have been received by the option holders had all option
holders exercised their options on March 31, 2006. During
the three months ended March 31, 2006, the aggregate
intrinsic value of options exercised was $2,252,000.
Cash proceeds from the exercise of stock options were $161,000
for the three months ended March 31, 2006. The Company did
not realize a tax benefit from these exercises as substantially
all stock options exercised were incentive stock options.
Additionally, the Company has recorded a valuation allowance to
completely offset its net deferred tax asset.
As of March 31, 2006, there was $5,454,000 of total
unrecognized compensation cost related to nonvested stock-based
compensation awards granted under the Plans. This cost is
expected to be recognized over a weighted
Vocus,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements — (Continued)
average period of 3.7 years. Substantially all options that
vested during the three months ended March 31, 2006 were
granted prior to June 15, 2005, the date the Company filed
a registration statement with the SEC to sell its common stock
in a public offering. The Company valued these options using the
intrinsic value method for purposes of recording stock-based
compensation expense in its financial statements. For pro forma
disclosure purposes, the Company valued these options using the
minimum value method. The fair value of these options that
vested during the three months ended March 31, 2006 was
$29,000.
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, all such matters, if any, 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.
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, 2005. 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.
We are a leading provider of on-demand software for corporate
communications and public relations. Our on-demand software
suite helps organizations of all sizes manage local and global
relationships and communications with journalists, analysts,
public officials and other key audiences. We deliver our
on-demand software over the Internet using a secure, scalable
application and system architecture, which allows our customers
to eliminate expensive up-front hardware and software costs and
to quickly deploy and implement our on-demand software.
We sell access to our on-demand software primarily through our
direct sales channel, and to a lesser extent through third-party
distributors. As of March 31, 2006, we had 1,447 active
customers of all sizes across 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 customers as unique
customer accounts that have an active subscription and have not
been suspended for non-payment.
We plan to continue the expansion of our customer base by
expanding our direct and indirect distribution channels,
expanding our international market penetration and selectively
pursuing strategic acquisitions. As a result, we plan to hire
additional personnel, particularly in sales and professional
services, expand our domestic and international selling and
marketing activities, increase the number of locations around
the world where we conduct business and develop our operational
and financial systems to manage a growing business. We also
intend to identify and acquire companies which would either
expand our solution’s functionality, provide access to new
customers or markets, or both.
We derive all of our revenues from subscription agreements and
related services. Our subscription agreements contain multiple
service elements and deliverables, which include use of our
on-demand software, hosting services, content and content
updates, implementation and training services and customer
support. The typical term of our subscription agreements is one
year, but increasingly our customers are selecting subscriptions
with multi-year terms. We generally invoice our customers in
advance of their annual subscription, with payment terms that
require our customers pay us within 30 days of invoice. Our
subscription agreements are non-cancelable, though customers
typically have the right to terminate their agreements for cause
if we materially breach our obligations under the agreement.
Professional services revenue consists primarily of data
migration, training and configuration services sold separately
after the initial subscription agreement. Typically, our
professional service engagements are billed on a fixed fee basis
with payment terms requiring our customers to pay us within
30 days of invoice. Revenues from professional services
sold separately from subscription agreements have not been
material to our business. During the three months ended
March 31, 2006, professional services sold separately
accounted for less than 5% of our revenues.
Historically, we have increased the price of our subscriptions
for many of our renewal customers in order to absorb the
increasing costs of providing ongoing hosting services, content
and customer support to our existing customer base. Since 2003,
these price increases have typically ranged from 5% to 10% per
annum.
Cost of Revenues. Cost of revenues consists
primarily of compensation for training and support personnel,
hosting infrastructure, amortization of content and purchased
technology, depreciation associated with computer equipment and
software and allocated overhead. We allocate overhead expenses
such as employee benefits, computer supplies, depreciation for
computer equipment and office supplies 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 PR 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 News On-Demand service. We expect that in 2006, cost of
revenues will increase in absolute dollars and remain constant
or decrease slightly as a percentage of revenues, as we incur
expenses to expand our content offerings and our capacity to
support new customers.
Sales and Marketing. Sales and marketing
expenses are our largest operating expense, accounting for 49%
of our revenues for the three months ended March 31, 2006.
Sales and marketing expenses consist primarily of compensation
for our sales and marketing personnel, sales commissions and
incentives, marketing programs, including lead generation,
events 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. Accordingly, we generally
experience a delay between the recognition of revenues and the
corresponding increase in sales and marketing expenses.
