UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2009
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _____ to
_____
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Commission
File Number: 1-33472
TECHTARGET,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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04-3483216
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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117
Kendrick Street, Suite 800
Needham,
Massachusetts 02494
(Address
of principal executive offices) (zip code)
(781)
657-1000
(Registrant’s
telephone number, including area code)
(Former
name, former address and formal fiscal year, if changed since last
report): Not applicable
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. þ
Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer", "accelerated filer" and
"smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large
Accelerated Filer £
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Accelerated
Filer þ
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Non-Accelerated
Filer o
(Do
not check if a smaller
reporting
company)
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Smaller
Reporting Company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes
þ No
The
registrant had 41,745,193 shares of Common Stock, $0.001 par value per
share, outstanding as of June 30, 2009.
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Item
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Page
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| Explanatory Note | 1 | ||
This
Quarterly Report on Form 10-Q is filed by TechTarget, Inc. ("the
Company", "we", "us" or similar pronouns) for the quarter ended March 31,
2009. This filing has been delayed as a result of activities related to the
restatement of our historical financials as disclosed in the Company’s most
recent filings, including Amendment No.1 to its Annual Report on Form 10-K/A for
the year ended December 31, 2008
and related exhibits filed on July 20, 2009.
As
disclosed therein, on June 10, 2009, the Company filed a Form 8-K which
informed the public that the Company determined that our previously-issued
consolidated financial statements should not be relied upon due to the Company’s
review of our revenue recognition policies, and that the Company would be
restating our consolidated financial statements as of and for the years ended
December 31, 2004, 2005, 2006 and 2007 within its December 31, 2008 Form 10-K
filing, and as of and for the quarter and year to date periods ended March 31,
2008 and 2007, June 30, 2008 and 2007, and September 30, 2008 and 2007, within
its respective Form 10-Q/A filings.
As a
result of the Company’s filing on July 16, 2009 of our Form 10-K for the
year-ended December 31, 2008 and Forms 10-Q/A for the quarters ended March 31,
June 30 and September 30, 2008, and following the filing of this Form
10-Q and the
contemporaneous filing of our Quarterly Report on Form 10-Q for the period ended
June 30, 2009, the Company will be current with its periodic
filings.
Consolidated
Balance Sheets
(In
thousands, except share and per share data)
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March
31, 2009
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December
31, 2008
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|||||||
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Assets
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(Unaudited)
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|||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 22,948 | $ | 24,130 | ||||
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Short-term
investments
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41,114 | 42,863 | ||||||
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Accounts
receivable, net of allowance for doubtful accounts of $579 and $642 as of
March 31, 2009 (unaudited) and December 31, 2008,
respectively
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13,684 | 17,622 | ||||||
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Prepaid
expenses and other current assets
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7,072 | 6,251 | ||||||
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Deferred
tax assets
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2,836 | 2,959 | ||||||
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Total
current assets
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87,654 | 93,825 | ||||||
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Property
and equipment, net
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3,710 | 3,904 | ||||||
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Long-term
investments
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6,619 | 2,575 | ||||||
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Goodwill
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88,958 | 88,958 | ||||||
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Intangible
assets, net of accumulated amortization
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16,027 | 17,242 | ||||||
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Deferred
tax assets
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3,545 | 3,369 | ||||||
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Other
assets
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132 | 139 | ||||||
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Total
assets
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$ | 206,645 | $ | 210,012 | ||||
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Liabilities
and Stockholders' Equity
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||||||||
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Current
liabilities:
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||||||||
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Current
portion of bank term loan payable
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$ | 2,250 | $ | 3,000 | ||||
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Accounts
payable
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2,232 | 3,404 | ||||||
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Accrued
expenses and other current liabilities
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2,260 | 2,908 | ||||||
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Accrued
compensation expenses
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788 | 702 | ||||||
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Deferred
revenue
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7,910 | 8,749 | ||||||
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Total
current liabilities
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15,440 | 18,763 | ||||||
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Long-term
liabilities:
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||||||||
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Other
liabilities
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244 | 312 | ||||||
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Total
liabilities
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15,684 | 19,075 | ||||||
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Commitments
(Note 10)
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- | - | ||||||
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Stockholders'
equity:
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||||||||
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Preferred
stock, 5,000,000 shares authorized; no shares issued or
outstanding
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- | - | ||||||
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Common
stock, $0.001 par value per share, 100,000,000 shares authorized,
41,727,131 and 41,616,963 shares issued and outstanding at March 31, 2009
(unaudited) and December 31, 2008, respectively
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42 | 42 | ||||||
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Additional
paid-in capital
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223,746 | 221,597 | ||||||
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Warrants
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2 | 2 | ||||||
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Accumulated
other comprehensive income (loss)
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106 | (77 | ) | |||||
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Accumulated
deficit
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(32,935 | ) | (30,627 | ) | ||||
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Total
stockholders' equity
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190,961 | 190,937 | ||||||
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Total
liabilities and stockholders' equity
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$ | 206,645 | $ | 210,012 | ||||
See
accompanying notes.
Consolidated
Statements of Operations
(In
thousands, except share and per share data)
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Three
Months Ended March 31,
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||||||||
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2009
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2008
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(Unaudited)
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Revenues:
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Online
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$ | 16,282 | $ | 18,210 | ||||
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Events
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2,190 | 3,985 | ||||||
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Print
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- | 1,068 | ||||||
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Total
revenues
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18,472 | 23,263 | ||||||
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Cost
of revenues:
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||||||||
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Online
(1)
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4,880 | 5,169 | ||||||
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Events
(1)
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1,081 | 1,827 | ||||||
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Print
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- | 546 | ||||||
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Total
cost of revenues
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5,961 | 7,542 | ||||||
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Gross
profit
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12,511 | 15,721 | ||||||
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Operating
expenses:
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||||||||
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Selling
and marketing (1)
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7,516 | 8,444 | ||||||
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Product
development (1)
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2,081 | 2,762 | ||||||
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General
and administrative (1)
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3,919 | 3,795 | ||||||
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Depreciation
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536 | 724 | ||||||
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Amortization
of intangible assets
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1,215 | 1,480 | ||||||
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Total
operating expenses
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15,267 | 17,205 | ||||||
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Operating
loss
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(2,756 | ) | (1,484 | ) | ||||
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Interest
income (expense), net
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(110 | ) | 418 | |||||
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Loss
before benefit from income taxes
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(2,866 | ) | (1,066 | ) | ||||
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Benefit
from income taxes
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(558 | ) | (630 | ) | ||||
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Net
loss
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$ | (2,308 | ) | $ | (436 | ) | ||
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Net
loss per common share:
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Basic
and diluted
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$ | (0.06 | ) | $ | (0.01 | ) | ||
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Weighted
average common shares outstanding:
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Basic
and diluted
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41,754,131 | 41,158,418 | ||||||
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(1) Amounts
include stock-based compensation expense as follows:
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Cost
of online revenue
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$ | 234 | $ | 98 | ||||
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Cost
of events revenue
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17 | 22 | ||||||
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Selling
and marketing
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1,328 | 1,392 | ||||||
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Product
development
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131 | 140 | ||||||
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General
and administrative
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893 | 601 | ||||||
See
accompanying notes.
Consolidated
Statements of Cash Flows
(In
thousands)
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Three
Months Ended March 31,
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||||||||
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2009
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2008
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(Unaudited)
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||||||||
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Operating
Activities:
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||||||||
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Net
loss
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$ | (2,308 | ) | $ | (436 | ) | ||
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Adjustments
to reconcile net loss to net cash provided by operating
activities:
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||||||||
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Depreciation
and amortization
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1,751 | 2,204 | ||||||
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Provision
for bad debt
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- | 144 | ||||||
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Amortization
of investment premium
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594 | - | ||||||
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Stock-based
compensation expense
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2,603 | 2,253 | ||||||
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Deferred
tax benefit
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(150 | ) | (186 | ) | ||||
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Excess
tax benefit - stock options
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- | (278 | ) | |||||
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Changes
in operating assets and liabilities, net of businesses
acquired:
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||||||||
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Accounts
receivable
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3,938 | (2,001 | ) | |||||
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Prepaid
expenses and other current assets
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(1,287 | ) | (1,944 | ) | ||||
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Other
assets
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7 | 2 | ||||||
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Accounts
payable
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(1,172 | ) | 858 | |||||
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Income
taxes payable
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- | (1,330 | ) | |||||
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Accrued
expenses and other current liabilities
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(648 | ) | (732 | ) | ||||
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Accrued
compensation expenses
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86 | (1,724 | ) | |||||
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Deferred
revenue
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(839 | ) | 3,580 | |||||
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Other
liabilities
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(37 | ) | (22 | ) | ||||
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Net
cash provided by operating activities
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2,538 | 388 | ||||||
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Investing
activities:
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||||||||
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Purchases
of property and equipment, and other assets
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(342 | ) | (417 | ) | ||||
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Purchases
of short-term investments
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(6,640 | ) | (30,703 | ) | ||||
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Proceeds
from sales and maturities of short-term investments
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4,000 | 59,904 | ||||||
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Purchases
of long-term investments
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- | (1,950 | ) | |||||
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Acquisition
of assets
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- | (50 | ) | |||||
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Net
cash (used in) provided by investing activities
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(2,982 | ) | 26,784 | |||||
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Financing
activities:
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||||||||
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Payments
on bank term loan payable
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(750 | ) | (750 | ) | ||||
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Excess
tax benefit - stock options
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- | 278 | ||||||
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Proceeds
from exercise of warrants and stock options
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12 | 904 | ||||||
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Net
cash (used in) provided by financing activities
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(738 | ) | 432 | |||||
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Net
(decrease) increase in cash and cash equivalents
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(1,182 | ) | 27,604 | |||||
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Cash
and cash equivalents at beginning of period
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24,130 | 10,693 | ||||||
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Cash
and cash equivalents at end of period
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$ | 22,948 | $ | 38,297 | ||||
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Supplemental
disclosure of cash flow information:
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||||||||
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Cash
paid for interest
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$ | 46 | $ | 100 | ||||
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Cash
paid for taxes
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$ | 53 | $ | 1,094 | ||||
See
accompanying notes.
Notes
to Consolidated Financial Statements
(In
thousands, except share and per share data)
1.
Organization and Operations
TechTarget,
Inc. (the Company) is a leading provider of specialized online content that
brings together buyers and sellers of corporate information technology, or IT,
products. The Company sells customized marketing programs that enable IT vendors
to reach corporate IT decision makers who are actively researching specific IT
purchases.
The
Company’s integrated content platform consists of a network of more than 60
websites that are complemented with targeted in-person events and specialized IT
magazines. The Company discontinued publishing its specialized IT
magazines in December 2008. During the critical stages of the purchase
decision process, these content offerings meet IT professionals' needs for
expert, peer and IT vendor information, and provide a platform on which IT
vendors can launch targeted marketing campaigns that generate measurable, high
return on investment (ROI). As IT professionals have become increasingly
specialized, they have come to rely on our sector-specific websites for
purchasing decision support. The Company’s content enables IT professionals to
navigate the complex and rapidly changing IT landscape where purchasing
decisions can have significant financial and operational consequences. Based
upon the logical clustering of users' respective job responsibilities and the
marketing focus of the products that the Company’s customers are advertising,
content offerings are currently categorized across ten distinct media groups:
Application Development; Channel; CIO/IT Strategy; Data Center and
Virtualization Technologies; Enterprise Applications; Networking; Security;
Storage; TechnologyGuide.com; and Vertical Software.
2.
Summary of Significant Accounting Policies
The
accompanying consolidated financial statements reflect the application of
certain significant accounting policies as described below and elsewhere in
these notes to the consolidated financial statements
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, which include KnowledgeStorm, Inc.,
Bitpipe, Inc., TechTarget Securities Corporation and TechTarget Limited.
KnowledgeStorm, Inc. and Bitpipe, Inc. are leading websites providing
in-depth vendor generated content targeted toward corporate IT
professionals. TechTarget Securities Corporation is a Massachusetts
Securities Corporation incorporated in 2004. TechTarget Limited is a subsidiary
doing business principally in the United Kingdom. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. All adjustments, which,
in the opinion of management, are considered necessary for a fair presentation
of the results of operations for the periods shown, are of a normal recurring
nature and have been reflected in the consolidated financial statements. The
results of operations for the periods presented are not necessarily indicative
of results to be expected for any other interim periods or for the full year.
The information included in these consolidated financial statements should be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in this report and the
consolidated financial statements and accompanying notes included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2008.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. accounting
principles generally accepted requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue
Recognition
The
Company generates substantially all of its revenue from the sale of targeted
advertising campaigns that are delivered via its network of websites, events and
print publications. The Company discontinued publishing print magazines in
December 2008. Revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, and
Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF)
Issue No. 00-21, Revenue
Arrangements With Multiple Deliverables. Revenue is recognized only when
the price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is performed and collectability of the resulting receivable
is reasonably assured.
Although
each of the Company’s online media offerings can be sold separately, most of the
Company’s online media sales involve multiple online
offerings. Because objective evidence of fair value does not exist
for all elements in the Company’s bundled advertising campaigns, no allocation
can be made among the various elements, and the Company recognizes revenue on
all items ratably over the term of the arrangement.
Event
Sponsorships. Sponsorship revenue from events is recognized
upon completion of the event in the period the event occurs. The majority of the
Company’s events are free to qualified attendees, however certain events are
based on a paid attendee model. The Company recognizes revenue for paid attendee
events upon completion of the event and receipt of payment from the attendee.
Amounts collected or billed prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue.
Print
Publications. When sold separately, advertising revenues from
print publications are recognized at the time the applicable publication is
distributed. When print advertising campaigns are sold with other
services, revenue is recognized for all services in the advertising campaign
over the term of the arrangement. Amounts collected or billed prior
to satisfying the above revenue recognition criteria are recorded as deferred
revenue.
Online
Media. Revenue for online media offerings is recognized for
specific online media offerings as follows when these items are sold
separately:
o White
Papers. White paper revenue is recognized ratably over
the period in which the white paper is available on the Company's
websites.
o Webcasts, Podcasts and
Videocasts. Webcast, podcast and videocast revenue is recognized
ratably over the period in which the webcast, podcast or videocast is
available on the Company’s websites.
o Software Package
Comparisons. Software package comparison revenue is recognized
ratably over the period in which the software information is available on
the Company’s websites.
o Promotional E-mails and
E-newsletters. Promotional e-mail revenue is recognized
ratably over the period in which the related content asset is available
on its websites because promotional emails do not have standalone value
from the related content asset. E-newsletter revenue is recognized in
the period in which the e-newsletter is sent.
o List Rentals. List
rental revenue is recognized in the period in which the e-mail is sent to the
list of registered members.
o Banners. Banner
revenue is recognized in the period in which the banner impressions
occur.
o Third Party Revenue Sharing
Arrangements. Revenue from third party revenue sharing
arrangements is recognized in the period in which the services are
performed.
The
Company offers customers the ability to purchase integrated ROI program
offerings, which can include any of its online media offerings packaged together
to address the particular customer's specific advertising requirements. As part
of these offerings, the Company will guarantee a minimum number of qualified
sales leads to be delivered over the course of the advertising
campaign. Scheduled end dates of advertising campaigns are sometimes
extended to satisfy lead guarantees or fulfill all elements of the advertising
campaign based on delayed receipt of advertising media collateral from the
customer. The Company estimates the revenue reserve necessary to properly defer
revenue recognition for extended advertising campaigns. These estimates are
based on the Company's experience in managing and fulfilling these integrated
ROI program offerings. Historically, shortfalls in fulfilling lead guarantees
before the scheduled completion date of an advertising campaign are satisfied
within an average of 44 days of such scheduled completion date. These
integrated ROI program offerings represented approximately 45% and 34% of online
revenues, and 39% and 27% of total revenues for the three months ended
March 31, 2009 and 2008, respectively.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, short and long-term
investments, accounts receivable, accounts payable, a term loan payable and an
interest rate swap. The carrying value of these instruments approximates
their estimated fair values.
Long-lived
Assets
Long-lived
assets consist of property and equipment, goodwill and other intangible
assets. Goodwill and other intangible assets arise from acquisitions
and are recorded in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and
Other Intangible Assets. In accordance with this statement, a
specifically identified intangible asset must be recorded as a separate asset
from goodwill if either of the following two criteria is met: (1) the intangible
asset acquired arises from contractual or other legal rights; or (2) the
intangible asset is separable. Accordingly, intangible assets consist of
specifically identified intangible assets. Goodwill is the excess of any
purchase price over the estimated fair market value of net tangible assets
acquired not allocated to specific intangible assets.
As
required by SFAS No. 142, goodwill and indefinite-lived intangible assets are
not amortized, but are reviewed annually for impairment or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life are amortized over their estimated useful lives, which
range from one to nine years, using methods of amortization that are
expected to reflect the estimated pattern of economic use, and are reviewed for
impairment when events or changes in circumstances suggest that the assets may
not be recoverable under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company performs its annual test of
impairment of goodwill on December 31st of each year, and whenever events or
changes in circumstances suggest that the carrying amount may not be
recoverable. Based on this evaluation, the Company believes that, as
of each of the balance sheet dates presented, none of the Company’s goodwill or
other long-lived assets was impaired.
