Notes to Restated Consolidated
Financial Statements
(In thousands, except share and per
share data)
1. Organization and
Operations
The
Company
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. TechTarget, Inc. is a Delaware corporation that was
incorporated on September 14, 1999.
The
Company's integrated content platform consists of a network of 42 websites that
are complemented with targeted in-person events and three specialized IT
magazines. Throughout all 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, or ROI.
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 eleven distinct
media groups: Application Development; Channel; CIO and IT
Management; Data Center; Enterprise Applications; Laptops and Mobile Technology;
Networking; Security; Storage; Vertical Software; and Windows and Distributed
Computing.
On
November 6, 2007, the Company acquired KnowledgeStorm, Inc. (KnowledgeStorm), a
privately-held company based in Alpharetta, GA for an aggregate purchase price
of approximately $58 million, consisting of approximately $52 million in cash
and 359,820 shares of the Company's common stock. KnowledgeStorm is
a leading online search resource providing vendor generated content targeted
toward corporate IT professionals. KnowledgeStorm offers IT marketers products
with a lead generation and branding focus to reach these corporate IT
professionals throughout the purchasing decision process. The
financial results of KnowledgeStorm will be included in the Company’s
consolidated results of operations from the date of acquisition.
Stock
Offering
In May
2007, the Company completed its initial public offering (IPO) of 8,855,000
shares of its common stock, of which 7,072,097 shares were sold by the Company
and 1,782,903 shares were sold by certain of the Company’s existing shareholders
at a price to the public of $13.00 per share. The Company
raised a total of $91,937 in gross proceeds from the offering, or $83,161 in net
proceeds after deducting underwriting discounts and commissions of $6,436 and
other offering costs of approximately $2,340. Upon the closing of the offering,
all shares of the Company’s redeemable convertible preferred stock automatically
converted into 24,372,953 shares of common stock.
Reverse Stock
Split
On
April 26, 2007, the Company's board of directors approved a 1-for-4 reverse
stock split of the Company's outstanding common stock. The reverse stock split
became effective immediately and all common share and per share amounts in the
accompanying consolidated financial statements and notes to the consolidated
financial statements have been retroactively adjusted for all periods presented
to give effect to the reverse stock split.
2. Restatement of Previously Issued
Financial Statements
The
Company determined that it had improperly classified a portion of its
stock-based compensation expense in its income tax provision as a permanent tax
difference when such portion should have been classified as a temporary tax
difference. This resulted in an overstatement of the income tax provision for
the third quarter of 2007. These restatements have no impact on the
Company's previously reported revenues, cash flows from operations or total cash
and cash equivalents shown in the consolidated financial statements for the
three and nine months ended September 30, 2007. The Company has
restated its financial statements as of and for the three and nine months
ended September 30, 2007 in accordance with SFAS No. 154,
Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3
. The restatement is to correct errors in its prepaid expenses,
non-current deferred tax assets and related provision for income taxes.
The restatement for the error resulted in a decrease to the provision for
income taxes and a corresponding increase to net income of $290 and
$824 for the three and nine months ended September 30, 2007,
respectively. The restatement for the error also resulted
in an increase to total assets of $824 at September 30,
2007
.
Consolidated
Balance Sheet Adjustments
The
following is a summary of the adjustments to our previously issued unaudited
consolidated balance sheet as of September 30, 2007.
|
|
September
30, 2007
|
|
|
|
As
Originally Reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
20,769
|
|
|
|
|
|
$
|
20,769
|
|
Short-term
investments
|
|
|
87,901
|
|
|
|
|
|
|
87,901
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
12,419
|
|
|
|
|
|
|
12,419
|
|
Prepaid
expenses and other current assets
|
|
|
3,459
|
|
|
|
(119
|
)
|
|
|
3,340
|
|
Deferred
tax asset
|
|
|
735
|
|
|
|
|
|
|
|
735
|
|
Total
current assets
|
|
|
125,283
|
|
|
|
(119
|
)
|
|
|
125,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,769
|
|
|
|
|
|
|
|
3,769
|
|
Goodwill
|
|
|
43,225
|
|
|
|
|
|
|
|
43,225
|
|
Intangible
assets, net of accumulated amortization
|
|
|
12,087
|
|
|
|
|
|
|
|
12,087
|
|
Other
assets
|
|
|
105
|
|
|
|
|
|
|
|
105
|
|
Deferred
tax asset
|
|
|
1,834
|
|
|
|
943
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
186,303
|
|
|
$
|
824
|
|
|
$
|
187,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of bank term loan payable
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Accounts
payable
|
|
|
3,121
|
|
|
|
|
|
|
|
3,121
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Accrued
expenses and other current liabilities
|
|
|
1,559
|
|
|
|
|
|
|
|
1,559
|
|
Accrued
compensation expenses
|
|
|
1,779
|
|
|
|
|
|
|
|
1,779
|
|
Deferred
revenue
|
|
|
5,590
|
|
|
|
|
|
|
|
5,590
|
|
Total
current liabilities
|
|
|
15,049
|
|
|
|
|
|
|
|
15,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
458
|
|
|
|
|
|
|
|
458
|
|
Bank
term loan payable, net of current portion
|
|
|
3,750
|
|
|
|
|
|
|
|
3,750
|
|
Total
liabilities
|
|
|
19,257
|
|
|
|
|
|
|
|
19,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 8)
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
41
|
|
|
|
|
|
|
|
41
|
|
Additional
paid-in capital
|
|
|
199,689
|
|
|
|
|
|
|
|
199,689
|
|
Warrants
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
Accumulated
other comprehensive loss
|
|
|
(70
|
)
|
|
|
|
|
|
|
(70
|
)
|
Accumulated
deficit
|
|
|
(32,669
|
)
|
|
|
824
|
|
|
|
(31,845
|
)
|
Total
stockholders' equity (deficit)
|
|
|
167,046
|
|
|
|
824
|
|
|
|
167,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
186,303
|
|
|
$
|
824
|
|
|
$
|
187,127
|
|
Consolidated
Statements of Operations Adjustments
The
following is a summary of the adjustments to our previously issued unaudited
consolidated statements of operations for the three and nine months
ended September 30, 2007.
