PART II
Item 5.
Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock is listed on the Nasdaq Global Market under the trading symbol
“TTGT”. The following table sets forth the high and low sales prices of our
common stock, as reported by the Nasdaq Global Market, for each quarterly period
within our most recent fiscal year since our initial public
offering:
|
|
High
|
|
|
Low
|
|
Fiscal
2007
|
|
|
|
|
|
|
Quarter
ended June 30, 2007 (since May 16, 2007)
|
|
|
|
|
|
|
|
|
Quarter
ended September 30, 2007
|
|
|
|
|
|
|
|
|
Quarter
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
closing sale price of our common stock, as reported by the Nasdaq Global Market,
was $11.62 on February 29, 2008.
Holders
As of
February 29, 2008 there were approximately 313 stockholders of record of our
common stock based on the records of our transfer agent.
Dividends
We did
not declare or pay any cash dividends on our common stock during the two most
recent fiscal years. We currently intend to retain earnings, if any, to fund the
development and growth of our business and do not anticipate paying other cash
dividends on our common stock in the foreseeable future. Our payment of any
future dividends will be at the discretion of our board of directors after
taking into account various factors, including our financial condition,
operating results, cash needs and growth plans.
Recent
Sales of Unregistered Securities
Since
January 1, 2005, we have issued the following securities that were not
registered under the Securities Act:
(a)
Issuances of Capital Stock
As of
November 2006, there were outstanding options to purchase 17,456 shares of our
common stock at an exercise price of $2.36 per share, the issuance of which may
not have been exempt from registration or certain qualification requirements
under federal or state securities laws. To address this issue, we made a
rescission offer that was completed in December 2006 to all holders of these
options pursuant to which we offered to repurchase these options for cash or
shares of our common stock. In connection with the completion of the rescission
offer, we issued 10,726 shares and paid out $6,561 in cash, which included
statutory interest. The sales of securities pursuant to the rescission offer
were made in reliance upon the exemption from registration provided by Section
3(b) of the Securities Act of 1933 for transactions by an issuer not involving a
public offering. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
(b)
Grants and Exercises of Stock Options.
During
2007, prior to our initial public offering, we granted stock options to purchase
75,000 shares of our common stock with an exercise price of $13.00 per share to
a director. During 2007, prior to our initial public offering,
pursuant to our 1999 Stock Option Plan, we issued and sold 333,636 shares of our
common stock upon the exercise of stock options for aggregate consideration of
$211,938.
During
2006, pursuant to our 1999 Stock Option Plan, we granted stock options to
purchase 4,243,500 shares of common stock with a weighted average exercise price
of $7.36 per share to our employees. During 2006, 371,634 options were exercised
for aggregate consideration of $553,659. During 2005, pursuant to our 1999 Stock
Option Plan, we granted stock options to purchase 42,500 shares of common stock
with a weighted average exercise price of $6.44 per share to our employees.
During 2005, 141,725 options were exercised for aggregate consideration of
$237,227.
The
issuance of common stock upon exercise of the options was exempt either pursuant
to Rule 701, as a transaction pursuant to a compensatory benefit plan, or
pursuant to Section 4(2), as a transaction by an issuer not involving a public
offering.
(c)
Exercises of Warrants
During
2006, we issued and sold 184,233 shares of our common stock upon the exercise of
a warrant for aggregate consideration of $338,988.
During
2007, we issued 52,764 shares of our common stock upon the cashless exercise of
warrants. We did not receive any consideration from the cashless
exercises apart from the surrender of the underlying warrants.
The
issuances of common stock upon the exercise of the warrants were made in
reliance upon the exemption from registration proved by Section 4(2) of the
Securities Act for transactions by an issuer not involving a public offering.
All of the foregoing securities are deemed restricted securities for purposes of
the Securities Act.
Use
of Proceeds from Public Offering of Common Stock
In
May 2007, we completed our initial public offering (IPO) pursuant to a
registration statement on Form S-1 (File No. 333-140503) that was
declared effective by the SEC on May 16, 2007. Under the registration
statement, we registered the offering and sale of an aggregate of
7,700,000 shares of our common stock, $0.001 par value, of which
6,427,152 shares were sold by the Company and 1,272,848 were sold by certain
selling stockholders. All of the shares of common stock issued
pursuant to the registration statement, including the shares sold by the selling
stockholders, were sold at a price to the public of $13.00 per
share.
As
a result of the IPO, we raised a total of $83.2 million in net proceeds after
deducting underwriting discounts and commissions of approximately $6.4 million
and offering expenses of approximately $2.3 million. In May 2007 we
repaid $12.0 million that we had borrowed against our revolving credit facility
in conjunction with the acquisition of TechnologyGuide.com in April
2007. In November 2007 we acquired KnowledgeStorm, Inc. for
approximately $58 million, consisting of approximately $52 million in cash and
359,820 shares of unregistered common stock of TechTarget valued at $6.0
million.
We
have applied the remaining net proceeds from the IPO to our working capital for
general corporate purposes. We have no current agreements or
commitments with respect to any material acquisitions. We have
invested the remaining net proceeds in cash, cash equivalents and short-term
investments, in accordance with our investment policy. None of the
remaining net proceeds were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of our equity securities, or any of
our other affiliates.
Equity
Compensation Plan Information
Information
relating to compensation plans under which our equity securities are authorized
for issuance is set forth under “Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters” in our definitive proxy
statement for our 2008 Annual Meeting of Stockholders.
Stock
Performance Graph
The
following graph compares the cumulative total return to stockholders of our
common stock for the period from May 16, 2007, the date of our initial public
offering, to December 31, 2007, to the cumulative total return of the Russell
2000 Index and the S&P 500 Media Industry Index for the same
period. This graph assumes the investment of $100.00 on May 16, 2007
in our common stock, the Russell 2000 Index and the S&P 500 Media Industry
Index and assumes any dividends are reinvested.
COMPARATIVE
STOCK PERFORMANCE
Among
TechTarget, Inc.
The
Russell 2000 Index and
The
S&P 500 Media Industry Index
|
|
May
16, 2007
|
|
|
June
30, 2007
|
|
|
September
30, 2007
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TechTarget,
Inc.
|
|
$
|
100.00
|
|
|
$
|
98.85
|
|
|
$
|
130.00
|
|
|
$
|
113.69
|
|
Russell
2000 Index
|
|
$
|
100.00
|
|
|
$
|
102.57
|
|
|
$
|
99.40
|
|
|
$
|
94.85
|
|
S&P
500 Media Industry Index
|
|
$
|
100.00
|
|
|
$
|
101.07
|
|
|
$
|
94.21
|
|
|
$
|
86.34
|
|
The
information included under the heading “Stock Performance Graph” in Item 5 of
this Annual Report on Form 10-K is “furnished” and not “filed” and shall
not be deemed to be “soliciting material” or subject to Regulation 14A, shall
not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934,
as amended, or otherwise subject to the liabilities of that section, nor shall
it be deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Securities Act of 1934, as amended.
Item 6.
Selected Consolidated Financial
Data
The
following selected consolidated financial data should be read in conjunction
with our audited consolidated financial statements, the related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included in this Annual Report on Form
10-K. The consolidated statement of operations data for the years
ended December 31, 2007, 2006 and 2005, and the selected consolidated
balance sheet data as of December 31, 2007 and 2006 have been derived from
our audited consolidated financial statements and related notes included in this
Annual Report on Form 10-K. The consolidated statement of operations
data for the years ended December 31, 2004 and 2003, and the consolidated
balance sheet data as of December 31, 2005, 2004 and 2003 have been derived
from audited consolidated financial statements and related notes, which are not
included in this Annual Report on Form 10-K. The historical results
are not necessarily indicative of the results to be expected for any future
period
.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in
thousands, except share and per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
63,686
|
|
|
$
|
51,176
|
|
|
$
|
43,662
|
|
|
$
|
31,342
|
|
|
$
|
21,023
|
|
Events
|
|
|
24,254
|
|
|
|
19,708
|
|
|
|
14,595
|
|
|
|
9,647
|
|
|
|
7,845
|
|
Print
|
|
|
6,725
|
|
|
|
8,128
|
|
|
|
8,489
|
|
|
|
5,738
|
|
|
|
3,598
|
|
Total
revenues
|
|
|
94,665
|
|
|
|
79,012
|
|
|
|
66,746
|
|
|
|
46,727
|
|
|
|
32,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
(1)
|
|
|
15,575
|
|
|
|
12,988
|
|
|
|
10,476
|
|
|
|
7,632
|
|
|
|
5,826
|
|
Events
(1)
|
|
|
8,611
|
|
|
|
6,493
|
|
|
|
6,202
|
|
|
|
5,948
|
|
|
|
4,798
|
|
Print
(1)
|
|
|
3,788
|
|
|
|
5,339
|
|
|
|
5,322
|
|
|
|
3,073
|
|
|
|
2,318
|
|
Total
cost of revenues
|
|
|
27,974
|
|
|
|
24,820
|
|
|
|
22,000
|
|
|
|
16,653
|
|
|
|
12,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
66,691
|
|
|
|
54,192
|
|
|
|
44,746
|
|
|
|
30,074
|
|
|
|
19,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
(1)
|
|
|
28,048
|
|
|
|
20,305
|
|
|
|
18,174
|
|
|
|
15,138
|
|
|
|
10,736
|
|
Product
development
(1)
|
|
|
7,320
|
|
|
|
6,295
|
|
|
|
5,756
|
|
|
|
4,111
|
|
|
|
3,728
|
|
General
and administrative
(1)
|
|
|
12,592
|
|
|
|
8,756
|
|
|
|
7,617
|
|
|
|
11,756
|
|
|
|
3,991
|
|
Depreciation
|
|
|
1,610
|
|
|
|
1,144
|
|
|
|
1,792
|
|
|
|
1,168
|
|
|
|
1,153
|
|
Amortization
of intangible assets
|
|
|
4,740
|
|
|
|
5,029
|
|
|
|
5,172
|
|
|
|
1,304
|
|
|
|
428
|
|
Total
operating expenses
|
|
|
54,310
|
|
|
|
41,529
|
|
|
|
38,511
|
|
|
|
33,477
|
|
|
|
20,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
12,381
|
|
|
|
12,663
|
|
|
|
6,235
|
|
|
|
(3,403
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
1,831
|
|
|
|
321
|
|
|
|
(30
|
)
|
|
|
143
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
14,212
|
|
|
|
12,984
|
|
|
|
6,205
|
|
|
|
(3,260
|
)
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
6,046
|
|
|
|
5,811
|
|
|
|
(2,681
|
)
|
|
|
32
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,166
|
|
|
$
|
7,173
|
|
|
$
|
8,886
|
|
|
$
|
(3,292
|
)
|
|
$
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.51
|
)
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,384,303
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
|
|
7,594,470
|
|
|
|
7,901,256
|
|
Diluted
|
|
|
31,346,738
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
|
|
7,594,470
|
|
|
|
7,901,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA (unaudited)
(3)
|
|
$
|
24,565
|
|
|
$
|
20,086
|
|
|
$
|
13,277
|
|
|
$
|
5,352
|
|
|
$
|
1,104
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
62,001
|
|
|
$
|
30,830
|
|
|
$
|
46,879
|
|
|
$
|
7,214
|
|
|
$
|
7,988
|
|
Total
assets
|
|
|
199,887
|
|
|
|
92,647
|
|
|
|
95,160
|
|
|
|
92,920
|
|
|
|
15,692
|
|
Total
liabilities
|
|
|
19,239
|
|
|
|
21,107
|
|
|
|
32,879
|
|
|
|
39,841
|
|
|
|
7,131
|
|
Total
redeemable convertible preferred stock
|
|
|
-
|
|
|
|
136,766
|
|
|
|
126,004
|
|
|
|
115,383
|
|
|
|
40,392
|
|
Total
stockholders' equity (deficit)
|
|
|
180,648
|
|
|
|
(65,226
|
)
|
|
|
(63,723
|
)
|
|
|
(62,304
|
)
|
|
|
(31,831
|
)
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in
thousands)
|
|
(1)
Amounts
include stock-based
compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of online revenue
|
|
$
|
189
|
|
|
$
|
87
|
|
|
$
|
-
|
|
|
$
|
78
|
|
|
$
|
-
|
|
Cost
of events revenue
|
|
|
53
|
|
|
|
31
|
|
|
|
-
|
|
|
|
236
|
|
|
|
-
|
|
Cost
of print revenue
|
|
|
15
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Selling
and marketing
|
|
|
2,999
|
|
|
|
606
|
|
|
|
-
|
|
|
|
1,025
|
|
|
|
-
|
|
Product
development
|
|
|
334
|
|
|
|
90
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
General
and administrative
|
|
|
2,244
|
|
|
|
424
|
|
|
|
78
|
|
|
|
4,937
|
|
|
|
35
|
|
Total
|
|
$
|
5,834
|
|
|
$
|
1,250
|
|
|
$
|
78
|
|
|
$
|
6,283
|
(a)
|
|
$
|
35
|
|
|
(a)
|
In
May 2004, we offered to repurchase for cash (i) up to 100% of the
issued and outstanding shares of our series A preferred stock; and
(ii) up to 45% of the aggregate issued and outstanding shares of common
stock and/or options to purchase the same (provided the option holder had
either completed four years of service with us as of May 1, 2004, or had
held the option for at least four years as of May 1, 2004), effected to
provide certain stockholders and option holders with liquidity. We
recorded stock-based compensation expense of $6,012,382 related to the
purchase of 1,429,157 options.