Internal
Use Software and Website Development Costs
The
Company accounts for website development costs according to the guidance in the
EITF Issue No. 00-2, Accounting for Web Site Development
Costs, which requires that costs incurred during the development of
website applications and infrastructure involving developing software to operate
a website be capitalized. Additionally, all costs relating to
internal use software are accounted for under Statement of Position (SOP) 98-1,
Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use. The
estimated useful life of costs capitalized is evaluated for each specific
project. Capitalized internal use software and website development costs
are reviewed for recoverability whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. An impairment loss shall be recognized only if the carrying
amount of the asset is not recoverable and exceeds its fair value. The
Company capitalized internal-use software and website development costs of $216
and $14 for the three months ended March 31, 2009 and 2008,
respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates. In addition,
SFAS No. 109 requires a valuation allowance against net deferred tax assets
if, based upon available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with SFAS
No. 109. FIN 48 prescribes a recognition and measurement method of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. In accordance with FIN 48, the
Company recognizes any interest and penalties related to unrecognized tax
benefits in income tax expense.
Stock-Based
Compensation
At March
31, 2009, the Company had two stock-based employee compensation plans which are
more fully described in Note 12. Effective January 1, 2006, the
Company adopted SFAS No. 123(R), Share-Based Payment, which
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. SFAS No. 123(R) requires nonpublic
companies that used the minimum value method under SFAS No. 123 for either
recognition or pro forma disclosures to apply SFAS No. 123(R) using the
prospective-transition method. As such, the Company will continue to
apply APB Opinion No. 25 in future periods to equity awards outstanding at
the date of adoption of SFAS No. 123(R) that were measured using the
minimum value method. In accordance with SFAS No. 123(R), the
Company recognizes the compensation cost of employee stock-based awards in the
statement of operations using the straight line method over the vesting period
of the award. Effective with the adoption of SFAS No. 123(R), the Company
has elected to use the Black-Scholes option pricing model to determine the fair
value of stock options granted.
Net
Income (Loss) Per Share
The
Company calculates net income (loss) per share in accordance with SFAS No. 128,
Earnings Per
Share. Basic earnings per share is computed based on the
weighted average number of common shares and vested restricted stock awards
outstanding during the period. Diluted earnings per share is computed using
the weighted average number of common shares outstanding during the period, plus
the dilutive effect of potential future issuances of common stock relating to
stock option programs and other potentially dilutive securities using the
treasury stock method. In calculating diluted earnings per share, the dilutive
effect of stock options is computed using the average market price for the
respective period. In addition, under SFAS No. 123(R), the assumed proceeds
under the treasury stock method include the average unrecognized compensation
expense and assumed tax benefit of stock options that are in-the-money. This
results in the “assumed” buyback of additional shares, thereby reducing the
dilutive impact of stock options.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
No. 141R). This Statement retains the fundamental requirements in Statement
141 that the acquisition method of accounting (which SFAS No. 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. SFAS No. 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in SFAS
No. 141R. SFAS No. 141R replaces the cost allocation process required
by SFAS No. 141, which required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their
estimated fair values. SFAS No. 141R retains the guidance in SFAS
No. 141 for identifying and recognizing intangible assets separately from
goodwill. SFAS No. 141R will now require acquisition costs to be expensed
as incurred, restructuring costs associated with a business combination must
generally be expensed prior to the acquisition date and changes in deferred tax
asset valuation allowances and income tax uncertainties after the acquisition
date generally will affect income tax expense. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which is the Company's 2009 fiscal year. The adoption of
SFAS No. 141R may have a significant impact on the Company's accounting for
future acquisitions.
In
December 2007, the FASB released SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. SFAS No.
160 was issued to improve the relevance, comparability, and transparency of
financial information provided in financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008 and will be applied
prospectively, except for the presentation and disclosure requirements which
will be applied retrospectively. The adoption of SFAS No. 160 on January 1, 2009
did not have a material effect on the Company's consolidated financial position
or results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 does not require any new fair value
measurements, but its provisions apply to all other accounting pronouncements
that require or permit fair value measurement. SFAS No. 157 was effective for
the Company’s fiscal year beginning January 1, 2008 and for interim periods
within that year. In February 2008, the FASB issued FASB Staff Position (“FSP”)
No. 157-2, Effective Date of
FASB Statement No. 157, which delayed for one year the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). In accordance with FSP No. 157-2, the
Company deferred the application of the provisions of SFAS No. 157 to certain
nonfinancial assets and liabilities including reporting units measured at fair
value in goodwill impairment tests, nonfinancial assets and liabilities measured
at fair value for impairment assessments and nonfinancial liabilities for
restructuring activities. As required, the Company adopted SFAS No. 157 for its
financial assets on January 1, 2008. Adoption did not have a material impact on
the Company’s financial position or results of operations. The adoption of SFAS
No. 157-2 on January 1, 2009, as it pertains to non-financial assets and
liabilities, did not have a material impact on the Company’s financial position
or results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS No. 161 requires disclosure of how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for and how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. SFAS No. 161 is effective for fiscal years beginning after
November 15, 2008, with early adoption permitted. The
adoption of SFAS No. 161 on January 1, 2009 did not have a material effect
on the Company's consolidated financial position or results of
operations.
In
April 2008, the FASB issued Staff Position FAS 142-3, Determination of Useful Life of
Intangible Assets, which amends the factors that should be considered in
developing the renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. The
adoption of FAS 142-3 on January 1, 2009 did not have a material effect on the
Company's consolidated financial position or results of
operations.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
generally accepted accounting principles in the United States. SFAS No. 162
is effective for the period ending September 30, 2009. The adoption
of SFAS No. 162 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which
establishes general standards of accounting for, and requires disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No. 165 is effective
for interim and annual periods ending after June 15, 2009.
The
adoption of SFAS 165 is not expected to have a material effect on our
consolidated financial position or results of
operations.
3.
Fair Value Measurements
On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
which, among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or
nonrecurring basis. SFAS No. 157 clarifies that fair value is an
exit price, representing the amount that would either be received to sell an
asset or be paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions, SFAS
No. 157 establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
· Level 1. Quoted prices in
active markets for identical assets and liabilities;
· Level 2. Observable inputs
other than quoted prices in active markets; and
· Level 3. Unobservable
inputs.
The fair
value hierarchy of the Company’s financial assets and liabilities carried at
fair value and measured on a recurring basis is as follows as of March 31,
2009:
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
March
31, 2009
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Money market funds
(1)
|
$ | 12,020 | $ | 12,020 | $ | - | $ | - | ||||||||
|
Short-term
investments
|
41,114 | - | 41,114 | - | ||||||||||||
|
Long-term
investments
|
6,619 | - | 6,619 | - | ||||||||||||
|
Interest rate swap
(2)
|
46 | - | 46 | - | ||||||||||||
|
Total
|
$ | 59,799 | $ | 12,020 | $ | 47,779 | $ | - | ||||||||
(1)
Included in cash equivalents on the accompanying consolidated balance
sheet.
(2) Included
in other liabilities on the accompanying consolidated balance
sheet.
4.
Acquisitions
On
November 19, 2008, the Company acquired substantially all of the assets of The
Brian Madden Company LLC (BMC), for $1,315 in cash, of which $1,184 was paid on
November 19, 2008 and the remaining balance of $131 will be paid on November 19,
2009. BMC operated a website (BrianMadden.com) and an event
addressing the topics of desktop virtualization, terminal services, and
application virtualization. The acquisition provides the Company with an
opportunity for growth within segments and in other markets in which it
currently does not have a presence, primarily desktop and application
virtualization.
The
Company applied the guidance included in EITF Issue No. 98-3 to conclude the
acquisition of BMC constituted the acquisition of a business. In connection with
this acquisition, the Company purchased $79 of property and equipment, $40 of
prepaid expenses, recorded $636 of goodwill and recorded $560 of intangible
assets related to customer relationships, a non-compete agreement and trade
names with estimated useful lives ranging from three to five years.
The
estimated fair value of $560 of acquired intangible assets is assigned as
follows:
|
Useful
Life
|
Estimated
Fair Value
|
||||
|
Customer
relationship intangible asset
|
48
months
|
$
|
227
|
||
|
Non-compete
agreement intangible asset
|
36
months
|
198
|
|||
|
Trade
name intangible asset
|
60
months
|
135
|
|||
|
Total
intangible assets
|
$
|
560
|
|||
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of BMC. To value the customer
relationship asset, an income approach was used, specifically a variation of the
discounted cash-flow method. The projected net cash flows for BMC were tax
affected using an effective rate of 41% and then discounted using a discount
rate of 25 % to calculate the value of the customer relationship asset.
Additionally, the present value of the sum of projected tax benefits was added
to arrive at the total fair value of the customer relationship asset. To value
the non-compete agreement a comparative business valuation method was used.
Based on a non-compete term of 36 months, management projected net cash flows
for the Company with and without the non-compete agreement in place. The present
value of the sum of the difference between the net cash flows with and without
the non-compete agreement in place was calculated, based on a discount rate of
25%. To value the trade name intangible asset a relief from royalty
method was used to estimate the pre-tax royalty savings to the Company related
to the BMC trade names. The projected net cash flows from the pre-tax
royalty savings were tax affected using an effective rate of 41% and then
discounted using a discount rate of 25% to calculate the value of the trade name
intangible asset.
5.
Restructuring Charge
In
December 2008 the Company implemented an expense reduction program that included
(i) a reduction in workforce, (ii) a reduction in certain office leases, (iii)
the elimination of its two print publications, and (iv) a continuation of strict
controls on discretionary spending. The Company has implemented the
cost reductions to lower its current and future operating expenses in order to
align its costs with the current business conditions with the goal of
maintaining its profitability and investing as appropriate to gain market
share. The Company’s restructuring charge was comprised
principally of employee severance and associated termination costs, costs
associated with a reduction in certain office leases, contract termination costs
in connection with the elimination of its two print publications and write-offs
of leasehold improvements associated with the exit of facilities.
The
Company’s restructuring charge recorded in 2008 was comprised of the
following;
| Restructuring Charge | ||||
|
Employee
severance pay and related costs
|
$
|
886
|
||
|
Non-cancelable
lease, contract termination, and other charges
|
559
|
|||
|
Write-off
of tenant improvements, furniture, and fixed assets
|
49
|
|||
|
Restructuring
charge
|
$
|
1,494
|
||
The
activity in the Company’s restructuring accrual for the three months ended March
31, 2009 is as follows:
|
Restructuring
Charge
|
||||
|
Balance
as of December 31, 2008
|
$ | 1,114 | ||
|
Cash
paid related to employee severance and other costs
|
(683 | ) | ||
|
Balance
as of March 31, 2009 (unaudited)
|
$ | 431 | ||
As of
March 31, 2009 the Company’s restructuring accrual balance of $431 was included
in the consolidated balance sheet in accrued expenses and other
liabilities.
6.
Cash, Cash Equivalents and Investments
Cash and
cash equivalents consist of highly liquid investments with maturities of three
months or less at date of purchase. Cash equivalents are carried at
cost, which approximates their fair market value. Cash and cash
equivalents consisted of the following:
|
March
31, 2009
|
December
31, 2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Cash
|
$ | 10,928 | $ | 9,850 | ||||
|
Money
market funds
|
12,020 | 14,280 | ||||||
|
Total
cash and cash equivalents
|
$ | 22,948 | $ | 24,130 | ||||
The
Company’s short and long-term investments are accounted for as available for
sale securities under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. These investments are recorded
at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of stockholders’
equity, net of tax. The unrealized gain was $162 and $10 as of
March 31, 2009 and December 31, 2008, respectively. Realized gains
and losses on the sale of these investments are determined using the specific
identification method. Realized
gains totaled $9 in the three months ended March 31, 2009. There were
no realized gains or losses in the three months ended March
31, 2008.
Short and
long-term investments consisted of the following:
| Short-term investments |
March
31, 2009
|
December
31, 2008
|
||||||
|
(Unaudited)
|
||||||||
|
Municipal
bonds
|
$ | 41,114 | $ | 42,863 | ||||
|
Total
short-term investments
|
$ | 41,114 | $ | 42,863 | ||||
| Long-term investments |
March
31, 2009
|
December
31, 2008
|
||||||
|
(Unaudited)
|
||||||||
|
Municipal
bonds
|
$ | 6,619 | $ | 2,575 | ||||
|
Total
long-term investments
|
$ | 6,619 | $ | 2,575 | ||||
Municipal
bonds have contractual maturity dates within eighteen months. All income
generated from these investments is recorded as interest income.
7. Intangible
Assets
Intangible
assets subject to amortization as of March 31, 2009 and December 31, 2008
consist of the following:
|
As
of March 31, 2009
|
||||||||||||||||
|
Estimated
Useful Lives (Years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Customer,
affiliate and advertiser relationships
|
1 - 9 | $ | 12,449 | $ | (5,120 | ) | $ | 7,329 | ||||||||
|
Developed
websites, technology and patents
|
3 - 6 | 5,400 | (1,725 | ) | 3,675 | |||||||||||
|
Trademark,
trade name and domain name
|
1 - 7 | 2,179 | (1,003 | ) | 1,176 | |||||||||||
|
Proprietary
user information database and Internet traffic
|
3 - 5 | 4,750 | (1,476 | ) | 3,274 | |||||||||||
|
Non-compete
agreements
|
1 - 3 | 1,933 | (1,360 | ) | 573 | |||||||||||
|
Total
intangible assets
|
$ | 26,711 | $ | (10,684 | ) | $ | 16,027 | |||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Estimated
Useful Lives (Years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
|||||||||||||
|
Customer,
affiliate and advertiser relationships
|
1 - 9 | $ | 12,449 | $ | (4,641 | ) | $ | 7,808 | ||||||||
|
Developed
websites, technology and patents
|
3 - 6 | 5,400 | (1,500 | ) | 3,900 | |||||||||||
|
Trademark,
trade name and domain name
|
1 - 7 | 2,179 | (912 | ) | 1,267 | |||||||||||
|
Proprietary
user information database and Internet traffic
|
3 - 5 | 4,750 | (1,216 | ) | 3,534 | |||||||||||
|
Non-compete
agreements
|
1 - 3 | 1,933 | (1,200 | ) | 733 | |||||||||||
|
Total
intangible assets
|
$ | 26,711 | $ | (9,469 | ) | $ | 17,242 | |||||||||
Intangible
assets are amortized over their estimated useful lives, which range
from one to nine years, using methods of amortization that are
expected to reflect the estimated pattern of economic use. The remaining
amortization expense will be recognized over a weighted-average period of
approximately 2.7 years.
Amortization
expense was $1,215 and $1,480 for the three months ended March 31, 2009 and
2008, respectively.
The
Company expects amortization expense of intangible assets to be as
follows:
|
Amortization
|
||||
|
Years
Ending December 31:
|
Expense
|
|||
|
2009
(April 1st - December 31st)
|
$ | 3,499 | ||
|
2010
|
4,202 | |||
|
2011
|
3,222 | |||
|
2012
|
2,462 | |||
|
2013
|
1,010 | |||
|
Thereafter
|
1,632 | |||
| $ | 16,027 | |||
8.
Net Loss Per Common Share
A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net loss per common share is as follows:
|
For
the Three Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Numerator:
|
||||||||
|
Net
loss
|
$ | (2,308 | ) | $ | (436 | ) | ||
|
Denominator:
|
||||||||
|
Basic
and diluted weighted average shares of common stock outstanding (1)
|
41,754,131 | 41,158,418 | ||||||
|
Net
Loss Per Common Share:
|
||||||||
|
Basic
and diluted net loss per common share
|
$ | (0.06 | ) | $ | (0.01 | ) | ||
|
(1)
|
In
calculating diluted earnings per share, shares related to outstanding
stock options, unvested restricted stock awards and warrants were excluded
because they were anti-dilutive.
|
9. Bank
Term Loan Payable
In
August 2006, the Company entered into a credit agreement (the "Credit
Agreement") with a commercial bank, which included a $10.0 million term
loan (the "Term Loan") and a $20.0 million revolving credit facility (the
"Revolving Credit Facility"). The Credit Agreement was amended in August 2007
and again in December 2008.
The
Revolving Credit Facility matures on August 30, 2011. Unless earlier payment is
required by an event of default, all principal and unpaid interest will be due
and payable on August 30, 2011. At the Company's option, the Revolving Credit
Facility bears interest at either the Prime Rate less 1.00% or the LIBOR rate
plus the applicable LIBOR margin. The applicable LIBOR margin is
based on the ratio of total funded debt to EBITDA for the preceding four fiscal
quarters. As of March 31, 2009, the applicable LIBOR margin was
1.25%.
The
Company is also required to pay an unused line fee on the daily unused amount of
its Revolving Credit Facility at a per annum rate based on the ratio of total
funded debt to EBITDA for the preceding four fiscal quarters. As of March 31,
2009, unused availability under the Revolving Credit Facility totaled $20
million and the per annum unused line fee rate was 0.20%.
The Term
Loan requires 39 consecutive monthly principal payments of $250, plus interest,
beginning on September 30, 2006 through December 30, 2009. As of March 31, 2009,
the outstanding balance due under the Term Loan was $2,250. There was no accrued
interest on the Term Loan at March 31, 2009.