As our revenues increase, we plan to continue to invest heavily
in sales and marketing by increasing the number of direct sales
personnel in order to add new customers and increase sales to
our existing customers. We also plan to expand our marketing
activities in order to build brand awareness and generate
additional leads for our growing sales personnel. We expect that
in 2006, sales and marketing expenses will increase in absolute
dollars but will decrease 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 on-demand software. Because of
our hosted, on-demand model, we are able to provide all of our
customers with a single, shared version of our most recent
application. As a result, we do not have to maintain legacy
versions of our software, which enables us to have relatively
low research and development expenses as compared to traditional
enterprise software business models. We expect that in 2006,
research and development expenses will increase in absolute
dollars as we upgrade and extend our service offerings and
develop new technologies, but will remain relatively consistent
as a percentage of revenues.
General and Administrative. General and
administrative expenses consist of compensation and related
expenses for executive, finance, accounting, administrative and
management information systems personnel, professional fees,
other corporate expenses and allocated overhead. We expect that
in 2006, general and administrative expenses will increase in
absolute dollars and increase slightly as a percentage of
revenues, as we incur additional costs associated with being a
public company.
Amortization of Intangible Assets. Amortized
intangible assets consist of customer relationships and
covenants not to compete from business combinations.
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
costs and expenses and related disclosures. On an ongoing basis,
we evaluate our estimates and assumptions. Our actual results
may differ from these estimates under different assumptions or
conditions.
We believe that of our significant accounting policies, which
are described in Note 2 to the consolidated financial
statements and in our annual report on
Form 10-K
for the year ended December 31, 2005, the following
accounting policies include a greater degree of judgement and
complexity. Accordingly, these are the policies we believe are
the most critical to aid in fully understanding and evaluating
our consolidated financial condition and results of operations.
Effective January 1, 2006, the Company adopted
SFAS No. 123R as described below.
Revenue Recognition. We recognize revenues in
accordance with SEC Staff Accounting Bulletin No. 101,
“Revenue Recognition in Financial Statements,” as
amended by Staff Accounting Bulletin No. 104, “Revenue
Recognition.” We recognize revenues from subscription
agreements for our on-demand software and related services 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. Amounts that have been invoiced are
recorded in accounts receivable and deferred revenue.
Our subscription agreements generally contain multiple service
elements and deliverables. These elements include access to our
software and often specify initial services including
implementation and training. Our subscription agreements do not
provide customers the right to take possession of the software
at any time.
Our revenue recognition policy considers all elements in our
multiple element subscription agreements as a single unit of
accounting, and accordingly, we recognize all associated fees
over the subscription period, which is typically one year. We
recognize our revenue over the subscription period because the
subscription is the last element delivered to the customer and
the predominant element of our agreements. In applying the
guidance in Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21, we determined that we do not have objective and
reliable evidence of the fair value of the subscription to our
on-demand software after delivery of specified initial services.
When we sell this subscription separately from professional
services the price charged varies widely, and therefore we
cannot objectively and reliably determine the
subscription’s fair value. As a result, subscription
revenues are recognized ratably over the subscription period.
Professional services sold separately from a subscription
arrangement are recognized as the services are performed.
Stock-Based Compensation. Prior to
January 1, 2006, we accounted for stock-based compensation
using the intrinsic value method of accounting under the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25). Our stock-based compensation awards have generally
been granted with an exercise price equal to the estimated fair
value of the underlying common stock on the grant date, and
accordingly, any stock-based compensation related to stock
option grants has not been material. We applied the disclosure
provisions under Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation and
related interpretations (SFAS No. 123) as if the fair value
method had been applied in measuring compensation expense. As a
result, stock-based compensation expense, based upon the fair
value method, was included as a pro forma disclosure in the
notes to our financial statements for the unvested portion of
the stock-based compensation awards granted after we became a
public entity.
On January 1, 2006, we adopted the provisions of Statement
of Financial Accounting Standard No. 123(R), Share-Based
Payment (SFAS No. 123R), using the modified-prospective
transition method. Because we did not complete our initial
public offering until December 2005, we have applied the
prospective method to the unvested portion of stock-based
compensation awards granted prior to June 15, 2005, the
date we first filed a registration statement with the Securities
and Exchange Commission (SEC). Accordingly, we have not restated
our financial results for prior periods. Under the prospective
method, we will continue to account for stock-based compensation
awards granted before June 15, 2005 using the intrinsic
value method as prescribed by APB No. 25. Under the
modified prospective method, stock-based compensation expense
for all stock-based compensation awards granted after
June 15, 2005, but not vested as of December 31, 2005,
is based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123. Stock-based
compensation expense for all stock-based compensation awards
granted after January 1, 2006 is based on the grant date
fair value estimated in accordance with the provisions of SFAS
No. 123R. We recognize compensation expense for stock-based
compensation awards on a straight-line basis over the requisite
service period of the award.
