Attached files
file | filename |
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EX-32.2 - EX-32.2 - Constant Contact, Inc. | b81949exv32w2.htm |
EX-31.1 - EX-31.1 - Constant Contact, Inc. | b81949exv31w1.htm |
EX-10.1 - EX-10.1 - Constant Contact, Inc. | b81949exv10w1.htm |
EX-31.2 - EX-31.2 - Constant Contact, Inc. | b81949exv31w2.htm |
EX-10.2 - EX-10.2 - Constant Contact, Inc. | b81949exv10w2.htm |
EX-32.1 - EX-32.1 - Constant Contact, Inc. | b81949exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33707
CONSTANT CONTACT, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-3285398 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
|
1601 Trapelo Road, Third Floor | ||
Waltham, Massachusetts | 02451 | |
(Address of principal executive offices) | (Zip Code) |
(781) 472-8100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
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 August 2, 2010, there were 28,980,225 shares of the registrants Common Stock, par
value $.01 per share, outstanding.
CONSTANT CONTACT, INC.
INDEX
2
Table of Contents
Part I. Financial Information
Item 1. | Financial Statements |
Constant Contact, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Unaudited)
June 30, | December 31, | |||||||
(In thousands, except share and per share data) | 2010 | 2009 | ||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 33,279 | $ | 59,822 | ||||
Marketable securities |
82,706 | 53,280 | ||||||
Accounts receivable, net |
59 | 53 | ||||||
Prepaid expenses and other current assets |
4,694 | 3,420 | ||||||
Total current assets |
120,738 | 116,575 | ||||||
Property and equipment, net |
26,842 | 23,891 | ||||||
Restricted cash |
750 | 750 | ||||||
Goodwill |
5,068 | | ||||||
Acquired intangible assets, net |
970 | | ||||||
Other assets |
272 | 272 | ||||||
Total assets |
$ | 154,640 | $ | 141,488 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 7,828 | $ | 5,806 | ||||
Accrued expenses |
7,528 | 7,211 | ||||||
Deferred revenue |
23,624 | 20,341 | ||||||
Total current liabilities |
38,980 | 33,358 | ||||||
Long-term accrued rent |
2,758 | 3,162 | ||||||
Total liabilities |
41,738 | 36,520 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value; 5,000,000
shares authorized; no shares issued or
outstanding as of June 30, 2010 and December
31, 2009 |
| | ||||||
Common stock, $0.01 par value; 100,000,000
shares authorized; 28,960,225 and 28,403,673
shares issued and outstanding as of June 30,
2010 and December 31, 2009, respectively |
290 | 284 | ||||||
Additional paid-in capital |
160,344 | 150,716 | ||||||
Accumulated other comprehensive income |
26 | 40 | ||||||
Accumulated deficit |
(47,758 | ) | (46,072 | ) | ||||
Total stockholders equity |
112,902 | 104,968 | ||||||
Total liabilities and stockholders equity |
$ | 154,640 | $ | 141,488 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
Constant Contact, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenue |
$ | 42,455 | $ | 30,955 | $ | 81,936 | $ | 59,073 | ||||||||
Cost of revenue |
12,686 | 8,897 | 24,402 | 17,026 | ||||||||||||
Gross profit |
29,769 | 22,058 | 57,534 | 42,047 | ||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
5,943 | 4,525 | 11,564 | 8,671 | ||||||||||||
Sales and marketing |
20,217 | 14,281 | 38,921 | 28,112 | ||||||||||||
General and administrative |
4,604 | 3,373 | 8,903 | 6,518 | ||||||||||||
Total operating expenses |
30,764 | 22,179 | 59,388 | 43,301 | ||||||||||||
Loss from operations |
(995 | ) | (121 | ) | (1,854 | ) | (1,254 | ) | ||||||||
Interest income |
85 | 160 | 168 | 286 | ||||||||||||
Net (loss) income |
$ | (910 | ) | $ | 39 | $ | (1,686 | ) | $ | (968 | ) | |||||
Net (loss) income per share: |
||||||||||||||||
Basic |
$ | (0.03 | ) | $ | 0.00 | $ | (0.06 | ) | $ | (0.03 | ) | |||||
Diluted |
$ | (0.03 | ) | $ | 0.00 | $ | (0.06 | ) | $ | (0.03 | ) | |||||
Weighted average shares outstanding used in computing per share amounts: |
||||||||||||||||
Basic |
28,652 | 28,207 | 28,554 | 28,175 | ||||||||||||
Diluted |
28,652 | 29,421 | 28,554 | 28,175 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
Constant Contact, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (1,686 | ) | $ | (968 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||
Depreciation and amortization |
5,464 | 3,761 | ||||||
Amortization (accretion) of premium (discount) on investments |
11 | (36 | ) | |||||
Stock-based compensation expense |
3,716 | 2,312 | ||||||
Recovery of bad debts |
(4 | ) | (4 | ) | ||||
Changes in operating assets and liabilities, net of effects from acquisition |
||||||||
Accounts receivable |
(2 | ) | (45 | ) | ||||
Prepaid expenses and other current assets |
(1,262 | ) | 295 | |||||
Other assets |
| 5 | ||||||
Accounts payable |
2,022 | (1,211 | ) | |||||
Accrued expenses |
95 | 1,057 | ||||||
Deferred revenue |
3,283 | 3,245 | ||||||
Long-term accrued rent |
(404 | ) | 1,185 | |||||
Net cash provided by operating activities |
11,233 | 9,596 | ||||||
Cash flows from investing activities |
||||||||
Purchases of marketable securities |
(63,746 | ) | (33,735 | ) | ||||
Proceeds from maturities of marketable securities |
34,295 | | ||||||
Increase in restricted cash |
| (442 | ) | |||||
Payment for
acquisition of Nutshell Mail, Inc., net of cash acquired |
(2,225 | ) | | |||||
Acquisition of property and equipment, including costs capitalized for
development of internal use software |
(8,350 | ) | (9,997 | ) | ||||
Net cash used in investing activities |
(40,026 | ) | (44,174 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of common stock pursuant to exercise of stock options |
1,860 | 243 | ||||||
Proceeds from issuance of common stock pursuant to employee stock purchase plan |
390 | 283 | ||||||
Net cash provided by financing activities |
2,250 | 526 | ||||||
Net decrease in cash and cash equivalents |
(26,543 | ) | (34,052 | ) | ||||
Cash and cash equivalents, beginning of period |
59,822 | 73,243 | ||||||
Cash and cash equivalents, end of period |
$ | 33,279 | $ | 39,191 | ||||
Supplemental disclosure of non-cash financing activities: |
||||||||
Issuance of
common stock in connection with the acquisition of Nutshell Mail, Inc. |
$ | 3,603 | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
Constant Contact, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
1. Nature of the Business
Constant Contact, Inc. (the Company) was incorporated as a Massachusetts corporation on August
25, 1995. The Company reincorporated in the State of Delaware in 2000. The Company is a leading
provider of on-demand email marketing, social media marketing, event marketing and online survey products to small
organizations, including small businesses, associations and nonprofits. The Companys email
marketing product allows customers to create, send and track email marketing campaigns. The
Companys online survey product enables customers to create and send surveys and analyze the
responses. The Companys event marketing product enables
customers to promote and manage events, track event registrations and collect online payments.
These products are designed and priced for small organizations and are marketed directly by the
Company and through a wide variety of channel partners.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include those of the Company and its
subsidiaries, Constant Contact Securities Corporation and Loyal Technologies LLC, after elimination
of all intercompany accounts and transactions. The accompanying condensed consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP).
The condensed consolidated balance sheet at December 31, 2009 was derived from audited financial
statements, but does not include all disclosures required by GAAP. The accompanying unaudited
condensed consolidated financial statements as of June 30, 2010 and for the three and six months
ended June 30, 2010 and 2009 have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for interim financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
However, the Company believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction
with the Companys audited consolidated financial statements and the notes thereto for the year
ended December 31, 2009 included in the Companys Annual Report on Form 10-K, File Number
001-33707, on file with the SEC.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments
necessary to present a fair statement of the Companys consolidated financial position as of June
30, 2010 and consolidated results of operations for the three and six months ended June 30, 2010
and 2009 and consolidated cash flows for the six months ended June 30, 2010 and 2009, have been
made. The condensed consolidated results of operations for the three and six months ended June 30,
1010 and cash flows for the six months ended June 30, 2010 are not necessarily indicative of the
results of operations and cash flows that may be expected for the year ending December 31, 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. On an ongoing basis,
management evaluates these estimates, judgments and assumptions, including those related to revenue
recognition, stock-based compensation, goodwill and acquired intangible assets, capitalization of
software and website development costs and income taxes. The Company bases these estimates on
historical and anticipated results and trends and on various other assumptions that the Company
believes are reasonable under the circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying values of assets and liabilities
and recorded revenue and expenses that are not readily apparent from other sources. Actual results
could differ from these estimates.
6
Table of Contents
Revenue Recognition
The Company provides access to its products through subscription arrangements whereby the customer
is charged a fee for access to its products. Subscription arrangements include access to use the
Companys software via the Internet and support services, such as telephone support. When there is
evidence of an arrangement, the fee is fixed or determinable and collectability is deemed
reasonably assured, the Company recognizes revenue on a daily basis over the subscription period as
the services are delivered. Delivery is considered to have occurred at the time the customer has
paid for the products and has access to the account via a log-in and password. The Company also
offers ancillary services to its customers related to its products such as custom services and
training. Custom services and training revenue is accounted for separate from subscription revenue
as those services have value on a standalone basis, do not involve a significant degree of risk or
unique acceptance criteria and as the fair value of the Companys subscription services is
evidenced by their availability on a standalone basis. Custom services and training revenue is
recognized as the services are performed.
Goodwill and Acquired Intangible Assets
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair
value of the net tangible assets and the identified intangible assets acquired. Goodwill is not
amortized, but rather is tested for impairment annually or more frequently if facts and
circumstances warrant a review. The Company performs its annual assessment for impairment of
goodwill in the fourth quarter and has determined that there is a single reporting unit
for the purpose of conducting this annual goodwill impairment assessment. For purposes of assessing potential impairment, the
Company annually estimates the fair value of the reporting unit (based on the Companys market
capitalization) and compares this amount to the carrying value of the reporting unit (as reflected
by the Companys total stockholders equity). If the Company determines that the carrying value of
the reporting unit exceeds its fair value, an impairment charge would be required.
Intangible assets acquired in a business combination are recorded under the acquisition method of
accounting at their estimated fair values at the date of acquisition. The Company amortizes
acquired intangible assets over their estimated useful lives on a straight-line basis.
Software and Web Site Development Costs
Relative to development costs of its on-demand products and website, in accordance with
authoritative guidance, the Company capitalizes certain direct costs to develop functionality as
well as certain upgrades and enhancements that are probable to result in additional functionality.
The costs incurred in the preliminary stages of development are expensed as incurred. Once an
application has reached the development stage, internal and external costs, if direct and
incremental, are capitalized as part of property and equipment until the software is substantially
complete and ready for its intended use. Capitalized software is amortized over a three-year period
in the expense category to which the software relates.
Comprehensive Loss
Comprehensive loss includes net loss, as well as other changes in stockholders equity that result
from transactions and economic events other than those with stockholders. The Companys only
element of other comprehensive loss is unrealized gains and losses on available-for-sale
securities. There were no realized gains or losses recorded to net loss for any of the three or six
month periods ended June 30, 2010 or 2009.