|
|
Three
Months Ended September 30, 2007
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
As
Originally Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Originally Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
14,687
|
|
|
|
|
|
|
$
|
14,687
|
|
|
$
|
44,726
|
|
|
|
|
|
|
$
|
44,726
|
|
Events
|
|
|
6,912
|
|
|
|
|
|
|
|
6,912
|
|
|
|
16,201
|
|
|
|
|
|
|
|
16,201
|
|
Print
|
|
|
1,702
|
|
|
|
|
|
|
|
1,702
|
|
|
|
5,323
|
|
|
|
|
|
|
|
5,323
|
|
Total
revenues
|
|
|
23,301
|
|
|
|
|
|
|
|
23,301
|
|
|
|
66,250
|
|
|
|
|
|
|
|
66,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
3,769
|
|
|
|
|
|
|
|
3,769
|
|
|
|
11,194
|
|
|
|
|
|
|
|
11,194
|
|
Events
|
|
|
2,283
|
|
|
|
|
|
|
|
2,283
|
|
|
|
6,065
|
|
|
|
|
|
|
|
6,065
|
|
Print
|
|
|
862
|
|
|
|
|
|
|
|
862
|
|
|
|
2,990
|
|
|
|
|
|
|
|
2,990
|
|
Total
cost of revenues
|
|
|
6,914
|
|
|
|
|
|
|
|
6,914
|
|
|
|
20,249
|
|
|
|
|
|
|
|
20,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,387
|
|
|
|
|
|
|
|
16,387
|
|
|
|
46,001
|
|
|
|
|
|
|
|
46,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
7,271
|
|
|
|
|
|
|
|
7,271
|
|
|
|
19,811
|
|
|
|
|
|
|
|
19,811
|
|
Product
development
|
|
|
1,677
|
|
|
|
|
|
|
|
1,677
|
|
|
|
5,021
|
|
|
|
|
|
|
|
5,021
|
|
General
and administrative
|
|
|
3,364
|
|
|
|
|
|
|
|
3,364
|
|
|
|
8,917
|
|
|
|
|
|
|
|
8,917
|
|
Depreciation
|
|
|
401
|
|
|
|
|
|
|
|
401
|
|
|
|
1,095
|
|
|
|
|
|
|
|
1,095
|
|
Amortization
of intangible assets
|
|
|
1,171
|
|
|
|
|
|
|
|
1,171
|
|
|
|
2,971
|
|
|
|
|
|
|
|
2,971
|
|
Total
operating expenses
|
|
|
13,884
|
|
|
|
|
|
|
|
13,884
|
|
|
|
37,815
|
|
|
|
|
|
|
|
37,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,503
|
|
|
|
|
|
|
|
2,503
|
|
|
|
8,186
|
|
|
|
|
|
|
|
8,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,043
|
|
|
|
|
|
|
|
1,043
|
|
|
|
2,058
|
|
|
|
|
|
|
|
2,058
|
|
Interest
expense
|
|
|
(146
|
)
|
|
|
|
|
|
|
(146
|
)
|
|
|
(851
|
)
|
|
|
|
|
|
|
(851
|
)
|
Total
interest income (expense)
|
|
|
897
|
|
|
|
|
|
|
|
897
|
|
|
|
1,207
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
3,400
|
|
|
|
|
|
|
|
3,400
|
|
|
|
9,393
|
|
|
|
|
|
|
|
9,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1,858
|
|
|
$
|
(290
|
)
|
|
|
1,568
|
|
|
|
4,820
|
|
|
$
|
(824
|
)
|
|
|
3,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,542
|
|
|
$
|
290
|
|
|
$
|
1,832
|
|
|
$
|
4,573
|
|
|
$
|
824
|
|
|
$
|
5,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
Consolidated
Statements of Cash Flow Adjustments
The
following is a summary of the adjustments to our previously issued unaudited
consolidated statement of cash flows for the nine months
ended September 30, 2007.