In
September 2006, the Company entered into an interest rate swap agreement with a
commercial bank to mitigate the interest rate fluctuations on the Term Loan.
With this interest rate swap agreement in place, the Company has fixed the
annual interest rate at 6.98% for the Term Loan. The interest rate swap
agreement terminates in December 2009. Under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the interest rate swap agreement is
deemed to be a cash flow hedge and qualifies for special accounting using the
shortcut method. Accordingly, changes in the fair value of the interest rate
swap agreement are recorded in "accumulated other comprehensive
income (loss)" on the consolidated statements of redeemable convertible
preferred stock and stockholders' equity (deficit). The fair value of
the cash flow hedge was $46 and $77 as of March 31, 2009 and December 31,
2008, respectively, and is recorded in other liabilities.
Borrowings
under the Credit Agreement are collateralized by a security interest in
substantially all assets of the Company. Covenants governing the Credit
Agreement require the maintenance of certain financial ratios. At March 31, 2009
the Company was in violation of one loan covenant under the Credit Agreement.
The Company failed to file timely audited financial statements with the SEC for
the year ended December 31, 2008 and unaudited financial statements with the SEC
for the three months ended March 31, 2009. The Company received a
waiver from the bank agreeing to waive compliance with such covenant solely for
the periods ending December 31, 2008 and March 31, 2009.
10. Commitments
and Contingencies
Operating
Leases
The
Company conducts its operations in leased office facilities under various
noncancelable operating lease agreements that expire through January,
2013. Future
minimum lease payments under noncancelable operating leases at March 31, 2009,
net of minimum sublease rental payments of $450 are as follows:
|
Years
Ending December 31:
|
Minimum
Lease Payments
|
|||
|
(Unaudited)
|
||||
|
2009
(April 1 - December 31)
|
2,229 | |||
|
2010
|
903 | |||
|
2011
|
593 | |||
|
2012
|
611 | |||
|
2013
|
51 | |||
|
Thereafter
|
- | |||
| $ | 4,387 | |||
Litigation
From time
to time and in the ordinary course of business, the Company may be subject to
various claims, charges, and litigation. At March 31, 2009 and December 31,
2008, the Company did not have any pending claims, charges, or litigation that
it expects would have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
11.
Comprehensive Loss
SFAS
No. 130, Reporting
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss) is defined to include all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders. For the three months ended March 31, 2009 and
2008 the Company’s comprehensive loss is as follows:
|
For
the Three Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Net
loss
|
$ | (2,308 | ) | $ | (436 | ) | ||
|
Other
comprehensive loss
|
||||||||
|
Change
in fair value of cash flow hedge
|
31 | (54 | ) | |||||
|
Unrealized
gain on investments
|
151 | - | ||||||
|
Unrealized
gain on foreign currency exchange
|
1 | - | ||||||
|
Total
comprehensive loss
|
$ | (2,125 | ) | $ | (490 | ) | ||
12. Stock-Based
Compensation
Stock
Option Plans
In
September 1999, the Company approved a stock option plan (the 1999 Plan) that
provides for the issuance of up to 12,384,646 shares of common stock
incentives. The 1999 Plan provides for the granting of incentive
stock options (ISOs), nonqualified stock options (NSOs), and stock grants. These
incentives may be offered to the Company’s employees, officers, directors,
consultants, and advisors, as defined. ISOs may be granted at no less
than fair market value on the date of grant, as determined by the Company’s
Board of Directors (the Board) (no less than 110% of fair market value on the
date of grant for 10% or greater stockholders), subject to limitations, as
defined. Each option shall be exercisable at such times and subject to such
terms as determined by the Board, generally four years, and shall expire
within ten years of issuance.
In April
2007, the Board approved the 2007 Stock Option and Incentive Plan (the 2007
Plan), which was approved by the stockholders and became effective upon the
consummation of the Company’s IPO in May 2007. Effective upon the consummation
of the IPO, no further awards will be made pursuant to the 1999 Plan, but any
outstanding awards under the 1999 Plan will remain in effect and will continue
to be subject to the terms of the 1999 Plan. The 2007 Plan allows the
Company to grant ISOs, NSOs, stock appreciation rights, deferred stock awards,
restricted stock and other awards. Under the 2007 Plan, stock options
may not be granted at less than fair market value on the date of grant, and
grants generally vest over a four year period. Stock options granted
under the 2007 Plan expire no later than ten years after the grant
date. The Company has reserved for issuance an aggregate of 2,911,667
shares of common stock under the 2007 Plan plus an additional annual increase to
be added automatically on January 1 of each year, beginning on January 1, 2008,
equal to the lesser of (a) 2% of the outstanding number of shares of common
stock (on a fully-diluted basis) on the immediately preceding December 31 and
(b) such lower number of shares as may be determined by our compensation
committee. The number of shares available for issuance under the 2007
Plan is subject to adjustment in the event of a stock split, stock dividend or
other change in capitalization. Generally, shares that are forfeited
or canceled from awards under the 2007 Plan also will be available for future
awards. In addition, shares subject to stock options returned to the
1999 Plan, as a result of their expiration, cancellation or termination, are
automatically made available for issuance under the 2007 Plan. As of
March 31, 2009 a total of 911,528 shares were available for grant under the 2007
Plan.
Accounting
for Stock-Based Compensation
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award. The Company calculated the fair values of the
options granted using the following estimated weighted-average
assumptions:
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
| (Unaudited) | ||||||||
|
Expected
volatility
|
75 | % | 46 | % | ||||
|
Expected
term
|
6.25
years
|
6.25
years
|
||||||
|
Risk-free
interest rate
|
2.21 | % | 3.15 | % | ||||
|
Expected
dividend yield
|
0.00 | % | 0.00 | % | ||||
|
Weighted-average
grant date fair value per share
|
$ | 1.58 | $ | 6.92 | ||||
As there
was no public market for the Company’s common stock prior to the Company's IPO
in May 2007, and limited historical information on the volatility of its common
stock since the date of the Company’s IPO, the Company determined the volatility
for options granted in the three months ended March 31, 2009 and 2008 based on
an analysis of the historical volatility of the Company’s stock and reported
data for a peer group of companies that issued options with substantially
similar terms. The expected volatility of options granted has been determined
using a weighted average of the historical volatility of the Company’s stock and
the peer group of companies for a period equal to the expected life of the
option. The expected life of options has been determined utilizing
the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin No.
110, Share-Based
Payment. The risk-free interest rate is based on a zero coupon
United States treasury instrument whose term is consistent with the expected
life of the stock options. The Company has not paid and does not anticipate
paying cash dividends on its shares of common stock; therefore, the expected
dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires
companies to utilize an estimated forfeiture rate when calculating the expense
for the period, whereas SFAS No. 123 permitted companies to record forfeitures
based on actual forfeitures, which was the Company’s historical policy under
SFAS No. 123. As a result, the Company applied an estimated annual
forfeiture rate based on its historical forfeiture experience of 2.00% in
determining the expense recorded in three months ended March 31, 2009 and
2008.
A summary
of the stock option activity under the Company's stock option plan for the three
months ended March 31, 2009 is presented below:
|
Quarter-to-Date
Activity
|
Options
Outstanding
|
Weighted-Average
Exercise Price Per Share
|
Weighted-Average
Remaining Contractual Term in Years
|
Aggregate
Intrinsic Value
|
||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Options
outstanding at December 31, 2008
|
7,765,578 | $ | 6.30 | |||||||||||||
|
Granted
|
35,000 | 2.34 | ||||||||||||||
|
Exercised
|
(7,625 | ) | 1.55 | |||||||||||||
|
Forfeited
|
(36,597 | ) | 8.87 | |||||||||||||
|
Canceled
|
(115,823 | ) | 7.12 | |||||||||||||
|
Options
outstanding at March 31, 2009
|
7,640,533 | $ | 6.26 | 6.7 | $ | 939 | ||||||||||
|
Options
exercisable at March 31, 2009
|
4,715,009 | $ | 5.48 | 5.5 | $ | 937 | ||||||||||
|
Options
vested or expected to vest at March 31, 2009
(1)
|
7,493,729 | $ | 6.24 | 6.6 | $ | 939 | ||||||||||
|
(1)
|
In
addition to the vested options, the Company expects a portion of the
unvested options to vest at some point in the future. Options expected to
vest is calculated by applying an estimated forfeiture rate to the
unvested options.
|
During
the three months ended March 31, 2009 and 2008, the total intrinsic value of
options exercised (i.e. the difference between the market price at exercise and
the price paid by the employee to exercise the options) was $8 and $1,172,
respectively, and the total amount of cash received from exercise of these
options was $12 and $904, respectively. The total grant date
fair value of stock options granted after the adoption of SFAS No. 123(R) on
January 1, 2006 that vested during the three months ended March 31, 2009 and
2008 was $1,328 and $1,193, respectively.
Unrecognized
stock-based compensation expense of non-vested stock options of $13.5 million is
expected to be recognized using the straight line method over a weighted-average
period of 1.3 years.
Restricted
Stock Awards
Restricted
stock awards are valued at the market price of a share of the Company’s
common stock on the date of grant. A summary of the restricted stock
award activity under the Company's stock option plan for the three months ended
March 31, 2009 is presented below:
|
Shares
|
Weighted-Average
Grant Date Fair Value Per Share
|
Aggregate
Intrinsic Value
|
|||||||
|
(Unaudited)
|
|||||||||
|
Nonvested
outstanding at December 31, 2008
|
464,476 | $ | 14.48 | ||||||
|
Granted
|
1,925,000 | 4.00 | |||||||
|
Vested
|
- | - | |||||||
|
Forfeited
|
- | - | |||||||
|
Nonvested
outstanding at March 31, 2009
|
2,389,476 | $ | 6.04 |
$ 5,735
|
|||||
The
vesting schedule for the 1,925,000 restricted stock awards granted during the
three months ended March 31, 2009 is contingent upon the Company achieving an
annual financial performance goal. Once the Company achieves the
annual performance goal, the restricted stock awards vest over four
years. If the Company does not achieve the annual performance goal by
the year ended December 31, 2011, the restricted stock awards expire and
terminate. The fair value of the restricted stock awards was based on
the market price of a share of the Company’s common stock on the date of
the grant and assumes the annual performance goal will be achieved in the year
ended December 31, 2009. If the Company does not achieve the
performance goal, recognized compensation expense will be reversed.
Unrecognized stock-based compensation expense of non-vested
restricted stock awards of $12.7 million is expected to be recognized using the
straight line method over a weighted-average period of 1.8 years.
13.
Stockholders’ Equity (Deficit)
Warrants
In
connection with an acquisition in May 2000, the Company issued to the seller a
warrant to purchase 40,625 shares of common stock at a price of $2.36 per
share. The warrant is exercisable immediately and expires on May 10,
2010. The seller exercised warrants to purchase 6,625 shares of
common stock using the conversion rights in the warrants in the three months
ended March 31, 2008. As result of the exercise using the conversion
rights, the Company issued 5,551 shares of common stock to the seller and
cancelled the 1,074 shares received in lieu of payment of the exercise
price. The seller did not exercise any warrants in the three months ended
March 31, 2009. At March 31, 2009 and December 31, 2008, there were
1,269 shares of the Company’s common stock reserved for the exercise of all
warrants.
Reserved
Common Stock
As of
March 31, 2009, the Company has reserved common stock for the
following:
|
Number
of Shares
|
||||
|
(Unaudited)
|
||||
|
Options
outstanding and available for grant under stock option
plans
|
10,970,974 | |||
|
Warrants
|
1,269 | |||
|
Total
common stock reserved
|
10,972,243 | |||
14. Income
Taxes
The
Company adopted the provisions of FIN 48, an interpretation of SFAS No.
109, Accounting for
Income Taxes, on January 1, 2007. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109 and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. At the
adoption date and as of March 31, 2009, the Company had no material unrecognized
tax benefits and no adjustments to liabilities or operations were
required.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. The Company recognized interest
and penalties totaling $5 in the three months ended March 31,
2009. The Company did not recognize any interest and penalties in the
three months ended March 31, 2008.
Tax years
2004 through 2007 are subject to examination by the federal and state taxing
authorities. The Internal Revenue Service completed an audit of our
2006 tax return without identifying any material adjustments. There
are no other income tax examinations currently in process.
The
Company’s effective tax rate was 19% and 59% for the three months ended March
31, 2009 and 2008, respectively. For the three months ended March 31,
2009, the Company calculated the benefit from income taxes using a
period-to-date approach under SFAS No. 109 as provided under FIN No. 18, Accounting for Income Taxes in
Interim Periods. For the three months ended March 31, 2008,
the Company calculated the benefit from income taxes using a forecasted tax
rate for the year ended December 31, 2008 as provided under APB Opinion No. 28,
Interim Financial
Reporting.
15. Segment
Information
SFAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information of these segments be presented in
interim financial reports to stockholders. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in making decisions on how to allocate resources and
assess performance. The Company's chief operating decision making group, as
defined under SFAS No. 131, consists of the Company's chief executive
officer, president and executive vice president. The Company views its
operations and manages its business as one operating segment.
Geographic
Data
Net sales
to unaffiliated customers by geographic area were as follows:
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
United
States and Canada
|
$ | 17,756 | $ | 22,530 | ||||
|
International
|
716 | 733 | ||||||
|
Total
|
$ | 18,472 | $ | 23,263 | ||||
16. Subsequent
Event
In August
2009, the Company entered into an agreement to lease approximately 87,875 square
feet of office space in Newton, Massachusetts. The lease is expected
to commence in March 2010 and has a term of 10 years. The Company is
receiving certain rent concessions during the first two years of the lease
term. Future minimum lease payments under the new operating lease are as
follows:
|
Years
Ending December 31:
|
Minimum
Lease Payments
|
|||
|
(Unaudited)
|
||||
|
2009
(April 1 - December 31)
|
- | |||
|
2010
|
- | |||
|
2011
|
2,270 | |||
|
2012
|
2,812 | |||
|
2013
|
2,812 | |||
|
Thereafter
|
18,015 | |||
| $ | 25,909 | |||
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes and the other financial information included
elsewhere in this Quarterly Report on Form 10-Q. In this discussion
and analysis, dollar, share and per share amounts are not rounded to thousands
unless otherwise indicated. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this Quarterly Report on Form 10-Q,
particularly under the heading "Risk Factors."
Overview
Background
We are a
leading provider of specialized online content that brings together buyers and
sellers of corporate IT products. We sell customized marketing programs that
enable IT vendors to reach corporate IT decision makers who are actively
researching specific IT purchases.
Our
integrated content platform consists of a network of more than 60 websites that
we complement with targeted in-person events and two specialized IT
magazines. We discontinued publishing our specialized IT magazines in
December 2008. Throughout the critical stages of the purchase decision
process, these content offerings meet IT professionals' needs for expert, peer
and IT vendor information, and provide a platform on which IT vendors can launch
targeted marketing campaigns that generate measurable, high ROI. As IT
professionals have become increasingly specialized, they have come to rely on
our sector-specific websites for purchasing decision support. Our content
enables IT professionals to navigate the complex and rapidly changing IT
landscape where purchasing decisions can have significant financial and
operational consequences. Based upon the logical clustering of our users'
respective job responsibilities and the marketing focus of the products that our
customers are advertising, we currently categorize our content offerings across
ten distinct media groups: Application Development; Channel; CIO/IT Strategy;
Data Center and Virtualization Technologies; Enterprise Applications;
Networking; Security; Storage; TechnologyGuide.com; and Vertical
Software.
Sources
of Revenues
We sell
advertising programs to IT vendors targeting a specific audience within a
particular IT sector or sub-sector. We maintain multiple points of contact with
our customers to provide support throughout their organizations and the sales
cycle. As a result, our customers often run multiple advertising programs with
us in order to reach discrete portions of our targeted audience. There are
multiple factors that can impact our customers' advertising objectives and
spending with us, including but not limited to, product launches, increases or
decreases to their advertising budgets, the timing of key industry marketing
events, responses to competitor activities and efforts to address specific
marketing objectives such as creating brand awareness or generating sales leads.
Our services are generally delivered under short-term contracts that run for the
length of a given advertising program, typically less than 6 months in
length.
We
generate substantially all of our revenues from the sale of targeted advertising
campaigns that we deliver via our network of websites, in-person events and
print publications.
Online. The
majority of our revenue is derived from the delivery of our online offerings
from our media groups. Online revenue represented 88% and 78% of
total revenues for the three months ended March 31, 2009 and 2008, respectively.
We expect the majority of our revenues to be derived through the delivery of
online offerings for the foreseeable future. As a result of our customers'
advertising objectives and preferences, the specific allocation of online
advertising offerings sold and delivered by us, on a period by period basis, can
fluctuate.
Through
our websites we sell a variety of online media offerings to connect IT vendors
to IT professionals. Our lead generation offerings allow IT vendors to capture
qualified sales leads from the distribution and promotion of content to our
audience of IT professionals. Our branding offerings provide IT vendors exposure
to targeted audiences of IT professionals actively researching information
related to their products and services.
Our
branding offerings include banners and e-newsletters. Banner advertising can be
purchased on specific websites within our network. We also offer the ability to
advertise in e-newsletters focused on key site sub-topics across our portfolio
of websites. These offerings give IT vendors the ability to increase their brand
awareness to highly specialized IT sectors.