Comprehensive (loss) income was as follows:
Three months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net (loss) income |
$ | (910 | ) | $ | 39 | |||
Other comprehensive (loss) income: |
||||||||
Unrealized gains on available-for-sale securities, net |
29 | 21 | ||||||
Comprehensive (loss) income |
$ | (881 | ) | $ | 60 | |||
Six months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (1,686 | ) | $ | (968 | ) | ||
Other comprehensive loss: |
||||||||
Unrealized losses on available-for-sale securities, net |
(14 | ) | (25 | ) | ||||
Comprehensive loss |
$ | (1,700 | ) | $ | (993 | ) | ||
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Table of Contents
At June 30, 2010, marketable securities by security type consisted of:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bills |
$ | 39,951 | 20 | $ | | $ | 39,971 | |||||||||
U.S. Treasury Note |
5,024 | 7 | | 5,031 | ||||||||||||
Corporate and Agency Bonds |
34,705 | 5 | (6 | ) | 34,704 | |||||||||||
Certificates of Deposit |
3,000 | | | 3,000 | ||||||||||||
Total |
$ | 82,680 | $ | 32 | $ | (6 | ) | $ | 82,706 | |||||||
At June 30, 2010, all marketable securities with the exception of the U.S Treasury Note had
maturities of less than one year. The U.S Treasury Note matures in less than two years. The
Company classifies all available-for-sale securities as short-term as the funds are available to
the Company, if needed, for current operations.
At December 31, 2009, marketable securities by security type consisted of:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bills |
$ | 31,928 | 22 | $ | (3 | ) | $ | 31,947 | ||||||||
Corporate and Agency Bonds |
17,712 | 21 | | 17,733 | ||||||||||||
Certificates of Deposit |
3,600 | | | 3,600 | ||||||||||||
Total |
$ | 53,240 | $ | 43 | $ | (3 | ) | $ | 53,280 | |||||||
Fair Value of Financial Instruments
The Company applies the authoritative guidance in measuring assets and liabilities that are carried
at fair value. Fair value under the guidance is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize
the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy
based on three levels of inputs, of which the first two are considered observable and the last is
considered unobservable, are used to measure fair value:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
The Companys cash equivalents of $20,336 and $49,630 as of June 30, 2010 and December 31, 2009,
respectively, which were invested in money market instruments, and the Companys marketable
securities were carried at fair value based on quoted market prices. Quoted market prices are a
level 1 measurement in the hierarchy of fair value measurements. The Company also considers
receivables related to credit card purchases of $1,736 and $1,006 at June 30, 2010 and December 31,
2009, respectively, to be equivalent to cash.
8
Table of Contents
Net Income (loss) Per Share
Basic and diluted net loss per share is computed by dividing net loss by the weighted average
number of unrestricted common shares outstanding for the period.
Diluted net income per share is computed by dividing net income by the sum of the weighted average
number of unrestricted common shares outstanding during the period and the weighted average number
of potential common shares from the assumed exercise of stock options and the vesting of shares of
restricted common stock using the treasury stock method when the effect is not anti-dilutive.
The following is a summary of the shares used in computing diluted net income per share for the
three months ended June 30, 2009:
(in thousands)
Three months | ||||
Ended June 30, | ||||
2009 | ||||
Weighted average shares used in calculating basic
net income per share |
28,207 | |||
Stock options |
1,179 | |||
Warrants |
1 | |||
Restricted shares |
34 | |||
Shares used in computing diluted net income per share |
29,421 | |||
The Company excluded the following common stock equivalents from the computation of diluted net
income (loss) per share because they had an anti-dilutive impact either because the proceeds from
the exercise of the options under the treasury stock method were in excess of the average fair
market value for the period or because the Company had a net loss in the period:
(in thousands)
Three months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Options to purchase common stock |
4,375 | 1,916 | ||||||
Warrants to purchase common stock |
1 | | ||||||
Restricted shares |
51 | | ||||||
Total options, warrants and restricted
shares exercisable into common stock |
4,427 | 1,916 | ||||||
The following common stock equivalents were excluded from the computation of diluted net loss per
share because they had an anti-dilutive impact as the Company had a net loss in each period:
(in thousands)
Six months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Options to purchase common stock |
4,316 | 3,249 | ||||||
Warrants to purchase common stock |
1 | 1 | ||||||
Restricted shares |
26 | 39 | ||||||
Total options, warrants and restricted shares
exercisable into common stock |
4,343 | 3,289 | ||||||
9
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Accounting for Stock-Based Compensation
The Company values all stock-based compensation, including grants of stock options and restricted
stock, at fair value on the date of grant, and expenses the fair value over the applicable service
period. The straight-line method is applied to all grants with service conditions, while the graded
vesting method is applied to all grants with both service and performance conditions.
Income Taxes
Income taxes are provided for tax effects of transactions reported in the financial statements and
consist of income taxes currently due plus deferred income taxes related to timing differences
between the basis of certain assets and liabilities for financial statement and income tax
reporting. Deferred taxes are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance is provided if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
The Company applies the authoritative guidance in accounting for uncertainty in income taxes
recognized in the financial statements. This guidance prescribes a two-step process to determine
the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine
the likelihood that it will be sustained upon external examination. If the tax position is deemed
more-likely-than-not to be sustained, the tax position is then assessed to determine the amount
of benefit to recognize in the financial statements. The amount of the benefit that may be
recognized is the largest amount that has a greater than 50% likelihood of being realized upon
ultimate settlement.
Segment Data
The Company manages its operations as a single segment for purposes of assessing performance and
making operating decisions. Revenue is generated predominately in the U.S. and all significant
assets are held in the U.S.
New Accounting Guidance
In September 2009, the Financial Accounting Standards Board issued authoritative guidance on
revenue arrangements with multiple deliverables that are not covered by software revenue guidance.
This guidance provides another alternative for establishing fair value for a deliverable when
vendor specific objective evidence or third-party evidence for deliverables in an arrangement
cannot be determined. Under this guidance, companies will be required to develop a best estimate of
the selling price for separate deliverables. Arrangement consideration will need to be allocated
using the relative selling price method as the residual method will no longer be permitted. This
guidance is effective January 1, 2011, and early adoption is permitted. The Company is currently
evaluating the impact, if any, of this guidance on its consolidated financial statements.
3. Acquisition of NutshellMail
On May 21, 2010, the Company acquired by merger all of the outstanding capital stock of Nutshell Mail, Inc.,
a Delaware corporation, (NutshellMail) in order to broaden the Companys offerings related to
social media. NutshellMail offered a free service that collects and organizes the latest messages
and activity from social networks into an interactive email. The operating expenses of NutshellMail
are included in the consolidated financial statements beginning on the acquisition date and are not
material to the consolidated results of the Company. The operations of NutshellMail prior to the
acquisition were not material to the consolidated results of the Company.
The aggregate purchase price was $5,972 including $2,369 of cash and 165,523 shares of common stock
valued at $3,603. For financial reporting purposes, the fair value of the common stock issued was based on the closing market price of
the Companys common stock on May 21, 2010, the closing
date of the acquisition. The Company allocated the purchase price as follows:
Current assets, including cash of $144 |
$ | 156 | ||
Purchased technology |
970 | |||
Goodwill |
5,068 | |||
Total assets acquired |
6,194 | |||
Fair value of liabilities assumed |
222 | |||
Net assets acquired |
$ | 5,972 | ||
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Table of Contents
The purchased technology was valued using the cost to replace method. The estimated economic life
of the purchased technology is three years.
Goodwill was recognized for the excess purchase price over the fair value of the assets acquired.
Goodwill is primarily attributable to NutshellMails knowledge of social media and expertise in
working with social media tools. Goodwill from the NutshellMail acquisition will be included within
the Companys one reporting unit and will be included in the Companys enterprise-level annual
review for impairment. Goodwill resulting from the acquisition of NutshellMail is not deductible
for tax purposes.
4. Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $5,068 as of June 30, 2010. The Companys goodwill resulted
from the acquisition of NutshellMail in May 2010 (see Note 3). Goodwill is not amortized, but
instead is reviewed for impairment at least annually in the fourth quarter or more frequently when
events and circumstances occur indicating that the recorded goodwill may be impaired. The Company
considers its business to be one reporting unit for purposes of performing its goodwill impairment
analysis.
Acquired intangible assets consist of developed technology and are stated at cost less
accumulated amortization. Amortization is on a straight-line basis over the estimated remaining
economic life of three years. The gross and net carrying amount of acquired intangible assets was
$970 at June 30, 2010. Future estimated amortization expense for intangible assets is $162 for
2010, $323 for each of 2011 and 2012 and $162 for 2013.
5. Stock-Based Awards
Stock Incentive Plan
The Companys 2007 Stock Incentive Plan (2007 Plan) permits the Company to make grants of
incentive stock options, non-statutory stock options, restricted stock and other stock-based awards
with a maximum term of ten years. These awards may be granted to the Companys employees, officers,
directors, consultants, and advisors. As of June 30, 2010, 902,906 shares of common stock were
available for issuance under the 2007 Plan.
Stock Purchase Plan
The Companys 2007 Employee Stock Purchase Plan, as amended (the Purchase Plan), became effective
upon the completion of the Companys initial public offering. Six-month offering periods begin on
January 1 and July 1 of each year, during which employees may elect to purchase shares of the
Companys common stock according to the terms of the offering. The per share purchase price for
offerings is equal to 85% of the closing market price of the Companys common stock at the end of
the offering period. The first offering period of 2010 began on January 1, 2010 and was completed
on June 30, 2010, at which time 21,519 shares were purchased for total proceeds of $390. As of June
30, 2010, 244,870 shares of common stock were available for issuance to participating employees
under the Purchase Plan.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense on all awards in the following expense
categories:
Three months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Cost of revenue |
$ | 286 | $ | 174 | ||||
Research and development |
572 | 283 | ||||||
Sales and marketing |
478 | 283 | ||||||
General and administrative |
645 | 499 | ||||||
Total |
$ | 1,981 | $ | 1,239 | ||||
Six months ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Cost of revenue |
$ | 523 | $ | 321 | ||||
Research and development |
973 | 506 | ||||||
Sales and marketing |
874 | 517 | ||||||
General and administrative |
1,346 | 968 | ||||||
Total |
$ | 3,716 | $ | 2,312 | ||||
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Additionally, the Company capitalized approximately $46 and $65 of stock-based compensation expense related
to the development of internal use software for the three and six months ended June 30, 2010,
respectively, and approximately $17 and $40 for the three and six months ended June 30, 2009,
respectively.
6. Income Taxes
The Company did not provide for any income taxes in any of the three or six month periods ended
June 30, 2010 or 2009.
The Company had gross deferred tax assets of $18,558 at December 31, 2009, which did not change
significantly at June 30, 2010. The Company has provided a valuation allowance for the full amount
of its net deferred tax assets because, at June 30, 2010 and December 31, 2009, it was not more
likely than not that any future benefit from deductible temporary differences and net operating
loss and tax credit carryforwards would be realized.
The Company has not recorded any amounts for unrecognized tax benefits as of June 30, 2010 or
December 31, 2009. As of June 30, 2010 and December 31, 2009, the Company had no accrued interest
or tax penalties recorded. The Companys income tax return reporting periods since December 31,
2005 are open to income tax audit examination by the federal and state tax authorities. In
addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is
permitted to audit earlier years and propose adjustments up to the amount of net operating losses
generated in those years.