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
As
Originally Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,573
|
|
|
$
|
824
|
|
|
$
|
5,397
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,066
|
|
|
|
|
|
|
|
4,066
|
|
Provision
for bad debt
|
|
|
117
|
|
|
|
|
|
|
|
117
|
|
Stock-based
compensation
|
|
|
3,922
|
|
|
|
|
|
|
|
3,922
|
|
Non-cash
interest expense
|
|
|
310
|
|
|
|
|
|
|
|
310
|
|
Deferred
tax benefit (provision)
|
|
|
570
|
|
|
|
(943
|
)
|
|
|
(373
|
)
|
Excess
tax benefit - stock options
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
(2,518
|
)
|
Changes
in operating assets and liabilities, net of businesses
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(441
|
)
|
|
|
|
|
|
|
(441
|
)
|
Prepaid
expenses and other current assets
|
|
|
74
|
|
|
|
119
|
|
|
|
193
|
|
Other
assets
|
|
|
745
|
|
|
|
|
|
|
|
745
|
|
Accounts
payable
|
|
|
193
|
|
|
|
|
|
|
|
193
|
|
Income
taxes payable
|
|
|
(1,854
|
)
|
|
|
|
|
|
|
(1,854
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(344
|
)
|
|
|
|
|
|
|
(344
|
)
|
Accrued
compensation expenses
|
|
|
(543
|
)
|
|
|
|
|
|
|
(543
|
)
|
Deferred
revenue
|
|
|
3,046
|
|
|
|
|
|
|
|
3,046
|
|
Other
liabilities
|
|
|
(110
|
)
|
|
|
|
|
|
|
(110
|
)
|
Net
cash provided by operating activities
|
|
|
11,806
|
|
|
|
-
|
|
|
|
11,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, and other assets
|
|
|
(2,344
|
)
|
|
|
|
|
|
|
(2,344
|
)
|
Purchases
of short-term investments
|
|
|
(284,247
|
)
|
|
|
|
|
|
|
(284,247
|
)
|
Sales
of short-term investments
|
|
|
196,346
|
|
|
|
|
|
|
|
196,346
|
|
Acquisition
of assets
|
|
|
(1,013
|
)
|
|
|
|
|
|
|
(1,013
|
)
|
Acquisition
of businesses, net of cash acquired
|
|
|
(15,015
|
)
|
|
|
|
|
|
|
(15,015
|
)
|
Net
cash used in investing activities
|
|
|
(106,273
|
)
|
|
|
-
|
|
|
|
(106,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from revolving credit facility
|
|
|
12,000
|
|
|
|
|
|
|
|
12,000
|
|
Payments
made on revolving credit facility
|
|
|
(12,000
|
)
|
|
|
|
|
|
|
(12,000
|
)
|
Payments
on bank term loan payable
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
(2,250
|
)
|
Proceeds
from initial public offering, net of stock issuance costs
|
|
|
83,161
|
|
|
|
|
|
|
|
83,161
|
|
Excess
tax benefit - stock options
|
|
|
2,518
|
|
|
|
|
|
|
|
2,518
|
|
Proceeds
from exercise of warrants and stock options
|
|
|
977
|
|
|
|
|
|
|
|
977
|
|
Net
cash provided by (used in) financing activities
|
|
|
84,406
|
|
|
|
-
|
|
|
|
84,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(10,061
|
)
|
|
|
|
|
|
|
(10,061
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
30,830
|
|
|
|
|
|
|
|
30,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
20,769
|
|
|
$
|
-
|
|
|
$
|
20,769
|
|
3. Summary of Significant Accounting
Policies
Principles of
Consolidation
The
accompanying unaudited consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Bitpipe, Inc., TechTarget
Securities Corporation and TechTarget, Ltd. Bitpipe, Inc. is a leading
provider of in-depth IT content including white papers, product literature,
and case studies from IT vendors. TechTarget Securities Corporation is a
Massachusetts Securities Corporation incorporated in 2004.
TechTarget, Ltd. is a subsidiary doing business principally in the United
Kingdom. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Unaudited Interim Financial
Information
The
accompanying interim consolidated financial statements are
unaudited. These financial statements and notes should be read in
conjunction with the audited consolidated financial statements and related
notes, together with management’s discussion and analysis of financial condition
and results of operations, contained in the Company’s Registration Statement on
Form S-1 (File No. 333-140503), which is on file with the Securities and
Exchange Commission (SEC).
The
accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
SEC rules and regulations. In the opinion of management, the
unaudited interim consolidated financial statements and notes have been prepared
on the same basis as the audited consolidated financial statements in the
Company’s Registration Statement on Form S-1 (File No. 333-140503), and include
all adjustments (consisting of normal, recurring adjustments) necessary for the
fair presentation of the Company's financial position at September 30, 2007,
results of operations for the three and nine months ended September 30, 2007 and
2006, and cash flows for the nine months ended September 30, 2007 and
2006. The interim periods are not necessarily indicative of results
to be expected for any other interim periods or for the full year.
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. 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 service has been provided and when there is persuasive evidence of
an arrangement, the fee is fixed or determinable and collection of the
receivable is reasonably assured.
Online
media.
Revenue for online media offerings is recognized
for specific online media offerings as follows:
|
-
|
White
Papers.
White paper revenue is recognized
ratably over the period in which the white paper is available on the
Company’s websites.
|
|
-
|
Webcasts and
Podcasts.
Webcast revenue is recognized in the period in
which the webcast occurs. Podcast revenue is recognized in the
period in which it is first posted and becomes available on the Company’s
websites.
|
|
-
|
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.
|
|
-
|
Dedicated E-mails, E-mail
Newsletters.
Dedicated e-mail and e-newsletter revenue
is recognized in the period in which the e-mail or e-newsletter is sent to
registered members.
|
|
-
|
List
Rentals.
List rental revenue is recognized in the period
in which the e-mails are sent to the list of registered
members.
|
|
-
|
Banners.
Banner
revenue is recognized in the period in which the banner impressions
occur.
|
While
each online media offering can be sold separately, most of the Company’s online
media sales involve multiple online offerings. At inception of the
arrangement, the Company evaluates the deliverables to determine whether they
represent separate units of accounting under EITF Issue No.
00-21. Deliverables are deemed to be separate units of accounting if
all of the following criteria are met: the delivered item has value to the
customer on a standalone basis; there is objective and reliable evidence of the
fair value of the item(s); and delivery or performance of the item(s) is
considered probable and substantially in the Company's control. The
Company allocates revenue to each unit of accounting in a transaction based upon
its fair value as determined by vendor objective evidence. Vendor
objective evidence of fair value for all elements of an arrangement is based
upon the normal pricing and discounting practices for those online media
offerings when sold to other similar customers. If vendor objective
evidence of fair value has not been established for all items under the
arrangement, no allocation can be made, and the Company recognizes revenue on
all online media offerings over the term of the arrangement.
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.
Throughout the advertising campaign, revenue is recognized as individual
offerings are delivered, and the lead guarantee commitments are closely
monitored to assess campaign performance. If the minimum number of qualified
sales leads is not met by the scheduled completion date of the advertising
campaign, the campaign is extended and the Company will extend the period over
which it recognizes revenue. In accordance with EITF Issue No. 00-21,
revenue is deferred for any undelivered offerings equal to a pro-rata amount of
the fair value of the additional media offerings as compared to the total
combined value of the original contract and the fair value of the additional
media offerings. The fair value of the additional media offerings is determined
based on standard rate card pricing for each of the additional media offerings.