|
(2)
|
Basic
and diluted net income (loss) per common share is computed by dividing the
net income (loss) applicable to common stockholders by the basic and
diluted weighted-average number of common shares outstanding for the
fiscal period. See "Note 2 of our Notes to Consolidated
Financial Statements."
|
(3)
|
The
following table reconciles net income (loss) to Adjusted EBITDA for the
periods presented and is unaudited:
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,166
|
|
|
$
|
7,173
|
|
|
$
|
8,886
|
|
|
$
|
(3,292
|
)
|
|
$
|
(533
|
)
|
Interest
income (expense), net
|
|
|
1,831
|
|
|
|
321
|
|
|
|
(30
|
)
|
|
|
143
|
|
|
|
(21
|
)
|
Provision
for (benefit from) income taxes
|
|
|
6,046
|
|
|
|
5,811
|
|
|
|
(2,681
|
)
|
|
|
32
|
|
|
|
-
|
|
Depreciation
|
|
|
1,610
|
|
|
|
1,144
|
|
|
|
1,792
|
|
|
|
1,168
|
|
|
|
1,153
|
|
Amortization
of intangible assets
|
|
|
4,740
|
|
|
|
5,029
|
|
|
|
5,172
|
|
|
|
1,304
|
|
|
|
428
|
|
EBITDA
|
|
|
18,731
|
|
|
|
18,836
|
|
|
|
13,199
|
|
|
|
(931
|
)
|
|
|
1,069
|
|
Stock-based
compensation
|
|
|
5,834
|
|
|
|
1,250
|
|
|
|
78
|
|
|
|
6,283
|
(a)
|
|
|
35
|
|
Adjusted
EBITDA
|
|
$
|
24,565
|
|
|
$
|
20,086
|
|
|
$
|
13,277
|
|
|
$
|
5,352
|
|
|
$
|
1,104
|
|
|
(a)
|
In
May 2004, we offered to repurchase for cash (i) up to 100% of the
issued and outstanding shares of our series A preferred stock; and
(ii) up to 45% of the aggregate issued and outstanding shares of common
stock and/or options to purchase the same (provided the option holder had
either completed four years of service with us as of May 1, 2004, or had
held the option for at least four years as of May 1, 2004), effected to
provide certain stockholders and option holders with liquidity. We
recorded stock-based compensation expense of $6,012,382 related to the
purchase of 1,429,157 options.
|
Adjusted
EBITDA is a metric used by management to measure operating performance. EBITDA
represents net income (loss) before interest income (expense) net, provision for
(benefit from) income taxes, depreciation and amortization. Adjusted EBITDA
represents EBITDA less stock-based compensation expense. We present Adjusted
EBITDA as a supplemental performance measure because we believe it facilitates
operating performance comparisons from period to period and company to company
by backing out potential differences caused by variations in capital structures
(affecting interest expense), tax positions (such as the impact on periods or
companies of changes in effective tax rates or net operating losses), the age
and book depreciation of fixed assets (affecting relative depreciation expense),
and the impact of non-cash stock-based compensation expense costs. Because
Adjusted EBITDA facilitates internal comparisons of operating performance on a
more consistent basis, we also use Adjusted EBITDA in measuring our performance
relative to that of our competitors. We also use Adjusted EBITDA in connection
with our compensation of our executive officers. Adjusted EBITDA is not a
measurement of our financial performance under GAAP and should not be considered
as an alternative to net income, operating income or any other performance
measures derived in accordance with GAAP or as an alternative to cash flow from
operating activities as a measure of our profitability or liquidity. We
understand that although Adjusted EBITDA is frequently used by securities
analysts, lenders and others in their evaluation of companies, Adjusted EBITDA
has limitations as an analytical tool, and you should not consider it in
isolation, or as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are:
·
|
Adjusted
EBITDA does not reflect our cash expenditures, or future requirements for
capital expenditures or contractual
commitments;
|
·
|
Adjusted
EBITDA does not reflect changes in, or cash requirements for, our working
capital needs;
|
·
|
Adjusted
EBITDA does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts;
|
·
|
Although
depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future,
and Adjusted EBITDA does not reflect any cash requirements for such
replacements; and
|
·
|
Other
companies in our industry may calculate Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative
measure.
|
Item 7
. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this Annual Report on
Form 10-K. In this discussion and analysis, dollar, share and
per share amounts are not rounded to thousands unless otherwise indicated.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in this Annual
Report on Form 10-K particularly under the heading "Risk Factors."
Overview
Background
We are a
leading provider of specialized online content that brings together buyers and
sellers of corporate IT products. We sell customized marketing programs that
enable IT vendors to reach corporate IT decision makers who are actively
researching specific IT purchases.
Our
integrated content platform consists of a network of websites that we complement
with targeted in-person events and two 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 ROI. As IT professionals have become increasingly
specialized, they have come to rely on our sector-specific websites for
purchasing decision support. Our content enables IT professionals to navigate
the complex and rapidly changing IT landscape where purchasing decisions can
have significant financial and operational consequences. Based upon the logical
clustering of our users' respective job responsibilities and the marketing focus
of the products that our customers are advertising, we currently categorize our
content offerings across 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.
In May
2007, we completed our initial public offering of 8.9 million shares of our
common stock, of which 7.1 million shares were sold by us and 1.8 million shares
were sold by certain of our existing shareholders at a price to the
public of $13.00 per share. We raised a total of $91.9 million
in gross proceeds from the offering, or $83.2 million in net proceeds after
deducting underwriting discounts and commissions of $6.4 million and other
offering costs of approximately $2.3 million. Upon the closing of the offering,
all shares of our redeemable convertible preferred stock automatically converted
into 24.4 million shares of common stock.
Sources
of Revenues
We sell
advertising programs to IT vendors targeting a specific audience within a
particular IT sector or sub-sector. We maintain multiple points of contact with
our customers to provide support throughout their organizations and the sales
cycle. As a result, our customers often run multiple advertising programs with
us in order to reach discrete portions of our targeted audience. There are
multiple factors that can impact our customers' advertising objectives and
spending with us, including but not limited to, product launches, increases or
decreases to their advertising budgets, the timing of key industry marketing
events, responses to competitor activities and efforts to address specific
marketing objectives such as creating brand awareness or generating sales leads.
Our services are generally delivered under short-term contracts that run for the
length of a given advertising program, typically less than
90 days.
We
generate substantially all of our revenues from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications.
Online.
The
majority of our revenue is derived from the delivery of our online offerings
from our media groups. Online revenue represented 67%, 65% and 65% of
total revenues for the years ended December 31, 2007, 2006 and 2005,
respectively. We expect the majority of our revenues to be derived through the
delivery of online offerings for the foreseeable future. As a result of our
customers' advertising objectives and preferences, the specific allocation of
online advertising offerings sold and delivered by us, on a period by period
basis, can fluctuate.
Through
our websites we sell a variety of online media offerings to connect IT vendors
to IT professionals. Our lead generation offerings allow IT vendors to capture
qualified sales leads from the distribution and promotion of content to our
audience of IT professionals. Our branding offerings provide IT vendors exposure
to targeted audiences of IT professionals actively researching information
related to their products and services.
Our
branding offerings include banners and e-newsletters. Banner advertising can be
purchased on specific websites within our network. We also offer the ability to
advertise in e-newsletters focused on key site sub-topics across our portfolio
of websites. These offerings give IT vendors the ability to increase their brand
awareness to highly specialized IT sectors.
Our lead
generation offerings include the following:
-
|
White
Papers.