Our lead
generation offerings include the following:
|
|
·
|
White
Papers. White papers are technical documents created by
IT vendors to describe business or technical problems that are addressed
by the vendors' products or services. IT vendors pay us to have their
white papers distributed to our users and receive targeted promotions on
our relevant websites. Prior to viewing white papers, our registered
members and visitors supply their corporate contact and qualification
information and agree to receive further information from the vendor. The
corporate contact and other qualification information for these leads are
supplied to the vendor in real time through our proprietary lead
management software.
|
|
|
·
|
Webcasts, Podcasts and
Videocasts. IT vendors pay us to sponsor and host
webcasts, podcasts and videocasts that bring informational sessions
directly to attendees' desktops and, in the case of podcasts, directly to
their mobile devices. As is the case with white papers, our users supply
their corporate contact and qualification information to the webcast,
podcast or videocast sponsor when they view or download the content.
Sponsorship includes access to the registrant information and visibility
before, during and after the event.
|
|
|
·
|
Software Package
Comparisons. Through our 2020software.com website, IT
vendors pay us to post information and specifications about their software
packages, typically organized by application category. Users can request
further information, which may include downloadable trial software from
multiple software providers in sectors such as customer relationship
management, or CRM, accounting, and business analytics. IT vendors, in
turn, receive qualified leads based upon the users who request their
information.
|
|
|
·
|
Promotional
E-mails. IT vendors pay us to further target the
promotion of their white papers, webcasts, videocasts, podcasts or
downloadable trial software by including their content in our periodic
e-mail updates to registered users of our websites. Users who have
voluntarily registered on our websites receive an e-mail update from us
when vendor content directly related to their interests is listed on our
sites.
|
|
|
·
|
List
Rentals. We also offer IT vendors the ability to message
relevant registered members on topics related to their interests. IT
vendors can rent our e-mail and postal lists of registered members using
specific criteria such as company size, geography or job
title.
|
|
|
·
|
Contextual
Advertising. Our contextual advertising programs
associate IT vendor white papers, webcasts, podcasts or other content on a
particular topic with our related sector-specific content. IT vendors have
the option to purchase exclusive sponsorship of content related to their
product or category.
|
|
|
·
|
Third Party Revenue Sharing
Arrangements. We have arrangements with certain third
parties, including for the licensing of our online content, for the
renting of our database of opted-in email subscribers and for which
advertising from customers of certain third parties is made available to
our website visitors. In each of these arrangements we are paid a share of
the resulting revenue.
|
Events. Events
revenue represented 12% and 17% of total revenues for the three months ended
March 31, 2009 and 2008, respectively. Most of our media groups operate revenue
generating events. The majority of our events are free to IT
professionals and are sponsored by IT vendors. Attendees are pre-screened based
on event-specific criteria such as sector-specific budget size, company size, or
job title. We offer three types of events: multi-day conferences, single-day
seminars and custom events. Multi-day conferences provide independent expert
content for our attendees and allow vendors to purchase exhibit space and other
sponsorship offerings that enable interaction with the attendees. We also hold
single-day seminars on various topics in major cities. These seminars provide
independent content on key sub-topics in the sectors we serve, are free to
qualified attendees, and offer multiple vendors the ability to interact with
specific, targeted audiences actively focused on buying decisions. Our custom
events differ from our conferences and seminars in that they are exclusively
sponsored by a single IT vendor, and the content is driven primarily by the sole
sponsor.
Print. Print
revenue represented 0% and 5% of total revenues for the three months ended March
31, 2009 and 2008, respectively. During the three months ended March 31, 2008,
we published monthly two controlled-circulation magazines that were free to
subscribers and generated revenue solely based on advertising fees. We
discontinued publishing both Storage and Information Security
magazines in December 2008.
Cost
of Revenues, Operating Expenses and Other
Expenses
consist of cost of revenues, selling and marketing, product development, general
and administrative, depreciation, and amortization expenses. Personnel-related
costs are a significant component of most of these expense categories. We had
536 employees at March 31, 2009.
Cost of Online
Revenue. Cost of online revenue consists primarily of:
salaries and related personnel costs; member acquisition expenses (primarily
keyword purchases from leading Internet search sites); freelance writer
expenses; website hosting costs; vendor expenses associated with the delivery of
webcast, podcast, videocast and list rental offerings; stock-based compensation
expenses; and related overhead.
Cost of Events
Revenue. Cost of events revenue consists primarily of:
facility expenses, including food and beverages for the event attendees;
salaries and related personnel costs; event speaker expenses; stock-based
compensation expenses; and related overhead.
Cost of Print
Revenue. Cost of print revenue consists primarily of: printing
and graphics expenses; mailing costs; salaries and related personnel costs;
freelance writer expenses; subscriber acquisition expenses (primarily
telemarketing); stock-based compensation expenses; and related
overhead.
Selling and
Marketing. Selling and marketing expense consists primarily
of: salaries and related personnel costs; sales commissions; travel, lodging and
other out-of-pocket expenses; stock-based compensation expenses; and related
overhead. Sales commissions are recorded as expense when earned by the
employee.
Product
Development. Product development includes the creation and
maintenance of our network of websites, advertiser offerings and technical
infrastructure. Product development expense consists primarily of salaries and
related personnel costs; stock-based compensation expenses; and related
overhead.
General and
Administrative. General and administrative expense consists
primarily of: salaries and related personnel costs; facilities expenses;
accounting, legal and other professional fees; stock-based compensation
expenses; and related overhead. General and administrative expense may continue
to increase as a percentage of total revenue for the foreseeable future as we
invest in infrastructure to support continued growth and incur additional
expenses related to being a publicly traded company, including increased audit
and legal fees, costs of compliance with securities and other regulations,
investor relations expense, and insurance premiums.
Depreciation. Depreciation
expense consists of the depreciation of our property and equipment. Depreciation
of property and equipment is calculated using the straight-line method over
their estimated useful lives ranging from three to five years.
Amortization of Intangible
Assets. Amortization
of intangible assets expense consists of the amortization of intangible assets
recorded in connection with our acquisitions. Separable intangible assets that
are not deemed to have an indefinite life are amortized over their useful lives,
which range from one to nine years, using methods that are expected to reflect
the estimated pattern of economic use.
Interest Income (Expense),
Net. Interest income (expense) net consists primarily of
interest income earned on cash and cash equivalent balances less interest
expense incurred on bank term loan balances. We historically have invested our
cash in money market accounts, municipal bonds and auction rate
securities.
Application
of Critical Accounting Policies and Use of Estimates
The
discussion of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates,
judgments and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue, long-lived assets, the allowance for doubtful accounts,
stock-based compensation, and income taxes. We based our estimates of the
carrying value of certain assets and liabilities on historical experience and on
various other assumptions that we believe to be reasonable. In many cases, we
could reasonably have used different accounting policies and estimates. In some
cases, changes in the accounting estimates are reasonably likely to occur from
period to period. Our actual results may differ from these estimates under
different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments used in the preparation of our consolidated financial statements. See
the notes to our financial statements for information about these critical
accounting policies as well as a description of our other accounting
policies.
Revenue
Recognition
We
generate substantially all of our revenue from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications. We recognize this revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition, and
Financial Accounting Standards Board's, or FASB, Emerging Issues Task Force, or
EITF, Issue No. 00-21, Revenue Arrangement With Multiple
Deliverables. In all cases, we recognize revenue only when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service
is performed and collectability of the resulting receivable is reasonably
assured.
Although
each of our online media offerings can be sold separately, most of our online
media sales involve multiple online offerings. Because objective
evidence of fair value does not exist for all elements in our bundled
advertising campaigns, no allocation can be made, and we recognize revenue on
all services over the term of the arrangement.
Event
Sponsorships. We sell our events separately from our other
service offerings, and recognize sponsorship revenue from events in the period
the event occurs. The majority of our events are free to qualified
attendees, however certain events are based on a paid attendee model. We
recognize revenue for paid attendee events upon completion of the event and
receipt of payment from the attendee. Amounts collected or billed prior to
satisfying the above revenue recognition criteria are recorded as deferred
revenue.
Print
Publications. When sold separately, we recognize advertising
revenue from print publications at the time the applicable publication is
distributed. When print advertising campaigns are sold with online media
offerings, we recognize revenue for all services in the advertising campaign
over the term of the arrangement. Amounts collected or billed prior to
satisfying the above revenue recognition criteria are recorded as deferred
revenue.
Online Media. We
recognize revenue from our specific online media offerings as follows when these
items are sold separately:
o White Papers. We
recognize white paper revenue ratably over the period in which the white
paper is available on our websites.
o Webcasts, Podcasts and
Videocasts. We recognize webcast, podcast and videocast
revenue ratably over the period in which the webcast, podcast or videocast is
available on our websites.
o Software Package
Comparisons. We recognize software package comparison revenue
ratably over the period in which the software information is available on our
websites.
o Promotional E-mails and
E-newsletters. We recognize promotional e-mail revenue ratably
over the period in which the related content asset is available on our websites
because promotional emails do not have standalone value from the related content
asset. We recognize e-newsletter revenue in the period in which
the e-newsletter is sent.
o List Rentals. We
recognize list rental revenue in the period in which the e-mail is sent to the
list of registered members.
o Banners. We
recognize banner revenue in the period in which the banner impressions
occur.
o Third Party Revenue Sharing
Arrangements. We recognize revenue from third party revenue
sharing arrangements in the period in which the services are
performed.
We offer
customers the ability to purchase integrated ROI program offerings, which can
include any of our online media offerings packaged together to address the
particular customer's specific advertising requirements. As part of these
offerings, we will guarantee a minimum number of qualified sales leads to be
delivered over the course of the advertising campaign. We sometimes
extend the scheduled end date of advertising campaigns to satisfy lead
guarantees or to fulfill all elements of the campaign based on delayed receipt
of advertising media collateral from the customer. We estimate the revenue
reserve necessary to properly defer revenue recognition for extended advertising
campaigns. These estimates are based on the Company's experience in managing and
fulfilling these integrated ROI program offerings. Historically, shortfalls in
fulfilling lead guarantees before the scheduled completion date of an
advertising campaign are satisfied within an average of 44 days of
such scheduled completion date. These integrated ROI program offerings
represented approximately 45% and 34% of our online revenues, and 39% and 27% of
our total revenues for the three months ended March 31, 2009 and 2008,
respectively.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
Long-Lived
Assets
Our
long-lived assets consist of property and equipment, goodwill and other
intangible assets. Goodwill and other intangible assets have arisen principally
from our acquisitions. The amount assigned to intangible assets is subjective
and based on our estimates of the future benefit of the intangible assets using
accepted valuation techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, other than goodwill, are amortized over their
estimated useful lives, which we determined based on the consideration of
several factors including the period of time the asset is expected to remain in
service. Intangible assets are amortized over their estimated useful lives,
which range from one to nine years, using methods of amortization that
are expected to reflect the estimated pattern of economic use. We evaluate the
carrying value and remaining useful lives of long-lived assets, other than
goodwill, whenever indicators of impairment are present. We evaluate the
carrying value of goodwill annually, and whenever indicators of impairment are
present. We use a discounted cash flow approach to determine the fair value of
goodwill.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, short-term and long-term
investments, accounts receivable, accounts payable, a term loan payable and an
interest rate swap. The carrying value of these instruments approximates
their estimated fair values.
Allowance
for Doubtful Accounts
We offset
gross trade accounts receivable with an allowance for doubtful accounts. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review our allowance for
doubtful accounts on a regular basis, and all past due balances are reviewed
individually for collectability. Account balances are charged against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Provisions for allowance for doubtful
accounts are recorded in general and administrative expense. If our historical
collection experience does not reflect our future ability to collect outstanding
accounts receivables, our future provision for doubtful accounts could be
materially affected. To date, we have not incurred any write-offs of accounts
receivable significantly different than the amounts reserved. The
allowance for doubtful accounts was $579,000 and $642,000 at March 31, 2009 and
December 31, 2008, respectively.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted SFAS No. 123(R), which requires companies to
expense the fair value of employee stock options and other forms of stock-based
compensation. SFAS No. 123(R) requires nonpublic companies that used
the minimum value method under SFAS No. 123 for either recognition or pro
forma disclosures to apply SFAS No. 123(R) using the prospective-transition
method. As such, we will continue to apply APB Opinion No. 25 in future
periods to equity awards outstanding at the date of adoption of SFAS
No. 123(R) that were measured using the minimum value method. In accordance
with SFAS No. 123(R), we will recognize the compensation cost of employee
stock-based awards in the statement of operations using the straight line method
over the vesting period of the award. Effective with the adoption of SFAS
No. 123(R), we have elected to use the Black-Scholes option pricing model
to determine the fair value of stock options granted. We calculated
the fair values of the options granted using the following estimated
weighted-average assumptions:
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Expected
volatility
|
75 | % | 46 | % | ||||
|
Expected
term
|
6.25
years
|
6.25
years
|
||||||
|
Risk-free
interest rate
|
2.21 | % | 3.15 | % | ||||
|
Expected
dividend yield
|
0.00 | % | 0.00 | % | ||||
|
Weighted-average
grant date fair value per share
|
$ | 1.58 | $ | 6.92 | ||||
As there
was no public market for our common stock prior to our initial public offering
in May 2007, and there has been limited historical information on the volatility
of our common stock since the date of our initial public offering, we determined
the volatility for options granted in the three months ended March 31, 2009 and
2008 based on an analysis of the historical volatility of our stock and reported
data for a peer group of companies that issued options with substantially
similar terms. The expected volatility of options granted has been determined
using a weighted average of the historical volatility of our stock and the peer
group of companies for a period equal to the expected life of the
option. The expected life of options has been determined utilizing
the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin
No. 110, Share-Based
Payment. The risk-free interest rate is based on a zero coupon
United States treasury instrument whose term is consistent with the expected
life of the stock options. We have not paid and do not anticipate paying cash
dividends on our shares of common stock; therefore, the expected dividend yield
is assumed to be zero. In addition, SFAS No. 123(R) requires companies to
utilize an estimated forfeiture rate when calculating the expense for the
period. As a result, we applied an estimated annual forfeiture rate
based on its historical forfeiture experience of 2.00% in determining the
expense recorded in three months ended March 31, 2009 and 2008.
The
vesting schedule for the 1,925,000 restricted stock awards granted during the
three months ended March 31, 2009 is contingent upon our achieving an annual
financial performance goal. Once we achieve the annual performance
goal, the restricted stock awards vest over four years. If we do not
achieve the annual performance goal by the year ended December 31, 2011, the
restricted stock awards expire and terminate. The fair value of the
restricted stock awards was based on the market price of a share of our
common stock on the date of the grant and assumes the annual performance goal
will be achieved in the year ended December 31, 2009. If we do not
achieve the performance goal, recognized compensation expense will be
reversed.
Internal
Use Software and Website Development Costs
We
account for internal-use software and website development costs in accordance
with the guidance set forth in Statement of Position, or SOP, 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use, and EITF Issue
No. 00-2, Accounting for
Website Development Costs. We capitalize costs of materials, consultants
and compensation and related expenses of employees who devote time to the
development of internal-use software and website applications and infrastructure
involving developing software to operate our websites. However, we expense as
incurred website development costs for new features and functionalities since it
is not probable that they will result in additional functionality until they are
both developed and tested with confirmation that they are more effective than
the current set of features and functionalities on our websites. Our judgment is
required in determining the point at which various projects enter the states at
which costs may be capitalized, in assessing the ongoing value of the
capitalized costs and in determining the estimated useful lives over which the
costs are amortized, which is generally three years. To the extent that we
change the manner in which we develop and test new features and functionalities
related to our websites, assess the ongoing value of capitalized assets or
determine the estimated useful lives over which the costs are amortized, the
amount of website development costs we capitalize and amortize in future periods
would be impacted. We review capitalized internal use software and website
development costs for recoverability whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. We would recognize an impairment loss only if the carrying
amount of the asset is not recoverable and exceeds its fair value. We
capitalized internal-use software and website development costs of $216 and $14
for the three months ended March 31, 2009 and 2008, respectively.
Income
Taxes
We are
subject to income taxes in both the United States and foreign jurisdictions, and
we use estimates in determining our provision for income taxes. We account for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates.
Our
deferred tax assets are comprised primarily of net operating loss, or NOL,
carryforwards. As of December 31, 2008, we had U.S. federal and state net
operating loss (NOL) carryforwards of approximately $11.1 million and $17.0
million, respectively, which may be used to offset future taxable income. The
NOL carryforwards expire through 2027, and are subject to review and possible
adjustment by the Internal Revenue Service. The Internal Revenue Code contains
provisions that limit the NOL and tax credit carryforwards available to be used
in any given year in the event of certain changes in the ownership interests of
significant stockholders. The federal NOL carry forwards of $11.1 million
available at December 31, 2008 were acquired from KnowledgeStorm and are subject
to limitations on their use in future years.