The Company estimates the additional media offerings to be delivered during the
extended period based on historical lead generation performance for each of the
offerings. The Company has managed and completed over 1,000 integrated
ROI program offerings since 2004, which it feels provides a reasonable
basis to establish these estimates. During the twelve months ended
September 30, 2007, lead shortfalls for integrated ROI program offerings were
satisfied within an average extended period of 38 days.
As of
September 30, 2007, substantially all of the integrated ROI program
offerings that had a guaranteed minimum number of qualified sales leads had been
delivered within the original contractual term. Standard contractual
terms and conditions for integrated ROI program offerings allow for the Company
to extend advertising campaigns in order to satisfy lead shortfalls.
When lead shortfalls are unable to be satisfied within a mutually
agreed-upon extended period, the Company recognizes revenue equal to, and the
customer is only responsible for paying, a pro rata amount based on the actual
number of leads delivered compared to the number of leads originally guaranteed.
Historically, lead guarantees associated with integrated ROI program
offerings have not required the Company to refund or extend payment terms to
customers, nor have they resulted in deferral of a material amount of revenue
outside of the original contractual term of the advertising
campaign.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
Event
sponsorships.
Sponsorship revenues from events are recognized
upon completion of the event in the period that the event
occurs. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are recorded as deferred revenue. The
majority of the Company’s events are free to qualified attendees, however
certain of the Company’s events are based on a paid attendee
model. Revenue is recognized for paid attendee events upon completion
of the event and receipt of payment from the attendee. Deferred
revenue relates to collection of the attendance fees in advance of the
event.
Print
publications.
Advertising revenues from print publications are
recognized at the time the applicable publication is
distributed. 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-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 useful lives using the
straight-line method over periods generally ranging from one
to six years, 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 $191
and $272 for the three months ended September 30, 2007 and 2006, respectively,
and $889 and $452 for the nine months ended September 30, 2007 and 2006,
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.
In July
2006, the FASB issued 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. The Company adopted the provisions
of FIN 48 effective January 1, 2007. 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
September 30, 2007, the Company had two stock-based employee compensation plans
which are more fully described in Note 9. Through December 31,
2005, the Company accounted for its stock-based awards to employees using the
intrinsic value method prescribed in APB Opinion No. 25 and related
interpretations. Under the intrinsic value method, compensation expense is
measured on the date of the grant as the difference between the deemed fair
value of our common stock and the exercise or purchase price multiplied by the
number of shares subject to stock options or the number of shares of restricted
stock awards granted.
Through
December 31, 2005, the Company accounted for stock-based compensation
expense for non-employees using the fair value method prescribed by SFAS,
No. 123 and the Black-Scholes option-pricing model, and recorded the fair
value of non-employee stock options as an expense over the vesting term of the
option.
In
December 2004, the FASB issued 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. The Company adopted SFAS No. 123(R)
effective January 1, 2006. 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 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), 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
As of May
16, 2007, the effective date of the Company's IPO, the Company
transitioned from having two classes of equity securities outstanding, common
and preferred stock, to a single class of equity securities outstanding, common
stock, upon automatic conversion of shares of redeemable convertible
preferred stock into shares of common stock. For the period prior to
May 16, 2007, the Company calculated net income (loss) per share in accordance
with SFAS No. 128,
Earnings
Per Share
, as clarified by EITF Issue No. 03-6,
Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per
Share
. EITF Issue No. 03-6 clarifies the use of the
“two-class” method of calculating earnings per share as originally prescribed in
SFAS No. 128. Under the two-class method, basic net income (loss) per
share is computed by dividing the net income (loss) applicable to common
stockholders by the weighted-average number of common shares outstanding for the
fiscal period. Diluted net income (loss) per share is computed using
the more dilutive of (a) the two-class method, or (b) the if-converted
method. The Company allocates net income first to preferred
stockholders based on dividend rights under the Company’s charter and then to
preferred and common stockholders based on ownership interests. Net
losses are not allocated to preferred stockholders.
For the
period subsequent to May 16, 2007, the Company has followed 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 outstanding. Diluted EPS 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 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.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair
value measurements. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the adoption of SFAS
No. 157 in 2008 will have a material impact on its results of
operations or financial position.
In
February 2007, the FASB released SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities,
and is effective for fiscal years
beginning after November 15, 2007. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company is currently analyzing the
effect, if any, SFAS No. 159 will have on its consolidated financial position
and results of operations.
4. Acquisitions
TechnologyGuide.com
On April
26, 2007, the Company acquired substantially all of the assets of
TechnologyGuide.com from TechnologyGuide, Inc., which was a privately-held
company based in Cincinnati, OH, for $15,000 in cash, plus $15 in
acquisition related transaction costs. TechnologyGuide.com is a
website business consisting of a portfolio of five websites; Notebookreview.com,
Brighthand.com, TabletPCReview.com, DigitalCameraReview.com and
SpotStop.com. The websites offer independent product reviews, price
comparisons, and forum-based discussions for selected technology
products. The acquisition provides the Company with opportunities for
growth within the laptop/notebook PC and "smart phone" markets in
which it currently does not have a significant presence.
The
Company applied the guidance included in EITF Issue No. 98-3,
Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or a Business
, to
conclude that the acquisition of TechnologyGuide.com constituted the acquisition
of a business. In connection with this acquisition, the Company
recorded $7,035 of goodwill and $7,980 of intangible assets related to developed
websites, customer relationships, and non-compete agreements with estimated
useful lives ranging from 36 to 72 months.