White papers are technical documents created by
IT vendors to describe business or technical problems that are addressed
by the vendors' products or services. IT vendors pay us to have their
white papers distributed to our users and receive targeted promotions on
our relevant websites. When viewing white papers, our registered members
and visitors supply their corporate contact and qualification information
and agree to receive further information from the vendor. The corporate
contact and other qualification information for these leads are supplied
to the vendor in real time through our proprietary lead management
software.
|
-
|
Webcasts and
Podcasts.
IT vendors pay us to sponsor and host webcasts
and podcasts that bring informational sessions directly to attendees'
desktops and, in the case of podcasts, directly to their mobile devices.
As is the case with white papers, our users supply their corporate contact
and qualification information to the webcast or podcast sponsor when they
view or download the content. Sponsorship includes access to the
registrant information and visibility before, during and after the
event.
|
-
|
Software Package
Comparisons.
Through our 2020software.com website, IT
vendors pay us to post information and specifications about their software
packages, typically organized by application category. Users can request
further information, which may include downloadable trial software from
multiple software providers in sectors such as customer relationship
management, or CRM, accounting, and business analytics. IT vendors, in
turn, receive qualified leads based upon the users who request their
information.
|
-
|
Dedicated
E-mails.
IT vendors pay us to further target the
promotion of their white papers, webcasts, podcasts or downloadable trial
software by including their content in our periodic e-mail updates to
registered users of our websites. Users who have voluntarily registered on
our websites receive an e-mail update from us when vendor content directly
related to their interests is listed on our
sites.
|
-
|
List
Rentals.
We also offer IT vendors the ability to message
relevant registered members on topics related to their interests. IT
vendors can rent our e-mail and postal lists of registered members using
specific criteria such as company size, geography or job
title.
|
-
|
Contextual
Advertising.
Our contextual advertising programs
associate IT vendor white papers, webcasts, podcasts or other content on a
particular topic with our related sector-specific content. IT vendors have
the option to purchase exclusive sponsorship of content related to their
product or category.
|
Events.
Events
revenue represented 26%, 25% and 22% of total revenues for the years ended
December 31, 2007, 2006 and 2005, respectively. Most of our media groups
operate revenue generating events. The majority of our events are free to IT
professionals and are sponsored by IT vendors. Attendees are pre-screened based
on event-specific criteria such as sector-specific budget size, company size, or
job title. We offer three types of events: multi-day conferences, single-day
seminars and custom events. Multi-day conferences provide independent expert
content for our attendees and allow vendors to purchase exhibit space and other
sponsorship offerings that enable interaction with the attendees. We also hold
single-day seminars on various topics in major cities. These seminars provide
independent content on key sub-topics in the sectors we serve, are free to
qualified attendees, and offer multiple vendors the ability to interact with
specific, targeted audiences actively focused on buying decisions. Our custom
events differ from our conferences and seminars in that they are exclusively
sponsored by a single IT vendor, and the content is driven primarily by the sole
sponsor.
Print.
Print
revenue represented 7%, 10% and 13% of total revenues for the years ended
December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, we
publish monthly two controlled-circulation magazines that are free to
subscribers and generate revenue solely based on advertising fees. The highly
targeted magazines we publish are:
Storage
magazine (Storage
Media Group), which we began publishing in 2002; and
Information Security
magazine
(Security Media Group), which we began publishing in 2003. We
discontinued publishing
CIO
Decisions
magazine in November 2007. Our magazines provide
readers with strategic guidance on important enterprise-level technology
decisions. We expect print revenue to decrease as a percentage of total
revenue in the foreseeable future.
Cost
of Revenues, Operating Expenses and Other
Expenses
consist of cost of revenues, selling and marketing, product development, general
and administrative, depreciation, and amortization expenses. Personnel-related
costs are a significant component of most of these expense categories. We grew
from 307 employees at December 31, 2004 to 584 employees at
December 31, 2007. We expect personnel-related expenses to continue to
increase in absolute dollars, but to decline over time as a percentage of total
revenues due to anticipated economies of scale in our business support
functions.
Cost of Online
Revenue.
Cost of online revenue consists primarily of:
salaries and related personnel costs; member acquisition expenses (primarily
keyword purchases from leading Internet search sites); freelance writer
expenses; website hosting costs; vendor expenses associated with the delivery of
webcast, podcast and list rental offerings; stock-based compensation expenses;
and related overhead.
Cost of Events
Revenue.
Cost of events revenue consists primarily of:
facility expenses, including food and beverages for the event attendees;
salaries and related personnel costs; event speaker expenses; stock-based
compensation expenses; and related overhead.
Cost of Print
Revenue.
Cost of print revenue consists primarily of: printing
and graphics expenses; mailing costs; salaries and related personnel costs;
freelance writer expenses; subscriber acquisition expenses (primarily
telemarketing); stock-based compensation expenses; and related
overhead.
Selling and
Marketing.
Selling and marketing expense consists primarily
of: salaries and related personnel costs; sales commissions; travel, lodging and
other out-of-pocket expenses; stock-based compensation expenses; and related
overhead. Sales commissions are recorded as expense when earned by the
employee.
Product
Development.
Product development includes the creation and
maintenance of our network of websites, advertiser offerings and technical
infrastructure. Product development expense consists primarily of salaries and
related personnel costs; stock-based compensation expenses; and related
overhead.
General and
Administrative.
General and administrative expense consists
primarily of: salaries and related personnel costs; facilities expenses;
accounting, legal and other professional fees; stock-based compensation
expenses; and related overhead. General and administrative expense may continue
to increase as a percentage of total revenue for the foreseeable future as we
invest in infrastructure to support continued growth and incur additional
expenses related to being a publicly traded company, including increased audit
and legal fees, costs of compliance with securities and other regulations,
investor relations expense, and higher insurance premiums.
Depreciation.
Depreciation
expense consists of the depreciation of our property and equipment. Depreciation
of property and equipment is calculated using the straight-line method over
their estimated useful lives ranging from three to five years.
Amortization of Intangible
Assets.
Amortization of intangible assets expense consists of
the amortization of intangible assets recorded in connection with our
acquisitions. Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives using the straight-line
method over periods ranging from one to nine years.
Interest Income (Expense),
Net.
Interest income (expense) net consists primarily of
interest income earned on cash and cash equivalent balances less interest
expense incurred on bank term loan balances. We historically have invested our
cash in money market accounts, commercial paper corporate debt securities,
municipal bonds, auction rate securities and variable rate demand
notes.
Application
of Critical Accounting Policies and Use of Estimates
The
discussion of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates,
judgments and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue, long-lived assets, the allowance for doubtful accounts,
stock-based compensation, and income taxes. We based our estimates of the
carrying value of certain assets and liabilities on historical experience and on
various other assumptions that we believe to be reasonable. In many cases, we
could reasonably have used different accounting policies and estimates. In some
cases, changes in the accounting estimates are reasonably likely to occur from
period to period. Our actual results may differ from these estimates under
different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments used in the preparation of our consolidated financial statements. See
the notes to our financial statements for information about these critical
accounting policies as well as a description of our other accounting
policies.
Revenue
Recognition
We
generate substantially all of our revenue from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications. We recognize this revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 104,
Revenue Recognition
, and
Financial Accounting Standards Board's, or FASB, Emerging Issues Task Force, or
EITF, Issue No. 00-21,
Revenue Arrangement With Multiple
Deliverables
. In all cases, we recognize revenue only when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service
is performed and collectibility of the resulting receivable is reasonably
assured.
Online.
We
recognize revenue from our specific online media offerings as
follows:
-
|
White
Papers.
We recognize white paper revenue ratably in the
period in which the white paper is available on our
websites.
|
-
|
Webcasts and
Podcasts.
We recognize webcast revenue in the period in
which the webcast occurs. We recognize podcast revenue in the period in
which it is posted and becomes available on our
websites.
|
-
|
Software Package
Comparisons.
We recognize software package comparison
revenue ratably over the period in which the software information is
available on our websites.
|
-
|
Dedicated E-mails and
E-newsletters.
We recognize dedicated e-mail and
e-newsletter revenue in the period in which the e-mail or e-newsletter is
sent.
|
-
|
List
Rentals.
We recognize list rental revenue in the period
in which the e-mails are sent to the list of registered
members.
|
-
|
Banners.
We
recognize banner revenue in the period in which the banner impressions
occur.
|
We offer
customers the ability to purchase integrated ROI program offerings, which can
include any of our online media offerings packaged together to address the
particular customer's specific advertising requirements. As part of these
offerings, we will guarantee a minimum number of qualified sales leads to be
delivered over the course of the advertising campaign. 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 advertising
campaign is extended, and we will defer recognition of revenue in an amount
equal to the value of the estimated inventory that will be required to fulfill
the guarantee. These estimates are based on our extensive experience in managing
and fulfilling these integrated ROI program offerings. Typically, shortfalls in
fulfilling lead guarantees before the scheduled completion date of an
advertising campaign are satisfied within an average of 45 days of such
scheduled completion date.
As of
December 31, 2007, substantially all of the integrated ROI program
offerings that have guaranteed a minimum number of qualified sales leads have
been delivered within the original contractual term. Integrated ROI program
offerings have not required us to defer a more than $25,000 in any quarter
during 2007, nor have we been required to refund or extend payment terms to
customers to account for these guarantees. These integrated ROI program
offerings represented approximately 35% and 29% of our online revenues, and 23%
and 19% of our total revenues for the years ended December 31, 2007 and
2006, respectively.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
While
each of our online media offerings can be sold separately, most of our online
media sales involve multiple online offerings. At inception of the arrangement,
we evaluate 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 our
control. We allocate 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 we recognize revenue on all items over the term of the
arrangement.
Events.
We
recognize event sponsorship revenue upon completion of the event in the period
the event occurs. The majority of our events are free to qualified attendees,
however certain events are based on a paid attendee model. We recognize revenue
for paid attendee events upon completion of the event and receipt of payment
from the attendee. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are recorded as deferred revenue.
Print.
We
recognize print revenue at the time the applicable magazine is distributed.
Amounts collected or billed prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue.
Stock-Based
Compensation Expense
Through
December 31, 2005, we accounted for stock option grants in accordance with
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to
Employees
, and complied with the disclosure provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based
Compensation
, as amended by SFAS No. 148,
Accounting for Stock-Based
Compensation—Transition and Disclosure
. Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic value of options
(the difference between the deemed fair value of our common stock and the option
exercise price) at the grant date and is amortized ratably over the option's
vesting period. We also accounted for non-employee option grants on a
fair-value basis using the Black-Scholes model and recognized this expense over
the applicable vesting period.