Net
Income (Loss) Per Share
We follow
the provisions of SFAS No. 128, Earnings Per Share, which
requires that basic EPS be calculated by dividing earnings available to common
shareholders for the period by the weighted average number of common shares and
vested restricted stock awards outstanding. Diluted EPS is computed
using the weighted-average number of common shares and
vested restricted stock awards outstanding during the period, plus the
dilutive effect of potential future issuances of common stock relating to stock
option programs and other potentially dilutive securities using the treasury
stock method. In calculating diluted EPS, the dilutive effect of stock options
is computed using the average market price for the respective period. In
addition, under SFAS No. 123(R), the assumed proceeds under the treasury stock
method include the average unrecognized compensation expense and assumed tax
benefit of stock options that are in-the-money. This results in the “assumed”
buyback of additional shares, thereby reducing the dilutive impact of stock
options.
Results
of Operations
The
following table sets forth our results of operations for the periods
indicated:
|
Three
Months Ended March 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
($
in thousands)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Online
|
$ | 16,282 | 88 | % | $ | 18,210 | 78 | % | ||||||||
|
Events
|
2,190 | 12 | 3,985 | 17 | ||||||||||||
|
Print
|
- | - | 1,068 | 5 | ||||||||||||
|
Total
revenues
|
18,472 | 100 | 23,263 | 100 | ||||||||||||
|
Cost
of revenues:
|
||||||||||||||||
|
Online
|
4,880 | 26 | 5,169 | 22 | ||||||||||||
|
Events
|
1,081 | 6 | 1,827 | 8 | ||||||||||||
|
Print
|
- | - | 546 | 2 | ||||||||||||
|
Total
cost of revenues
|
5,961 | 32 | 7,542 | 32 | ||||||||||||
|
Gross
profit
|
12,511 | 68 | 15,721 | 68 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
and marketing
|
7,516 | 41 | 8,444 | 37 | ||||||||||||
|
Product
development
|
2,081 | 11 | 2,762 | 12 | ||||||||||||
|
General
and administrative
|
3,919 | 21 | 3,795 | 16 | ||||||||||||
|
Depreciation
|
536 | 3 | 724 | 3 | ||||||||||||
|
Amortization
of intangible assets
|
1,215 | 7 | 1,480 | 7 | ||||||||||||
|
Total
operating expenses
|
15,267 | 83 | 17,205 | 75 | ||||||||||||
|
Operating
loss
|
(2,756 | ) | (15 | ) | (1,484 | ) | (7 | ) | ||||||||
|
Interest
income (expense), net
|
(110 | ) | * | 418 | 2 | |||||||||||
|
Loss
before benefit from income taxes
|
(2,866 | ) | (15 | ) | (1,066 | ) | (5 | ) | ||||||||
|
Benefit
from income taxes
|
(558 | ) | (3 | ) | (630 | ) | (3 | ) | ||||||||
|
Net
loss
|
$ | (2,308 | ) | (12 | )% | $ | (436 | ) | (2 | )% | ||||||
* Percentage not meaningful.
Comparison
of Three Months Ended March 31, 2009 and 2008
Revenues
|
Three
Months Ended March 31,
|
||||||||||||||||
|
Increase
|
Percent
|
|||||||||||||||
|
2009
|
2008
|
(Decrease)
|
Change
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
($
in thousands)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Online
|
$ | 16,282 | $ | 18,210 | $ | (1,928 | ) | (11 | ) % | |||||||
|
Events
|
2,190 | 3,985 | (1,795 | ) | (45 | ) | ||||||||||
|
Print
|
- | 1,068 | (1,068 | ) | (100 | ) | ||||||||||
|
Total
revenues
|
$ | 18,472 | $ | 23,263 | $ | (4,791 | ) | (21 | ) % | |||||||
Online. The
decrease in online revenue was primarily attributable to a $1.6 million decrease
in revenue from lead generation offerings due primarily to a decrease in white
paper and webcast sales volumes. Additionally, revenue from third
party revenue sharing arrangements decreased by $711,000 in the first quarter of
2009 as compared to the same period of 2008. The decrease was partially
offset by a $327,000 increase in branding revenue due primarily to an increase
in banner sales volume.
Events. The
decrease in events revenue was primarily attributable to a $1.5 million decrease
in seminar series and custom event revenue due to a
decrease of 18 events produced in the first quarter of 2009 as
compared to the same period of 2008. The decrease also reflects a
decrease in revenue from multi-day conferences of $293,000 in the first quarter
of 2009 as compared to the same period of 2008.
Print. We did not
recognize any print revenue in the first quarter of 2009 because we discontinued
publishing both of our print publications, Storage and Information Security
magazines, in December 2008.
Cost
of Revenues and Gross Profit
|
Three
Months Ended March 31,
|
||||||||||||||||
|
Increase
|
Percent
|
|||||||||||||||
|
2009
|
2008
|
(Decrease)
|
Change
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
($
in thousands)
|
||||||||||||||||
|
Cost
of revenues:
|
||||||||||||||||
|
Online
|
$ | 4,880 | $ | 5,169 | $ | (289 | ) | (6 | %) | |||||||
|
Events
|
1,081 | 1,827 | (746 | ) | (41 | ) | ||||||||||
|
Print
|
- | 546 | (546 | ) | (100 | ) | ||||||||||
|
Total
cost of revenues
|
$ | 5,961 | $ | 7,542 | $ | (1,581 | ) | (21 | %) | |||||||
|
Gross
profit
|
$ | 12,511 | $ | 15,721 | $ | (3,210 | ) | (20 | %) | |||||||
|
Gross
profit percentage
|
68 | % | 68 | % | ||||||||||||
Cost of Online
Revenue. The decrease in cost of online revenue was primarily
attributable to a $436,000 decrease in member acquisition expenses, primarily
related to keyword purchases for 2020software.com. The decrease also reflects a
$148,000 decrease in production and hosting costs for online products due to the
decreased sales volume of online services in the first quarter of 2009 as
compared to the same period of 2008. The decrease was partially
offset by a $284,000 increase in salaries and benefits.
Cost of Events
Revenue. The decrease in cost of events revenue was
attributable in part to a $415,000 decrease in seminar series and custom event
costs due to a decrease of 18 events produced in the first
quarter of 2009 compared to the same period of 2008. The decrease
also reflects a $262,000 decrease in salaries, benefits and temporary help due
to a decrease in headcount in our events organization resulting from the
expense reduction program implemented in December 2008.
Cost of Print
Revenue. We did not recognize any cost of print revenue in the
first quarter of 2009 because we discontinued publishing both Storage and Information Security
magazines in December 2008.
Gross Profit. Our
gross profit is equal to the difference between our revenues and our cost of
revenues for the period. The decrease in gross profit is attributable to a $1.6
million decrease in online gross profit, a $1.0 million decrease in events gross
profit, and a $522,000 decrease in print gross profit. Gross margin for the
first quarter of 2009 was 68% as compared to 68% for the same period of
2008. Because the majority of our costs are labor-related and
therefore fixed in nature, we expect our gross profit to fluctuate from period
to period depending on the total revenues for the period as well as the relative
contribution of online and events revenue to our total revenues.
Operating
Expenses and Other
|
Three
Months Ended March 31,
|
||||||||||||||||
|
Increase
|
Percent
|
|||||||||||||||
|
2009
|
2008
|
(Decrease)
|
Change
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
($
in thousands)
|
||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
and marketing
|
$ | 7,516 | $ | 8,444 | $ | (928 | ) | (11 | ) % | |||||||
|
Product
development
|
2,081 | 2,762 | (681 | ) | (25 | ) | ||||||||||
|
General
and administrative
|
3,919 | 3,795 | 124 | 3 | ||||||||||||
|
Depreciation
|
536 | 724 | (188 | ) | (26 | ) | ||||||||||
|
Amortization
of intangible assets
|
1,215 | 1,480 | (265 | ) | (18 | ) | ||||||||||
|
Total
operating expenses
|
$ | 15,267 | $ | 17,205 | $ | (1,938 | ) | (11 | ) % | |||||||
|
Interest
income (expense), net
|
$ | (110 | ) | $ | 418 | $ | (528 | ) | * | |||||||
|
Benefit
from income taxes
|
$ | (558 | ) | $ | (630 | ) | $ | 72 | (11 | ) % | ||||||
* Percentage
not meaningful.
Selling and
Marketing. The decrease in selling and marketing expense was
attributable in part to a $639,000 decrease in salaries, commissions, bonuses
and benefits due to a decrease in headcount in our sales and marketing
organizations resulting from the expense reduction program implemented in
December 2008. The decrease also reflects a $246,000 decrease in
travel related costs.
Product
Development. The decrease in product development expense was
attributable to a $647,000 decrease in salaries and benefits due to a
decrease in headcount in our product development organization resulting
from the expense reduction program implemented in December 2008.
General and
Administrative. The increase in general and administrative
expense was attributable in part to a $292,000 increase in stock-based
compensation and a $64,000 increase in other employee
compensation. The increase also reflects a $222,000 increase in
professional fees. The increase was partially offset by a $144,000
decrease in bad debt expense, a $144,000 decrease in corporate functions, and a
$145,000 decrease in various contracted services.
Depreciation and Amortization of
Intangible Assets. The decrease in depreciation expense was
primarily attributable to depreciation of assets acquired from KnowledgeStorm in
November 2007. The decrease in amortization of intangible assets expense was
primarily attributable to amortization of intangible assets related to our
acquisitions of TechnologyGuide.com in May 2007 and KnowledgeStorm in November
2007.
Interest Income (Expense),
Net. The
decrease in interest income (expense), net reflects an adjustment to
interest income of ($284,000) in the first quarter of 2009 related to
interest income recognized in error in the fourth quarter of 2008, as well
as lower interest rates during the first quarter of 2009 compared to
the same period of 2008.
Provision for Income
Taxes. Our
effective tax rate was 19% for the three months ended March 31, 2009 and
59% for the three months ended March 31, 2008. The decrease in the
effective tax rate was due to a change in the method used to calculate the
benefit from income taxes. For the three months ended March 31, 2009,
we calculated the benefit from income taxes using a period-to-date
approach under SFAS No. 109 as provided under FIN No. 18, Accounting for Income Taxes in
Interim Periods. For the three months ended March 31, 2008, we
calculated the benefit from income taxes using a forecasted tax rate for
the year ended December 31, 2008 as provided under APB Opinion No. 28, Interim Financial
Reporting.
Seasonality
The
timing of our revenues is affected by seasonal factors. Our revenues are
seasonal primarily as a result of the annual budget approval process of many of
our customers and the historical decrease in advertising activity in July and
August. Revenues are usually the lowest in the first quarter of each calendar
year, increase during the second quarter, decrease during the third quarter, and
increase again during the fourth quarter. Events revenue may vary depending on
which quarters we produce the event, which may vary when compared to previous
periods. The timing of revenues in relation to our expenses, much of which does
not vary directly with revenue, has an impact on the cost of online revenue,
selling and marketing, product development, and general and administrative
expenses as a percentage of revenue in each calendar quarter during the
year.
The
majority of our expenses are personnel-related and include salaries, stock-based
compensation, benefits and incentive-based compensation plan expenses. As a
result, we have not experienced significant seasonal fluctuations in the timing
of our expenses period to period.
Liquidity
and Capital Resources
Resources
We
believe that our existing cash and cash equivalents, our cash flow from
operating activities and available bank borrowings will be sufficient to meet
our anticipated cash needs for at least the next twelve months. Our
future working capital requirements will depend on many factors, including the
operations of our existing business, our potential strategic expansion
internationally, future acquisitions we might undertake, and the expansion into
complementary businesses. To the extent that our cash and cash
equivalents and cash flow from operating activities are insufficient to fund our
future activities, we may need to raise additional funds through bank credit
arrangements or public or private equity or debt financings. We also
may need to raise additional funds in the event we determine in the future to
effect one or more additional acquisitions of businesses. In the
event additional funding is required, we may not be able to obtain bank credit
arrangements or affect an equity or debt financing on terms acceptable to us or
at all.
|
March
31, 2009
|
December
31, 2008
|
|||||||
|
(Unaudited)
|
||||||||
|
($
in thousands)
|
||||||||
|
Cash,
cash equivalents and investments
|
$ | 70,681 | $ | 69,568 | ||||
|
Accounts
receivable, net
|
$ | 13,684 | $ | 17,622 | ||||
Cash,
Cash Equivalents and Investments
Our cash,
cash equivalents and investments at March 31, 2009 were held for working capital
purposes and were invested primarily in money market accounts and municipal
bonds. We do not enter into investments for trading or speculative
purposes.
Accounts
Receivable, Net
Our
accounts receivable balance fluctuates from period to period, which affects our
cash flow from operating activities. The fluctuations vary depending on the
timing of our service delivery and billing activity, cash collections, and
changes to our allowance for doubtful accounts. We use days' sales outstanding,
or DSO, calculated on a monthly basis, as a measurement of the quality and
status of our receivables. We define DSO as average accounts receivable divided
by total revenue for the applicable period, multiplied by the number of days in
the applicable period. DSO was 79 and 66 days for the three
months ended March 31, 2009 and 2008, respectively.
Operating
Activities
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
($
in thousands)
|
||||||||
|
Net
cash provided by operating activities
|
$ | 2,538 | $ | 388 | ||||
|
Net
cash used in investing activities
(1)
|
$ | (342 | ) | $ | (467 | ) | ||
|
Net
cash provided by (used in) financing activities
|
$ | (738 | ) | $ | 432 | |||
Cash
provided by operating activities primarily consists of net income adjusted for
certain non-cash items including depreciation and amortization, the provision
for bad debt, stock-based compensation, deferred income taxes, and the effect of
changes in working capital and other activities. Cash provided by
operating activities in the three months ended March 31, 2009 was $2.5 million
and consisted of $2.3 million of net loss, $1.8 million of depreciation and
amortization, $2.6 million of stock-based compensation, and $492,000 provided by
working capital and other activities.
Cash
provided by operating activities in the three months ended March 31, 2008 was
$388,000 and consisted of $436,000 of net loss, $2.2 million of
depreciation and amortization and $2.3 million of stock-based compensation,
offset by $3.6 million used in working capital and other
activities.
Investing
Activities
Cash used
in investing activities primarily consists of purchases of property and
equipment and acquisitions of businesses. Cash used in investing
activities in the three months ended March 31, 2009, net of investment activity,
was $342,000 for the purchase of property and equipment. Cash used in
investing activities in the three months ended March 31, 2008, net of investment
activity, was $467,000 and consisted of $417,000 for the purchase of property
and equipment and $50,000 for the purchase of certain web site domain
names.
Equity
Financing Activities
We
received proceeds from the exercise of warrants and stock options in the amounts
of $12,000 and $904,000 in the three months ended March 31, 2009 and 2008,
respectively.
Term
Loan and Credit Facility Borrowings
On August
30, 2006, we entered into a credit agreement with Citizens Bank of
Massachusetts, which included a $10.0 million term loan and a $20.0 million
revolving credit facility. As of March 31, 2009, outstanding
borrowings under the credit agreements were $2.3 million.
Our
revolving credit facility matures on August 30, 2011. Unless earlier payment is
required by an event of default, all principal and any unpaid interest will be
due and payable on August 30, 2011. At our option, the revolving
credit facility bears interest at either the lender's prime rate less 1.00% or
the London Interbank Offered Rate, or LIBOR, plus the applicable LIBOR margin.
The applicable LIBOR margin is based on the ratio of total funded debt to EBITDA
for the preceding four fiscal quarters. As of March 31, 2009, the
applicable LIBOR margin was 1.25%.
We are
also required to pay an unused line fee on the daily unused amount of our
revolving credit facility at a per annum rate based on the ratio of total funded
debt to EBITDA for the preceding four fiscal quarters. As of March 31, 2009,
unused availability under our revolving credit facility totaled $20 million and
the per annum unused line fee rate was 0.20%.
Our term
loan requires the payment of 39 consecutive monthly installments of $250,000
each, plus interest, the first such installment was due on September 30, 2006,
with a final payment of the entire unpaid principal balance due on December 30,
2009. In September 2006, we entered into an interest rate swap
agreement to mitigate interest rate fluctuation, and fix the interest rate on
the term loan at 6.98%.
Borrowings
under our credit agreements are collateralized by an interest in and lien on all
of our assets and certain other guarantees and pledges. Our credit agreements
contain certain affirmative and negative covenants, which require, among other
things, that we meet certain financial ratio covenants and limit certain capital
expenditures. At March 31, 2009 we were in violation of one loan covenant under
the credit agreement with Citizens Bank. We failed to file timely financial
statements with the SEC. We received a waiver from the bank agreeing to
waive compliance with such covenant solely for the quarters ending December 31,
2008 and March 31, 2009.
Capital
Expenditures
We have
made capital expenditures primarily for computer equipment and related software
needed to host our websites, internal-use software development costs, as well as
for leasehold improvements and other general purposes to support our
growth. Our capital expenditures totaled $342,000 and $417,000 for
the three months ended March 31, 2009 and 2008, respectively. We
expect to spend approximately $2.9 million in capital expenditures in the
remaining nine months of 2009, primarily for leasehold improvements, website
development costs, computer equipment and related software, and internal-use
software development costs. We are not currently party to any purchase contracts
related to future capital expenditures.