The
estimated fair value of $7,980 of acquired intangible assets is assigned as
follows:
|
|
|
Estimated
Fair
|
|
|
Useful
Life
|
|
Value
|
|
Developed
websites intangible asset
|
72
months
|
|
$
|
5,400
|
|
Customer
relationship intangible asset
|
60
months
|
|
|
1,790
|
|
Non-compete
agreements intangible asset
|
36
months
|
|
|
790
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
$
|
7,980
|
|
Management
engaged a third party valuation specialist to assist in determining the fair
value of the acquired assets of TechnologyGuide.com. To value the
websites and customer relationship intangible assets, an income approach was
used, specifically a variation of the discounted cash-flow
method. For the websites intangible asset, expenses and income taxes
were deducted from estimated revenues attributable to the existing
websites. For the customer relationship intangible asset, expenses
and income taxes were deducted from estimated revenues attributable to the
existing customers. The projected net cash flows for each were then
tax affected using an effective rate of 41% and then discounted using a discount
rate of 22.3% to determine the value of the intangible assets,
respectively. Additionally, the present value of the sum of projected
tax benefits was added to arrive at the total fair value of the intangible
assets, respectively. To value the non-compete agreements a
comparative business valuation method was used. Based on non-compete terms of
36 months, management projected net cash flows for the Company with and
without the non-compete agreements in place. The present value of the sum of the
difference between the net cash flows with and without the non-compete
agreements in place was calculated, based on a discount rate of
22.3%.
Results
of operations for TechnologyGuide.com have been included in the Company’s
results of operations since the acquisition date of April 26, 2007.
2020Software.com
On
May 3, 2006, the Company acquired substantially all of the assets
associated with 2020Software.com from 20/20 Software, Inc., which was a
privately-held company based in Los Angeles, California, for $15,000 in cash,
plus $17 in acquisition related transaction costs. The acquisition provides the
Company with an opportunity for growth within markets in which it currently does
not have a significant presence, primarily vertical software applications and
enterprise markets. At the time of acquisition, 2020Software.com was
a website business focused on providing detailed feature-comparison information
and access to trial software for businesses seeking trial versions of
accounting, customer relationship management and other business software.
Since the acquisition of 2020Software.com, the Company has expanded
into additional vertical markets including the retail, manufacturing,
construction and medical software markets.
The
Company applied the guidance included in EITF Issue No. 98-3 to conclude
that the acquisition of 2020Software.com constituted the acquisition of a
business. In connection with this acquisition, the Company purchased $397 of
accounts receivable, recorded $9,440 of goodwill and recorded $5,180 of
intangible assets related to customer relationships, customer order backlog and
a non-compete agreement, with estimated useful lives ranging from 12 to 60
months.
The
estimated fair value of $5,180 of acquired intangible assets is assigned as
follows:
|
|
|
Estimated
Fair
|
|
|
Useful
Life
|
|
Value
|
|
Customer
relationship intangible asset
|
60
months
|
|
$
|
4,170
|
|
Non-compete
agreement intangible asset
|
36
months
|
|
|
550
|
|
Customer
order backlog intangible asset
|
12
months
|
|
|
460
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
$
|
5,180
|
|
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of 2020Software.com. To value
the customer relationship and backlog intangible assets, an income approach was
used, specifically a variation of the discounted cash-flow method. The projected
net cash flows for 2020Software.com were tax affected using an effective rate of
40% and then discounted using a discount rate of 20.1% to calculate the value of
the customer relationship and backlog intangible assets. Additionally, the
present value of the sum of projected tax benefits was added to arrive at the
total fair value of the customer relationship and backlog intangible assets. 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 20.1%.
Results
of operations for 2020Software.com have been included in the Company’s results
of operations since the acquisition date of May 3, 2006.
Pro Forma Results of
Operations
The
following pro forma results of operations for the three and nine months ended
September 30, 2007 and 2006 have been prepared as though the acquisitions of
TechnologyGuide.com and 2020Software.com had occurred as of January 1,
2006. This pro forma financial information is not indicative of the
results of operations that may occur in the future.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
(restated)
|
|
|
2006
|
|
|
2007
(restated)
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma revenues
|
|
$
|
23,301
|
|
|
$
|
20,778
|
|
|
$
|
67,109
|
|
|
$
|
58,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
1,430
|
|
|
$
|
1,547
|
|
|
$
|
4,493
|
|
|
$
|
3,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.59
|
)
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.59
|
)
|
Pro forma
net income increased from $1,229 and $3,863 as originally reported to
$1,430 and $4,493 as restated for the three and nine months ended September
30, 2007, respectively. Pro forma basic net income per common
share increased from $0.03 and $0.00 as originally reported
to $0.04 and $0.02 as restated for the three and nine months ended
September 30, 2007, respectively. Pro forma diluted net income per common
share increased from $0.00 as originally reported to $0.02 as
restated for the nine months ended September 30, 2007.
5.
Cash, Cash Equivalents and Short-Term 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:
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,772
|
|
|
$
|
3,262
|
|
Money
market funds
|
|
|
13,815
|
|
|
|
5,935
|
|
Municipal
bonds
|
|
|
1,000
|
|
|
|
-
|
|
Commercial
paper corporate debt securities
|
|
|
3,182
|
|
|
|
21,633
|
|
Total
cash and cash equivalents
|
|
$
|
20,769
|
|
|
$
|
30,830
|
|
As of
September 30, 2007, short-term investments consist of commercial paper corporate
debt securities, municipal bonds, auction rate securities and variable rate
demand notes. Auction rate securities are variable-rate bonds tied to
short-term interest rates with maturities in excess of 90
days. Interest rates on these securities typically reset through
a modified Dutch auction at predetermined short-term intervals, usually every 1,
7, 28 or 35 days. Variable rate demand notes are long-term, taxable, or
tax-exempt bonds issued on a variable rate basis that can be tendered by the
Company for purchase at par whenever interest rates reset, usually every 7
days. Despite the long-term nature of the stated contractual
maturities of these variable rate demand notes, the Company has the intent and
ability to quickly liquidate these securities. Auction rate
securities and variable rate demand notes are recorded at fair market
value, which approximates cost because of their short-term
interest rates. Commercial paper corporate debt securities and municipal
bonds are securities issued by various highly rated municipalities that
have maturities between three and twelve months at date of
purchase.