In accordance with SFAS No. 123R, we used the
Black-Scholes option pricing model to measure the fair value of
our option awards granted after June 15, 2005. The
Black-Scholes model requires the input of highly subjective
assumptions including volatility, expected term, risk-free
interest rate and dividend yield. In 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB No. 107) which
provides supplemental implementation guidance for SFAS
No. 123R. We recently became a public entity, and therefore
have a limited history of volatility. Accordingly, our expected
volatility is based on the historical volatilities of similar
entities’ common stock over the most recent period
commensurate with the estimated expected term of the awards. The
expected term of an award is based on the “simplified”
method allowed by SAB No. 107, whereby the expected
term is equal to the midpoint between the vesting date and the
end of the contractual term of the award. The risk-free interest
rate is based on the rate on U.S. Treasury securities with
maturities consistent with the estimated expected term of the
awards. We have not paid and do not anticipate paying a cash
dividend in the foreseeable future and accordingly, use an
expected dividend yield of zero. Changes in these assumptions
can affect the estimated fair value of options granted and the
related compensation expense which may significantly impact our
results of operations in future periods.
Stock-based compensation expense recognized is based on the
estimated portion of the awards that are expected to vest. We
apply estimated forfeiture rates based on analyses of historical
data, including termination patterns and other factors.
As of March 31, 2006, there was $5,454,000 of total
unrecognized compensation cost related to nonvested stock-based
compensation awards granted under our equity Plans. That cost is
expected to be recognized over a weighted-average period of
3.7 years.
Results
of Operations
The following tables set forth selected unaudited consolidated
statements of operations data for each of the periods indicated
as a percentage of total revenues for the periods indicated.
The following table sets forth our total deferred revenue and
net cash provided by operating activities for each of the
periods indicated and number of active customers as of the last
day of each of the periods indicated.
Three
Months Ended March 31, 2006 and 2005
Revenues. Revenues for the three months ended
March 31, 2006 were $8.3 million, an increase of
$2.2 million, or 35%, over revenues of $6.1 million
for the comparable period in 2005. The increase in revenues was
primarily due to the increase in the number of total active
customers to 1,447 as of March 31, 2006 from 1,174 as of
March 31, 2005, and to a lesser extent an increase in
prices charged for subscriptions from our renewal customers. The
increase in total active customers was the result of the
continued increased market acceptance of our on-demand software
for public relations. We estimate that the increase in prices
charged for subscriptions from our renewal customers represented
$258,000 of the total increase in revenues over the comparable
period. Total deferred revenue as of March 31, 2006 was
$21.3 million, representing an increase of
$5.0 million, or 31%, over total deferred revenue of
$16.4 million as of March 31, 2005.
Cost of Revenues. Cost of revenues for the
three months ended March 31, 2006 was $2.0 million, an
increase of $505,000, or 35%, over cost of revenues of
$1.5 million for the comparable period in 2005. The
increase in cost of revenues was primarily due to an increase of
$566,000 in employee related costs, including $459,000 from
personnel for the maintenance of our information database,
$72,000 from amortization of our internally developed software
and information database used in our subscription services and
$19,000 in stock-based compensation reflecting the adoption of
SFAS No. 123R, offset by a decrease of $209,000 in
third-party license and royalty fees. We launched our
information database in August 2005, resulting in a reduction of
license and royalty fees paid to third-party providers. We had
75 full-time employee equivalents in our professional and
other support services groups at March 31, 2006 compared to
26 full-time employee equivalents at March 31, 2005.
Sales and Marketing Expenses. Sales and
marketing expenses for the three months ended 2006 were
$4.0 million, an increase of $651,000, or 19%, over sales
and marketing expenses of $3.4 million for the comparable
period in 2005. The increase was primarily due to an increase of
$570,000 in employee related costs, including $144,000 in sales
commissions and $71,000 in stock-based compensation reflecting
the adoption of SFAS No. 123R. Our sales and marketing
headcount increased by 28% as we hired additional sales
personnel to focus on adding new customers and increasing
revenues from existing customers. We had 100 full-time
sales and marketing employee equivalents at March 31, 2006
compared to 78 full-time employee equivalents at
March 31, 2005.
Research and Development Expenses. Research
and development expenses for the three months ended
March 31, 2006 were $739,000, an increase of $143,000, or
24%, over research and development expenses of $596,000 for the
comparable period in 2005. The increase in research and
development expenses was primarily due to an increase of
$114,000 in employee related costs and an increase of $53,000 in
stock-based compensation reflecting the adoption of
SFAS No. 123R. For the three months ended
March 31, 2006 and 2005, we capitalized $10,000 and
$87,000, respectively, of employee related costs for internally
developed software used in our subscription services. We had
23 full-time employee equivalents in our research and
development group at March 31, 2006 and 2005.