7. Accrued Expenses
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Payroll and payroll related |
$ | 3,224 | $ | 1,984 | ||||
Licensed software and maintenance |
1,150 | 1,106 | ||||||
Marketing programs |
833 | 2,014 | ||||||
Other accrued expenses |
2,321 | 2,107 | ||||||
$ | 7,528 | $ | 7,211 | |||||
8. Commitments and Contingencies
Operating Leases
Prior to May 2009, the Company leased its headquarters under a noncancelable operating lease that
included certain lease incentives, payment escalations and rent holidays, the net effect of which
was accrued and was being recognized as a reduction to rent expense such that rent expense would be
recognized on a straight-line basis over the term of occupancy.
In May 2009, the Company entered into a new lease (the new lease) that superseded the original
lease. The new lease, effective through September 30, 2015 with one five-year extension option,
includes the space under the original lease as well as additional space that will be made available
to the Company at various points during the term of the new lease. The new lease also includes
payment escalations and rent holidays, the net effect of which has been accrued and, together with
the remaining balance of the accrued lease incentives from the original lease, is being recognized
as a reduction to rent expense such that rent expense per square foot is recognized on a
straight-line basis over the term of occupancy. Under the new lease, the landlord is responsible
for making certain improvements to the leased space at an agreed upon cost to the landlord. If the
landlord and the Company mutually agree to make improvements that cost in excess of the agreed upon
landlord cost, the landlord will bill that excess cost to the Company as additional rent. This
additional rent, if and when incurred, will be included in the net calculation of lease incentives,
so that rent expense per square foot will be recognized on a straight-line basis over the remaining
term of occupancy.
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In May 2008, the Company entered into two lease agreements in connection with a second sales
and support office. The first agreement provided for temporary space through April 2009. The second
agreement provides for the lease of long-term space through April 2019 with three three-year
extension options. The agreement for long-term space contains certain lease incentives and payment
escalations, the net effect of which has been accrued such that rent expense per square foot is
being recognized on a straight-line basis over the term of occupancy.
The Company also leases a small amount of general office space in Florida and California under
lease agreements that expire in 2012 and 2010, respectively.
The accrued rent balance was $2,987 at June 30, 2010, of which $229 was included in accrued expense
and $2,758 was included in long-term accrued rent. The accrued rent balance was $3,248 at December
31, 2009, of which $86 was included in accrued expenses and $3,162 was included in long-term accrued
rent. Total rent expense under operating leases was $1,222 and $2,346 for the three and six months
ended June 30, 3010, respectively, and $820 and $1,598 for the three and six months ended June 30,
2009, respectively.
As of June 30, 2010, future minimum lease payments under noncancelable operating leases for the
years ending December 31 are as follows:
Remainder of 2010 |
$ | 2,265 | ||
2011 |
4,831 | |||
2012 |
5,209 | |||
2013 |
5,352 | |||
2014 and thereafter |
12,999 | |||
Total |
$ | 30,656 | ||
Hosting Services
The Company has agreements with two vendors to provide specialized space and related services from
which the Company hosts its software applications. As of June 30, 2010, future minimum payments
under the agreements for the years ending December 31 are as follows:
Remainder of 2010 |
$ | 1,627 | ||
2011 |
1,900 | |||
2012 |
1,661 | |||
2013 |
774 | |||
Total |
$ | 5,962 | ||
Vendor Commitments
As of June 30, 2010, the Company had issued both cancellable and non-cancellable purchase orders
and entered into contractual commitments with various vendors totaling $9,195 related primarily to
marketing programs and other non-marketing goods and services to be delivered primarily during 2010.
Letters of Credit and Restricted Cash
As of June 30, 2010 and December 31, 2009, the Company maintained a letter of credit totaling $750
for the benefit of the landlord of the Companys corporate headquarters lease. The landlord can
draw against the letter of credit in the event of default by the Company. The Company was required
to maintain a cash balance of at least $750 as of June 30, 2010 and December 31, 2009, to secure
the letter of credit. This amount was classified as restricted cash in the balance sheet at June
30, 2010 and December 31, 2009.
Indemnification Obligations
The Company enters into standard indemnification agreements with the Companys channel partners and
certain other third parties in the ordinary course of business. Pursuant to these agreements, the
Company indemnifies and agrees to reimburse the indemnified
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party for losses incurred by the indemnified party in connection with certain intellectual property
infringement and other claims by any third party with respect to the Companys business and
technology. Based on historical information and information known as of June 30, 2010, the Company
does not expect it will incur any significant liabilities under these indemnification agreements.
9. 401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue
Code. This plan covers substantially all employees who meet minimum age and service requirements
and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the Board of Directors. The Company
elected to make matching contributions for the plan year ending December 31, 2010 at a rate of 100%
of each employees contribution up to a maximum matching contribution of 3% of the employees
compensation and at a rate of 50% of each employees contribution in excess of 3% up to a maximum
of 5% of the employees compensation.
Through June 30, 2010 and 2009, the Company made matching contributions of $838 and $602,
respectively.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the unaudited condensed consolidated financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto and managements discussion and analysis of
financial condition and results of operations for the year ended December 31, 2009 included in our
Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 10,
2010. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These
statements are often identified by the use of words such as may, will, expect, believe,
anticipate, intend, could, estimate, or continue, and similar expressions or variations.
Such forward-looking statements are subject to risks, uncertainties and other factors that could
cause actual results and the timing of certain events to differ materially from future results
expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in the section titled Risk
Factors, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this
report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as
of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and
developments will cause our views to change. However, while we may elect to update these
forward-looking statements at some point in the future, we have no current intention of doing so
except to the extent required by applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date subsequent to the date of this
Quarterly Report on Form 10-Q.
Business Overview
We are a
leading provider of on-demand email marketing, social media
marketing, event marketing and online survey solutions
for small organizations, including small businesses, associations and non-profits. Our customers
use our email marketing product to more effectively and efficiently create, send and track
professional and affordable permission-based email marketing campaigns. Our event marketing
product allows our customers to promote and manage events,
track event registration and collect online payments. We also offer an online survey product that
complements our email marketing product and enables our customers to easily create and send surveys
and effectively analyze responses.
We provide our products on an on-demand basis through a web browser. Our email marketing customers
pay a monthly subscription fee that generally ranges between $15 per month and $150 per month based
on the size of their contact lists and, in some cases, volume of mailings. Our event marketing
customers pay a fee of $15 per month to manage up to five concurrent events. Our survey customers
pay a flat monthly fee of $15 that enables them to receive and track a maximum of 5,000 survey
responses. We offer discounts for multiple product purchases and prepayments and to non-profits.
At June 30, 2010, we had approximately 392,000 email marketing customers. We measure our customer
base as the number of email marketing customers that we bill directly in the last month of a
period. We market our products and acquire our customers through a variety of sources, including
online marketing through search engines and advertising on online networks and other websites,
offline marketing through radio advertising, limited television advertising, local seminars and
other marketing efforts, contractual relationships with our channel partners, referrals from our
growing customer base, general brand awareness and the inclusion of a link to our website in the
footer of emails sent by our customers.
In May 2010, we acquired Nutshell Mail, Inc., a Delaware Corporation (NutshellMail) to extend our
social media marketing capabilities. NutshellMails current free offering provides capabilities for small
organizations to monitor and engage with social networks directly from their email inbox.
Key Financial and Operating Metrics
In connection with the ongoing operation of our business, our management regularly reviews key
financial and operating metrics including revenue, expenses, average monthly revenue growth,
average revenue per email marketing customer, cost of acquisition, gross and net customer
additions, trialer growth, conversion rates for our website visitors and our trialers, customer
attrition, customer satisfaction rates, average speed of answer for customer support calls, email
deliverability rates, and capital expenditures, among others. Management considers these financial
and operating metrics critical to understanding and improving our business, reviewing our
historical performance, benchmarking our performance versus other companies and identifying current
and future trends, and for planning purposes.
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In addition, we consider the following non-GAAP financial measures to be key indicators of our
financial performance:
| adjusted EBITDA, which we define as GAAP net income (loss) plus depreciation and amortization and stock-based compensation and minus net interest income; | ||
| adjusted EBITDA margin, which we define as adjusted EBITDA divided by revenue; and | ||
| free cash flow, which we define as net cash flow from operating activities less acquisition of property and equipment. |
We believe that these non-GAAP financial measures are useful to management and investors in
evaluating our operating performance for the periods presented and provide a tool for evaluating
our ongoing operations. These non-GAAP financial measures, however, are not a measure of financial
performance under accounting principles generally accepted in the United States of America (GAAP)
and should not be considered a substitute for GAAP financial measures, including but not limited to
net income (loss) or cash flows from operating, investing and financing activities and may not be
comparable to similarly titled measures reported by other companies.
Certain Trends and Uncertainties
The following represents a summary of certain trends and uncertainties, which could have a
significant impact on our financial condition and results of operations. This summary is not
intended to be a complete list of potential trends and uncertainties that could impact our business
in the long or short term. The summary should be considered along with the factors identified in
the section titled Risk Factors set forth in Part II, Item 1A of this Quarterly Report on Form
10-Q and elsewhere in this report.
| We continue to closely monitor current adverse economic conditions, particularly as they impact small businesses, associations and non-profits. We believe that small businesses, in particular, continue to be greatly impacted by the slow economy. We are unable to predict the likely duration and severity of the current adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business. | ||
| We believe that given the size of our potential market and the relatively low barriers to entry, competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations. | ||
| We believe that as we continue to grow revenue at expected rates, our cost of revenue and operating expenses, including sales and marketing, research and development and general and administrative expenses, will increase in absolute dollar amounts. For a description of the general trends we anticipate in various expense categories, see Cost of Revenue and Operating Expenses below. | ||
| As of June 30, 2010, we had cash and cash equivalents and short-term marketable securities of $116 million. Due to the low interest rates generally we expect only a nominal amount of investment income in 2010. |
Sources of Revenue
We derive our revenue principally from subscription fees from our customers. Our revenue is driven
primarily by the number of paying customers and the subscription fees for our products and is not
concentrated within any one customer or group of customers. In 2009, our top 100 email marketing
customers accounted for less than 1% of our total email marketing revenue. We do not require our
customers to commit to a contractual term; however, our customers are required to prepay for
subscriptions on a monthly, semi-annual, or annual basis by providing a credit card or check form
of payment. Fees are recorded initially as deferred revenue and then recognized as revenue on a
daily basis over the prepaid subscription period.
We also generate a small amount of revenue from ancillary services related to our products, which
primarily consist of custom services and training through our experts program. Revenue generated
from custom services and training accounted for approximately 1% of gross revenue for each of the
three and six month periods ended June 30, 2010 and 2009.
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Cost of Revenue and Operating Expenses
We allocate certain occupancy and general office related expenses, such as rent, utilities, office
supplies and depreciation of general office assets, to cost of revenue and operating expense
categories based on headcount. As a result, an occupancy expense allocation is reflected in cost of
revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists primarily of wages and benefits for software operations
and customer support personnel, credit card processing fees, depreciation and amortization and
maintenance and hosting of our software applications underlying our product offerings. We allocate
a portion of customer support costs relating to assisting trial customers to sales and marketing
expense.
The expenses related to our hosted software applications are affected by the number of customers
who subscribe to our products and the complexity and redundancy of our software applications and
hosting infrastructure. We expect cost of revenue to increase in absolute dollars as we expect to
increase our number of customers, but decrease slightly as a percentage of revenue due to
efficiencies created by our expected revenue growth.