The
Company’s short-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 cost, which approximates fair market value, therefore the
Company has no unrealized gains or losses from these investments.
Short-term
investments consisted of the following:
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper corporate debt securities
|
|
$
|
4,800
|
|
|
$
|
-
|
|
Municipal
bonds
|
|
|
29,801
|
|
|
|
-
|
|
Auction
rate securities
|
|
|
39,950
|
|
|
|
-
|
|
Variable
rate demand notes
|
|
|
13,350
|
|
|
|
-
|
|
Total
short-term investments
|
|
$
|
87,901
|
|
|
$
|
-
|
|
All
income generated from these short-term investments is recorded as interest
income.
6. Goodwill and Intangible
Assets
The
changes in the carrying amount of goodwill for the nine months ended September
30, 2007 and for the year ended December 31, 2006 are as
follows:
|
|
Total
|
|
|
|
|
|
Balance
as of December 31, 2005
|
|
$
|
26,535
|
|
Acquisitions
during the period
|
|
|
9,440
|
|
Other
adjustments
|
|
|
215
|
|
Balance
as of December 31, 2006
|
|
|
36,190
|
|
Acquisitions
during the period
|
|
|
7,035
|
|
Balance
as of September 30, 2007
|
|
$
|
43,225
|
|
Intangible
assets subject to amortization as of September 30, 2007 and December 31,
2006 consist of the following:
|
|
As of September 30,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Customer,
affiliate and advertiser relationships
|
|
$
|
13,367
|
|
|
$
|
(8,020
|
)
|
|
$
|
5,347
|
|
Developed
websites, technology and patents
|
|
|
5,976
|
|
|
|
(919
|
)
|
|
|
5,057
|
|
Trademark,
trade name and domain name
|
|
|
894
|
|
|
|
(451
|
)
|
|
|
443
|
|
Non-compete
agreements
|
|
|
1,675
|
|
|
|
(435
|
)
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
21,912
|
|
|
$
|
(9,825
|
)
|
|
$
|
12,087
|
|
|
|
As of December 31,
2006
|
|
|
|
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Customer,
affiliate and advertiser relationships
|
|
$
|
11,025
|
|
|
$
|
(6,010
|
)
|
|
$
|
5,015
|
|
Developed
websites, technology and patents
|
|
|
576
|
|
|
|
(400
|
)
|
|
|
176
|
|
Trademark,
trade name and domain name
|
|
|
768
|
|
|
|
(321
|
)
|
|
|
447
|
|
Non-compete
agreements
|
|
|
550
|
|
|
|
(122
|
)
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
12,919
|
|
|
$
|
(6,853
|
)
|
|
$
|
6,066
|
|
Intangible
assets are amortized over their estimated useful lives, which range from 12 to
72 months, using the straight-line method of amortization, which approximates
the estimated pattern of economic use. Amortization expense was $1,172 and
$1,378 for the three months ended September 30, 2007 and 2006 respectively, and
$2,972 and $3,886 for the nine months ended September 30, 2007 and 2006,
respectively. At September 30, 2007, the remaining amortization
expense will be recognized over a weighted-average period of
approximately 2.65 years.
The
Company expects amortization expense of intangible assets to be as
follows:
|
|
Total
|
|
|
|
|
|
2007
(October 1st - December 31st)
|
|
$
|
1,020
|
|
2008
|
|
|
2,967
|
|
2009
|
|
|
2,831
|
|
2010
|
|
|
2,361
|
|
2011
|
|
|
1,584
|
|
2012
|
|
|
1,024
|
|
Thereafter
|
|
|
300
|
|
|
|
|
|
|
Total
amortization expense
|
|
$
|
12,087
|
|
7. Net Income (Loss) Per
Share
A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net income (loss) per common share is as follows:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2007
(restated)
|
|
|
2006
|
|
|
2007
(restated)
|
|
|
2006
|
|
|
|
(unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,832
|
|
|
$
|
1,587
|
|
|
$
|
5,397
|
|
|
$
|
4,401
|
|
Allocation
of net income to periods
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocable to period during which two classes of equity securities
were outstanding
|
|
|
-
|
|
|
|
1,587
|
|
|
|
1,959
|
|
|
|
4,401
|
|
Net
income allocable to period during which one class of equity securities was
outstanding
|
|
|
1,832
|
|
|
|
-
|
|
|
|
3,438
|
|
|
|
-
|
|
Net
income
|
|
$
|
1,832
|
|
|
$
|
1,587
|
|
|
$
|
5,397
|
|
|
$
|
4,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocable to two class period
|
|
$
|
-
|
|
|
$
|
1,587
|
|
|
$
|
1,959
|
|
|
$
|
4,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock dividends
|
|
|
-
|
|
|
|
2,824
|
|
|
|
3,948
|
|
|
|
8,091
|
|
Net
income applicable to preferred stockholders for two class
period
|
|
|
-
|
|
|
|
2,824
|
|
|
|
3,948
|
|
|
|
8,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders for two class
period
|
|
|
-
|
|
|
|
(1,237
|
)
|
|
|
(1,989
|
)
|
|
|
(3,690
|
)
|
Net
income allocable to one class period
|
|
|
1,832
|
|
|
|
-
|
|
|
|
3,438
|
|
|
|
-
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
1,832
|
|
|
$
|
(1,237
|
)
|
|
$
|
1,449
|
|
|
$
|
(3,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
40,354,796
|
|
|
|
7,909,485
|
|
|
|
24,282,474
|
|
|
|
7,788,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
40,354,796
|
|
|
|
7,909,485
|
|
|
|
24,282,474
|
|
|
|
7,788,440
|
|
Effect
of potentially dilutive shares
|
|
|
2,981,702
|
|
|
|
-
|
|
|
|
2,902,196
|
|
|
|
-
|
|
Total
weighted average shares of common stock outstanding
|
|
|
43,336,498
|
|
|
|
7,909,485
|
|
|
|
27,184,670
|
|
|
|
7,788,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Net Income
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
1,832
|
|
|
$
|
(1,237
|
)
|
|
$
|
1,449
|
|
|
$
|
(3,690
|
)
|
Weighted
average shares of stock outstanding
|
|
|
40,354,796
|
|
|
|
7,909,485
|
|
|
|
24,282,474
|
|
|
|
7,788,440
|
|
Net
income (loss) per common share
|
|
$
|
0.05