General and Administrative Expenses. General
and administrative expenses for the three months ended
March 31, 2006 were $1.9 million, an increase of
$699,000, or 57%, over general and administrative expenses of
$1.2 million for the comparable period in 2005. The
increase in general and administrative expenses was primarily
due to $216,000 in public company operating costs and
professional fees, $87,000 in employee related costs, $71,000 in
depreciation expense and $232,000 in stock-based compensation
reflecting the adoption of SFAS No. 123R. Our general
and administrative headcount increased by 11% as we hired
additional personnel to support our growth. We had
21 full-time employee equivalents in our general and
administrative group at March 31, 2006 compared to
19 full-time employee equivalents at March 31, 2005.
Amortization of Intangible
Assets. Amortization of intangible assets for the
three months ended March 31, 2006 was $261,000, a decrease
of $133,000, or 34%, over amortization of intangible assets of
$394,000 for the comparable period in 2005. Customer
relationships acquired in the purchase of PAT were fully
amortized in January 2006 resulting in the decrease in
amortization.
Other Income (Expense). Other income for the
three months ended March 31, 2006 was $482,000 compared to
other expense of $22,000 for the comparable period in 2005. The
increase in other income (expense) was $504,000. We invested
proceeds from our initial public offering in December 2005 in
cash equivalents and short-
term investments, and we repaid in full our outstanding
borrowings under our revolving line of credit which was
terminated. The higher balances of cash and short-term
investments resulted in increased interest income of $465,000.
The repayment of the outstanding borrowings under our revolving
line of credit resulted in decreased interest expense of $33,000.
Provision for Income Taxes. The provision for
income taxes for the three months ended March 31, 2006 was
$32,000 compared to no provision for income taxes for the
comparable period in 2005. The provision for income taxes in
2006 reflects an increase in the valuation allowance for
estimated Alternative Minimum Tax (AMT) payments for 2006. We
have incurred losses for all periods presented and have recorded
a valuation allowance to offset net deferred tax assets
including credits for AMT payments.
At March 31, 2006, our principal sources of liquidity were
cash and cash equivalents, short-term investments and net
accounts receivable totaling $48.3 million, compared to
$47.4 million at December 31, 2005.
Our deferred revenue at March 31, 2006 and
December 31, 2005 was $21.3 million and
$20.7 million, respectively, which reflects growth in the
invoiced amounts due from our customers. Amounts that have been
invoiced are recorded in accounts receivable and deferred
revenue, which are then recognized as revenue ratably over the
term of the subscription arrangement.
Net cash provided by operating activities was $2.2 million
during the three months ended March 31, 2006 and $347,000
during the comparable period in 2005. The increase of
$1.8 million resulted principally from a lower net loss for
the three months ended March 31, 2006, non-cash stock-based
compensation and increased collections from customers.
Net cash used in investing activities was $2.1 million
during the three months ended March 31, 2006. Net cash used
in investing activities consisted primarily of cash invested in
short-term marketable securities.
As of December 31, 2005, we had net operating loss
carryforwards of $22.6 million available to reduce future
taxable income. In the future, we may utilize our net operating
loss carryforwards and would begin making cash tax payments at
that time. In addition, the limitations on utilizing net
operating loss carryforwards and other minimum state taxes may
also increase our overall tax obligations. We expect that if we
generate taxable income
and/or we
are not allowed to use net operating loss carryforwards for
state tax purposes, our cash generated from operations will be
adequate to meet our income tax obligations.
As of March 31, 2006, 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. In
addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
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, 2005. Our exposures to
market risk have not changed materially since December 31,
2005.
Our management carried out an evaluation required by
Rule 13a-15
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), under the supervision and with the
participation of our President and Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”),
of the effectiveness of our disclosure controls and procedures
as defined in
Rule 13a-15(e)
and
15d-15(e)
under the Exchange Act (“Disclosure Controls and
Procedures”). A control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by
management override of the controls. Based on the evaluation,
our CEO and CFO concluded that as of March 31, 2006, our
Disclosure Controls and Procedures are effective at the
reasonable assurance level.
We have implemented a new accounting software system during the
three months ended March 31, 2006. This new system provides
expanded functionality and capabilities and when fully utilized,
we may achieve additional benefits from the system which could
impact our control environment in the future. To date, there
have been no material changes in the internal controls over
financial reporting.
We are not currently subject to any material legal proceedings.
From time to time, however, we are named as a defendant in legal
actions arising from our normal business activities. Although we
cannot accurately predict the amount of our liability, if any,
that could arise with respect to legal actions currently pending
against us, we do not expect that any such liability will have a
material adverse effect on our financial positions, operating
results or cash flows.