Research and Development. Research and development expenses consist primarily of wages and benefits
for product strategy and development personnel. We have focused our research and development
efforts on improving ease of use, functionality and technological scalability of our existing
products, as well as on developing new offerings. We primarily expense research and development
costs; however, direct development costs related to software enhancements that add functionality
are capitalized and depreciated over their useful life. We expect that on an annual basis research
and development expenses will increase in absolute dollars as we continue to enhance and expand our
product offerings, but remain generally consistent as a percentage of revenue
as we expect to continue to grow our revenue at a similar rate.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and promotional
costs, wages and benefits for sales and marketing personnel, partner referral fees, and the portion
of customer support costs that relate to assisting trial customers. Advertising costs consist
primarily of pay-per-click advertising with search engines, other online and offline advertising
media, including radio, television and print advertisements, as well as the costs to create and
produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist
primarily of public relations, memberships, and event costs. Our advertising and promotional
expenses have historically been highest in the fourth quarter of each year as this reflects a
period of increased sales and marketing activity for many small organizations. In order to continue
to grow our business and brand and category awareness, we expect that we will continue to commit
substantial resources to our sales and marketing efforts. As a result, we expect that on an annual
basis sales and marketing expenses will increase in absolute dollars, but decrease as a percentage
of revenue as we expect to continue to grow our revenue at a faster rate. On a quarterly basis,
however, our sales and marketing expenses may increase or decrease as a percentage of revenue based
on the timing of our sales and marketing initiatives.
General and Administrative. General and administrative expenses consist primarily of wages and
benefits for administrative, human resources, internal information technology support, finance and
accounting personnel, professional fees, certain taxes and other corporate expenses. We expect that
general and administrative expenses will increase as we continue to add personnel in connection
with the anticipated growth of our business and incur costs related to operating as a public
company. Therefore, we expect that our general and administrative expenses will increase in
absolute dollars, but remain generally consistent or decline slightly as a percentage of revenue as
we expect to continue to grow our revenue at a similar rate.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of our financial statements and related
disclosures requires us to make estimates, assumptions and judgments that affect the reported
amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe
that of our significant accounting policies, which are described in the notes to the condensed
consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in
our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC, the
following accounting policies involve the most judgment and complexity:
| Revenue recognition; | |
| Income taxes; | |
| Goodwill and acquired intangible assets (see description below); |
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| Software and website development costs; and | |
| Stock-based compensation. |
Accordingly, we believe the policies set forth above are critical to fully understanding and
evaluating our financial condition and results of operations. If actual results or events differ
materially from the estimates, judgments and assumptions used by us in applying these policies, our
reported financial condition and results of operations could be materially affected.
Goodwill and Acquired Intangible Assets
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair
value of the net tangible assets and the identified intangible assets acquired. Goodwill is not
amortized, but rather is tested for impairment annually or more frequently if facts and
circumstances warrant a review. The Company performs its annual assessment for impairment of
goodwill in the fourth quarter and has determined that there is a single reporting unit
for the purpose of conducting this annual goodwill impairment assessment. For purposes of assessing potential impairment, the
Company annually estimates the fair value of the reporting unit (based on the Companys market
capitalization) and compares this amount to the carrying value of the reporting unit (as reflected
by the Companys total stockholders equity). If the Company determines that the carrying value of
the reporting unit exceeds its fair value, an impairment charge would be required.
Intangible assets acquired in a business combination are recorded under the acquisition method of
accounting at their estimated fair values at the date of acquisition. The Company amortizes
acquired intangible assets over their estimated useful lives on a straight-line basis.
There have been no other material changes in our critical accounting policies since December 31,
2009. For further information please see the discussion of critical accounting policies included in
our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.
Results of Operations
Three Months Ended June 30, 2010 compared to Three Months Ended June 30, 2009
Revenue. Revenue for the three months ended June 30, 2010 was $42.5 million, an increase of $11.5
million, or 37%, over revenue of $31.0 million for the three months ended June 30, 2009. The
increase in revenue resulted primarily from a 30% increase in the number of average monthly email
marketing customers and a 5% increase in average revenue per customer. The increase in average
revenue per customer in the three months ended June 30, 2010 was due to an increase in average customer
list size and additional revenue from add-ons to our email marketing product and from our event
marketing and survey products. We expect our average revenue per customer to increase over time as
we expect to generate additional revenue from our email marketing customers for add-ons to the
email marketing product and from our event marketing and survey products.
Cost of Revenue. Cost of revenue for the three months ended June 30, 2010 was $12.7 million, an
increase of $3.8 million, or 43%, over cost of revenue of $8.9 million for the three months ended
June 30, 2009. Of the increase in cost of revenue, $1.6 million resulted from increased
depreciation, hosting and maintenance costs as a result of scaling and adding capacity to our
hosting infrastructure. Additionally, $1.1 million and $265,000 of the increase resulted from
increased personnel costs attributable to additional employees in our customer support group and
operations group, respectively, because we increased the number of employees to support our
customer growth and manage our infrastructure. We also experienced an increase of $288,000 in our
occupancy cost allocation due to the increase in employees in our customer support group. Outside
facilities expense increased by $223,000 related to our experts program seminars. Approximately
$160,000 of the increase related to higher credit card fees due to the higher volume of billing
transactions. As a percentage of revenue, cost of revenue was 30% for the three months ended June
30, 2010 and 29% for the three months ended June 30, 2009. The increase as a percentage of revenue
was due primarily to the 53% increase in depreciation, hosting and maintenance costs as compared to
the 37% increase in revenue.
Research and Development Expenses. Research and development expenses for the three months ended
June 30, 2010 were $5.9 million, an increase of $1.4 million, or 31%, over research and development
expenses of $4.5 million for the three months ended
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June 30, 2009. As a percentage of revenue, research and development expenses were 14% for the three
months ended June 30, 2010 and 15% for the three months ended June 30, 2009. The increase in
absolute dollars was primarily due to additional personnel related costs of $1.1 million and
additional contractor fees of $281,000 because we increased the number of research and development
employees and contractors to further enhance our products.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2010
were $20.2 million, an increase of $5.9 million, or 42%, over sales and marketing expenses of $14.3
million for the three months ended June 30, 2009. As a percentage of revenue, sales and marketing
expenses were 48% for the three months ended June 30, 2010 and 46% for the three months ended June
30, 2009. The increase in absolute dollars was primarily due to increased advertising and
promotional expenditures of $3.2 million due to continued expansion of our multi-channel marketing
strategy, including our television and radio advertising campaigns. Additionally, personnel related
costs increased by $1.7 million because we added employees in an effort to generate sales leads and
accommodate the growth in sales leads. Partner referral fees increased by $423,000 as the number of
customers generated from our channel partners increased.
General and Administrative Expenses. General and administrative expenses for the three months ended
June 30, 2010 were $4.6 million, an increase of $1.2 million, or 36%, over general and
administrative expenses of $3.4 million for the three months ended June 30, 2009. As a percentage
of revenue, general and administrative expenses were 11% for both the three months ended June 30,
2010 and 2009. The increase in absolute dollars was primarily due to additional personnel related
costs of $450,000 because we increased the number of general and administrative employees to
support our overall growth, and because our stock-based compensation expense increased due to
additional stock option grants. We incurred increased professional services fees and insurance of
$489,000, primarily due to transaction costs associated with our acquisition of NutshellMail in May
2010. We also experienced an increase of $208,000 in our occupancy cost allocation due primarily to
the increase in employees in our general and administrative group.
Interest Income. Interest income for the three months ended June 30, 2010 was $85,000, a decrease
of $75,000 from interest income of $160,000 for the three months ended June 30, 2009. The decrease
was due entirely to the decrease in interest rates generally in 2010 as compared to 2009.
Six Months Ended June 30, 2010 compared to Six Months Ended June 30, 2009
Revenue. Revenue for the six months ended June 30, 2010 was $81.9 million, an increase of $22.8
million, or 39%, over revenue of $59.1 million for the six months ended June 30, 2009. The increase
in revenue resulted primarily from a 32% increase in the number of average monthly email marketing
customers and a 5% increase in average revenue per customer. The increase in average revenue per
customer in the six months ended June 30, 2010 was due to an increase in average customer list size
and additional revenue from add-ons to our email marketing product and from our event marketing and
survey products.
Cost of Revenue. Cost of revenue for the six months ended June 30, 2010 was $24.4 million, an
increase of $7.4 million, or 43%, over cost of revenue of $17.0 million for the six months ended
June 30, 2009. Of the increase in cost of revenue, $3.0 million resulted from increased
depreciation, hosting and maintenance costs as a result of scaling and adding capacity to our
hosting infrastructure. Additionally, $2.3 million and $607,000 of the increase resulted from
increased personnel costs attributable to additional employees in our customer support group and
operations group, respectively, because we increased the number of employees to support our
customer growth and manage our infrastructure. We also experienced an increase of $562,000 in our
occupancy cost allocation due to the increase in employees in our customer support group.
Approximately $337,000 of the increase related to higher credit card fees due to the higher volume
of billing transactions. Outside facilities expense increased by $251,000 related to our experts
program seminars. As a percentage of revenue, cost of revenue was 30% for the six months ended June
30, 2010 and 29% for the six months ended June 30, 2009. The increase as a percentage of revenue
was due primarily to the 54% increase in depreciation, hosting and maintenance costs as compared to
the 39% increase in revenue.
Research and Development Expenses. Research and development expenses for the six months ended June
30, 2010 were $11.6 million, an increase of $2.9 million, or 33%, over research and development
expenses of $8.7 million for the six months ended June 30, 2009. As a percentage of revenue,
research and development expenses were 14% for the six months ended June 30, 2010 and 15% for the
six months ended June 30, 2009. The increase in absolute dollars was primarily due to additional
personnel related costs
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of $2.1 million and additional contractor fees of $628,000 because we
increased the number of research and development employees and
contractors to further enhance our products.
Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2010
were $38.9 million, an increase of $10.8 million, or 38%, over sales and marketing expenses of
$28.1 million for the six months ended June 30, 2009. As a percentage of revenue, sales and
marketing expenses were 48% for each of the six-month periods ended June 30, 2010 and 2009. The increase
in absolute dollars was primarily due to increased advertising and promotional expenditures of $5.8
million due to continued expansion of our multi-channel marketing strategy, including our television
and radio advertising campaigns. Additionally, personnel related costs increased by $3.2 million
because we added employees in an effort to generate sales leads and accommodate the growth in sales
leads. Partner referral fees increased by $760,000 as the number of customers generated from our
channel partners increased.
General and Administrative Expenses. General and administrative expenses for the six months ended
June 30, 2010 were $8.9 million, an increase of $2.4 million, or 37%, over general and
administrative expenses of $6.5 million for the six months ended June 30, 2009. As a percentage of
revenue, general and administrative expenses were 11% for each of the six-month periods ended June
30, 2010 and 2009. The increase in absolute dollars was primarily due to additional personnel
related costs of $1.2 million because we increased the number of general and administrative
employees to support our overall growth, and because our stock-based compensation expense increased
due to additional stock option grants. We incurred increased professional fees and insurance of
$598,000, primarily due to transaction costs associated with our acquisition of NutshellMail in May
2010, as well as increased systems consulting costs. We also experienced an increase of $310,000
in our occupancy cost allocation due primarily to the increase in employees.
Interest Income. Interest income for the six months ended June 30, 2010 was $168,000, a decrease of
$118,000 from interest income of $286,000 for the six months ended June 30, 2009. The decrease was
due entirely to the decrease in interest rates generally in 2010 as compared to 2009.
Liquidity and Capital Resources
At June 30, 2010, our principal sources of liquidity were cash and cash equivalents and marketable
securities of $116 million.