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
1,832
|
|
|
$
|
(1,237
|
)
|
|
$
|
1,449
|
|
|
$
|
(3,690
|
)
|
Weighted
average shares of stock outstanding
|
|
|
43,336,498
|
|
|
|
7,909,485
|
|
|
|
27,184,670
|
|
|
|
7,788,440
|
|
Net
income (loss) per common share
|
|
$
|
0.04
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.47
|
)
|
(1)
|
As
of May 16, 2007, the effective date of the Company's IPO, the
Company transitioned from having two classes of equity securities
outstanding, common and preferred stock, to a single class of equity
securities outstanding, common stock, upon automatic conversion of
shares of redeemable convertible preferred stock into shares of common
stock.
|
8. Bank Term Loan
Payable
In
August 2006, the Company entered into a credit agreement (Credit Agreement)
with Citizens Bank of Massachusetts, which included a $10,000 term loan (Term
Loan) and a $20,000 revolving credit facility (Revolving Credit Facility).
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 plus the applicable LIBOR margin. 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 of 0.375%. The Company borrowed
$12,000 against its Revolving Credit Facility in conjunction with the
acquisition of TechnologyGuide.com in April 2007. The entire
outstanding balance of $12,000 was repaid in May 2007 with proceeds from the
Company’s IPO. As of September 30, 2007, unused availability under
the Revolving Credit Facility totaled $20,000.
In
August 2007, the Company entered into an amendment to the Credit
Agreement. The amendment changes the applicable LIBOR margin from
1.50% to a sliding scale based on the ratio of total funded debt to EBITDA for
the preceding four fiscal quarters. As of September 30, 2007, the
applicable LIBOR margin was 1.25%.
The Term
Loan requires 39 consecutive monthly principal payments of $250, plus interest,
beginning on September 30, 2006 through December 30, 2009. As of
September 30, 2007, the outstanding balance due under the Term Loan was
$6,750. There was no accrued interest on the Term Loan at September
30, 2007.
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 5.48% plus the applicable LIBOR margin 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
loss" on the consolidated statements of redeemable convertible preferred stock
and stockholders' deficit. As of September 30, 2007, the fair value of the cash
flow hedge was $70 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. The Company was
in compliance with all financial covenants as of September 30,
2007.
The
future maturities of the Term Loan agreement at September 30, 2007 are as
follows:
Year Ending December
31,
|
|
As of September 30,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
2007
(October 1st - December 31st)
|
|
$
|
750
|
|
2008
|
|
|
3,000
|
|
2009
|
|
|
3,000
|
|
|
|
|
6,750
|
|
Less
current portion
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
$
|
3,750
|
|
9. Comprehensive Income
(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 and nine months ended September 30,
2007 comprehensive income is the sum of net income and the change in the fair
value of the Company's cash flow hedge, as follows:
|
|
Three Months Ended September
30, 2007 (restated)
|
|
|
Nine Months Ended September 30,
2007 (restated)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,832
|
|
|
$
|
5,397
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Change
in fair value of cash flow hedge
|
|
|
(47
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
1,785
|
|
|
$
|
5,383
|
|
10. Commitments and
Contingencies
From time
to time and in the ordinary course of business, the Company may be subject to
various claims, charges, and litigation. At September 30, 2007 and
December 31, 2006, 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. 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 all
options 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 September 30, 2007 a total of 2,780,433 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 September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Risk-free
interest rate
|
|
|
*
|
|
|
|
4.68%-5.05
|
%
|
|
|
4.61%-5.04
|
%
|
|
|
4.68%-5.05
|
%
|
Expected
volatility
|
|
|
*
|
|
|
|
58%-59
|
%
|
|
|
49%-50
|
%
|
|
|
58%-63
|
%
|
Expected
life
|
|
|
*
|
|
|
6.25
years
|
|
|
6.25
years
|
|
|
6.25
years
|
|
Dividend
yield
|
|
|
*
|
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Weighted-average
grant date fair value per share
|
|
|
*
|
|
|
$
|
4.47
|
|
|
$
|
7.71
|
|
|
$
|
4.48
|
|
*
|
The
Company did not grant any stock options during the three months ended
September 30, 2007.
|
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 and nine months ended September 30, 2007 and
2006 based on an analysis of 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 an average of the historical
volatility measures of this 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. 107,
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 forfeiture rate, based on its historical forfeiture experience during
the previous six years, of 8.40% in determining the expense recorded in the
three and nine months ended September 30, 2006. In September 2007,
the Company changed the estimated forfeiture rate from 8.40% to 4.00% based on a
decrease in its historical forfeiture experience during the previous two
years. The Company applied the new forfeiture rate of 4.00% in
determining the expense recorded in the three and nine months ended September
30, 2007.