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. This
discussion highlights some of the risks which may affect future
operating results. These are the risks and uncertainties we
believe are most important for you to consider. Additional risks
and uncertainties not presently known to us, which we currently
deem immaterial or which are similar to those faced by other
companies in our industry or business in general, may also
impair our business operations. If any of the following risks or
uncertainties actually occurs, our business, financial condition
and operating results would likely suffer. The following
discussion of risks and uncertainties does not reflect any
material changes from the risk factors as previously disclosed
in our annual report on
Form 10-K
for the year ended December 31, 2005.
Risks
Related to Our Business and Industry
The market for software designed specifically for corporate
communications and public relations is relatively new and
emerging, making our business and future prospects difficult to
evaluate. Many companies have invested substantial personnel and
financial resources in their PR departments, and may be
reluctant or unwilling to migrate to software designed to
address the corporate communications and public relations
market. Widespread market acceptance of our solutions is
critical to the success of our business. 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 corporate communications and public relations
software. These challenges, risks and difficulties include the
following:
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. Failure to
adequately do so could adversely affect our business, results of
operations or financial condition.
Although our predecessor company was founded in 1988, we did not
begin offering our on-demand software until 1999. We derive, and
expect to continue to derive for the foreseeable future, all of
our revenue from providing on-demand software and related
ancillary services. The market for on-demand software is at an
early stage of development, and it is uncertain whether
on-demand solutions such as ours will achieve and sustain high
levels of demand and market acceptance. Our success will depend
to a substantial extent on the willingness of companies to
increase their use of on-demand software in general and for
on-demand corporate communications and public relations software
in particular. If businesses do not perceive the benefits of
on-demand software, 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.
Our solutions are sold pursuant to annual or multi-year
subscription agreements and our customers have no obligation to
renew these agreements. As a result, we are not able to
consistently and accurately predict future renewal rates. Our
customers’ renewal rates may decline or fluctuate or our
customers may renew for fewer modules or seats as a result of a
number of factors, including their level of satisfaction with
our solutions, their ability to continue their operations due to
budgetary or other concerns, and the availability and pricing of
competing products. Additionally, we may lose our customers due
to the high turnover rate in the PR departments of small and
mid-sized organizations. If large numbers of existing 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.
We recognize revenue from our customers over the term of their
subscription agreements with us. 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 business model also makes
it difficult for us to reflect any rapid increase in our
customer base and the resulting effect of this increase in our
revenue in any one period because revenue from new customers
will be recognized over the applicable subscription agreement
term.
The success of our strategy is dependent, in part, on the
success of our efforts to sell additional modules to our
existing customers and to increase the number of users per
customer. These customers might choose not to expand
their use of or make additional purchases of our solutions. If
we fail to generate additional business from our current
customers, our revenue could grow at a slower rate or decrease.
We have developed our own content that our customers began using
in place of a significant portion of the third-party content
that had been included in the information database that we make
available to our customers through our on-demand software. In
August 2005, we began providing this internally-developed
content to our customers. If this new information database does
not attain market acceptance, current customers may not renew
their subscription agreements with us, and it may be more
difficult for us to acquire new customers. We may be required to
continue to license information from third parties, and such
information may not continue to be available from third parties
on commercially reasonable terms, if at all.
We have incurred operating losses in the past and we may incur
operating losses in the future. Our recent operating losses were
$3.6 million for 2003, $2.7 million for 2004 and
$4.9 million for 2005. We have not been profitable since we
began offering our on-demand software, and we may not become
profitable. In addition, we expect our operating expenses to
increase in the future as we expand our operations, and if our
operating expenses exceed our expectations, our financial
performance could be adversely affected. If our revenue does not
grow to offset these increased expenses, we may not become
profitable. You should not consider recent quarterly revenue
growth as indicative of our future performance. In fact, in
future quarters we may not have any revenue growth, or our
revenue could decline.
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:
Because our on-demand software is sold pursuant to annual or
multi-year subscription agreements, and we recognize revenue
from these subscriptions over the term of the agreement,
downturns or upturns in sales may not be immediately reflected
in our operating results. 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 corporate communications and public relations market is
fragmented, competitive and rapidly evolving, and there are
limited barriers to entry to some segments of this market. We
expect the intensity of competition to increase in the future as
existing competitors develop their capabilities and as new
companies enter our market. Increased competition could result
in pricing pressure, reduced sales, lower margins or the failure
of our solutions to achieve or maintain broad market acceptance.