Contractual
Obligations and Commitments
As of
March 31, 2009, our principal commitments consist of obligations under leases
for office space and principal and interest payments due under our bank term
loan. The offices are leased under noncancelable operating lease agreements that
expire through January 2013. The following table sets forth our commitments to
settle contractual obligations in cash as of March 31, 2009:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
3
- 5 Years
|
More
than 5 Years
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||
|
Bank
term loan payable
|
$ | 2,250 | $ | 2,250 | $ | - | $ | - | $ | - | ||||||||||
|
Operating
leases (1)
|
4,387 | 2,596 | 1,791 | - | - | |||||||||||||||
|
Total
|
$ | 6,637 | $ | 4,846 | $ | 1,791 | $ | - | $ | - | ||||||||||
|
(1)
|
Operating
lease obligations are net of minimum sublease payments of $450,000 due
under a sublease agreement that expires in November
2010.
|
In August
2009, we entered into an agreement to lease approximately 87,875 square feet of
office space in Newton, Massachusetts. The lease is expected to
commence in March 2010 and has a term of 10 years. We are receiving
certain rent concessions during the first two years of the lease term. The
following table sets forth our additional commitments to settle contractual
obligations in cash under the new lease agreement:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
3
- 5 Years
|
More
than 5 Years
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||
|
Operating
lease
|
$ | 25,909 | $ | - | $ | 5,785 | $ | 8,656 | $ | 11,468 | ||||||||||
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
See Note
2 of “Notes to Consolidated Financial Statements” for recent accounting
pronouncements that could have an effect on us.
Market
risk represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates. Our market risk exposure
is primarily a result of fluctuations in foreign exchange rates and interest
rates. We do not hold or issue financial instruments for trading
purposes.
Foreign
Currency Exchange Risk
Our
subsidiary, TechTarget Limited, was established in July 2006 and is located
in London, England. We currently believe our exposure to foreign currency
exchange rate fluctuations is financially immaterial and therefore have not
entered into foreign currency hedging transactions. We continue to review this
issue and may consider hedging certain foreign exchange risks through the use of
currency futures or options in the future.
Interest
Rate Risk
At March
31, 2009, we had cash, cash equivalents and investments totaling $70.7 million.
These amounts were invested primarily in money market accounts and municipal
bonds. The cash, cash equivalents and investments were held for
working capital purposes. We do not enter into investments for
trading or speculative purposes. Due to the short-term nature of
these investments, we believe that we do not have any material exposure to
changes in the fair value of our investment portfolio as a result of changes in
interest rates. Declines in interest rates, however, would reduce future
investment income.
Our
exposure to market risk also relates to the amount of interest expense we must
pay under our revolving credit facility. The advances under this
credit facility bear a variable rate of interest determined as a function of the
lender's prime rate or LIBOR. At March 31, 2009, there were no
amounts outstanding under our revolving credit facility.
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 March 31, 2009. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities 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 Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s 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
Securities Exchange Act is accumulated and communicated to the company’s
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 March 31,
2009, and due to the material weaknesses in our internal control over
financial reporting described in our accompanying Management's Report on Internal
Control over Financial Reporting, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and
procedures were not effective at the reasonable assurance level. As further
discussed below under “Remediation Plans”, management is implementing measures
that we believe will address these deficiencies in our controls and
procedures.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for our company. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under
the Securities Exchange Act, as a process designed by, or under the supervision
of, a company's principal executive and principal financial officers and
effected by the company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:
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·
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pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
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·
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provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
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·
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provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial
statements.
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Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, including our chief executive officer and chief financial officer,
assessed the effectiveness of our internal controls over financial reporting as
of March 31, 2009. In connection with this assessment, we identified the
following material weaknesses in internal control over financial reporting as of
March 31, 2009. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. In
making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Because of the material weaknesses described below, management
believes that, as of March 31, 2009, our internal control over financial
reporting was not effective based on this criteria.
Accounting for Certain Complex
Online Service Revenue Transactions. As a result of further review of the
Company’s business processes pertaining to its online service revenue offerings
and the related application of accounting policies and procedures to these
business processes, management identified material weaknesses in internal
control over financial reporting related to the misapplication of generally
accepted accounting principles on revenue arrangements involving certain online
service offerings as well as our assessment of verifiable objective evidence of
fair value for elements included in multiple element advertising
campaigns. This misapplication of generally accepted accounting
principles led to the necessary restatement of previously issued financial
statements and other financial information.
Management
identified the following material weaknesses surrounding the Company’s internal
controls over its accounting for certain complex service revenue
transactions:
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1.
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Inadequate
and ineffective controls over the accounting for certain complex service
revenue recognition
transactions.
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The
Company did not have effective design or operational controls over the
accounting for certain online service revenue transactions, specifically; the
Company’s ability to apply generally accepted accounting principles as they
relate to the recognition of revenue on transactions that include duration-based
services and multiple element advertising campaigns. This material weakness
resulted in the misstatement of revenue for certain service offerings and
multiple element campaigns, which required previously reported consolidated
financial statements to be restated.
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2.
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Inadequate
and ineffective controls over adequacy of staffing of accounting
group.
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The
Company’s controls related to ensuring the adequacy of staffing of its
accounting and finance department were inadequate and
ineffective. This material weakness resulted in the misstatement of
revenue for certain service offerings and multiple element campaigns, which
required previously reported consolidated financial statements to be
restated.
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3.
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Insufficient
and ineffective review and supervision by management of the policies and
procedures underlying certain complex service revenue
transactions.
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Management’s
monitoring and review controls over the Company’s underlying accounting policies
and procedures as well as the business process controls surrounding certain
complex online service revenue transactions were inadequate and ineffective.
This material weakness resulted in the misstatement of revenue for certain
service offerings and multiple element campaigns, which required previously
reported consolidated financial statements to be restated.
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4.
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Inadequate
and ineffective detective controls to ensure timely and proper
identification and correction of errors.
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Management’s
oversight and related detective controls to ensure timely and proper
identification and correction of errors for arrangements involving certain
complex online service revenue transactions were inadequate and ineffective.
This material weakness resulted in the misstatement of revenue for certain
service offerings and multiple element campaigns, which required previously
reported consolidated financial statements to be restated.
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5.
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Inadequate
and ineffective accounting and reporting system for processing and
reporting of certain complex service revenue
transactions.
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The
Company’s current accounting and financial reporting system and related internal
controls is inadequate to carry out the volume and level of complexities
associated with the Company’s online service revenue transactions. This material
weakness resulted in the misstatement of revenue for certain service offerings
and multiple element campaigns, which required previously reported consolidated
financial statements to be restated.
As a
result of these material weaknesses, we restated our previously issued financial
statements and other financial information for the years 2007 and 2006; and
financial information for the years 2005 and 2004, and for each of the quarterly
periods ended March 31, June 30, and September 30 in the year 2008 and for each
of the quarterly periods in the year 2007. The aforementioned errors
resulted in changes in revenues, deferred revenue and income taxes for the
aforementioned periods.
Changes
in Internal Control over Financial Reporting
No change
in internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act) occurred during the quarter ended
March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, other than
those material weaknesses described above.
Remediation
Plans
Management
has identified the following measures to strengthen our internal control over
financial reporting and to address the material weaknesses described above. We
began implementing certain of these measures prior to the filing of this Form
10-Q but changes made to our internal controls have not yet been in place for a
sufficient time to have had a significant effect. Management expects
to continue to develop remediation plans and implement additional changes to our
internal control over financial reporting during fiscal 2009 and possibly into
fiscal 2010, described in detail hereafter. We believe that the actions taken to
date, as well as our planned future actions, will adequately address the
material weaknesses.
In
order to improve controls over the accounting for certain complex service
revenue transactions, we have initiated and intend to continue to:
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Assess
the expertise of our staff responsible for revenue recognition and address
any identified deficiencies in order to enhance and augment the depth of
knowledge of our staff and reduce the risk of future accounting errors and
financial statement misstatements.
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Utilize
specialized third party consultants to assist us in monitoring and
ensuring the propriety of our revenue recognition policies, procedures,
and activities on a quarterly basis, beginning with the current
quarter.
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Communicate
revised revenue recognition policies and procedures to appropriate
accounting staff, and train them on their usage and
application.
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Ensure
that accounting group management is heavily involved in oversight and
monitoring of the recording and reporting of complex service revenue
recognition transactions during current and future reporting
periods.
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Review
the controls over revenue recognition to ensure procedures exist to
properly account for any changes in
operations.
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In
order to improve controls over ensuring the adequacy of staffing of the
accounting group, we have initiated and intend to continue to:
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Assess
the depth and expertise of our staff responsible for revenue recognition
and address any identified
deficiencies.
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Work
with our Human Resources department in aggressively identifying and
recruiting future capable technical accounting staff
candidates.
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Utilize
specialized third party consultants to assist us in monitoring and
ensuring the propriety of our revenue recognition policies, procedures,
and activities on a quarterly basis, beginning with the current
quarter.
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In
order improve controls to ensure an adequate level of review and supervision by
management exists with respect to the underlying accounting policies and
procedures underlying certain complex service revenue transactions, we have
initiated and intend to continue to:
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·
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Ensure
that accounting group management is routinely reviewing and monitoring the
application of and any changes to the accounting policies and procedures
underlying complex service revenue recognition transactions during future
reporting periods.
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Ensure
the proper evidence of this review is consistently documented during
future reporting periods.
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In
order to ensure the improvement of the effectiveness of detective controls in
identifying and correcting errors, we have initiated and intend to continue
to:
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·
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Ensure
that accounting group management is heavily involved in oversight and
monitoring of the recording and reporting of complex service revenue
recognition transactions during future reporting
periods.
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·
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Utilize
specialized third party consultants to assist us in monitoring and
ensuring the propriety of our revenue recognition policies, procedures,
and activities on a quarterly basis, beginning with the current
quarter.
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Consider
implementation of additional automation, trending analyses, and management
reporting to highlight potential future revenue recognition
issues.
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In
order to ensure the Company’s accounting and reporting systems are adequate to
carry out the level and complexities associated with our service revenue
transactions, we have initiated and intend to continue to:
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Utilize
specialized third party consultants to assist us in assessing the
limitations of our current system
environment.
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Implement
an enhanced revenue software application to improve our current financial
reporting system.
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Update internal processes and procedures to improve the controls over the start date and end date of our service offerings. |
We are
not currently a party to any material litigation, and we are not aware of any
pending or threatened litigation against us that could have a material adverse
effect on our business, operating results or financial condition.
In addition to the other information
set forth in this Quarterly Report on Form 10-Q, you should carefully consider
the factors discussed under the heading, “Risk Factors” in our Annual Report
filed on Form 10-K/A for the year ended December 31, 2008. These are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this
Quarterly Report on Form 10-Q. Because of these factors, as well as other
variables affecting our operating results, past financial performance should not
be considered as a reliable indicator of future performance and investors should
not use historical trends to anticipate results or trends in future periods.
These risks are not the only ones facing us.
Risks
Relating to Our Business
The
current economic recession and general economic, business, or industry
conditions may continue to adversely affect the business of the Company, as well
as our ability to forecast financial results.
The
domestic and international economies continue to experience a significant
recession. This recession has been magnified by factors including the tightening
of the availability and cost of credit, geopolitical issues, a depressed U.S.
real estate market, decreased business and consumer confidence and increased
unemployment. These and other macro-economic conditions have contributed to
increased volatility and diminished expectations for the global economy and
expectations of future global economic growth. If the economic climate in the
U.S. and abroad does not improve or deteriorates further, our customers or
potential customers could reduce or delay their purchases of our offerings,
which would adversely impact our revenues and our ability to sell our offerings,
collect customer receivables and, ultimately, our profitability. Additionally,
future economic conditions currently have an increased degree of inherent
uncertainty. As a result, it is more difficult to estimate the level of growth
or contraction for the economy as a whole, as well as for the various sectors of
the economy, such as the IT market. Because all components of our budgeting and
forecasting are dependent upon estimates of growth or contraction in the IT
market and demand for our offerings, the prevailing economic uncertainties
render accurate estimates of future income and expenditures very difficult to
make. We cannot predict the effect or duration of this economic
slowdown or the timing or strength of a subsequent economic recovery, worldwide
or in the IT industry. Further adverse changes may occur as a result of soft
global, domestic or regional economic conditions, wavering consumer confidence,
unemployment, declines in stock markets, contraction of credit availability, or
other factors affecting economic conditions generally. These changes may
negatively affect the sales of our offerings, increase exposure to losses from
bad debts, increase the cost and decrease the availability of financing, or
increase the risk of loss on investments.
Financial
market instability and continued uncertain conditions in the United States and
global economies have in the past and could in the future adversely affect our
revenues and operating results.
We
believe that the instability affecting the financial markets and a further
deterioration in the current business climate within the United States and/or
other geographic regions in which we do business have had, and could continue to
have, a negative impact on our revenue and operating results. Because
all of our clients are in the IT industry, the success of our business is
intrinsically linked to the health, and subject to market conditions, of the IT
industry. Regional, domestic and global economic weakness and uncertainty, and
the limited access to sources of traditional capital and/or debt have resulted
in some companies reassessing their spending, including for technology projects.
In turn, many of our customers have reassessed and will, for the foreseeable
future, be likely to continue to scrutinize their spending on advertising
campaigns. Prior market downturns in the IT industry have resulted
in declines in advertising spending, which can cause longer sales
cycles, deferral or delay of purchases by IT vendors and generally reduced
expenditures for advertising and related services. Our revenues and
profitability depend on the overall demand for advertising services from our
customers. We believe that demand for our offerings has been in the past, and
could be in the future, disproportionately affected by fluctuations,
disruptions, instability or downturns in the economy and the IT industry, which
may cause customers and potential customers to exit the industry or delay,
cancel or reduce any planned expenditures for our advertising offerings.
Furthermore, competitors may respond to market conditions by lowering prices and
attempting to lure away our customers and prospects to lower cost
offerings. In addition, a slowdown in the formation of new IT
companies, or a decline in the growth of existing IT companies, would cause a
decline in demand for our offerings.
Because
we depend on our ability to generate revenues from the sale of advertising,
fluctuations in advertising spending could have an adverse effect on our
operating results.
The
primary source of our revenues is the sale of advertising to our customers. Our
advertising revenues accounted for approximately 98% of our total revenues for
the three month period ended March 31, 2009. We believe that advertising
spending on the Internet, as in traditional media, fluctuates significantly as a
result of a variety of factors, many of which are outside of our control. These
factors include:
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variations
in expenditures by advertisers due to budgetary
constraints;
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the
cancellation or delay of projects by
advertisers;
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the
cyclical and discretionary nature of advertising
spending;
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general
economic conditions, as well as economic conditions specific to the
Internet and online and offline media industry;
and
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the
occurrence of extraordinary events, such as natural disasters,
international or domestic terrorist attacks or armed
conflict.
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Because
all of our customers are in the IT industry, our revenues are subject to
characteristics of the IT industry that can affect advertising spending by IT
vendors.
The IT
industry is characterized by, among other things, volatile quarterly results,
uneven sales patterns, short product life cycles, rapid technological
developments and frequent new product introductions and enhancements. As a
result, our customers’ advertising budgets, which are often viewed as
discretionary expenditures, may increase or decrease significantly over a short
period of time. In addition, the advertising budgets of our customers may
fluctuate as a result of:
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·
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weakness
in corporate IT spending resulting in a decline in IT advertising
spending;
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increased
concentration in the IT industry as a result of consolidations, leading to
a decrease in the number of current and prospective customers, as well as
an overall reduction in
advertising;
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spending
by combined entities following such
consolidations;
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the
timing of advertising campaigns around new product introductions and
initiatives; and
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economic
conditions specific to the IT
industry.
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Our
quarterly operating results are subject to fluctuations, and these fluctuations
may adversely affect the trading price of our common stock.
We have
experienced and expect to experience fluctuations in our quarterly revenues and
operating results. Our quarterly revenues and operating results may fluctuate
from quarter to quarter due to a number of factors, many of which are outside of
our control. In addition to the factors described elsewhere in this ‘‘Risk
Factors’’ section, these factors include:
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the
spending priorities and advertising budget cycles of specific
advertisers;
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the
addition or loss of advertisers;
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the
addition of new sites and services by us or our competitors;
and
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·
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seasonal
fluctuations in advertising
spending.
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Due to
such risks, you should not rely on quarter-to-quarter comparisons of our results
of operations as an indicator of our future results. Due to the foregoing
factors, it is also possible that our results of operations in one or more
quarters may fall below the expectations of investors and/or securities
analysts. In such an event, the trading price of our common stock is likely to
decline.
Our
revenues are primarily derived from short-term contracts that may not be
renewed.
The
primary source of our revenues is the sale of advertising to our customers, and
we expect that this will continue to be the case for the foreseeable future. Our
advertising contracts are primarily short-term, typically less than 6 months,
and are generally subject to termination without substantial penalty by the
customer at any time, generally with minimal notice requirements. We cannot
assure you that our current customers will fulfill their obligations under their
existing contracts, continue to participate in our existing programs beyond the
terms of their existing contracts or enter into any additional contracts for new
programs that we offer. If a significant number of advertisers or a few large
advertisers decided not to continue advertising on our websites or conducting or
sponsoring events, we could experience a rapid decline in our revenues over a
relatively short period of time.
If
we are unable to deliver content and services that attract and retain users, our
ability to attract advertisers may be affected, which could in turn have an
adverse affect on our revenues.