On
January 1, 2006, we adopted the requirements of SFAS No. 123(R),
Share Based Payment
. SFAS
No. 123(R) requires us to measure the cost of employee services received in
exchange for an award of equity instruments, based on the fair value of the
award on the date of grant, and to recognize the cost over the period during
which the employee is required to provide the services in exchange for the
award. We adopted SFAS 123(R) using the prospective method, which requires
us to apply its provisions only to stock-based awards to employees granted on or
after January 1, 2006. For the years ended December 31, 2007 and 2006,
we recorded expense of $5.83 million and $1.25 million, respectively,
in connection with share-based payment awards. Unrecognized stock-based
compensation expense for non-vested options and restricted stock awards of
$18.9 million and $8.7 million is expected to be recognized using the
straight-line method over a weighted-average period of 1.65 years and 2.05
years, respectively. The actual amount of stock-based compensation expense we
record in any fiscal period will depend on a number of factors, including the
number of equity instruments issued and the volatility of our stock price over
time.
Long-Lived
Assets
Our
long-lived assets consist of property and equipment, goodwill and other
intangible assets. Goodwill and other intangible assets have arisen principally
from our acquisitions. The amount assigned to intangible assets is subjective
and based on our estimates of the future benefit of the intangible assets using
accepted valuation techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, other than goodwill, are amortized over their
estimated useful lives, which we determined based on the consideration of
several factors including the period of time the asset is expected to remain in
service. We evaluate the carrying value and remaining useful lives of long-lived
assets, other than goodwill, whenever indicators of impairment are present. We
evaluate the carrying value of goodwill annually, and whenever indicators of
impairment are present. Because we have one reporting segment under SFAS No.
142,
Goodwill and Other
Intangible Assets,
we utilize the entity-wide approach to assess goodwill
for impairment and compare our market value to our net book value to determine
if an impairment exists.
Income
Taxes
We are
subject to income taxes in both the United States and foreign jurisdictions, and
we use estimates in determining our provision for income taxes. We account for
income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates.
Our
deferred tax assets are comprised primarily of net operating loss, or NOL,
carryforwards. As of December 31, 2007, we had federal and state NOL
carryforwards of approximately $18.1 million and $18.2 million,
respectively, which may be used to offset future taxable income. The NOL
carryforwards expire at various times through 2027, and are subject to review
and possible adjustment by the Internal Revenue Service. The Internal Revenue
Code contains provisions that limit the NOL and tax credit carryforwards
available to be used in any given year in the event of certain changes in the
ownership interests of significant stockholders. The federal NOL carryforwards
of $18.1 million available at December 31, 2007 were acquired from
KnowledgeStorm and are subject to limitations on their use in future
years.
In
evaluating the ability to realize our net deferred tax assets, we consider all
available evidence, both positive and negative, including past operating
results, the existence of cumulative losses in the most recent fiscal years, tax
planning strategies that are prudent, and feasible and forecasts of future
taxable income. In 2005, we reversed a $6.75 million valuation allowance because
sufficient positive evidence existed to ascertain that it was more likely than
not that we would be able to realize our deferred tax assets. This conclusion
was based on our operating performance over the past few years and our operating
plans for the foreseeable future. In the event that we are unable to generate
taxable earnings in the future and determine that it is more likely than not
that we can not realize our deferred tax assets, an adjustment to the valuation
allowance would be made which may decrease income in the period that such
determination is made, and may increase income in subsequent
periods.
We
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. We did not
recognize any liability for unrecognized tax benefits as a result of adopting
FIN 48 on January 1, 2007 and during the year ended December 31,
2007.
Net
Income (Loss) Per Share
We
calculate net income (loss) per share in accordance with SFAS No. 128,
Earnings
Per Share
(SFAS No. 128). Through May 17, 2007, we calculated net income
per share in accordance with SFAS No. 128, 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.
Effective for periods beginning after March 31, 2004, EITF Issue No. 03-6
provides guidance on how to determine whether a security should be considered a
"participating security" for purposes of computing earnings per share and how
earnings should be allocated to a participating security when using the
two-class method for computing basic earnings per share. We determined that our
convertible preferred stock represented a participating security and therefore
adopted the provisions of EITF Issue No. 03-6.
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. We allocate net income first to
preferred stockholders based on dividend rights under our charter and then to
preferred and common stockholders based on ownership interests. Net losses are
not allocated to preferred stockholders.
As of May
16, 2007, the effective date of our initial public offering, we
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. In calculating diluted earnings per
share for the period January 1, 2007 to May 16, 2007 shares related to
redeemable convertible preferred stock were excluded because they were
anti-dilutive. In calculating diluted earnings per share for 2006 and 2005,
shares related to redeemable convertible preferred stock and outstanding stock
options and warrants were excluded because they were anti-dilutive.
Subsequent
to our initial public offering, basic earnings per share is computed based
only on the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding during the period, plus the dilutive effect of
potential future issuances of common stock relating to stock option programs and
other potentially dilutive securities using the treasury stock method. In
calculating diluted earnings per share, the dilutive effect of stock options is
computed using the average market price for the respective period. In addition,
under SFAS No. 123(R), the assumed proceeds under the treasury stock method
include the average unrecognized compensation expense 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.
Allowance
for Doubtful Accounts
We reduce
gross trade accounts receivable with an allowance for doubtful accounts. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review our allowance for
doubtful accounts on a regular basis, and all past due balances are reviewed
individually for collectibility. Account balances are charged against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Provisions for allowance for doubtful
accounts are recorded in general and administrative expense. If our historical
collection experience does not reflect our future ability to collect outstanding
accounts receivables, our future provision for doubtful accounts could be
materially affected. To date, we have not incurred any write-offs of accounts
receivable significantly different than the amounts reserved. As of
December 31, 2007 and 2006, the allowance for doubtful accounts was $424
and $580, respectively.
Results
of Operations
The
following table sets forth our results of operations for the periods
indicated:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
63,686
|
|
|
|
67
|
%
|
|
$
|
51,176
|
|
|
|
65
|
%
|
|
$
|
43,662
|
|
|
|
65
|
%
|
Events
|
|
|
24,254
|
|
|
|
26
|
|
|
|
19,708
|
|
|
|
25
|
|
|
|
14,595
|
|
|
|
22
|
|
Print
|
|
|
6,725
|
|
|
|
7
|
|
|
|
8,128
|
|
|
|
10
|
|
|
|
8,489
|
|
|
|
13
|
|
Total
revenues
|
|
|
94,665
|
|
|
|
100
|
|
|
|
79,012
|
|
|
|
100
|
|
|
|
66,746
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
15,575
|
|
|
|
17
|
|
|
|
12,988
|
|
|
|
16
|
|
|
|
10,476
|
|
|
|
16
|
|
Events
|
|
|
8,611
|
|
|
|
9
|
|
|
|
6,493
|
|
|
|
8
|
|
|
|
6,202
|
|
|
|
9
|
|
Print
|
|
|
3,788
|
|
|
|
4
|
|
|
|
5,339
|
|
|
|
7
|
|
|
|
5,322
|
|
|
|
8
|
|
Total
cost of revenues
|
|
|
27,974
|
|
|
|
30
|
|
|
|
24,820
|
|
|
|
31
|
|
|
|
22,000
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
66,691
|
|
|
|
70
|
|
|
|
54,192
|
|
|
|
69
|
|
|
|
44,746
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
28,048
|
|
|
|
30
|
|
|
|
20,305
|
|
|
|
26
|
|
|
|
18,174
|
|
|
|
27
|
|
Product
development
|
|
|
7,320
|
|
|
|
8
|
|
|
|
6,295
|
|
|
|
8
|
|
|
|
5,756
|
|
|
|
9
|
|
General
and administrative
|
|
|
12,592
|
|
|
|
13
|
|
|
|
8,756
|
|
|
|
11
|
|
|
|
7,617
|
|
|
|
11
|
|
Depreciation
|
|
|
1,610
|
|
|
|
2
|
|
|
|
1,144
|
|
|
|
1
|
|
|
|
1,792
|
|
|
|
3
|
|
Amortization
of intangible assets
|
|
|
4,740
|
|
|
|
5
|
|
|
|
5,029
|
|
|
|
6
|
|
|
|
5,172
|
|
|
|
8
|
|
Total
operating expenses
|
|
|
54,310
|
|
|
|
58
|
|
|
|
41,529
|
|
|
|
53
|
|
|
|
38,511
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
12,381
|
|
|
|
13
|
|
|
|
12,663
|
|
|
|
16
|
|
|
|
6,235
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
1,831
|
|
|
|
2
|
|
|
|
321
|
|
|
|
*
|
|
|
|
(30
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for (benefit from) income taxes
|
|
|
14,212
|
|
|
|
15
|
|
|
|
12,984
|
|
|
|
16
|
|
|
|
6,205
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
6,046
|
|
|
|
6
|
|
|
|
5,811
|
|
|
|
7
|
|
|
|
(2,681
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,166
|
|
|
|
9
|
%
|
|
$
|
7,173
|
|
|
|
9
|
%
|
|
$
|
8,886
|
|
|
|
13
|
%
|
* Percentage
not meaningful.
Comparison
of Fiscal Years Ended December 31, 2007 and 2006
Revenues
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online.
The
increase in online revenue was attributable to a $14.7 million increase in
revenue from lead generation offerings due primarily to an increase in webcast
and white paper sales volumes as well as revenues from TechnologyGuide.com,
which we acquired in April 2007 and KnowledgeStorm, which we acquired in
November 2007. The increase is offset by a $2.3 million decrease in revenue from
branding offerings due primarily to decreases in banner and e-newsletter sales
volume.
Events.
The
increase in events revenue was primarily attributable to a $4.2 million
increase in seminar series revenue due to an increase in the number of seminar
series events produced in 2007 as compared to 2006.
Print.
The
decrease in print revenue was attributable to the continued shift of advertising
budgets towards online offerings. Additionally, we discontinued
publishing
CIO
Decisions
magazine in November 2007.
Cost
of Revenues and Gross Profit
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Online
Revenue.
The increase in cost of online revenue was in part
attributable to a $888,000 increase in member acquisition expenses, primarily
related to keyword purchases for 2020software.com which we acquired in
May 2006. The increase also reflects $594,000 in additional webcast cost of
sales due to increased webcast sales volume in 2007. Approximately
$516,000 of the increase is attributable to salaries and benefits due to an
increase in average headcount of 10 employees in our online editorial and
operations organizations, as well as an additional $193,000 related to increased
freelancer expenses in 2007. We increased headcount and freelancers expenditures
to support the increase in online revenue volume and to provide additional
editorial content. Approximately $420,000 of the increase related to
the acquisition of KnowledgeStorm, which we completed in November
2007.