A summary
of the activity under the Company's stock option plan as of September 30, 2007
and changes during the three and nine month periods then ended 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 June 30, 2007 (unaudited)
|
|
|
7,214,168
|
|
|
$
|
5.74
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(69,649
|
)
|
|
|
2.93
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(10,016
|
)
|
|
|
7.27
|
|
|
|
|
|
|
|
Options
canceled
|
|
|
(733
|
)
|
|
|
7.36
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2007 (unaudited)
|
|
|
7,133,770
|
|
|
$
|
5.77
|
|
|
|
7.4
|
|
|
$
|
79,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2007 (unaudited)
|
|
|
3,536,762
|
|
|
$
|
3.88
|
|
|
|
5.9
|
|
|
$
|
46,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested or expected to vest at September 30, 2007
(1)
(unaudited)
|
|
|
6,989,890
|
|
|
$
|
5.73
|
|
|
|
7.4
|
|
|
$
|
78,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Year-to-Date
Activity
|
|
Options
Outstanding
|
|
|
Weighted-Average
Exercise Price Per Share
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
7,922,323
|
|
|
$
|
4.96
|
|
Options
granted
|
|
|
224,500
|
|
|
|
14.16
|
|
Options
exercised
|
|
|
(954,248
|
)
|
|
|
1.03
|
|
Options
forfeited
|
|
|
(57,447
|
)
|
|
|
5.76
|
|
Options
canceled
|
|
|
(1,358
|
)
|
|
|
5.65
|
|
Options
outstanding at September 30, 2007 (unaudited)
|
|
|
7,133,770
|
|
|
$
|
5.77
|
|
During
the three and nine months ended September 30, 2007, 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 $677 and
$11,424, respectively, and the total amount of cash received from exercise of
these options was $204 and $984, 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 and nine months ended
September 30, 2007 was $4,455 and $4,627, respectively.
During
the three and nine months ended September 30, 2006, the total intrinsic value of
options exercised was $82 and $1,917, respectively, and the total amount of
cash received from exercise of these options was $49 and $441,
respectively. None of the options granted after the adoption of SFAS
No. 123(R) on January 1, 2006 vested during the three and nine months
ended September 30, 2006.
Unrecognized
stock-based compensation expense of non-vested stock options of $15,074 is
expected to be recognized using the straight line method over a weighted-average
period of 1.59 years.
12. Stockholders’
Equity
In April
2007, the Board of Directors approved an amendment and restatement of the
Company’s Certificate of Incorporation to increase the authorized number of
shares of common stock from 44,344,656 to 100,000,000, to authorize 5,000,000
shares of undesignated preferred stock, par value $0.001 per share, and to
eliminate all reference to the designated Series Preferred Stock.
Warrants
In
connection with the Company’s original Bank Term Loan agreement, in July 2001
the Company issued to the lender for the Bank Term Loan (the “Lender”) a fully
exercisable warrant to purchase up to 74,074 shares of series A redeemable
convertible preferred stock at $0.5411 per share. In connection with
an amendment to the Bank Term Loan agreement in April 2002 the Company issued to
the Lender an additional fully exercisable warrant to purchase 55,443
shares of series A redeemable convertible preferred stock at a price of
$0.5411 per share. Upon the closing of the Company’s IPO in May
2007, these warrants outstanding converted into warrants to purchase an
aggregate of 32,378 shares of the Company’s common stock at an exercise price of
$2.1644 per share. In August 2007, the Lender exercised their
warrants to purchase 32,378 shares of common stock using the conversion rights
in the warrants. As result of the exercise using the conversion
rights, the Company issued 26,740 shares of common stock to the Lender and
cancelled the 5,638 shares received in lieu of payment of the exercise
price. 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. At September 30, 2007 and December 31, 2006,
there were 40,625 and 73,003 shares, respectively, of the Company’s common stock
reserved for the exercise of all warrants.
Reserved Common
Stock
As of
September 30, 2007 the Company has reserved common stock for the
following:
|
|
Number
of
|
|
|
|
Shares
|
|
|
|
(unaudited)
|
|
|
|
|
|
Options
outstanding and available for grant under stock option
plans
|
|
|
9,914,203
|
|
Warrants
|
|
|
40,625
|
|
|
|
|
|
|
|
|
|
9,954,828
|
|
13. 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 September 30, 2007, 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. No interest and penalties have
been recognized by the Company to date.
Tax years
2003 through 2006 are subject to examination by the federal and state taxing
authorities. There are no income tax examinations currently in
process.
The
Company recorded a provision for income taxes in 2007 based upon a 43% effective
tax rate.
14. 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 September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
|
$
|
22,952
|
|
|
$
|
20,055
|
|
|
$
|
65,058
|
|
|
$
|
55,344
|
|
International
|
|
|
349
|
|
|
|
212
|
|
|
|
1,192
|
|
|
|
551
|
|
Total
|
|
$
|
23,301
|
|
|
$
|
20,267
|
|
|
$
|
66,250
|
|
|
$
|
55,895
|
|
15. Subsequent
Event
On
November 6, 2007, the Company acquired KnowledgeStorm, Inc. (KnowledgeStorm), a
privately-held company based in Alpharetta, GA for an aggregate purchase price
of approximately $58 million, consisting of approximately $52 million in cash
and 359,820 shares of the Company's common stock. KnowledgeStorm is
a leading online search resource providing vendor generated content addressing
corporate IT professionals. KnowledgeStorm offers IT marketers products with a
lead generation and branding focus to reach these corporate IT professionals
throughout the purchasing decision process. The financial results of
KnowledgeStorm will be included in the Company’s consolidated results of
operations from the date of acquisition.