From our inception through the time of our initial public offering, we have financed our operations
primarily through the sale of redeemable convertible preferred stock, issuance of convertible
promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from
operations. In October 2007, we completed our initial public offering, in which we issued and sold
6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised
approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions
and other offering costs. We used $2.6 million of proceeds to repay our outstanding principal and
interest under our term loan facility. In April 2008, we completed a secondary public offering in
which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per
share. We raised approximately $4.0 million in net proceeds after deducting underwriting discounts
and commissions and other offering costs. In the future, we anticipate that our primary sources of
liquidity will be cash generated from our operating activities.
Cash Provided By Operating Activities
Net cash provided by operating activities was $11.2 million for the six months ended June 30, 2010
as compared to $9.6 million for the six months ended June 30, 2009. Net cash provided by operating
activities for the six months ended June 30, 2010 consisted of the contributions from working
capital accounts of $4.1 million and non-cash charges of $9.2 million partially offset by the net
loss of $1.7 million and a decrease in long-term accrued rent of $404,000. The contribution from
working capital accounts was primarily due to an increase in deferred revenue of $3.3 million and
an increase in accounts payable and accrued expense of $2.1 million partially offset by an increase
in prepaid expenses and other receivables of $1.3 million. The non-cash charges consisted primarily
of depreciation and amortization of $5.5 million and stock-based compensation expense of $3.7
million. Net cash provided by operating activities for the six months ended June 30, 2009 consisted
of the contributions from working capital accounts of $3.3 million, non-cash charges of $6.1
million and an increase in long-term accrued rent of $1.2 million, partially offset by the net loss
of $968,000. The contribution from working capital accounts was primarily due to an increase in
deferred revenue of $3.2 million, an increase in accrued expenses of $1.1 million and a decrease in
prepaid expenses and other receivables of $295,000 partially offset by a decrease in accounts
payable of $1.2 million. The non-cash charges consisted primarily of depreciation and amortization
of $3.8 million and stock-based compensation expense of $2.3 million.
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Cash Used In Investing Activities
Net cash used in investing activities was $40.0 million for the six months ended June 30, 2010
compared to $44.2 million for the six months ended June 30, 2009. Net cash used in investing
activities during the six months ended June 30, 2010 consisted primarily of cash paid to purchase
marketable securities of $63.7 million partially offset by cash received from the maturities of
marketable securities of $34.3 million. Cash paid to purchase property and equipment was $8.4
million and cash used for the acquisition of NutshellMail was $2.2 million, net of cash received.
Property and equipment purchases consisted of hardware and software to support our product
infrastructure, capitalization of certain software development costs, computer equipment for our
employees and furniture and fixtures and leasehold improvements primarily related to additional
office space. Net cash used in investing activities during the six months ended June 30, 2009
consisted of the purchase of marketable securities of $33.7 million and the acquisition of property
and equipment of $10.0 million as well as an increase in restricted cash of $442,000 related to a
new lease we signed in May 2009. Property and equipment purchases consisted of hardware and
software to support our product infrastructure, capitalization of certain software development
costs, computer equipment for our employees and equipment and leasehold improvements primarily
related to our second sales and support office.
Cash Provided By Financing Activities
Net cash provided by financing activities was $2.3 million for the six months ended June 30, 2010
and was due to proceeds from the issuance of our common stock pursuant to the exercise of stock
options of $1.9 million as well as proceeds from the purchase of our common stock pursuant to our
employee stock purchase plan of $390,000. Net cash provided by financing activities was $526,000
for the six months ended June 30, 2009 and was due to proceeds from the issuance of our common
stock pursuant to the exercise of stock options of $243,000 as well as proceeds from the purchase
of our common stock pursuant to our employee stock purchase plan of $283,000.
Contractual Obligations
We lease our headquarters under an operating lease that is effective through September 2015 with
one five-year extension option. The lease includes the space we are occupying now as well as
additional space that will be made available to us through the term of the lease. Additionally, we
lease office space for a sales and support office under an operating lease that expires in April
2019 with three three-year extension options.
We have agreements with two vendors to provide specialized space and related services from which we
host our software application. The agreements include payment commitments that expire at various
dates through 2013.
As of June 30, 2010, we had issued both cancellable and non-cancellable purchase orders and entered
into contractual commitments with various vendors totaling $9.2 million. This amount relates
primarily to marketing programs and other non-marketing related goods and services to be delivered
during 2010.
The following table summarizes our contractual obligations at June 30, 2010 and the effect such
obligations are expected to have on our liquidity and cash flow in future periods.
Payments Due In | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1 - 3 Years | 3 - 5 Years | 5 Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations |
$ | 30,656 | $ | 4,669 | $ | 10,300 | $ | 10,912 | $ | 4,775 | ||||||||||
Hosting commitments |
5,962 | 2,717 | 2,858 | 387 | | |||||||||||||||
Vendor commitments |
9,195 | 9,195 | | | | |||||||||||||||
Total |
$ | 45,813 | $ | 16,581 | $ | 13,158 | $ | 11,299 | $ | 4,775 | ||||||||||
Our future capital requirements may vary materially from those now planned and will depend on many
factors, including, but not limited to, development of new products, market acceptance of our
products, the levels of advertising and promotion required to launch additional products and
improve our competitive position in the marketplace, the expansion of our sales, support and
marketing organizations, the establishment of additional offices in the United States and worldwide
and the building of infrastructure necessary to support our anticipated growth, the response of
competitors to our products and our relationships with suppliers and clients. Since
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the introduction of our on-demand email marketing product in 2000, we have experienced increases in our
expenditures to accommodate expected growth in our operations and personnel. We anticipate that, while our capital
expenditures may vary significantly from quarter to quarter, they will generally continue to
increase over time.
We believe that our current cash, cash equivalents and marketable securities and operating cash
flows will be sufficient to meet our working capital and capital expenditure requirements for at
least the next twelve months. Thereafter, we may need to raise additional funds through public or
private financings or borrowings to fund our operations, develop or enhance products, to fund
expansion, to respond to competitive pressures or to acquire complementary products, businesses or
technologies. If required, additional financing may not be available on terms that are favorable to
us, if at all. If we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced and these securities might
have rights, preferences and privileges senior to those of our current stockholders or we may be
subject to covenants that restrict how we conduct our business. No assurance can be given that
additional financing will be available or that, if available, such financing can be obtained on
terms favorable to our stockholders and us.
The markets in which we operate are suffering from the lingering effects of the recent economic
recession. We have limited experience operating our business during an economic downturn. We do not
know if our current business model will operate as effectively during an economic downturn.
Furthermore, we are unable to predict the likely duration and severity of the current adverse
economic conditions in the U.S. and other countries, but the longer the duration the greater risks
we face in operating our business. Therefore, the current economic conditions could have a
significant adverse impact on our operating results and working capital.
During the last three years, inflation and changing prices have not had a material effect on our
business. We are unable to predict whether inflation or
changing prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in
entities referred to as variable interest entities, which include special purpose entities and
other structured finance entities.
New Accounting Guidance
In September 2009, the Financial Accounting Standards Board (the FASB) issued authoritative
guidance on revenue arrangements with multiple deliverables. This guidance provides another
alternative for establishing fair value for a deliverable. When vendor specific objective evidence
or third-party evidence for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price for separate deliverables and allocate
arrangement consideration using the relative selling price method. This guidance is effective
January 1, 2011, and early adoption is permitted. We are currently evaluating the impact of this
guidance, if any, on our consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Exchange Risk. We bill for our products in U.S. dollars and receive payment in
U.S. dollars and our operating expenses are paid predominantly in U.S. dollars. Accordingly, our
results of operations and cash flows are not subject to material fluctuations due to changes in
foreign currency exchange rates.
Interest Rate Sensitivity. We had cash and cash equivalents and marketable securities of $116
million at June 30, 2010, which consisted primarily of cash, short-term government securities,
corporate and agency bonds, certificates of deposit and money market instruments. Interest income
is sensitive to changes in the general level of U.S. interest rates; however, due to the short-term
nature of these investments, we do not believe that we have any material exposure to changes in the
fair value of our investment portfolio as a result of changes in interest rates.
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010. The term
disclosure controls and procedures, as defined in Rules 13a-15(e)
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and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30,
2010, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course of
our business. We are not presently a party to any legal proceedings that, in our opinion, would
have a material adverse effect on our business, results of operations or financial condition.
Item 1A. | Risk Factors |
Our business is subject to numerous risks. We caution you that the following important factors,
among others, could cause our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in filings with the SEC, press releases,
communications with investors and oral statements. Any or all of our forward-looking statements in
this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results
may differ materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
If we are unable to attract new customers and retain existing customers on a cost-effective basis,
our business and results of operations will be affected adversely.
To succeed, we must continue to attract and retain a large number of customers on a cost-effective
basis, many of whom have not previously used an email marketing service. We rely on a variety of
methods to attract new customers, such as paying providers of online services, search engines,
directories and other websites to provide content, advertising banners and other links that direct
customers to our website, radio and television advertising and including a link to our
website in substantially all of our customers emails. In addition, we are committed to providing
our customers with a high level of support. As a result, we believe many of our new customers are
referred to us by existing customers. If we are unable to use any of our current marketing
initiatives or the cost of such initiatives were to significantly increase or such initiatives or
our efforts to satisfy our existing customers are not successful, we may not be able to attract new
customers or retain existing customers on a cost-effective basis and, as a result, our revenue and
results of operations would be affected adversely.
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Current economic conditions may further negatively affect the small business sector, which may
cause our customers to terminate
existing accounts with us or cause potential customers to fail to
purchase our products, resulting in a decrease in our revenue and
impairing our ability to operate profitably.
Our email marketing, event marketing and survey products are designed specifically for small
organizations, including small businesses, associations and non-profits. These organizations
frequently have limited budgets and may be more likely to be significantly affected by economic
downturns than their larger, more established counterparts. While the overall economy appears to be
improving, we believe that small organizations continue to experience economic hardship. As a
result, small organizations may choose to spend the limited funds that they have on items other
than our products and may experience higher failure rates. Moreover, if small organizations
experience economic distress, they may be unwilling or unable to expend resources on marketing,
including email marketing, which would negatively affect the overall demand for our products,
increase customer attrition and could cause our revenue to decline. In addition, we have limited
experience operating our business during an economic downturn. Accordingly, we do not know if our
current business model will continue to operate effectively during an economic downturn.
Furthermore, we are unable to predict the likely duration and severity of the current adverse
economic conditions in the U.S. and other countries, but the longer the duration the greater risks
we face in operating our business. There can be no assurance, therefore, that current economic
conditions or worsening economic conditions, or a recurring recession, will not have a significant
adverse impact on our operating and financial results.
Our business is substantially dependent on the market for email marketing services for small
organizations.
We derive, and expect to continue to derive, substantially all of our revenue from our email
marketing product for small organizations, including small businesses, associations and
non-profits. As a result, widespread acceptance of email marketing among small organizations is
critical to our future growth and success. The overall market for email marketing and related
services is relatively new and still evolving, and small organizations have generally been slower
than larger organizations to adopt email marketing as part of their marketing mix. There is no
certainty regarding how or whether this market will develop, or whether it will experience any
significant contractions. Our ability to attract and retain customers will depend in part on our
ability to make email marketing convenient, effective and affordable. If small organizations
determine that email marketing does not sufficiently benefit them or utilize alternative or new
electronic methods of communicating with their customers, existing customers may cancel their
accounts and potential customers may decide not to adopt email marketing. In addition, many small
organizations lack the technical expertise to effectively send email marketing campaigns. As
technology advances, however, small organizations may establish the capability to manage their own
email marketing and therefore may have no need for our email marketing product. If the market for
email marketing services fails to grow or grows more slowly than we currently anticipate, demand
for our services may decline and our revenue would suffer.