Cost of Events
Revenue.
The increase in cost of events revenue was primarily
attributable to a $1.2 million increase in seminar and custom event cost of
sales due to an increase in the number of seminar series and custom events
produced in 2007 as compared to 2006. Approximately $547,000 of the
increase was related to salaries, bonuses, benefits and temporary staffing
expenses to support the increase in seminar series and custom event
volume. Three additional multi-day conferences were held in 2007 as
compared to 2006 resulting in increased conference expenses of approximately
$305,000.
Cost of Print
Revenue.
The decrease in cost of print revenue was
attributable to our efforts in 2007 to reduce production costs for all three
magazines in response to our customer’s advertising budgets continuing to shift
away from print and towards online offerings. Additionally, we
discontinued publishing
CIO
Decisions
magazine in November 2007.
Gross Profit.
The
increase in gross profit reflects a $9.9 million increase in online gross profit
and a $2.4 million increase in events gross profit. The increase in online
gross profit is attributable to an increase in online revenue at a consistent
gross profit percentage. The increase in events gross profit is attributable to
an increase in custom event and seminar series revenue at a higher gross profit
percentage on these events when compared to 2006. We expect our gross profit to
fluctuate from period to period depending on our mix of revenues.
Operating
Expenses and Other
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percent
change not meaningful.
Selling and
Marketing.
The increase in selling and marketing expense was
primarily attributable to a $3.9 million increase in salaries, commissions, and
benefits related to an increase in average headcount of 45 employees in our
sales and marketing organizations, as well as increases to employee
compensation. The increase in headcount was to support the growth in revenues.
The increase also reflects a $2.4 million increase in stock-based compensation
expense and a $347,000 increase in travel expense resulting from the growth in
sales personnel. Approximately $945,000 of selling and marketing
expense related to the results of operations of KnowledgeStorm which we acquired
in November 2007.
Product
Development.
The increase in product development expense was
primarily attributable to $612,000 of expense related to the results of
operations of KnowledgeStorm which we acquired in November 2007. An
additional $144,000 of the increase was for consulting expenses related to IT
infrastructure improvements to support the growing number of online
offerings. The increase also reflects a $244,000 increase in
stock-based compensation.
General and
Administrative.
The increase in general and administrative
expense was primarily attributable to a $1.8 million increase in stock-based
compensation and a $482,000 increase in other employee
compensation. The increase was also attributable to a $955,000
increase in audit, legal, and insurance expenses related to operating as a
publicly traded company since May 2007. The increase also reflects a
$259,000 increase in facilities expense due to leasing additional office space
in our Needham, MA headquarters beginning in July 2007.
Depreciation.
The
increase in depreciation expense was attributable to purchases of property and
equipment of $2.7 million in the year ended December 31, 2007 compared to $1.3
million in 2006.
Amortization of Intangible
Assets.
The decrease in amortization of intangible assets
expense was attributable to intangible assets related to acquisitions in prior
years becoming fully amortized, offset in part by the amortization of intangible
assets related to our acquisitions of TechnologyGuide.com in May 2007 and
KnowledgeStorm in November 2007.
Interest Income (Expense),
Net.
The increase in interest income (expense), net reflected
an increase in average cash and short-term investment balances during 2007
compared to 2006.
Provision for Income
Taxes.
The provision for income taxes as a percentage of
income before taxes, or our annual effective tax rate, was 43% in 2007 and 45%
in 2006. The decrease in the effective tax rate was primarily due to
an increase in interest income exempt from Federal taxation.
Comparison
of Fiscal Years Ended December 31, 2006 and 2005
Revenues
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online.
The
increase in online revenue was attributable to a $5.2 million increase in
revenue from lead generation offerings due primarily to an increase in software
package comparison and webcast sales volumes. The increase also reflects a
$2.6 million increase in revenue from branding offerings due primarily to
an increase in banner sales volume.
Events.
The
increase in events revenue was attributable to a $3.0 million increase in
seminar series revenue and a $2.2 million increase in custom event revenue.
We introduced both custom event and seminar series offerings in 2005 and,
therefore, more events associated with these revenue streams were produced in
2006 as compared to 2005.
Print.
The
decrease in print revenue was attributable to the continued shift of advertising
budgets towards online offerings.
Cost
of Revenues and Gross Profit
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Online
Revenue.
The increase in cost of online revenue was
attributable to a $1.2 million increase in member acquisition expenses
primarily related to keyword purchases for 2020software.com, which we acquired
in May 2006. The increase also reflects a $857,000 increase in salaries and
benefits primarily related to an increase in average headcount of 19 employees
in our online editorial and operations organizations, as well as increases in
employee compensation. We increased headcount to support the increase in online
revenue volume and to provide additional editorial content.
Cost of Events
Revenue.
The increase in cost of events revenue was primarily
attributable to a $801,000 increase in salaries and benefits primarily related
to an increase in average headcount of 20 employees in our event organizations,
as well as increases in employee compensation. We increased headcount to support
the increase in seminar series and custom event volume. The increase was offset
in part by a decrease in hotel related costs associated with the operation of
multi-day conferences.
Cost of Print
Revenue.
The increase in cost of print revenue was
attributable to three additional months of publishing
CIO Decisions
magazine during
2006 compared to 2005, offset primarily by a decrease in non-compensation
related expenses incurred publishing our other two magazines.
Gross Profit.
The
increase in gross profit reflects a $5.0 million increase in online gross
profit and a $4.8 million increase in events gross profit. The increase in
online gross profit is attributable to an increase in online revenue at a
consistent gross profit percentage. The increase in events gross profit is
attributable to an increase in custom event and seminar series revenue at a
higher gross profit percentage on these events when compared to 2005. We expect
our gross profit to fluctuate from period to period depending on our mix of
revenues.
Operating
Expenses and Other
|
|
For
the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
($
in thousands)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percent
change not meaningful.
Selling and
Marketing.
The increase in selling and marketing expense was
primarily attributable to a $884,000 increase in salaries, commissions, and
benefits related to an increase in average headcount of 22 employees in our
sales and marketing organizations, as well as increases to employee
compensation. The increase in headcount was to support the growth in revenues.
The increase also reflects a $606,000 increase in stock-based compensation and a
$498,000 increase in travel expense resulting from the growth in sales
personnel.
Product
Development.
The increase in product development expense was
primarily attributable to a $369,000 increase in salaries and benefits primarily
related to an increase in average headcount of six employees in our product
development organizations, as well as increases in employee compensation. We
increased our headcount to support the growing number of online offerings and to
maintain and upgrade our IT infrastructure.
General and
Administrative.
The increase in general and administrative
expense was primarily attributable to a $553,000 increase in employee
compensation and a $491,000 increase in bad debt expense. The increase in bad
debt expense was attributable to bad debt expense of $366,000 in 2006 compared
to ($124,000) in 2005 due to a reduction in the allowance for doubtful accounts
recorded in 2005.
Depreciation.
The
decrease in depreciation expense was attributable to a change effective
January 1, 2006, in the estimated useful life for computer equipment and
software from two years to three years to more closely approximate the service
lives of the assets placed in service to date.
Amortization of Intangible
Assets.
The decrease in amortization of intangible assets
expense was attributable to intangible assets related to acquisitions in prior
years becoming fully amortized, offset in part by the amortization of intangible
assets related to our acquisition of 2020software.com in
May 2006.
Interest Income (Expense),
Net.
The increase in interest income (expense), net reflected
an increase in interest income attributable to higher interest rates in
2006.
Provision for Income
Taxes.
We recorded a provision for income taxes in 2006 based
upon a 45% effective tax rate. Our effective tax rate increased after the
adoption of SFAS No. 123(R) because stock-based compensation is a
nondeductible expense in our tax provision. The provision for income taxes is
net of an $85,000 deferred tax benefit recorded to revalue our deferred tax
assets using a federal tax rate of 35%. The $2.7 million benefit from
income taxes in 2005 was primarily attributable to the release of the valuation
allowance against our deferred tax assets. In the fourth quarter of 2005, we
determined that it was more likely than not that we would generate sufficient
future taxable income from operations to realize tax benefits arising from the
use of our existing net operating loss carryforwards.
Selected
Quarterly Results of Operations
The
following table presents our unaudited quarterly consolidated results of
operations and our unaudited quarterly consolidated results of operations as a
percentage of revenue for the eight quarters ended December 31, 2007. The
unaudited quarterly consolidated information has been prepared on the same basis
as our audited consolidated financial statements. You should read the following
table presenting our quarterly consolidated results of operations in conjunction
with our audited consolidated financial statements and the related notes
included elsewhere in this prospectus. The operating results for any quarter are
not necessarily indicative of the operating results for any future
period
.
|
|
For
the Three Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Mar.
31
|
|
|
Jun.
30
|
|
|
Sep.
30
|
|
|
Dec.
31
|
|
|
Mar.
31
|
|
|
Jun.
30
|
|
|
Sep.
30
|
|
|
Dec.