If we are unable to compete effectively, it will be difficult
for us to maintain our pricing rates and add and retain
customers, and our business, financial condition and results of
operations will be seriously harmed. We face competition from:
Many of our current and potential competitors have longer
operating histories, a larger presence in the general PR market,
access to larger customer bases and substantially greater
financial, technical, sales and marketing, management, service,
support and other resources than we have. As a result, our
competitors may be able to respond more quickly than we can to
new or changing opportunities, technologies, standards or
customer requirements or devote greater resources to the
promotion and sale of their products and services than we can.
To the extent our competitors have an existing relationship with
a potential customer, that customer may be unwilling to switch
vendors due to existing time and financial commitments with our
competitors.
We also expect that new competitors, such as enterprise software
vendors and online service providers that have traditionally
focused on enterprise resource planning or back office
applications, will enter the on-demand software market with
competing products as the on-demand software 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.
The market for our on-demand software is characterized by
changes in client requirements, changes in protocols and
evolving industry standards. If we are unable to enhance or
develop new features for our existing solutions or develop
acceptable new solutions that keep pace with these changes, our
on-demand software may become obsolete, less marketable and less
competitive and our business will be harmed. The success of any
enhancements, new modules and on-demand software depends on
several factors, including timely completion, introduction and
market acceptance of the modules. Failure to produce acceptable
new modules and enhancements may significantly impair our
revenue growth and reputation.
All of our solutions reside on hardware that we own or lease and
operate that is currently located in a third-party facility
maintained and operated in Sterling, Virginia. We do not
maintain long-term supply contracts with our third-party
facility provider, and the provider does not guarantee that our
customers’ access to our solutions will be
uninterrupted, error-free or secure. Our operations depend on
our third-party facility provider’s ability to protect
their and our 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 arrangement is terminated, or there is
a lapse of service or damage to such facility, 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 located at
our headquarters in Lanham, Maryland, 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 facility. In the event of a
disaster in which our third-party facility was irreparably
damaged or destroyed, we could experience lengthy interruptions
in our service. Moreover, our disaster recovery computer
hardware and systems are located within the same geographic
region as our third-party facility and may be equally or more
affected by any disaster affecting our third-party facility. Any
or all of these events could cause our customers to lose access
to our software. In addition, the failure by our third- party
facility to meet our capacity requirements could result in
interruptions in our 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, 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.
Prospective customers, especially large enterprise customers,
may require heavily customized features and functions unique to
their business processes. If prospective customers require
customized features or functions that we do not offer, and that
would be difficult for them to implement themselves, then the
market for our solutions will be more limited and our business
could suffer.
One of our business strategies is to continue to selectively
acquire companies which would either expand our solution’s
functionality, provide access to new customers or markets, or
both. We also may enter into business relationships with other
organizations in order to expand our service offerings, which
could involve preferred or exclusive licenses, additional
channels of distribution or discount pricing or investments in
other organizations. An acquisition, investment or business
relationship may result in unforeseen operating difficulties and
expenditures. In particular, we may encounter difficulties
assimilating or integrating the acquired organizations,
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 customers obtained through
acquisitions than our typical renewal rates. Moreover, we cannot
assure you that the anticipated benefits of any acquisition,
investment or business relationship would be realized or that we
would not be exposed to unknown liabilities. In connection with
one or more of these transactions, we may:
To date, we have completed several acquisitions. For example, in
January 2003 we acquired substantially all of the assets of
Public Affairs Technology, Inc., and in November 2004 we
acquired substantially all of the assets of Gnossos Software,
Inc. In both of these transactions, the consideration we paid
included both cash and shares of our common stock. The issuance
of shares of our common stock diluted the ownership of our
existing stockholders, and the cash consideration paid reduced
the cash available to us for other purposes.
Increasing our customer base and achieving broader market
acceptance of our solutions will depend to a significant extent
on our ability to expand our sales and marketing operations. We
plan to continue to expand our direct sales force and engage
additional third-party channel partners, both domestically and
internationally. This expansion will require us to invest
significant financial and other resources. Our business will be
seriously harmed if our efforts do not generate a corresponding
significant increase in revenue. We may not achieve anticipated
revenue growth from expanding our direct sales force if we are
unable to hire and develop talented direct sales personnel, if
our new direct sales personnel are unable to achieve desired
productivity levels in a reasonable period of time or if we are
unable to retain our existing direct sales personnel. We also
may not achieve anticipated revenue growth from our third-party
channel partners if we are unable to attract and retain
additional motivated third-party channel partners, if any
existing or future 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.
We believe that developing and maintaining awareness of our
brand in a cost-effective manner 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 brand 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 brand.
If we fail to successfully promote and maintain our brand, or
incur substantial expenses in an unsuccessful attempt to promote
and maintain our brand, 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.
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 facility 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.
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 assure you 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.
Our 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 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.