Our
future success depends on our ability to deliver original and compelling content
and services to attract and retain users. Our user base is comprised of
corporate IT professionals who demand specialized websites and events tailored
to the sectors of the IT products for which they are responsible and that they
purchase. Our content and services may not be attractive to a sufficient number
of users to attract advertisers and generate revenues consistent with our
estimates. We also may not develop new content or services in a timely or
cost-effective manner. Our ability to develop and produce this specialized
content successfully is subject to numerous uncertainties, including our ability
to:
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anticipate
and respond successfully to rapidly changing IT developments and
preferences to ensure that our content remains timely and interesting to
our users;
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attract
and retain qualified editors, writers and technical
personnel;
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fund
new development for our programs and other
offerings;
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successfully
expand our content offerings into new platform and delivery mechanisms;
and
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promote
and strengthen the brands of our websites and our
name.
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If we are
not successful in maintaining and growing our user base, our ability to retain
and attract advertisers may be affected, which could in turn have an adverse
affect on our revenues.
Our
inability to sustain our historical advertising rates could adversely affect our
operating results.
The
market for advertising has fluctuated over the past few years. If we are unable
to maintain historical pricing levels for advertising on our websites and for
sponsorships at our events, our revenues could be adversely
affected.
Competition
for advertisers is intense, and we may not compete successfully which could
result in a material reduction in our market share, the number of our
advertisers and our revenues.
We
compete for potential advertisers with a number of different types of offerings
and companies, including: broad-based media outlets, such as television,
newspapers and business periodicals that are designed to reach a wide audience;
general purpose portals and search engines; and offline and online offerings of
media companies that produce content specifically for IT professionals,
including International Data Group, United Business Media and Ziff Davis
Enterprise. Advertisers may choose our competitors over us not only because they
prefer our competitors’ online and events offerings to ours, but also because
advertisers prefer to utilize other forms of advertising offered by our
competitors that are not offered by us. Although less than 5% of our
revenues for the three-month period ended March 31, 2009 were derived from
advertisers located outside of North America, as we continue to expand
internationally, as we did in 2008 by operating our own websites in the United
Kingdom and in 2009 in India, we expect to compete with many of the competitors
mentioned above, as well as with established media companies based in particular
countries or geographical regions. Many of these foreign-based media companies
will be larger than we are and will have established relationships with local
advertisers. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we have. As a result, we
could lose market share to our competitors in one or more of our businesses and
our revenues could decline.
We
depend upon Internet search engines to attract a significant portion of the
users who visit our websites, and if we were listed less prominently in search
result listings, our business and operating results would be
harmed.
We derive
a significant portion of our website traffic from users who search for IT
purchasing content through Internet search engines, such as Google, MSN and
Yahoo! A critical factor in attracting users to our websites is whether we are
prominently displayed in response to an Internet search relating to IT content.
Search result listings are determined and displayed in accordance with a set of
formulas or algorithms developed by the particular Internet search engine. The
algorithms determine the order of the listing of results in response to the
user’s Internet search. From time to time, search engines revise these
algorithms. In some instances, these modifications may cause our websites to be
listed less prominently in unpaid search results, which will result in decreased
traffic from search engine users to our websites. Our websites may also become
listed less prominently in unpaid search results for other reasons, such as
search engine technical difficulties, search engine technical changes and
changes we make to our websites. In addition, search engines have deemed the
practices of some companies to be inconsistent with search engine guidelines and
have decided not to list their websites in search result listings at all. If we
are listed less prominently or not at all in search result listings for any
reason, the traffic to our websites likely will decline, which could harm our
operating results. If we decide to attempt to replace this traffic, we may be
required to increase our marketing expenditures, which also could harm our
operating results.
We
may not innovate at a successful pace, which could harm our operating
results.
Our
industry is rapidly adopting new technologies and standards to create and
satisfy the demands of users and advertisers. It is critical that we continue to
innovate by anticipating and adapting to these changes to ensure that our
content-delivery platforms and services remain effective and interesting to our
users, advertisers and partners. In addition, we may discover that we must make
significant expenditures to achieve these goals. If we fail to accomplish these
goals, we may lose users and the advertisers that seek to reach those users,
which could harm our operating results.
We
may be unable to continue to build awareness of our brands, which could
negatively impact our business and cause our revenues to decline.
Building
and maintaining recognition of our brands is critical to attracting and
expanding our online user base, attendance at our events . We intend to continue
to build existing brands and introduce new brands that will resonate with our
targeted audiences, but we may not be successful. In order to promote these
brands, in response to competitive pressures or otherwise, we may find it
necessary to increase our marketing budget, hire additional marketing and public
relations personnel or otherwise increase our financial commitment to creating
and maintaining brand loyalty among our clients. If we fail to promote and
maintain our brands effectively, or incur excessive expenses attempting to
promote and maintain our brands, our business and financial results may
suffer.
Given
the tenure and experience of our Chief Executive Officer and President, and
their guiding roles in developing our business and growth strategy since our
inception, our growth may be inhibited or our operations may be impaired if we
were to lose the services of either of them.
Our
growth and success depends to a significant extent on our ability to retain Greg
Strakosch, our Chief Executive Officer, and Don Hawk, our President, who founded
the company and have developed, engineered and stewarded the growth and
operation of our business since its inception. The loss of the services of
either of these persons could inhibit our growth or impair our operations and
cause our stock price to decline.
We
may not be able to attract, hire and retain qualified personnel
cost-effectively, which could impact the quality of our content and services and
the effectiveness and efficiency of our management, resulting in increased costs
and losses in revenues.
Our
success depends on our ability to attract, hire and retain at commercially
reasonable rates qualified technical editorial, sales and marketing, customer
support, financial and accounting, legal and other managerial personnel. The
competition for personnel in the industries in which we operate is intense. Our
personnel may terminate their employment at any time for any reason. Loss of
personnel may also result in increased costs for replacement hiring and
training. If we fail to attract and hire new personnel or retain and motivate
our current personnel, we may not be able to operate our businesses effectively
or efficiently, serve our customers properly or maintain the quality of our
content and services. In particular, our success depends in significant part on
maintaining and growing an effective sales force. This dependence involves a
number of challenges, including:
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the
need to hire, integrate, motivate and retain additional sales and sales
support personnel;
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the
need to train new sales personnel, many of whom lack sales experience when
they are hired; and
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competition
from other companies in hiring and retaining sales
personnel.
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We
may fail to identify or successfully acquire and integrate businesses, products
and technologies that would otherwise enhance our service offerings to our
customers and users, and as a result our revenues may decline or fail to
grow.
We have
acquired, and in the future may acquire or invest in, complementary businesses,
products or technologies. Acquisitions and investments involve numerous risks
including:
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difficulty
in assimilating the operations and personnel of acquired
businesses;
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potential
disruption of our ongoing businesses and distraction of our management and
the management of acquired
companies;
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difficulty
in incorporating acquired technology and rights into our offerings and
services;
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unanticipated
expenses related to technology and other
integration;
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potential
failure to achieve additional sales and enhance our customer bases through
cross marketing of the combined company’s services to new and existing
customers;
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potential
litigation resulting from our business combinations or acquisition
activities; and
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potential
unknown liabilities associated with the acquired
businesses.
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Our
inability to integrate any acquired business successfully, or the failure to
achieve any expected synergies, could result in increased expenses and a
reduction in expected revenues or revenue growth. As a result, our stock price
could fluctuate or decline. In addition, we cannot assure you that we will be
successful in expanding into complementary sectors in the future, which could
harm our business, operating results and financial condition.
The
costs associated with potential acquisitions or strategic partnerships could
dilute your investment or adversely affect our results of
operations.
In order
to finance acquisitions, investments or strategic partnerships, we may use
equity securities, debt, cash, or a combination of the foregoing. Any issuance
of equity securities or securities convertible into equity may result in
substantial dilution to our existing stockholders, reduce the market price of
our common stock, or both. Any debt financing is likely to have financial and
other covenants that could have an adverse impact on our business if we do not
achieve our projected results. In addition, the related increases in expenses
could adversely affect our results of operations.
We
have limited protection of our intellectual property and could be subject to
infringement claims that may result in costly litigation, the payment of damages
or the need to revise the way we conduct our business.
Our
success and ability to compete are dependent in part on the strength of our
proprietary rights, on the goodwill associated with our trademarks, trade names
and service marks, and on our ability to use U.S. and foreign laws to protect
them. Our intellectual property includes, among other things, our original
content, our editorial features, logos, brands, domain names, the technology
that we use to deliver our services, the various databases of information that
we maintain and make available by license, and the appearance of our websites.
We claim common law protection on certain names and marks that we have used in
connection with our business activities. Although we have applied for and
obtained registration of many of our marks in countries outside of the United
States where we do business, we have not been able to obtain registration of all
of our key marks in such jurisdictions, in some cases due to prior registration
or use by third parties employing similar marks. In addition to U.S. and foreign
laws, we rely on confidentiality agreements with our employees and third parties
and protective contractual provisions to safeguard our intellectual property.
Policing our intellectual property rights worldwide is a difficult task, and we
may not be able to identify infringing users. We cannot be certain
that third party licensees of our content will always take actions to protect
the value of our proprietary rights and reputation. Intellectual property laws
and our agreements may not be sufficient to prevent others from copying or
otherwise obtaining and using our content or technologies. In addition, others
may develop non-infringing technologies that are similar or superior to ours. In
seeking to protect our marks, copyrights, domain names and other proprietary
rights, or in defending ourselves against claims of infringement that may be
with or without merit, we could face costly litigation and the diversion of our
management’s attention and resources. These claims could result in the need to
develop alternative trademarks, content or technology or to enter into costly
royalty or licensing agreements, which could have a material adverse effect on
our business, results of operations and financial condition. We may not have, in
all cases, conducted formal evaluations to confirm that our technology and
services do not or will not infringe upon the intellectual property rights of
third parties. As a result, we cannot be certain that our technology, offerings,
services or online content do not or will not infringe upon the intellectual
property rights of third parties. If we were found to have infringed on a third
party’s intellectual property rights, the value of our brands and our business
reputation could be impaired, and our business could suffer.
Our
business could be harmed if we are unable to correspond with existing and
potential users by e-mail.
We use
e-mail as a significant means of communicating with our existing users. The laws
and regulations governing the use of e-mail for marketing purposes continue to
evolve, and the growth and development of the market for commerce over the
Internet may lead to the adoption of additional legislation and/or changes to
existing laws. If new laws or regulations are adopted, or existing laws and
regulations are interpreted and/or amended or modified, to impose additional
restrictions on our ability to send e-mail to our users or potential users, we
may not be able to communicate with them in a cost-effective manner. In addition
to legal restrictions on the use of e-mail, Internet service providers and
others typically attempt to block the transmission of unsolicited e-mail,
commonly known as ‘‘spam.’’ If an Internet service provider or software program
identifies e-mail from us as ‘‘spam,’’ we could be placed on a restricted list
that would block our e-mail to users or potential users who maintain e-mail
accounts with these Internet service providers or who use these software
programs. If we are unable to communicate by e-mail with our users and potential
users as a result of legislation, blockage or otherwise, our business, operating
results and financial condition could be harmed.
Changes
in laws and standards relating to data collection and use practices and the
privacy of Internet users and other data could impair our efforts to maintain
and grow our audience and thereby decrease our advertising revenue.
We
collect information from our users who register on our websites or for services,
or respond to surveys. Subject to each user’s permission (or right to decline,
which we refer to as an ‘‘opt-out’’), we may use this information to inform our
users of services that they have indicated may be of interest to them. We may
also share this information with our advertising clients for registered members
who have elected to receive additional promotional materials and have granted us
permission to share their information with third parties. The U.S. federal and
various state governments have adopted or proposed limitations on the
collection, distribution and use of personal information of Internet users.
Several foreign jurisdictions, including the European Union, the United Kingdom
and Canada, have adopted legislation (including directives or regulations) that
may increase the requirements for collecting, or limit our collection and use
of, information from Internet users in these jurisdictions. In addition, growing
public concern about privacy, data security and the collection, distribution and
use of personal information has led to self-regulation of these practices by the
Internet advertising and direct marketing industry, and to increased federal and
state regulation. Because many of the proposed laws or regulations are in their
early stages, we cannot yet determine the impact these regulations may have on
our business over time. Although, to date, our efforts to comply with applicable
federal and state laws and regulations have not hurt our business, additional,
more burdensome laws or regulations, including consumer privacy and data
security laws, could be enacted or applied to us or our customers. Such laws or
regulations could impair our ability to collect user information that helps us
to provide more targeted advertising to our users, thereby impairing our ability
to maintain and grow our audience and maximize advertising revenue from our
advertising clients. Additionally, the US Federal Trade Commission (the “FTC”)
and many state attorneys general are applying federal and state consumer
protection laws to require that the online collection, use and dissemination of
data, and the presentation of Web site content, comply with certain standards
for notice, choice, security and access. Courts may also adopt these
developing standards. In many cases, the specific limitations imposed
by these standards are subject to interpretation by courts and other
governmental authorities. In addition, on December 20, 2007, the FTC
published for public comment proposed principles to address consumer privacy
issues that may arise from so-called “behavioral targeting” (i.e. the tracking
of a user’s online activities in order to deliver advertising tailored to his or
her interests) and to encourage industry self-regulation. On February 12, 2009,
following public comment, the FTC released a Staff Report with its revised
principles for self-regulation of behavioral targeting. Although the FTC
currently appears to be less concerned with the “first-party” behavioral and
contextual advertising than other types of behavioral targeting that include the
storage of more, and potentially sensitive, data or that collects information
outside of the “traditional Web site context” (such as through a mobile device
or by an ISP), the FTC has stated that it will continue to evaluate
self-regulatory programs. In the event of additional legislation in this area,
our ability to effectively target our users may be limited. We believe that we
are in compliance with the consumer protection standards that apply to us, but a
determination by a state or federal agency or court that any of our practices do
not meet these standards could create liability to us, result in adverse
publicity and affect negatively our businesses. New interpretations
of these standards could also require us to incur additional costs and restrict
our business operations. In addition, several foreign governmental
bodies, including the European Union, the United Kingdom and Canada have
regulations dealing with the collection and use of personal information obtained
from their citizens, some of which we may be subject to as a result of the
expansion of our business internationally. We believe that we are in compliance
with the regulations that apply to us, however, such laws may be modified and
new laws may be enacted in the future. Any such developments (or developments
stemming from enactment or modification of other laws) or the failure to
anticipate accurately the application or interpretation of these laws could
create liability to us, result in adverse publicity and affect negatively our
businesses.
There
are a number of risks associated with expansion of our business internationally
that could adversely affect our business.
We have
over 11 license and other arrangements in various countries and maintain direct
presences in the United Kingdom and India. In addition to facing many of the
same challenges we face domestically, there are additional risks and costs
inherent in expanding our business in international markets,
including:
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limitations
on our activities in foreign countries where we have granted rights to
existing business partners;
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the
adaptation of our websites and advertising programs to meet local needs
and to comply with local legal regulatory
requirements;
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varied,
unfamiliar and unclear legal and regulatory restrictions, as well as
unforeseen changes in, legal and regulatory
requirements;
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more
restrictive data protection regulation, which may vary by
country;
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difficulties
in staffing and managing multinational
operations;
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difficulties
in finding appropriate foreign licensees or joint venture
partners;
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distance,
language and cultural differences in doing business with foreign
entities;
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foreign
political and economic uncertainty;
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less
extensive adoption of the Internet as an information source and increased
restriction on the content of
websites;
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currency
exchange-rate fluctuations; and
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potential
adverse tax requirements.
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As a
result, we may face difficulties and unforeseen expenses in expanding our
business internationally and even if we attempt to do so, we may be
unsuccessful, which could harm our business, operating results and financial
condition.
Changes
in regulations could adversely affect our business and results of
operations.
It is
possible that new laws and regulations or new interpretations of existing laws
and regulations in the United States and elsewhere will be adopted covering
issues affecting our business, including:
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privacy,
data security and use of personally identifiable
information;
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copyrights,
trademarks and domain names; and
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marketing
practices, such as e-mail or direct
marketing.
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Increased
government regulation, or the application of existing laws to online activities,
could:
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decrease
the growth rate of the Internet;
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reduce
our revenues;
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increase
our operating expenses; or
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expose
us to significant liabilities.
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Furthermore,
the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is still evolving. Therefore, we might
be unable to prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights. Any
impairment in the value of these important assets could cause our stock price to
decline. We cannot be sure what effect any future material noncompliance by us
with these laws and regulations or any material changes in these laws and
regulations could have on our business, operating results and financial
condition.
As
a creator and a distributor of content over the Internet, we face potential
liability for legal claims based on the nature and content of the materials that
we create or distribute.
Due to
the nature of content published on our online network, including content placed
on our online network by third parties, and as a creator and distributor of
original content and research, we face potential liability based on a variety of
theories, including defamation, negligence, copyright or trademark infringement,
or other legal theories based on the nature, creation or distribution of this
information. Such claims may also include, among others, claims that by
providing hypertext links to websites operated by third parties, we are liable
for wrongful actions by those third parties through these websites. Similar
claims have been brought, and sometimes successfully asserted, against online
services. It is also possible that our users could make claims against us for
losses incurred in reliance on information provided on our networks. In
addition, we could be exposed to liability in connection with material posted to
our Internet sites by third parties. For example, many of our sites offer users
an opportunity to post unmoderated comments and opinions. Some of this
user-generated content may infringe on third party intellectual property rights
or privacy rights or may otherwise be subject to challenge under copyright laws.