31
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
13,709
|
|
|
$
|
16,330
|
|
|
$
|
14,687
|
|
|
$
|
18,960
|
|
|
$
|
10,375
|
|
|
$
|
12,812
|
|
|
$
|
12,565
|
|
|
$
|
15,424
|
|
Events
|
|
|
2,939
|
|
|
|
6,350
|
|
|
|
6,912
|
|
|
|
8,053
|
|
|
|
2,327
|
|
|
|
5,742
|
|
|
|
5,893
|
|
|
|
5,746
|
|
Print
|
|
|
1,697
|
|
|
|
1,924
|
|
|
|
1,702
|
|
|
|
1,402
|
|
|
|
2,209
|
|
|
|
2,163
|
|
|
|
1,809
|
|
|
|
1,947
|
|
Total
revenues
|
|
|
18,345
|
|
|
|
24,604
|
|
|
|
23,301
|
|
|
|
28,415
|
|
|
|
14,911
|
|
|
|
20,717
|
|
|
|
20,267
|
|
|
|
23,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
3,525
|
|
|
|
3,900
|
|
|
|
3,769
|
|
|
|
4,381
|
|
|
|
2,621
|
|
|
|
2,992
|
|
|
|
3,644
|
|
|
|
3,731
|
|
Events
|
|
|
1,372
|
|
|
|
2,410
|
|
|
|
2,283
|
|
|
|
2,546
|
|
|
|
1,274
|
|
|
|
1,735
|
|
|
|
1,632
|
|
|
|
1,852
|
|
Print
|
|
|
1,129
|
|
|
|
999
|
|
|
|
862
|
|
|
|
798
|
|
|
|
1,407
|
|
|
|
1,423
|
|
|
|
1,385
|
|
|
|
1,124
|
|
Total
cost of revenues
|
|
|
6,026
|
|
|
|
7,309
|
|
|
|
6,914
|
|
|
|
7,725
|
|
|
|
5,302
|
|
|
|
6,150
|
|
|
|
6,661
|
|
|
|
6,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
12,319
|
|
|
|
17,295
|
|
|
|
16,387
|
|
|
|
20,690
|
|
|
|
9,609
|
|
|
|
14,567
|
|
|
|
13,606
|
|
|
|
16,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
6,152
|
|
|
|
6,388
|
|
|
|
7,271
|
|
|
|
8,237
|
|
|
|
4,432
|
|
|
|
5,191
|
|
|
|
4,932
|
|
|
|
5,750
|
|
Product
development
|
|
|
1,748
|
|
|
|
1,596
|
|
|
|
1,677
|
|
|
|
2,299
|
|
|
|
1,564
|
|
|
|
1,559
|
|
|
|
1,617
|
|
|
|
1,555
|
|
General
and administrative
|
|
|
2,610
|
|
|
|
2,943
|
|
|
|
3,364
|
|
|
|
3,675
|
|
|
|
1,791
|
|
|
|
2,084
|
|
|
|
2,126
|
|
|
|
2,755
|
|
Depreciation
|
|
|
330
|
|
|
|
364
|
|
|
|
401
|
|
|
|
515
|
|
|
|
218
|
|
|
|
238
|
|
|
|
241
|
|
|
|
447
|
|
Amortization
of intangible assets
|
|
|
759
|
|
|
|
1,041
|
|
|
|
1,171
|
|
|
|
1,769
|
|
|
|
1,084
|
|
|
|
1,424
|
|
|
|
1,378
|
|
|
|
1,143
|
|
Total
operating expenses
|
|
|
11,599
|
|
|
|
12,332
|
|
|
|
13,884
|
|
|
|
16,495
|
|
|
|
9,089
|
|
|
|
10,496
|
|
|
|
10,294
|
|
|
|
11,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
720
|
|
|
|
4,963
|
|
|
|
2,503
|
|
|
|
4,195
|
|
|
|
520
|
|
|
|
4,071
|
|
|
|
3,312
|
|
|
|
4,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(67
|
)
|
|
|
377
|
|
|
|
897
|
|
|
|
624
|
|
|
|
96
|
|
|
|
42
|
|
|
|
(16
|
)
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
653
|
|
|
|
5,340
|
|
|
|
3,400
|
|
|
|
4,819
|
|
|
|
616
|
|
|
|
4,113
|
|
|
|
3,296
|
|
|
|
4,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
336
|
|
|
|
2,092
|
|
|
|
1,568
|
|
|
|
2,050
|
|
|
|
175
|
|
|
|
1,739
|
|
|
|
1,709
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
317
|
|
|
$
|
3,248
|
|
|
$
|
1,832
|
|
|
$
|
2,769
|
|
|
$
|
441
|
|
|
$
|
2,374
|
|
|
$
|
1,587
|
|
|
$
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share basic
|
|
$
|
(0.28
|
)
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.00
|
|
Net
income (loss) per share diluted
|
|
$
|
(0.28
|
)
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.00
|
|
Seasonality
The
timing of our revenues is affected by seasonal factors. Our revenues are
seasonal primarily as a result of the annual budget approval process of many of
our customers and the historical decrease in advertising activity in July and
August. Revenues are usually the lowest in the first quarter of each calendar
year, increase during the second quarter, decrease during the third quarter, and
increase again during the fourth quarter. Events revenue may vary depending on
which quarters we produce the event, which may vary when compared to previous
periods. The timing of revenues in relation to our expenses, much of which does
not vary directly with revenue, has an impact on the cost of online revenue,
selling and marketing, product development, and general and administrative
expenses as a percentage of revenue in each calendar quarter during the
year.
The
majority of our expenses are personnel-related and include salaries, stock-based
compensation, benefits and incentive-based compensation plan expenses. As a
result, we have not experienced significant seasonal fluctuations in the timing
of our expenses period to period.
Liquidity
and Capital Resources
|
|
As
of and for the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands)
|
|
Cash,
cash equivalents and short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in investing activities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cash
used in investing activities shown net of short-term investment
activity.
Cash,
Cash Equivalents and Short-Term Investments
Our cash,
cash equivalents and short-term investments at December 31, 2007 were held
for working capital purposes and were invested primarily in money market
accounts, municipal bonds, auction rate securities and variable rate demand
notes. We do not enter into investments for trading or speculative
purposes.
At March
20, 2008, we held $6.2 million in auction rate securities. 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. These auctions have
historically provided a liquid market for these securities. In
February and March 2008, our investment in auction rate securities of $6.2
million failed at auction due to sell orders exceeding buy orders. Our ability
to liquidate our auction rate securities and fully recover the carrying value
of our auction rate securities in the near term may be limited or not exist
and we may in the future be required to record an impairment charge on these
investments. The vast majority of our auction rate securities, including those
that have failed, were rated AAA at the time of purchase. We believe we will be
able to liquidate our investments without significant loss within the next year,
and we currently believe these securities are not impaired, primarily due to the
credit worthiness of the issuers of the underlying securities and their ability
to refinance if auctions continue to fail. However, it could take until the
final maturity of the underlying notes (up to 25 years) to realize its
investments' recorded value.
Accounts
Receivable, Net
Our
accounts receivable balance fluctuates from period to period, which affects our
cash flow from operating activities. The fluctuations vary depending on the
timing of our service delivery and billing activity, cash collections, and
changes to our allowance for doubtful accounts. We use days' sales outstanding,
or DSO, calculated on a monthly basis, as a measurement of the quality and
status of our receivables. We define DSO as accounts receivable divided by total
revenue for the applicable period, multiplied by the number of days in the
applicable period. DSO was 55 days at December 31, 2007, 51 days
at December 31, 2006 and 46 days at December 31,
2005.
Operating
Activities
Cash
provided by operating activities primarily consists of net income (loss)
adjusted for certain non-cash items including depreciation and amortization,
provision for bad debt, stock-based compensation, deferred income taxes, and the
effect of changes in working capital and other activities. Cash provided by
operating activities for the year ended December 31, 2007 was
$13.3 million, compared to $12.3 million and $11.3 million in the years
ended December 31, 2006 and 2005, respectively, primarily due to increased
profitability.
Investing
Activities
Cash used
in investing activities primarily consists of purchases of property and
equipment and acquisitions of businesses. Cash used in investing activities, net
of short-term investment activity, for the year ended December 31, 2007 was
$67.9 million and consisted of $64.2 million for the acquisitions of
TechnologyGuide.com in April 2007 and KnowledgeStorm in November 2007, net of
cash acquired, $2.7 million for the purchase of property and equipment and
$1.0 million to acquire certain assets of Ajaxian in February
2007. Cash used in investing activities for the year ended December
31, 2006 was $16.3 million and consisted of $15.0 million for the
acquisition of 2020software.com in May 2006 and $1.3 million for the
purchase of property and equipment. Cash used in investing activities for the
year ended December 31, 2005, net of short-term investment activity, was
$1.9 million due primarily to $2.1 million for the purchase of
property and equipment.
Financing
Activities
Cash
provided by financing activities for the year ended December 31, 2007 was $85.8
million. In May 2007, we completed our initial public offering of 8.9
million shares of our common stock, of which 7.1 million shares were sold by us
and 1.8 million shares were sold by stockholders of ours, all at a price to the
public of $13.00 per share. We raised a total of $91.9 million
in gross proceeds from the offering, or $83.2 million in net proceeds after
deducting underwriting discounts and commissions of $6.4 million and other
offering costs of approximately $2.3 million. In addition, we
received proceeds from the exercise of common stock options and warrants of $2.5
million for the year ended December 31, 2007. Cash used in financing
activities for the year ended December 31, 2006 was $12.1 million and consisted
of net principal payments of $13.0 million towards our bank term loan payable,
offset by approximately $892,000 of proceeds from the exercise of common stock
options and warrants. Cash used in financing activities for the year
ended December 31, 2005 was approximately $2.8 million and consisted of net
principal payments of $3.0 million towards our bank term loan payable, offset by
$238,000 of proceeds from the exercise of common stock options and
warrants.
Term
Loan and Credit Facility Borrowings
We
previously maintained a term loan with a commercial bank under which we made
borrowings net of principal repayments of $3.0 million in 2005. On
August 30, 2006, we entered into a credit agreement with Citizens Bank of
Massachusetts, which included a $10.0 million term loan and a
$20.0 million revolving credit facility. Initial borrowings under the
credit agreements were used to pay off the prior principal balance of
$22.0 million and provide working capital. As of December 31, 2007,
outstanding borrowings under the credit agreements were
$6.0 million.
Our
revolving credit facility matures on August 30, 2011. Unless earlier
payment is required by an event of default, all principal and any unpaid
interest will be due and payable on August 30, 2011. At our option, the
revolving credit facility bears interest at either the lender's prime rate less
1.00% or the London Interbank Offered Rate, or LIBOR, plus the applicable LIBOR
margin. We are also required to pay an unused line fee on the daily
unused amount of our revolving credit facility at a per annum rate of
0.25%. As of December 31, 2007, unused availability under our
revolving credit facility totaled $20.0 million.
In August
2007, we 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 December 31, 2007, the applicable LIBOR margin was
1.25%.
Our term
loan requires the payment of 39 consecutive monthly installments of $250,000
each, plus interest, the first such installment was due on September 30,
2006, with a final payment of the entire unpaid principal balance due on
December 30, 2009. In September 2006, we entered into an interest rate
swap agreement to mitigate interest rate fluctuation, and fix the interest rate
on the term loan at 6.98%.
Borrowings
under our credit agreements are collateralized by an interest in and lien on all
of our assets and certain other guarantees and pledges. Our credit agreements
contain certain affirmative and negative covenants, which require, among other
things, that we meet certain financial ratio covenants and limit certain capital
expenditures. We were in compliance with all covenants under the credit
agreements as of December 31, 2007.
Capital
Expenditures
We have
made capital expenditures primarily for computer equipment and related software
needed to host our websites, internal-use software development costs, as well as
for leasehold improvements and other general purposes to support our growth. Our
capital expenditures totaled $2.7 million, $1.3 million and $2.1 million
for the years ended December 31, 2007, 2006 and 2005, respectively. We expect to
spend approximately $3.0 million in capital expenditures in 2008 primarily
for website development costs, computer equipment and related software, and
internal-use software development costs. We are not currently party to any
purchase contracts related to future capital expenditures.