The
success of our business depends on the continued growth and
acceptance of the Internet as a business and communications
tool, and the related expansion of the Internet
infrastructure.
The future success of our business depends upon the continued
and widespread adoption of the Internet as a primary medium for
commerce, communication and business applications. Our business
growth would be impeded if the performance or perception of the
Internet was harmed by security problems such as
“viruses,” “worms” and other malicious
programs, reliability issues arising from outages and damage to
Internet infrastructure, delays in development or adoption of
new standards and protocols to handle increased demands of
Internet activity, increased costs, decreased accessibility and
quality of service or increased government regulation and
taxation of Internet activity.
Federal, state or foreign government bodies or agencies have in
the past adopted, and may in the future adopt, laws or
regulations affecting data privacy, the use of the Internet as a
commercial medium and the use of email for marketing or other
consumer communications. In addition, government agencies or
private organizations may begin to impose taxes, fees or other
charges for accessing the Internet or for sending commercial
email. These laws or charges could limit the growth of
Internet-related commerce or communications generally, result in
a decline in the use of the Internet and the viability of
Internet-based services such as ours and reduce the demand for
our products.
The Internet has experienced, and is expected to continue to
experience, significant user and traffic growth, which has, at
times, caused user frustration with slow access and download
times. If Internet activity grows faster than Internet
infrastructure or if the Internet infrastructure is otherwise
unable to support the demands placed on it, or if hosting
capacity becomes scarce, our business growth may be adversely
affected.
If we are unable to protect our 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 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 copyright laws afford only limited protection for our
intellectual property rights and may not protect such rights in
the event competitors independently develop solutions similar or
superior to ours. In addition, the laws of some countries in
which our solutions are or may be licensed do not protect our
solutions and intellectual property rights to the same extent as
do the laws of the United States.
To protect our trade secrets and other proprietary information,
we require employees, consultants, advisors and collaborators to
enter into confidentiality agreements. These agreements may not
provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information.
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. If a third-party
successfully asserts a claim that we are infringing their
proprietary rights, royalty or licensing agreements might not be
available on terms we find acceptable or at all. As currently
pending patent applications are not publicly available, we
cannot anticipate all such claims or know with certainty whether
our technology infringes the intellectual property rights of
third-parties. We expect that the number of infringement claims
in our market will increase as the number of solutions and
competitors in our industry grows. These claims, whether or not
successful, could:
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.
Rapid growth in our headcount and operations may place a
significant strain on our management, administrative,
operational and financial infrastructure. We anticipate that
additional growth will be required to address increases in our
customer base, as well as expansion into new geographic areas.
Our success will depend in part upon the ability of our senior
management to manage growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. To
date, we have not experienced any
significant problems as a result of the rapid growth in our
headcount, other than occasional office space constraints.
However, our anticipated future growth may place greater strains
on our resources. For instance, if our new hires perform poorly,
or if we are unsuccessful in hiring, training, managing and
integrating these new employees as needed, or if we are not
successful in retaining our existing employees, our business may
be harmed. To manage the expected growth of our operations and
personnel, we will need to continue to improve our operational,
financial and management controls and our reporting systems and
procedures. The additional headcount and capital investments we
expect to add will increase our cost base, which will make it
more difficult for us to offset any future revenue shortfalls by
offsetting expense reductions in the short term. If we fail to
successfully manage our growth, we will be unable to execute our
business plan.
Our success depends largely upon the continued services of our
executive officers and other key personnel, particularly Richard
Rudman, our Chief Executive Officer, President and Chairman and
Robert Lentz, our Chief Technology Officer. 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. Although we currently maintain key man
life insurance policies on Messrs. Rudman and Lentz, this
insurance would not adequately compensate us for the loss of
their services, and we may not maintain these policies. The loss
of one or more of our key employees could seriously harm our
business.
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 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.
Furthermore, changes to accounting principles generally accepted
in the United States relating to the expensing of stock options
may discourage us from granting the size or type of stock
options awards that job candidates require to join our company,
and may result in our paying additional cash compensation to job
candidates to offset reduced stock option grants. 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.
We have small but growing international operations and our
business strategy includes expanding these operations.
Conducting international operations subjects us to new risks
that we have not generally faced in the United States. These
include:
The occurrence of any one of these risks could negatively affect
our international operations and, consequently, our results of
operations generally. In addition, the Internet may not be used
as widely in international markets in which we expand our
international operations and, as a result, we may not be
successful in offering our solutions internationally.
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 software
or enhance our existing solutions, enhance our operating
infrastructure and acquire complementary businesses and
technologies. Accordingly, we may need to engage in equity or
debt financings to secure additional funds. If we raise
additional funds through 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.