U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could
minimize the effectiveness of our email marketing product, and establishes financial penalties for
non-compliance, 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, particularly Utah and Michigan,
which have enacted do-not-email registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as adult or other harmful products.
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 email marketing product. 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,
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. We also may be required to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain customers or increase our operating
costs.
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In the event we are unable to retain existing customers or to grow our customer base by adding new
customers, our operating results will be adversely affected.
Our growth strategy is in part driven by our ability to retain our existing customers and grow our
customer base by adding new customers. Customers cancel their accounts for many reasons, including
economic concerns, business failure or a perception that they do not use our product effectively,
the service is not a good value and that they can manage their email campaigns without our product.
In some cases, we terminate an account because the customer fails to comply with our standard terms
and conditions. As our customer base continues to grow, even if our customer retention rates remain
the same on a percentage basis, the absolute number of customers we lose each month will increase.
We must continually add new customers to replace customers whose accounts are cancelled or
terminated, which may involve significantly higher marketing expenditures than we currently
anticipate. If too many of our customers cancel our service, or if we are unable to attract new
customers in numbers sufficient to grow our business, our operating results would be adversely
affected.
If the security of our customers confidential information stored in our systems is breached or
otherwise subjected to unauthorized access, our reputation may be severely harmed, we may be
exposed to liability and we may lose the ability to offer our customers a credit card payment
option.
Our system stores our customers proprietary email distribution lists, credit card information and
other critical data. Any accidental or willful security breaches or other unauthorized access could
expose us to liability for the loss of such information, adverse regulatory action by federal and
state governments, time-consuming and expensive litigation and other possible liabilities as well
as negative publicity, which could severely damage our reputation. If security measures are
breached because of third-party action, employee error, malfeasance or otherwise, or if design
flaws in our software are exposed and exploited, and, as a result, a third party obtains
unauthorized access to any of our customers data, our relationships with our customers will be
severely damaged, and we could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are not recognized until
they are launched against a target, we and our third-party hosting facilities may be unable to
anticipate these techniques or to implement adequate preventative measures. In addition, as we
continue to grow our customer base and our brand becomes more widely known and recognized, we may
become a more inviting target for third parties seeking to compromise our security systems. Many
states, including Massachusetts, have enacted laws requiring companies to notify individuals of
data security breaches involving certain types of personal data. These mandatory disclosures
regarding a security breach often lead to widespread negative publicity, which may cause our
customers to lose confidence in the effectiveness of our data security measures. Any security
breach, whether actual or perceived, would harm our reputation, and we could lose customers and
fail to acquire new customers. If we fail to maintain our compliance with the data protection
policy standards adopted by the major credit card issuers, we could lose our ability to offer our
customers a credit card payment option. Any loss of our ability to offer our customers a credit
card payment option would harm our reputation and make our products less attractive to many small
organizations by negatively impacting our customer experience and significantly increasing our
administrative costs related to customer payment processing.
Our existing general liability insurance may not cover any, or only a portion of any potential
claims to which we are exposed or may not be adequate to indemnify us for all or any portion of
liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage would increase our operating losses and reduce our net worth and
working capital.
Evolving regulations concerning data privacy may restrict our customers ability to solicit,
collect, process and use data necessary to use our products or may increase their costs, which
could harm our business.
Federal, state and foreign governments have enacted, and may in the future enact, laws and
regulations concerning the solicitation, collection, processing or use of consumers personal
information. Such laws and regulations may require companies to implement privacy and security
policies, permit users to access, correct and delete personal information stored or maintained by
such companies, inform individuals of security breaches that affect their personal information,
and, in some cases, obtain individuals consent to use personal information for certain purposes.
Other proposed legislation could, if enacted, prohibit or limit the use of certain technologies
that track individuals activities on web pages or that record when individuals click through to an
Internet address contained in an email message. Such laws and regulations could restrict our
customers ability to collect and use email addresses, page viewing data, and personal information,
which may reduce demand for our products. They may also negatively impact our ability to
effectively market our products.
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As Internet commerce develops, federal, state and foreign governments may adopt new laws to
regulate Internet commerce, which may negatively affect our business.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign
governments becomes more likely. Our business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws applicable to our products. The cost to
comply with such laws or regulations could be significant and would increase our operating
expenses, and we may be unable to pass along those costs to our customers in the form of increased
subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may
decide to impose taxes on services provided over the Internet or via email. Such taxes could
discourage the use of the Internet and email as a means of commercial marketing, which would
adversely affect the viability of our products.
As we attempt to expand our customer base through our marketing efforts, our new customers may use
our products differently than our existing customers and, accordingly, our business model may not
be as efficient at attracting and retaining new customers.
As we attempt to expand our customer base, our new customers may use our products differently than
our existing customers. For example, a greater percentage of new customers may take advantage of
the free trial period we offer but ultimately choose to use another form of marketing to reach
their constituents. If our new customers are not as loyal as our existing customers, our attrition
rate will increase and our customer referrals will decrease, which would have an adverse effect on
our results of operations. In addition, as we seek to expand our customer base, we expect to
increase our spending on sales and marketing activities in order to attract new customers, which
will increase our operating costs. There can be no assurance that these sales and marketing efforts
will be successful.
The market in which we participate is highly competitive and, if we do not compete effectively, our
operating results could be harmed.
The market for our products is highly competitive and rapidly changing, and the barriers to entry
are relatively low. With the introduction of new technologies and the influx of new entrants to the
market, we expect competition to persist and intensify in the future, which could harm our ability
to increase sales, limit customer attrition and maintain our prices.
Our principal email marketing competitors include providers of email marketing products for small
to medium size businesses such as Vertical Response, Inc., iContact Corporation, AWeber Systems,
Inc., Protus, Inc. (Campaigner®), Emma, Inc., The Rocket Science Group LLC
(MailChimptm) and VistaPrint Limited, as well as the in-house information
technology capabilities of prospective customers. Competition could result in reduced sales,
reduced margins or the failure of our email marketing product to achieve or maintain more
widespread market acceptance, any of which could harm our business. In addition, there are a number
of other vendors that are focused on providing email marketing products for larger organizations,
including Alterian Inc., ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc., StrongMail
Systems, Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited). While we do not
compete currently with vendors of email marketing products serving larger customers, we may face
future competition from these providers if they determine that our target market presents an
opportunity for them. Finally, in the future, our email marketing product may experience
competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and
other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc.,
possessing large, existing customer bases, substantial financial resources and established
distribution channels. If these companies decide to develop, market or resell competitive email
marketing products, acquire one of our existing competitors or form a strategic alliance with one
of our competitors, our ability to compete effectively could be significantly compromised and our
operating results could be harmed. In addition, one or more of these entities could decide to offer
a competitive email marketing product at no cost or low cost in order to generate revenue as part
of a larger product offering.
Our other
products also face intense competition. Our new event marketing product
competes with offerings by Eventbrite, Inc., Evite, LLC (a wholly-owned, operating business of
IAC/InterActiveCorp), Regonline, (a division of The Active Network, Inc.), 123Signup AMS, Inc.,
Pingg Corp., Acteva.com, Punchbowl Software, Inc., BonaSource Inc. (Wild
Apricottm) and with r.s.v.p offerings from some of our email marketing
competitors. Our survey product competes with similar offerings by Zoomerang (a division of Market
Tools, Inc.) and Surveymonkey.com Corporation and with similar
offerings from many other entities, including some of our email
marketing competitors. Our current and potential competitors may have significantly more financial,
technical, marketing and other resources than we do and may be able to devote greater resources to
the development, promotion, sale and support of their products. Our current and potential
competitors may have more extensive customer bases and broader customer relationships than we have.
In addition, these companies may have longer operating histories and greater name recognition than we
have and may be able to bundle email marketing, event marketing or survey products with other products
that have already gained widespread market acceptance and offer them at no cost or low cost.
These competitors may be better able to respond quickly to new technologies and to undertake more
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extensive marketing campaigns. If we are unable to compete with such companies, the demand for
our products could substantially decline.
Any significant disruption in service on our website or in our computer systems, or in our customer
support services, could reduce the attractiveness of our products and result in a loss of
customers.
The satisfactory performance, reliability and availability of our technology and our underlying
network infrastructure are critical to our operations, level of customer service, reputation and
ability to attract new customers and retain existing customers. Our production system hardware and
the disaster recovery operations for our production system hardware are co-located in third-party
hosting facilities. One facility is owned and operated by Digital 55 Middlesex, LLC, an affiliate
of Digital Realty Trust, Inc., and is located in Bedford, Massachusetts. The other facility is
owned and operated by Internap Network Services Corporation and is located in Somerville,
Massachusetts. Neither Digital nor Internap guarantees that our customers access to our products
will be uninterrupted, error-free or secure. Our operations depend on Digitals and Internaps
ability to protect their and our systems in their facilities against damage or interruption from
natural disasters, power or telecommunications failures, air quality, temperature, humidity and
other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts
and similar events. In the event that our arrangement with Digital or Internap is terminated, or
there is a lapse of service or damage to the Digital or Internap facilities, we could experience
interruptions in our service as well as delays and additional expense in arranging new facilities.
In addition, our
customer support services, which are located at our headquarters in Waltham, Massachusetts and at
our sales and support office in Loveland, Colorado, would experience interruptions as a result of
any disruption of electrical, phone or any other similar facility support services. Any
interruptions or delays in access to our products or customer support, whether as a result of
Digital, Internap, or other third-party error, our own error, natural disasters, security breaches
or malicious actions, such as denial-of-service or similar attacks, 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 could damage our brand and reputation, divert our employees attention, reduce
our revenue, subject us to liability and cause customers to cancel their accounts, any of which
could adversely affect our business, financial condition and results of operations.
Our production disaster recovery system is located at one of our third-party hosting facilities.
Our corporate disaster recovery system is located at our headquarters in Waltham, Massachusetts.
Neither system provides real time backup or has been tested under actual disaster conditions and
neither system may have sufficient capacity to recover all data and services in the event of an
outage. In the event of a disaster in which our production system hardware and the disaster
recovery operations for our production system hardware are irreparably damaged or destroyed, we
would experience interruptions in access to our products. Moreover, our headquarters, our
production system hardware and the disaster recovery operations for our production system hardware
are all located within several miles of each other. As a result, any regional disaster could affect
all three locations equally. Any or all of these events could cause our customers to lose access to
our products.
If the delivery of our customers emails is limited or blocked, the fees we may be able to charge
for our email marketing product may not be accepted by the market and customers may cancel their
accounts.
ISPs 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. We continually
improve our own technology and work closely with ISPs to maintain our deliverability rates. 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 or authentication technologies
or other policies, then the fees we charge for our email marketing product may not be accepted by
the market, and customers may cancel their accounts. This, in turn, could harm our business and
financial performance.
If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share
and our revenue may decrease.
We believe that developing and maintaining awareness of the Constant Contact brand in a
cost-effective manner is critical to our goal of achieving widespread acceptance of our existing
and future products and attracting new customers. Furthermore, we believe that the importance of
brand recognition will increase as competition in our industry increases. Successful promotion of
our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness
and affordability of our products for our target customer demographic. Historically, our efforts to
build our brand have involved significant expense, and it is likely that our future marketing
efforts will require us to incur additional significant expenses. Such brand promotion activities
may not yield increased revenue and, even if they do, any revenue increases may not offset the
expenses we incur to promote our brand. If we fail to successfully promote
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and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote
and maintain our brand, we may lose our existing customers to our competitors or be unable to
attract new customers, which would cause our revenue to decrease.