Contractual
Obligations and Commitments
As of
December 31, 2007, our principal commitments consist of obligations under
leases for office space and principal and interest payments due under our bank
term loan. The offices are leased under noncancelable operating lease agreements
that expire through January 2013. The following table sets forth our commitments
to settle contractual obligations in cash as of December 31,
2007:
|
|
Payments
Due By Period
|
|
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1
- 3 Years
|
|
|
3
- 5 Years
|
|
|
More
than 5 Years
|
|
|
|
(in
thousands)
|
|
Bank
term loan payable
|
|
$
|
6,000
|
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating
leases
(1)
|
|
|
8,620
|
|
|
|
3,125
|
|
|
|
4,833
|
|
|
|
662
|
|
|
|
-
|
|
Total
|
|
$
|
14,620
|
|
|
$
|
6,125
|
|
|
$
|
7,833
|
|
|
$
|
662
|
|
|
$
|
-
|
|
(1)
|
Operating
lease obligations are net of minimum sublease payments of $76,000 due
under various sublease agreements that expire through July
2008.
|
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
See Note
2 of “Notes to Consolidated Financial Statements” for recent accounting
pronouncements that could have an effect on us.
Item 7A
. Quantitative and Qualitative Disclosures About Market
Risk
Market
risk represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates. Our market risk
exposure is primarily the result of recent auction failures in the auction rate
securities market, fluctuations in foreign exchange rates, and fluctuations in
interest rates. We do not hold or issue financial instruments for trading
purposes.
Auction
Rate Securities Market Risk
At March
20, 2008, we held $6.2 million in auction rate securities. 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. These auctions have
historically provided a liquid market for these securities. In
February and March 2008, our investment in auction rate securities of $6.2
million failed at auction due to sell orders exceeding buy orders. Our
ability to liquidate our auction rate securities and fully recover the carrying
value of our auction rate securities in the near term may be limited or not
exist and we may in the future be required to record an impairment charge on
these investments. The vast majority of our auction rate securities, including
those that have failed, were rated AAA at the time of purchase. We believe we
will be able to liquidate our investments without significant loss within the
next year, and we currently believe these securities are not impaired, primarily
due to the credit worthiness of the issuers of the underlying securities and
their ability to refinance if auctions continue to fail. However, it could take
until the final maturity of the underlying notes (up to 25 years) to realize its
investments' recorded value.
Foreign
Currency Exchange Risk
Our
subsidiary, TechTarget Limited, was established in July 2006 and is located
in London, England. As of December 31, 2007, all of our international
customer agreements have been denominated in U.S. dollars, and aggregate foreign
currency payments made by us through this subsidiary have been less than
$200,000 during the year ended December 31, 2007. We currently believe our
exposure to foreign currency exchange rate fluctuations is financially
immaterial and therefore have not entered into foreign currency hedging
transactions. We continue to review this issue and may consider hedging certain
foreign exchange risks through the use of currency futures or options in the
future.
Interest
Rate Risk
At
December 31, 2007, we had cash, cash equivalents and short-term investments
totaling $62.0 million. These amounts were invested primarily in
money market accounts, municipal bonds, auction rate securities and variable
rate demand notes. The cash and cash equivalents were held for
working capital purposes. We do not enter into investments for
trading or speculative purposes. With the exception of the market
risks associated with the auction rate securities, we believe we do not have any
material exposure to changes in the fair value of our investment portfolio as a
result of changes in interest rates due to the short-term nature of these
investments. Declines in interest rates, however, would reduce future
investment income.
Our
exposure to market risk also relates to the amount of interest expense we must
pay under our revolving credit facility. The advances under this credit facility
bear a variable rate of interest determined as a function of the lender's prime
rate or LIBOR. At December 31, 2007, there were no amounts
outstanding under our revolving credit facility.
Item 8.
Financial Statements and Supplementary
Data
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
[ ]
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
[ ]
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006
and 2005
|
[ ]
|
Consolidated
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit) for the Years Ended December 31, 2007, 2006 and
2005
|
[ ]
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006
and 2005
|
[ ]
|
Notes
to Consolidated Financial Statements
|
[ ]
|
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Stockholders
TechTarget,
Inc.
We have
audited the accompanying consolidated balance sheets of TechTarget, Inc. as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders’ equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of TechTarget, Inc. at
December 31, 2007 and 2006, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123(R),
Share-Based
Payment
. Additionally, as discussed in Note 2 to the consolidated
financial statements, effective January 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109.
/s/ Ernst
& Young LLP
Boston,
Massachusetts
March 21,
2008
TechTarget, Inc.
Consolidated
Balance Sheets
(in
thousands, except share and per share data)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,693
|
|
|
$
|
30,830
|
|
Short-term
investments
|
|
|
51,308
|
|
|
|
-
|
|
Accounts
receivable, net of allowance for doubtful accounts of $424 and $580 as of
December 31, 2007 and 2006, respectively.
|
|
|
15,198
|
|
|
|
12,096
|
|
Prepaid
expenses and other current assets
|
|
|
1,962
|
|
|
|
952
|
|
Deferred
tax assets
|
|
|
2,947
|
|
|
|
1,784
|
|
Total
current assets
|
|
|
82,108
|
|
|
|
45,662
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,401
|
|
|
|
2,520
|
|
Goodwill
|
|
|
88,326
|
|
|
|
36,190
|
|
Intangible
assets, net of accumulated amortization
|
|
|
21,939
|
|
|
|
6,066
|
|
Other
assets
|
|
|
203
|
|
|
|
854
|
|
Deferred
tax assets
|
|
|
2,910
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
199,887
|
|
|
$
|
92,647
|
|
|
|
|
|
|
|
|
|
|
Liabilities,
Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of bank term loan payable
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
Accounts
payable
|
|
|
2,919
|
|
|
|
2,928
|
|
Income
taxes payable
|
|
|
1,031
|
|
|
|
1,854
|
|
Accrued
expenses and other current liabilities
|
|
|
2,473
|
|
|
|
1,904
|
|
Accrued
compensation expenses
|
|
|
2,600
|
|
|
|
2,322
|
|
Deferred
revenue
|
|
|
3,761
|
|
|
|
2,544
|
|
Total
current liabilities
|
|
|
15,784
|
|
|
|
14,552
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
455
|
|
|
|
555
|
|
Bank
term loan payable, net of current portion
|
|
|
3,000
|
|
|
|
6,000
|
|
Total
liabilities
|
|
|
19,239
|
|
|
|
21,107
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 8)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series
A redeemable convertible preferred stock - $0.001 par value; 36,009,488
shares authorized ; 0 and 35,879,971 shares issued
and
outstanding, liquidation preference of $0 and $30,656 at December 31, 2007
and 2006, respectively.
|
|
|
-
|
|
|
|
30,468
|
|
Series
B redeemable convertible preferred stock - $0.001 par value; 51,470,588
shares authorized ; 0 and 51,470,588 shares issued
and
outstanding, liquidation preference of $0 and $88,296 at December 31, 2007
and 2006, respectively.
|
|
|
-
|
|
|
|
88,260
|
|
Series
C redeemable convertible preferred stock - $0.001 par value; 10,141,302
shares authorized ; 0 and 10,141,302 shares issued
and
outstanding, liquidation preference of $0 and $18,058 at December 31, 2007
and 2006, respectively.
|
|
|
-
|
|
|
|
18,038
|
|
Total
redeemable convertible preferred stock
|
|
|
-
|
|
|
|
136,766
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized; no shares issued or
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value per share, 100,000,000 shares authorized;
41,081,616 and 7,969,830 shares issued and outstanding
at
December 31, 2007 and 2006, respectively
|
|
|
41
|
|
|
|
8
|
|
Additional
paid-in capital
|
|
|
209,773
|
|
|
|
-
|
|
Warrants
|
|
|
13
|
|
|
|
105
|
|
Accumulated
other comprehensive loss
|
|
|
(102
|
)
|
|
|
(56
|
)
|
Accumulated
deficit
|
|
|
(29,077
|
)
|
|
|
(65,283
|
)
|
Total
stockholders' equity (deficit)
|
|
|
180,648
|
|
|
|
(65,226
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit)
|
|
$
|
199,887
|
|
|
$
|
92,647
|
|
See
accompanying notes.
TechTarget, Inc.
Consolidated
Statements of Operations
(in
thousands, except share and per share data)
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Online
|
|
$
|
63,686
|
|
|
$
|
51,176
|
|
|
$
|
43,662
|
|
Events
|
|
|
24,254
|
|
|
|
19,708
|
|
|
|
14,595
|
|
Print
|
|
|
6,725
|
|
|
|
8,128
|
|
|
|
8,489
|
|
Total
revenues
|
|
|
94,665
|
|
|
|
79,012
|
|
|
|
66,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
(1)
|
|
|
15,575
|
|
|
|
12,988
|
|
|
|
10,476
|
|
Events
(1)
|
|
|
8,611
|
|
|
|
6,493
|
|
|
|
6,202
|
|
Print
(1)
|
|
|
3,788
|
|
|
|
5,339
|
|
|
|
5,322
|
|
Total
cost of revenues
|
|
|
27,974
|
|
|
|
24,820
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
66,691
|
|
|
|
54,192
|
|
|
|
44,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
(1)
|
|
|
28,048
|
|
|
|
20,305
|
|
|
|
18,174
|
|
Product
development
(1)
|
|
|
7,320
|
|
|
|
6,295
|
|
|
|
5,756
|
|
General
and administrative
(1)
|
|
|
12,592
|
|
|
|
8,756
|
|
|
|
7,617
|
|
Depreciation
|
|
|
1,610
|
|
|
|
1,144
|
|
|
|
1,792
|
|
Amortization
of intangible assets
|
|
|
4,740
|
|
|
|
5,029
|
|
|
|
5,172
|
|
Total
operating expenses
|
|
|
54,310
|
|
|
|
41,529
|
|
|
|
38,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
12,381
|
|
|
|
12,663
|
|
|
|
6,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,815
|
|
|
|
1,613
|
|
|
|
1,219
|
|
Interest
expense
|
|
|
(984
|
)
|
|
|
(1,292
|
)
|
|
|
(1,249
|
)
|
Total
interest income (expense)
|
|
|
1,831
|
|
|
|
321
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for (benefit from) income taxes
|
|
|
14,212
|
|
|
|
12,984
|
|
|
|
6,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
6,046
|
|
|
|
5,811
|
|
|
|
(2,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,166
|
|
|
$
|
7,173
|
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,384,303
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
Diluted
|
|
|
31,346,738
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts
include stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of online revenue
|
|
$
|
189
|
|
|
$
|
87
|
|
|
$
|
-
|
|
Cost
of events revenue
|
|
|
53
|
|
|
|
31
|
|
|
|
-
|
|
Cost
of print revenue
|
|
|
15
|
|
|
|
12
|
|
|
|
-
|
|
Selling
and marketing
|
|
|
2,999
|
|
|
|
606
|
|
|
|
-
|
|
Product
development
|
|
|
334
|
|
|
|
90
|
|
|
|
-
|
|
General
and administrative
|
|
|
2,244
|
|
|
|
424
|
|
|
|
78
|
|
See
accompanying notes.