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.
For example, FASB now requires companies to expense the fair
value of employee stock options. Such stock option expensing
requires us, beginning in 2006, to value our employee stock
option grants pursuant to a fair value-based model, and then
amortize that value against our reported earnings over the
vesting period in effect for those options. We have previously
accounted for stock-based awards to employees in accordance with
the intrinsic value method. The intrinsic value method generally
results in recording less expense than the fair value method for
stock-based awards. This change in accounting treatment will
materially and adversely affect our reported results of
operations. We discuss more fully the adoption of new rules for
accounting for stock-based awards in Note 2 to the notes to
the consolidated financial statements included elsewhere in this
report.
Many new laws, regulations and standards, notably those adopted
in connection with the Sarbanes-Oxley Act of 2002, 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.
Risks
Related to our Common Stock and the Securities Markets
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. If
one or more of these analysts cease coverage of us, we could
lose visibility in the market, which may cause our stock price
to decline.
The market price of our common stock could fluctuate
significantly as a result of:
As of March 31, 2006, our executive officers, directors,
current 5% or greater stockholders and affiliated entities
together beneficially owned approximately 60% of our outstanding
common stock. These stockholders, acting together, have control
over most matters that require approval by our stockholders,
including the election of directors and approval of significant
corporate transactions. Corporate action might be taken even if
other stockholders oppose them. This concentration of ownership
might also have the effect of delaying or preventing a change of
control of our company that other stockholders may view as
beneficial.
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:
In addition, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a change in
control of our company.
In connection with our initial public offering, we, along with
our officers, directors and certain stockholders, agreed,
subject to limited exceptions, not to sell or transfer any
shares of common stock for 180 days after December 6,
2005 without Thomas Weisel Partners LLC’s consent. However,
Thomas Weisel Partners LLC may release these shares from these
restrictions at any time. In evaluating whether to grant such a
request, Thomas Weisel Partners LLC may consider a number of
factors with a view toward maintaining an orderly market for,
and minimizing volatility in the market price of, our common
stock. These factors include, among others, the number of shares
involved, recent trading volume and prices of the stock, the
length of time before the
lock-up
expires and the reasons for, and the timing of, the request. We
cannot predict what effect, if any, market sales of shares held
by any stockholder or the availability of these shares for
future sale will have on the market price of our common stock.
A total of approximately 9,019,094 shares of common stock
may be sold in the public market by existing stockholders on or
about 181 days after December 6, 2005, subject to
applicable volume and other limitations imposed under federal
securities law. Sales of substantial amounts of our common stock
in the public market or the perception that such sales could
occur, 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.
Sale of
Unregistered Securities
None.
In connection with our initial public offering of our common
stock, the SEC declared our Registration Statement on
Form S-1
(No. 333-125834),
filed under the Securities Act of 1933, effective on
December 6, 2005. On December 12, 2005, we closed the
sale of 5,000,000 shares of our common stock registered
under the Registration Statement. On January 6, 2006,
certain selling stockholders sold 750,000 shares of our
common stock pursuant to the exercise in full of the
underwriters’ over-allotment option. Thomas Weisel Partners
LLC, RBC Capital Markets, Wachovia Securities and William
Blair & Company served as the managing underwriters.
The initial public offering price was $9.00 per share. The
aggregate sale price for all of the shares sold by us was
$45.0 million, resulting in net proceeds to us of
approximately $40.0 million after payment of underwriting
discounts and commissions and legal, accounting and other fees
incurred in connection with the offering of approximately
$5.0 million. The aggregate sales price for all of the
shares sold by the selling stockholders was approximately
$6.8 million. We did not receive any of the proceeds from
the sale of shares of common stock by the selling stockholders.
In December 2005, we used approximately $6.8 million from
the net proceeds received from our initial public offering to
repay certain indebtedness. We have invested the remainder of
the proceeds from the initial public offering in short-term,
interest-bearing, investment-grade securities and money market
funds. We anticipate that we will use the remaining proceeds to
fund working capital and general corporate purposes, which may
include the expansion of our content and service offerings and
potential acquisitions of complimentary businesses, products and
technologies. We cannot specify with certainty all of the
particular uses for the proceeds. The amounts we actually expend
for these purposes may vary significantly and will depend on a
number of factors. Accordingly, our management will retain broad
discretion in the allocation of the proceeds.
On March 2, 2006, we filed a report on
Form 8-K
reporting the termination of certain material agreements in
January 2006. The information contained in that report is hereby
incorporated by this reference.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VOCUS, INC.
Richard Rudman
Chief Executive Officer, President and Chairman
Stephen Vintz
Chief Financial Officer, Treasurer and Secretary
Date: May 12, 2006
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