Such claims, whether brought in the United States or abroad, could divert
management time and attention away from our business and result in significant
cost to investigate and defend, regardless of the merit of these claims. In
addition, if we become subject to these types of claims and are not successful
in our defense, we may be forced to pay substantial damages. Our insurance may
not adequately protect us against these claims. The filing of these claims may
also damage our reputation as a high quality provider of unbiased, timely
analysis and result in client cancellations or overall decreased demand for our
services.
We
may be liable if third parties or our employees misappropriate our users’
confidential business information.
We
currently retain confidential information relating to our users in secure
database servers. Although we observe security measures throughout our
operations, we cannot assure you that we will be able to prevent individuals
from gaining unauthorized access to these database servers. Any unauthorized
access to our servers, or abuse by our employees, could result in the theft of
confidential user information. If confidential information is compromised, we
could lose customers or become subject to liability or litigation and our
reputation could be harmed, any of which could materially and adversely affect
our business and results of operations.
Our
business, which is dependent on centrally located communications and computer
hardware systems, is vulnerable to natural disasters, telecommunication and
systems failures, terrorism and other problems, which could reduce traffic on
our networks or websites and result in decreased capacity for advertising
space.
Our
operations are dependent on our communications systems and computer hardware,
all of which are located in data centers operated by third parties. These
systems could be damaged by fire, floods, earthquakes, power loss,
telecommunication failures and similar events. Our insurance policies have
limited coverage levels for loss or damages in these events and may not
adequately compensate us for any losses that may occur. In addition, terrorist
acts or acts of war may cause harm to our employees or damage our facilities,
our clients, our clients’ customers and vendors, or cause us to postpone or
cancel, or result in dramatically reduced attendance at, our events, which could
adversely impact our revenues, costs and expenses and financial position. We are
predominantly uninsured for losses and interruptions to our systems or
cancellations of events caused by terrorist acts and acts of war.
Our
systems may be subject to slower response times and system disruptions that
could adversely affect our revenues.
Our
ability to attract and maintain relationships with users, advertisers and
strategic partners will depend on the satisfactory performance, reliability and
availability of our Internet infrastructure. Our Internet advertising revenues
relate directly to the number of advertisements and other marketing
opportunities delivered to our users. System interruptions or delays that result
in the unavailability of Internet sites or slower response times for users would
reduce the number of advertising impressions and leads delivered. This could
reduce our revenues as the attractiveness of our sites to users and advertisers
decreases. Our insurance policies provide only limited coverage for service
interruptions and may not adequately compensate us for any losses that may occur
due to any failures or interruptions in our systems. Further, we do not have
multiple site capacity for all of our services in the event of any such
occurrence.
We may
experience service disruptions for the following reasons:
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occasional
scheduled maintenance;
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equipment
failure;
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volumes
of visits to our websites that exceed our infrastructure’s capacity;
and
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natural
disasters, telecommunications failures, power failures, other system
failures, maintenance, viruses, hacking or other events outside of our
control.
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In
addition, our networks and websites must accommodate a high volume of traffic
and deliver frequently updated information. They have experienced in the past,
and may experience in the future, slower response times or decreased traffic for
a variety of reasons. There have been instances where our online networks as a
whole, or our websites individually, have been inaccessible. Also, slower
response times, which have occurred more frequently, can result from general
Internet problems, routing and equipment problems involving third party Internet
access providers, problems with third party advertising servers, increased
traffic to our servers, viruses and other security breaches, many of which
problems are out of our control. In addition, our users depend on Internet
service providers and online service providers for access to our online networks
or websites. Those providers have experienced outages and delays in the past,
and may experience outages or delays in the future. Moreover, our Internet
infrastructure might not be able to support continued growth of our online
networks or websites. Any of these problems could result in less traffic to our
networks or websites or harm the perception of our networks or websites as
reliable sources of information. Less traffic on our networks and websites or
periodic interruptions in service could have the effect of reducing demand for
advertising on our networks or websites, thereby reducing our advertising
revenues.
Our
networks may be vulnerable to unauthorized persons accessing our systems,
viruses and other disruptions, which could result in the theft of our
proprietary information and/or disrupt our Internet operations making our
websites less attractive and reliable for our users and
advertisers.
Internet
usage could decline if any well-publicized compromise of security occurs.
‘‘Hacking’’ involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our service. We
may be required to expend capital and other resources to protect our websites
against hackers. Our online networks could also be affected by computer viruses
or other similar disruptive problems, and we could inadvertently transmit
viruses across our networks to our users or other third parties. Any of these
occurrences could harm our business or give rise to a cause of action against
us. Providing unimpeded access to our online networks is critical to servicing
our customers and providing superior customer service. Our inability to provide
continuous access to our online networks could cause some of our customers to
discontinue purchasing advertising programs and services and/or prevent or deter
our users from accessing our networks. Our activities and the activities of
third party contractors involve the storage and transmission of proprietary and
personal information. Accordingly, security breaches could expose us to a risk
of loss or litigation and possible liability. We cannot assure that contractual
provisions attempting to limit our liability in these areas will be successful
or enforceable, or that other parties will accept such contractual provisions as
part of our agreements.
We
will continue to incur significant costs as a result of operating as a public
company, and our management will be required to devote substantial time to new
compliance initiatives.
We will
continue to incur significant legal, accounting and other expenses as a public
company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and the Nasdaq Stock Market, or Nasdaq, has imposed
various new requirements on public companies, including requiring changes in
corporate governance practices. Our management and other personnel will need to
continue to devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have increased our legal and financial
compliance costs and will make some activities more time-consuming and costly.
For example, these rules and regulations may require us to incur substantial
costs to maintain the same or similar director and officer liability insurance
coverage.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, although we have completed our system and process
evaluation and testing of our internal controls over financial reporting to
allow management and our independent registered public accounting firm to report
on the effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, ongoing compliance with
Section 404 requires that we continue to incur substantial accounting expense
and expend significant management efforts. We currently do not have an internal
audit group, and have engaged outside accounting and advisory services with
appropriate public company experience and technical accounting knowledge to
assist with these ongoing compliance efforts. If we or our independent
registered public accounting firm identifies future deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, as
was the case for the year-end audit of 2008, the market price of our stock could
decline and we could be subject to sanctions or investigations by Nasdaq, the
SEC or other regulatory authorities, which would require additional financial
and management resources.
If
we do not maintain proper and effective disclosure controls and procedures and
internal controls over financial reporting, our ability to produce accurate
financial statements could be impaired, which could adversely affect our
operating results, our ability to operate our business and investors’ views of
us.
Ensuring
that we have adequate disclosure controls and procedures, including internal
financial and accounting controls and procedures, in place to help ensure that
we can produce accurate financial statements on a timely basis is a costly and
time-consuming effort that needs to be re-evaluated frequently. On an ongoing
basis, both we and our independent auditors will be documenting and testing our
internal controls and procedures in connection with the requirements of Section
404 of the Sarbanes-Oxley Act and, as part of that documentation and testing,
identifying areas for further attention and improvement. Implementing any
appropriate changes to our internal controls may entail substantial costs in
order to modify our existing accounting systems, take a significant period of
time to complete and distract our officers, directors and employees from the
operation of our business. These changes may not, however, be effective in
maintaining the adequacy of our internal controls, and any failure to maintain
that adequacy, or consequent inability to produce accurate financial statements
on a timely basis, could increase our operating costs and could materially
impair our ability to operate our business. In addition, investors’ perceptions
that our internal controls are inadequate or that we are unable to produce
accurate financial statements may seriously affect our stock price. Due to the
internal financial and accounting controls and procedures deficiencies detailed
elsewhere herein, we have also concluded that our disclosure controls and
procedures are inadequate. Also, as detailed elsewhere herein, we have
undertaken remediation efforts to address the deficiencies in our internal
financial and accounting controls and procedures and expect that as a result of
implementing those remedial steps that are disclosure controls will be
adequate.
Our
ability to raise capital in the future may be limited.
Our
business and operations may consume resources faster than we anticipate. In the
future, we may need to raise additional funds to expand our sales and marketing
and service development efforts or to make acquisitions. Additional financing
may not be available on favorable terms, if at all. If adequate funds are not
available on acceptable terms, we may be unable to fund the expansion of our
sales and marketing and research and development efforts or take advantage of
acquisition or other opportunities, which could seriously harm our business and
operating results. If we incur debt, the debt holders would have rights senior
to common stockholders to make claims on our assets and the terms of any debt
could restrict our operations, including our ability to pay dividends on our
common stock. Furthermore, if we issue additional equity securities,
stockholders will experience dilution, and the new equity securities could have
rights senior to those of our common stock. Because our decision to issue
securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, our stockholders bear the risk of our
future securities offerings reducing the market price of our common stock and
diluting their interest.
The
impairment of a significant amount of goodwill and intangible assets on our
balance sheet could result in a decrease in earnings and, as a result, our stock
price could decline.
In the
course of our operating history, we have acquired assets and businesses. Some of
our acquisitions have resulted in the recording of a significant amount of
goodwill and/or intangible assets on our financial statements. We had
approximately $105 million of goodwill and net intangible assets as of March 31,
2009. The goodwill and/or intangible assets were recorded because the fair value
of the net tangible assets acquired was less than the purchase price. We may not
realize the full value of the goodwill and/or intangible assets. As such, we
evaluate goodwill and other intangible assets with indefinite useful lives for
impairment on an annual basis or more frequently if events or circumstances
suggest that the asset may be impaired. We evaluate other intangible assets
subject to amortization whenever events or changes in circumstances indicate
that the carrying amount of those assets may not be recoverable. If goodwill or
other intangible assets are determined to be impaired, we will write off the
unrecoverable portion as a charge to our earnings. If we acquire new assets and
businesses in the future, as we intend to do, we may record additional goodwill
and/or intangible assets. The possible write-off of the goodwill and/or
intangible assets could negatively impact our future earnings and, as a result,
the market price of our common stock could decline.
We
will record substantial expenses related to our issuance of stock-based
compensation which may have a material negative impact on our operating results
for the foreseeable future.
Effective
January 1, 2006, we adopted SFAS, No. 123(R), Share-Based Payment, as
amended by SFAS No. 148, Accounting for
Stock- Based
Compensation—Transition and Disclosure for stock-based employee
compensation. Our stock-based compensation expenses are expected to be
significant in future periods, which will have an adverse impact on our
operating income and net income. SFAS No. 123(R) requires the use of highly
subjective assumptions, including the option’s expected life and the price
volatility of the underlying stock. Changes in the subjective input assumptions
can materially affect the amount of our stock-based compensation expense. In
addition, an increase in the competitiveness of the market for qualified
employees could result in an increased use of stock-based compensation awards,
which in turn would result in increased stock-based compensation expense in
future periods.
The
trading value of our common stock may be volatile and decline substantially;
Current Nasdaq non-Compliance.
The
trading price of our common stock is likely to be volatile and could be subject
to wide fluctuations in response to various factors, some of which are beyond
our control. In addition to the factors discussed in this ‘‘Risk Factors’’
section and elsewhere in this prospectus, these factors include:
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our
operating performance and the operating performance of similar
companies;
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the
overall performance of the equity
markets;
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announcements
by us or our competitors of acquisitions, business plans or commercial
relationships;
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threatened
or actual litigation;
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changes
in laws or regulations relating to the provision of Internet
content;
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any
major change in our board of directors or
management;
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publication
of research reports about us, our competitors or our industry, or positive
or negative recommendations or withdrawal of research coverage by
securities analysts;
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our
sale of common stock or other securities in the
future;
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large
volumes of sales of our shares of common stock by existing stockholders;
and
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general
political and economic conditions.
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In
addition, the stock market in general, and historically the market for
Internet-related companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. Securities class action litigation has
often been instituted against companies following periods of volatility in the
overall market and in the market price of a company’s securities. This
litigation, if instituted against us, could result in substantial costs, divert
our management’s attention and resources and harm our business, operating
results and financial condition.
We are
also currently not in compliance with the filing requirements under Nasdaq
Marketplace Rule 4310(c)(14) due to our failure to timely file periodic reports
with the Securities and Exchange Commission. Based on our
correspondence with Nasdaq, we understand that we will not be delisted from the
Nasdaq Global Market as long as we regain compliance with these filing
requirements on or prior to September 28, 2009. If we are unable to
regain compliance with these filing requirements, or if Nasdaq otherwise
determines to delist us from the Nasdaq Global Market, then trading in our
common stock could become more volatile and the volume of trading could decline
substantially.
Provisions
of our certificate of incorporation, bylaws and Delaware law could deter
takeover attempts.
Various
provisions in our certificate of incorporation and bylaws could delay, prevent
or make more difficult a merger, tender offer, proxy contest or change of
control. Our stockholders might view any transaction of this type as being in
their best interest since the transaction could result in a higher stock price
than the then-current market price for our common stock. Among other things, our
certificate of incorporation and bylaws:
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authorize
our board of directors to issue preferred stock with the terms of each
series to be fixed by our board of directors, which could be used to
institute a ‘‘poison pill’’ that would work to dilute the share ownership
of a potential hostile acquirer, effectively preventing acquisitions that
have not been approved by our
board;
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divide
our board of directors into three classes so that only approximately
one-third of the total number of directors is elected each
year;
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permit
directors to be removed only for
cause;
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prohibit
action by less than unanimous written consent of our stockholders;
and
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specify
advance notice requirements for stockholder proposals and director
nominations. In addition, with some exceptions, the Delaware General
Corporation Law restricts or delays mergers and other business
combinations between us and any stockholder that acquires 15% or more of
our voting stock.
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Future
sales of shares of our common stock by existing stockholders could depress the
market price of our common stock.
If our
existing stockholders sell, or indicate an intent to sell, substantial amounts
of our common stock in the public market, the trading price of our common stock
could decline significantly. A large portion of our outstanding shares of common
stock are held by our officers, directors and affiliates. Two of our affiliates
are venture capital funds, which are typically structured to have a finite life.
As these venture capital funds approach or pass the life of the fund, their
decision to sell or hold our stock may be based not only on the underlying
investment merits of our stock, but also on the requirements of their internal
fund structure. Our directors, executive officers and affiliates beneficially
own approximately 29 million shares of our common stock, which represents 69% of
our shares outstanding as of June 30, 2009. If these additional
shares are sold, or if it is perceived that they will be sold, in the public
market, the trading price of our common stock could decline
substantially.
A
limited number of stockholders will have the ability to influence the outcome of
director elections and other matters requiring stockholder
approval.
Our
directors, executive officers and affiliates beneficially own approximately
69% of our outstanding common stock. These stockholders, if they act together,
could exert substantial influence over matters requiring approval by our
stockholders, including the election of directors, the amendment of our
certificate of incorporation and bylaws and the approval of mergers or other
business combination transactions. This concentration of ownership may
discourage, delay or prevent a change in control of our company, which could
deprive our stockholders of an opportunity to receive a premium for their stock
as part of a sale of our company and might reduce our stock price. These actions
may be taken even if they are opposed by other stockholders.
(a) Sales
of Unregistered Securities
None.
(b) Use
of Proceeds from Public Offering of Common Stock
In May
2007, we completed our initial public offering (IPO) pursuant to a registration
statement on Form S-1 (File No. 333-140503) that was declared effective by the
SEC on May 16, 2007. Under the registration statement, we registered
the offering and sale of an aggregate of 7,700,000 shares of our common stock,
$0.001 par value, of which 6,427,152 shares were sold by the Company and
1,272,848 were sold by certain selling stockholders. All of the
shares of common stock issued pursuant to the registration statement, including
the shares sold by the selling stockholders, were sold at a price to the public
of $13.00 per share.
As a
result of the IPO, we raised a total of $83.2 million in net proceeds after
deducting underwriting discounts and commissions of approximately $6.4 million
and offering expenses of approximately $2.3 million. In May 2007 we
repaid $12.0 million that we had borrowed against our revolving credit facility
in conjunction with the acquisition of TechnologyGuide.com in April
2007. In November 2007 we acquired KnowledgeStorm, Inc. for
approximately $58 million, consisting of approximately $52 million in cash and
359,820 shares of unregistered common stock of TechTarget valued at $6.0
million. In November 2008 we acquired The Brian Madden Company LLC
for approximately $1.3 million in cash.
We have
applied the remaining net proceeds from the IPO to our working capital for
general corporate purposes. We have no current agreements or
commitments with respect to any material acquisitions. We have
invested the remaining net proceeds in cash, cash equivalents and short-term
investments, in accordance with our investment policy. None of the
remaining net proceeds were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of our equity securities, or any of
our other affiliates.
None.
None.
None.
(a)
Exhibits
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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.
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TECHTARGET,
INC
(Registrant)
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Date:
August 17, 2009
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By:
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/s/
GREG STRAKOSCH
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Greg
Strakosch, Chief
Executive Officer
(Principal
Executive Officer)
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Date:
August 17, 2009
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By:
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/s/
ERIC SOCKOL
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Eric
Sockol, Chief
Financial Officer and Treasurer
(Principal
Accounting and Financial Officer)
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