We depend on search engines to attract a significant percentage of our 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, which would adversely affect our business and results of
operations.
Many of our customers located our website by clicking through on search results displayed by search
engines such as Google, Yahoo! and Bingtm. Search engines typically provide
two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be
purchased, and instead are determined and displayed solely by a set of formulas designed by the
search engine. Purchased listings can be purchased by advertisers in order to attract users to
their websites. We rely on both algorithmic and purchased listings to attract a significant
percentage of the customers we serve to our website. 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, this could
result in fewer potential customers
clicking through to our website, requiring us to resort to other costly resources to replace this
traffic, which, in turn, could reduce our revenue and negatively impact our operating results,
harming our business. 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. The cost of purchased search listing advertising fluctuates
and may increase as demand for these channels grows, and any such increases could negatively affect
our financial results.
The success of our business depends on the continued growth and acceptance of email as a
communications tool and the related expansion and reliability of the Internet infrastructure. If
consumers do not continue to use email or alternative communications tools gain popularity, demand
for our email marketing products may decline.
The future success of our business depends on the continued and widespread adoption of email as a
primary means of communication. Security problems such as viruses, worms and other malicious
programs or reliability issues arising from outages and damage to the Internet infrastructure could
create the perception that email is not a safe and reliable means of communication, which would
discourage businesses and consumers from using email. Use of email by businesses and consumers also
depends on the ability of ISPs to prevent unsolicited bulk email, or spam, from overwhelming
consumers inboxes. In recent years, ISPs have developed new technologies to filter unwanted
messages before they reach users inboxes. In response, spammers have employed more sophisticated
techniques to reach consumers inboxes. Although companies in the anti-spam industry have started
to address the techniques used by spammers, if security problems become widespread or frequent or
if ISPs cannot effectively control spam, the use of email as a means of communication may decline
as consumers find alternative ways to communicate. In addition, if alternative communications
tools, such as those available on social networking sites, gain widespread acceptance, the need for
email may lessen. Any decrease in the use of email would reduce demand for our email marketing
product and harm our business.
Various private spam blacklists have in the past interfered with, and may in the future 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 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 significantly exceed current legal requirements and classify certain email
solicitations that comply with current 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 that do not adhere to those standards of conduct or
practices for commercial email solicitations that the blacklisting entity believes are appropriate.
If a companys 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 entitys service or purchases its blacklist.
Some of our Internet protocol addresses currently are listed with one or more blacklisting entities
and, in the future, our other Internet protocol addresses may also be listed with these and other
blacklisting entities. There can be no guarantee that we will not continue to be blacklisted or
that we will be able to successfully remove ourselves from those lists. Blacklisting of this type
could interfere with our ability to market our products and services and communicate with our
customers and could undermine the effectiveness of our customers email marketing campaigns, all of
which could have a material negative impact on our business and results of operations.
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Our efforts to expand our
product offerings beyond email marketing may not succeed.
We have largely focused our business on providing our email marketing product for small
organizations, but in the last few years we have expanded our service
offerings. In 2007, we introduced our survey product and our add-on email archive service that
enables our customers to archive their past email campaigns. In the fourth quarter of 2009, we
launched our event marketing product. Through our acquisition of
privately-held Nutshell Mail, Inc. (NutshellMail),
which we completed in May 2010, we now provide a tool for small
organizations to monitor and engage with social networks through
their email inbox. Our efforts to
introduce new products beyond our email marketing
product, including our event marketing and survey products and our
social media modular offerings, may not result in significant revenue growth, may
divert management resources from our existing operations and require us to commit significant
financial resources to an unproven business or product, which may harm our financial performance.
Our customers use of our products and website to transmit negative messages or website links to
harmful applications could damage our reputation, and we may face liability for unauthorized,
inaccurate or fraudulent information distributed via our products.
Our customers could use our products or website 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. Any such use of our products
could damage our reputation and we could face claims for damages, copyright or trademark
infringement, defamation, negligence or fraud. Moreover, our customers promotion of their products
and services through our products may not comply with federal, state and foreign laws. We cannot
predict whether our role in facilitating these activities would expose us to liability under these
laws. Even if claims asserted against us do not result in liability, we may incur substantial costs
in investigating and defending such claims. If we are found liable for our customers activities,
we could be required to pay fines or penalties, redesign business methods or otherwise expend
resources to remedy any damages caused by such actions and to avoid future liability.
Our existing general liability insurance may not cover all or any or portion of the potential
claims to which we are exposed or may not be adequate to indemnify us for all or any portion of
liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage would adversely affect our results of operations and reduce our net
worth and working capital.
Our business may be negatively impacted by seasonal trends.
Sales of our products are impacted by seasonality. Typically, the fourth calendar quarter is our
strongest quarter for customer growth because our prospective customers communicate more frequently
with their customers and members during this time. Accordingly, we increase our sales and marketing
activities at the end of the third quarter and during the fourth quarter. Our customer growth in
the second and third quarters is typically slower as we move into the summer months, and in
response, we moderate certain of our customer acquisition activities, which may magnify the
seasonal trends. If these seasonality trends change materially, our financial and operating results
for any given quarter may be negatively impacted and may differ materially from results in prior
quarterly periods.
If we fail to enhance our existing products or develop new products, our products may become
obsolete or less competitive and we could lose customers.
If we are unable to enhance our existing products or develop new products that keep pace with rapid
technological developments and meet our customers needs, our business will be harmed. Creating and
designing such enhancements and new products entail significant technical and business risks and
require substantial expenditures and lead-time, and there is no guarantee that such enhancements
and new products will be completed in a timely fashion. Nor is there any guarantee that any new
product offerings will gain acceptance among our customers or by the broader
market. For example, our existing email marketing customers may not view any new product as
complementary to our email product offerings and therefore decide not to purchase such product. If
we cannot enhance our existing services or develop new products or if we are not successful in
selling such enhancements and new products to our customers, we could lose customers or have
difficulty attracting new customers, which would adversely impact our financial performance.
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Our relationships with our channel partners may be terminated or may not continue to be beneficial
in generating new customers, which could adversely affect our ability to increase
our customer base.
We maintain a network of active channel partners, which include national small business service
providers and local small business service providers such as web developers and marketing agencies,
which refer customers to us through links on their websites and outbound promotion to their
customers. If we are unable to maintain our contractual relationships with existing channel
partners or establish new contractual relationships with potential channel partners, we may
experience delays and increased costs in adding customers, which could have a material adverse
effect on us. The number of customers we are able to add through these marketing relationships is
dependent on the marketing efforts of our partners over which we exercise very little control, and
a significant decrease in the number of new customers generated through these
relationships could adversely affect the size of our customer base and revenue.
Competition for employees in our industry is intense, and we may not be able to attract and retain
the highly skilled employees whom we need to support our business.
Competition for highly skilled technical and marketing personnel is intense and we continue to face
difficulty identifying and hiring qualified personnel in certain areas of our business. We may not
be able to hire and retain such personnel at compensation levels consistent with our existing
compensation and salary structure. Many of the companies with which we compete for experienced
employees have greater resources than we have and may be able to offer more attractive terms of
employment. In particular, candidates making employment decisions, particularly in high-technology
industries, often consider the value of any equity they may receive in connection with their
employment. As a result, any significant volatility in the price of our stock may adversely affect
our ability to attract or retain highly skilled technical and marketing personnel.
In addition, we invest significant time and expense in training our employees, which increases
their value to competitors who may seek to recruit them. If we fail to retain our employees, we
could incur significant expenses in hiring and training their replacements and the quality of our
services and our ability to serve our customers could diminish, resulting in a material adverse
effect on our business.
Our anticipated growth could strain our personnel resources and infrastructure, and if we are
unable to implement appropriate controls and procedures to manage our anticipated growth, we may
not be able to successfully implement our business plan.
We are currently experiencing a period of rapid growth in our headcount and operations, which has
placed, and will continue to place, to the extent that we are able to sustain such growth, a
significant strain on our management and our administrative, operational and financial reporting
infrastructure.
Our success will depend in part on the ability of our senior management to manage this expected
growth effectively. To do so, we believe we will need to continue to hire, train and manage new
employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring,
training, managing and integrating these new employees, 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 and financial controls and
update our reporting procedures and systems, which includes fully migrating to a new customer
billing system in 2010. The expected addition of new employees and the capital investments that we
anticipate will be necessary to manage our anticipated growth will increase our cost base, which
will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in
the short term. If we fail to successfully manage our anticipated growth, we will be unable to
execute our business plan.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of
growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Our future also
depends on the continued contributions of our executive officers and other key technical and
marketing personnel, each of whom would be difficult to replace. In particular, Gail F. Goodman,
our Chairman, President and Chief Executive Officer, is critical to the management of our business
and operations and the development of our strategic direction. The loss of the services of Ms.
Goodman or other executive officers or key personnel and the process to replace any of our key
personnel would involve significant time and expense, may take longer than anticipated and may
significantly delay or prevent the achievement of our business objectives.
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We rely on third-party computer hardware and software that may be difficult to replace or that
could cause errors or failures of our service and that requires us to closely monitor our usage to
ensure that we remain in compliance with any applicable licensing requirements.
We rely on computer hardware purchased and software licensed from third parties in order to offer
our products, including hardware and software from such large vendors as International Business
Machines Corporation, Dell Computer Corporation, 3PAR Inc., Oracle Corporation, Juniper Networks,
Inc. and EMC Corporation. This hardware and software may not continue to be available on
commercially reasonable terms, or at all. If we lose the right to use any of this hardware or
software or such hardware or software malfunctions, our customers could experience delays or be
unable to access our services until we can obtain and integrate equivalent technology or repair the
cause of the malfunctioning hardware or software. Any delays or failures associated with our
services could upset our customers and harm our business. In addition, if we fail to remain in
compliance with the licensing requirements related to any third-party computer hardware and
software we use, we may be subject to unanticipated expenses, auditing costs, penalties and the
loss of such hardware and software, all of which could have a material adverse effect on our
financial condition and results of operations.
If we are unable to protect the confidentiality of our unpatented proprietary information,
processes and know-how and trade secrets, the value of our technology and products could be
adversely affected.
We rely upon unpatented proprietary technology, processes and know-how and trade secrets. Although
we try to protect this information in part by executing confidentiality agreements with our
employees, consultants and third parties, such agreements may offer only limited protection and may
be breached. Any unauthorized disclosure or dissemination of our proprietary technology, processes
and know-how or our trade secrets, whether by breach of a confidentiality agreement or otherwise,
may cause irreparable harm to our business, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise be independently developed by our competitors
or other third parties. If we are unable to protect the confidentiality of our proprietary
information, processes and know-how or our trade secrets are disclosed, the value of our technology
and services could be adversely affected, which could negatively impact our business, financial
condition and results of operations.
Our use of open source software could impose limitations on our ability to commercialize our
products.
We incorporate open source software into our products. Although we monitor our use of open source
software closely, the terms of many open source licenses to which we are subject have not been
interpreted by United States or foreign courts, and there is a risk that such licenses could be
construed in a manner that imposes unanticipated conditions or restrictions on our ability to
commercialize our products. In such event, we could be required to seek licenses from third parties
in order to continue offering our products, to re-engineer our products or to discontinue sales of
our products, or to release our software code under the terms of an open source license, any of
which could materially adversely affect our business. Given the nature of open source software,
there is also a risk that third parties may assert copyright and other intellectual property
infringement claims against us based on our use of certain open source software programs. The risks
associated with intellectual property infringement claims are discussed immediately below.
