Item
1A. Risk Factors
In addition to the other information
set forth in this Quarterly Report on Form 10-Q/A, you should carefully consider
the factors discussed under the heading, “Risk Factors” in our Registration
Statement on Form S-1 (File No. 333-140503). 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/A. 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
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. 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:
·
variations
in expenditures by advertisers due to budgetary
constraints;
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·
the
cancellation or delay of projects by
advertisers;
|
·
the
cyclical and discretionary nature of advertising
spending;
|
·
general
economic conditions, as well as economic conditions specific to the
Internet and online and offline media industry; and
|
·
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:
·
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 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 significant fluctuations, and these fluctuations may adversely affect
the trading price of our common stock.
We have
experienced and expect to experience significant fluctuations in our quarterly
revenues and operating results. Our quarterly revenues and operating results may
fluctuate significantly 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:
·
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
|
·
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 almost exclusively short-term, typically less than 90
days, and are subject to termination without substantial penalty by the customer
at any time, generally with minimal notice requirements of 30 days or less. 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 in our print magazines, 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, print
publications 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:
·
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
|
·
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 in our
print publications 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, CMP Media Inc. and Ziff Davis Media
Inc. Advertisers may choose our competitors over us not only because
they prefer our competitors’ online, events and print 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 fiscal year ended December 31, 2006 and the
three and six months ended June 30, 2007 were derived from advertisers located
outside of North America, as we continue to expand internationally, 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 and our offline
readership. 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, both of
whom were founders of our 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, 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:
·
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 product 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:
·
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 products to new and existing
customers;
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·
potential
litigation resulting from our business combinations or acquisition
activities; and
|
·
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 products and 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 U.S. 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 trademarks, 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 products 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 individuals could impair our efforts to maintain and grow our audience
and thereby decrease our advertising revenue.
We
collect information from our users who register 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 products
and services that 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 and Canada, have adopted legislation
(including directives or regulations) that may 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.
There are a number of risks
associated with expansion of our business internationally that could adversely
affect our business.
We have
fourteen license arrangements in various countries and maintain a direct sales
presence in the United Kingdom. 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:
·
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:
·
privacy,
data security and use of personally identifiable
information;
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·
copyrights,
trademarks and domain names; and
|
·
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:
·
decrease
the growth rate of the Internet;
|
·
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
products and 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 Verizon, Inc. 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:
·
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.
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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.
If we fail to 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. We are in the
process of documenting, reviewing and, if appropriate, improving our internal
controls and procedures in connection with the requirements of Section 404 of
the Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent auditors addressing these assessments. Both we and our
independent auditors will be testing our internal controls in connection with
the Section 404 requirements 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.
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 product 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 have $56.5 million of goodwill and net intangible assets as of
June 30, 2007. 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.
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 after the 180-day contractual lock-up
entered into in connection with our IPO and other legal restrictions on resale
lapse, the trading price of our common stock could decline significantly. Morgan
Stanley & Co. Incorporated and Lehman Brothers Inc. may, in their sole
discretion, permit our officers, directors, employees and current stockholders
to sell shares prior to the expiration of the lock-up agreements. After the
lock-up agreements expire, and based on shares outstanding as of June 30, 2007,
an additional 31,180,554 shares will be eligible for sale in the public market,
30,492,394 of which are held by directors, executive officers and other
affiliates and will be subject to volume limitations under Rule 144 under the
Securities Act of 1933, as amended, or the Securities Act, and various vesting
agreements. In addition, the 7,209,168 shares subject to outstanding options
under our 1999 and 2007 Stock Option Plans as of June 30, 2007, the 2,774,684
shares reserved for future issuance under our 2007 Stock Option Plan and 73,003
shares issuable upon exercise of warrants will become eligible for sale in the
public market in the future, subject to certain legal and contractual
limitations. 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.