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 require us to obtain expensive
licenses, and our business may be adversely affected.
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. These claims, whether or not successful, could:
| divert managements attention; | ||
| result in costly and time-consuming litigation; | ||
| require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; | ||
| in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or | ||
| require us to redesign our software and services to avoid infringement. |
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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 agreements with our channel partners
require us to indemnify them for third-party intellectual property infringement claims, which would
increase the cost to us resulting from an adverse ruling on 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 time. Finally, if a third
party successfully asserts a claim that our products infringe its proprietary rights, royalty or
licensing agreements might not be available on terms we find acceptable or at all and we may be
required to pay significant monetary damages to such third party.
Providing our products to customers outside the United States exposes us to risks inherent in
international business.
Customers in more than 140 countries and territories currently use our email marketing product, and
we expect to expand our international operations in the future. Accordingly, we are subject to
risks and challenges that we would otherwise not face if we conducted our business only in the
United States. The risks and challenges associated with providing our products to customers outside
the United States include:
| localization of our products, including translation into foreign languages and associated expenses; | ||
| laws and business practices favoring local competitors; | ||
| compliance with multiple, conflicting and changing governmental laws and regulations, including tax, email marketing, privacy and data protection laws and regulations; | ||
| foreign currency fluctuations; | ||
| different pricing environments; | ||
| difficulties in staffing and maintaining foreign operations; and | ||
| regional economic and political conditions. |
We
have incurred net losses in the past and may incur net losses in the future.
We have
incurred net losses in the past and may incur net losses in the future. As of June
30, 2010, our accumulated deficit was $47.8 million. Our recent net losses were $910,000 for the
three months ended June 30, 2010, $776,000 for the three months ended March 31, 2010, $1.3 million
for the year ended December 31, 2009 and $2.1 million for the year ended December 31, 2008. Our
quarters ended September 30, 2009, June 30, 2009 and March 31, 2008 were the only quarters in which
we generated a profit. There is no guarantee we will be profitable in the future. In addition, we
expect our operating expenses to increase in the future as we expand our operations. 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 be profitable in any
future period. Our recent revenue growth may not be indicative of our future performance. In future
periods, we may not have any revenue growth, or our revenue could decline.
We are incurring significant costs as a result of operating as a public company, and our management
has been, and will continue to be, required to devote substantial time to compliance initiatives.
The Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the SEC and the NASDAQ Stock
Market, require public companies to meet certain corporate governance standards. Our management and
other personnel devote a substantial amount of time to these compliance initiatives. Moreover, as a
public company, these rules and regulations have increased our legal and financial compliance costs
and have made some activities more time-consuming and costly. In addition, the Sarbanes-Oxley Act
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
Acts requirements relating to internal control over financial reporting, we incur substantial
accounting expense and expend significant management time on compliance-related issues. We expect
to continue to
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incur such expenses and expend such time in the future. In addition, we will continue to hire
additional accounting and financial staff with appropriate public company experience and technical
accounting knowledge. If in the future 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 control over financial reporting that are deemed to be material
weaknesses, the market price of our stock would likely decline and we could be subject to sanctions
or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which would
require additional financial and management resources.
Our ability to use net operating loss carryforwards in the United States may be limited.
As of December 31, 2009 we had net operating loss carryforwards of $39.2 million for U.S. federal
tax purposes and $9.3 million for state tax purposes. These loss carryforwards expire at varying
dates between 2010 and 2029. To the extent available, we intend to use these net operating loss
carryforwards to reduce the corporate income tax liability associated with our operations, if any.
Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of
net operating loss carryforwards that may be used to offset taxable income when a corporation has
undergone significant changes in stock ownership. While we do not believe that our public stock
offerings and prior private financings have resulted in ownership changes that would limit our
ability to utilize net operating loss carryforwards, any subsequent ownership changes could result
in such a limitation. To the extent our use of net operating loss carryforwards is significantly
limited, our income could be subject to corporate income tax earlier than it would if we were able
to use net operating loss carryforwards, which could have a negative effect on our financial
results.
Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or
investors, our stock price could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of
securities analysts or investors, the trading price of our common stock could decline. Some of the
important factors that could cause our revenue and operating results to fluctuate from quarter to
quarter include:
| our ability to retain existing customers, attract new customers and satisfy our customers requirements; | ||
| general economic conditions; | ||
| changes in our pricing policies; | ||
| our ability to expand our business; | ||
| the effectiveness of our personnel; | ||
| new product and service introductions; | ||
| technical difficulties or interruptions in our services as a result of our actions or those of third parties; | ||
| the timing of additional investments in our hardware and software systems; | ||
| the seasonal trends in our business; | ||
| regulatory compliance costs; | ||
| costs associated with future acquisitions of technologies and businesses; and | ||
| extraordinary expenses such as litigation or other dispute-related settlement payments. |
Some of these factors are not within our control, and the occurrence of one or more of them may
cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons
of our revenue and operating results may not be meaningful and should not be relied upon as an
indication of future performance.
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We may need additional capital in the future, which may not be available to us on favorable terms,
or at all, and may dilute the
ownership of our existing stockholders.
We have historically relied on outside financing and cash from operations to fund our operations,
capital expenditures and growth. We may require additional capital from equity or debt financing in
the future to:
| fund our operations; | ||
| respond to competitive pressures; | ||
| take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and | ||
| develop new products or enhancements to existing products. |
We may not be able to secure timely additional financing on favorable terms, or at all. The terms
of any additional financing may place limits on our financial and operating flexibility. If we
raise additional funds through issuances of equity, convertible debt securities or other securities
convertible into equity, our existing stockholders could suffer significant dilution, and any new
securities we issue could have rights, preferences and privileges senior to those of our common
stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if
and when we require it, our ability to grow or support our business and to respond to business
challenges could be significantly limited.
We may engage in future acquisitions that could disrupt our business, dilute stockholder value and
harm our business, operating results or financial condition.
In
May 2010, we completed our acquisition of NutshellMail. We have, from time to time,
evaluated other acquisition opportunities and may pursue acquisition opportunities in the future.
Our acquisition of NutshellMail was our first significant acquisition to date and, therefore,
our ability as an organization to make and integrate NutshellMail and any other significant
acquisitions is unproven. Moreover, acquisitions involve numerous risks, including:
| an inability to locate a suitable acquisition candidate or technology or acquire a desirable candidate or technology on favorable terms; | ||
| difficulties in integrating personnel and operations from the acquired business or acquired technology with our existing technology and products and in retaining and motivating key personnel from the business; | ||
| disruptions in our ongoing operations and the diversion of our managements attention from their day-to-day responsibilities associated with operating our business; | ||
| increases in our expenses that adversely impact our business, operating results and financial condition; | ||
| potential write-offs of acquired assets and increased amortization expense related to identifiable assets acquired; and | ||
| potentially dilutive issuances of equity securities or the incurrence of debt. |
In addition, our acquisition of NutshellMail and any other acquisitions we complete may not
ultimately strengthen our competitive position or achieve our goals, or such an acquisition may be
viewed negatively by our customers, stockholders or the financial markets.
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be highly volatile and could be
subject to wide fluctuations in response to various factors. Some of the factors that may cause the
market price of our common stock to fluctuate include:
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| fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; | ||
| quarterly net new email marketing customer additions; | ||
| changes in estimates of our financial results or recommendations by securities analysts; | ||
| changes in general economic, industry and market conditions; | ||
| failure of any of our products to achieve or maintain market acceptance; | ||
| changes in market valuations of similar companies; | ||
| success of competitive products; | ||
| changes in our capital structure, such as future issuances of securities or the incurrence of debt; | ||
| announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances; | ||
| regulatory developments in the United States, foreign countries or both; | ||
| litigation involving our company, our general industry or both; | ||
| additions or departures of key personnel; and | ||
| investors general perception of us. |
In addition, if the market for technology stocks or the stock market in general experiences a loss
of investor confidence, the trading price of our common stock could decline for reasons unrelated
to our business, financial condition or results of operations. If any of the foregoing occurs, it
could cause our stock price to fall and may expose us to class action lawsuits that, even if
unsuccessful, could be costly to defend and a distraction to management.
If securities or industry analysts do not continue to publish research or publish inaccurate or
unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities
or industry analysts publish about us or our business. We do not control these analysts. If one or
more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable
research about our business, our stock price would likely decline. If one or more of these analysts
ceases coverage of our company or fails to publish reports on us regularly, demand for our stock
could decrease, which could cause our stock price and trading volume to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or
prevent a change of control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation
Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a
business combination with an interested stockholder for a period of three years after the person
becomes an interested stockholder, even if a change of control would be beneficial to our existing
stockholders. In addition, our restated certificate of incorporation and second amended and
restated bylaws may discourage, delay or prevent a change in our management or control over us that
stockholders may consider favorable. Among other things, our restated certificate of incorporation
and second amended and restated bylaws:
| authorize the issuance of blank check preferred stock that could be issued by our board of directors to impede or delay a takeover attempt; |
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| establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election; | ||
| require that directors only be removed from office for cause and only upon a supermajority stockholder vote; | ||
| provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office; | ||
| limit who may call special meetings of stockholders; | ||
| prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and | ||
| require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and second amended and restated bylaws. |
We do not currently intend to pay dividends on our common stock and, consequently, the ability to
achieve a return on an investment in our common stock will depend on appreciation in the price of
our common stock.
We do not expect to pay cash dividends on our common stock. Any future dividend payments are within
the absolute discretion of our board of directors and will depend on, among other things, our
results of operations, working capital requirements, capital expenditure requirements, financial
condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of
applicable law and other factors that our board of directors may deem relevant. We may not generate
sufficient cash from operations in the future to pay dividends on our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 21, 2010, the Company issued 165,523 shares of its common stock, par value $0.01 per share,
in a private placement in reliance on Regulation D under the Securities Act of 1933, as amended, to
the former stockholders of Nutshell Mail, Inc. in connection with the closing of the Companys
acquisition of Nutshell Mail, Inc. The Company did not receive any cash proceeds as a result of
the issuance of these shares. On June 25, 2010, the Company filed a registration statement on Form
S-3 (File No. 333-167798) covering the resale of these shares by the former stockholders of
Nutshell Mail, Inc. See also Note 3 Acquisition of Nutshell Mail of the Notes to Condensed
Consolidated Financial Statements included elsewhere in this report.
Item 6. Exhibits The exhibits listed in the Exhibit Index immediately preceding the exhibits are
filed (other than exhibit 32.1 and exhibit 32.2) as part of this Quarterly Report on Form 10-Q and
such Exhibit Index is incorporated herein by reference.
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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.
CONSTANT CONTACT, INC. |
||||
Date: August 4, 2010 | By: | /s/ Gail F. Goodman | ||
Gail F. Goodman | ||||
President and Chief
Executive Officer
(Principal Executive Officer) |
||||
Date: August 4, 2010 | By: | /s/ Harpreet S. Grewal | ||
Harpreet S. Grewal | ||||
Executive Vice
President and Chief
Financial Officer
(Principal Financial Officer) |
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EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
Exhibit No. | Description | |
10.1*
|
First Amendment to Lease dated as of May 3, 2010 by and between BP Reservoir Place LLC (as successor-in-interest to Boston Properties Limited Partnership) and the Company. | |
10.2*
|
Registration Rights Agreement dated as of May 21, 2010 by and among the Company and the stockholders of Nutshell Mail, Inc. | |
31.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 *#
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer. | |
32.2 *#
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer. |
# | This certification shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall they be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | |
* | Filed herewith. |
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