TechTarget, Inc.
Consolidated
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)
(in
thousands, except share and per share data)
|
|
Redeemable
Convertible Preferred Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Redemption
Value
|
|
|
Number
of Shares
|
|
|
$0.001
Par Value
|
|
|
Number
of Shares
|
|
|
Value
|
|
|
Additional
Paid-In Capital
|
|
|
Warrants
|
|
|
Deferred
Compensation
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
97,491,861
|
|
|
$
|
115,383
|
|
|
|
8,108,248
|
|
|
$
|
8
|
|
|
|
836,010
|
|
|
$
|
(4,548
|
)
|
|
$
|
-
|
|
|
$
|
364
|
|
|
$
|
(33
|
)
|
|
$
|
-
|
|
|
$
|
(58,095
|
)
|
|
$
|
(62,304
|
)
|
Accretion
of redeemable convertible preferred stock
|
|
|
|
|
|
|
10,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,621
|
)
|
Issuance
of common stock from stock options
|
|
|
|
|
|
|
|
|
|
|
141,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Deferred
compensation related to nonqualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
Reclassification
from additional paid-in capital to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,310
|
)
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,886
|
|
|
|
8,886
|
|
Balance,
December 31, 2005
|
|
|
97,491,861
|
|
|
$
|
126,004
|
|
|
|
8,249,973
|
|
|
$
|
8
|
|
|
|
836,010
|
|
|
$
|
(4,548
|
)
|
|
$
|
-
|
|
|
$
|
364
|
|
|
$
|
(28
|
)
|
|
$
|
-
|
|
|
$
|
(59,519
|
)
|
|
$
|
(63,723
|
)
|
Accretion
of redeemable convertible preferred stock
|
|
|
|
|
|
|
10,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,762
|
)
|
Issuance
of common stock from warrants and stock options
|
|
|
|
|
|
|
|
|
|
|
555,867
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,150
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
Retirement
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(836,010
|
)
|
|
|
(1
|
)
|
|
|
(836,010
|
)
|
|
|
4,548
|
|
|
|
(4,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,222
|
|
|
|
1,222
|
|
Reclassification
from additional paid-in capital to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,159
|
)
|
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
(56
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
7,173
|
|
|
|
7,173
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,117
|
|
Balance,
December 31, 2006
|
|
|
97,491,861
|
|
|
$
|
136,766
|
|
|
|
7,969,830
|
|
|
$
|
8
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
(56
|
)
|
|
$
|
(65,283
|
)
|
|
$
|
(65,226
|
)
|
Accretion
of redeemable convertible preferred stock
|
|
|
|
|
|
|
2,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(2,613
|
)
|
Reclassification
from additional paid-in capital to accumulated deficit prior
to
initial
public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,492
|
)
|
|
|
-
|
|
Conversion
of redeemable convertible preferred stock to common stock
|
|
|
(97,491,861
|
)
|
|
|
(139,379
|
)
|
|
|
24,372,953
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
108,822
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
30,532
|
|
|
|
139,734
|
|
Sale
of common stock in initial public offering, net of issuance
costs
|
|
|
|
|
|
|
|
|
|
|
7,072,097
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
83,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,161
|
|
Issuance
of common stock from warrants, stock options and restricted stock
awards
|
|
|
|
1,306,916
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2,862
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,466
|
|
Issuance
of common stock to acquire KnowledgeStorm
|
|
|
|
|
|
|
|
|
|
|
359,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Excess
tax benefit - stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
Reclassification
of preferred stock warrants to other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,834
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
(46
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,166
|
|
|
|
8,166
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,120
|
|
Balance,
December 31, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
|
41,081,616
|
|
|
$
|
41
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
209,773
|
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
(102
|
)
|
|
$
|
(29,077
|
)
|
|
$
|
180,648
|
|
See
accompanying notes.
TechTarget, Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,166
|
|
|
$
|
7,173
|
|
|
$
|
8,886
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,350
|
|
|
|
6,173
|
|
|
|
6,964
|
|
Provision
for bad debt
|
|
|
78
|
|
|
|
366
|
|
|
|
(124
|
)
|
Stock-based
compensation
|
|
|
5,834
|
|
|
|
1,250
|
|
|
|
78
|
|
Non-cash
interest expense
|
|
|
312
|
|
|
|
92
|
|
|
|
24
|
|
Deferred
tax benefit
|
|
|
(921
|
)
|
|
|
174
|
|
|
|
(2,995
|
)
|
Excess
tax benefit - stock options
|
|
|
(3,126
|
)
|
|
|
-
|
|
|
|
-
|
|
Changes
in operating assets and liabilities, net of businesses
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,985
|
)
|
|
|
(3,247
|
)
|
|
|
1,161
|
|
Prepaid
expenses and other current assets
|
|
|
1,703
|
|
|
|
(39
|
)
|
|
|
(300
|
)
|
Other
assets
|
|
|
686
|
|
|
|
(774
|
)
|
|
|
(83
|
)
|
Accounts
payable
|
|
|
(246
|
)
|
|
|
(741
|
)
|
|
|
1,204
|
|
Income
taxes payable
|
|
|
(181
|
)
|
|
|
1,539
|
|
|
|
315
|
|
Accrued
expenses and other current liabilities
|
|
|
(855
|
)
|
|
|
399
|
|
|
|
30
|
|
Accrued
compensation expenses
|
|
|
(2,729
|
)
|
|
|
446
|
|
|
|
(2,305
|
)
|
Deferred
revenue
|
|
|
373
|
|
|
|
(418
|
)
|
|
|
(1,642
|
)
|
Other
liabilities
|
|
|
(157
|
)
|
|
|
(54
|
)
|
|
|
122
|
|
Net
cash provided by operating activities
|
|
|
13,302
|
|
|
|
12,339
|
|
|
|
11,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, and other assets
|
|
|
(2,709
|
)
|
|
|
(1,263
|
)
|
|
|
(2,141
|
)
|
Purchases
of short-term investments
|
|
|
(354,729
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from sales and maturities of short-term investments
|
|
|
303,421
|
|
|
|
-
|
|
|
|
33,000
|
|
Proceeds
from sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
233
|
|
Acquisition
of assets
|
|
|
(1,013
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
(64,162
|
)
|
|
|
(15,017
|
)
|
|
|
-
|
|
Net
cash (used in) provided by investing activities
|
|
|
(119,192
|
)
|
|
|
(16,280
|
)
|
|
|
31,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from revolving credit facility
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
Payments
made on revolving credit facility
|
|
|
(12,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from bank term loan payable
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Payments
on bank term loan payable
|
|
|
(3,000
|
)
|
|
|
(23,000
|
)
|
|
|
(3,000
|
)
|
Proceeds
from initial public offering, net of stock issuance costs
|
|
|
83,161
|
|
|
|
-
|
|
|
|
-
|
|
Excess
tax benefit - stock options
|
|
|
3,126
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from exercise of warrants and stock options
|
|
|
2,466
|
|
|
|
892
|
|
|
|
238
|
|
Net
cash provided by (used in) financing activities
|
|
|
85,753
|
|
|
|
(12,108
|
)
|
|
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(20,137
|
)
|
|
|
(16,049
|
)
|
|
|
39,665
|
|
Cash
and cash equivalents at beginning of period
|
|
|
30,830
|
|
|
|
46,879
|
|
|
|
7,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
10,693
|
|
|
$
|
30,830
|
|
|
$
|
46,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
620
|
|
|
$
|
1,286
|
|
|
$
|
1,192
|
|
Cash paid
for taxes
|
|
$
|
4,484
|
|
|
$
|
4,165
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with
KnowledgeStorm acquisition
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes.
TechTarget, Inc.
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007, 2006 and 2005
(In
thousands, except share and per share data)
1.
Organization and Operations
TechTarget, Inc.
(the Company) is a leading provider of specialized online content that brings
together buyers and sellers of corporate information technology, or IT,
products. The Company sells customized marketing programs that enable IT vendors
to reach corporate IT decision makers who are actively researching specific IT
purchases.
The
Company’s integrated content platform consists of a network of approximately 50
websites that are complemented with targeted in-person events and two
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
(ROI). As IT professionals have become increasingly specialized, they have come
to rely on our sector-specific websites for purchasing decision support. The
Company’s content enables IT professionals to navigate the complex and rapidly
changing IT landscape where purchasing decisions can have significant financial
and operational consequences. Based upon the logical clustering of users'
respective job responsibilities and the marketing focus of the products that the
Company’s customers are advertising, content offerings are currently categorized
across 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.
In May
2007, the Company completed its initial public offering of 8.9 million
shares of its common stock, which is more fully described in Note 10 to the
consolidated financial statements.
2.
Summary of Significant Accounting Policies
The
accompanying consolidated financial statements reflect the application of
certain significant accounting policies as described below and elsewhere in
these notes to the consolidated financial statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, which include KnowledgeStorm, Inc.,
Bitpipe, Inc., TechTarget Securities Corporation and TechTarget, Ltd.
KnowledgeStorm, Inc. was acquired by the Company on November 6, 2007 and is a
leading online search resource providing vendor generated content targeted
toward corporate IT professionals. 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.
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 in 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 posted and becomes available on the Company's
websites.
|
-
|
Software Package
Comparisons.
Software package comparison revenue is
recognized ratably in the period in which the software information is
available on the Company's
websites.
|
-
|
Dedicated E-mails and
E-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.
|
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 advertising campaign is extended, and the Company will defer
recognition of revenue in an amount equal to the value of the estimated
inventory that will be required to fulfill the guarantee. These estimates are
based on the Company's extensive experience in managing and fulfilling these
integrated ROI program offerings. Typically, shortfalls in fulfilling lead
guarantees before the scheduled completion date of an advertising campaign are
satisfied within an average of 45 days of such scheduled completion
date.
As of
December 31, 2007, substantially all of the integrated ROI program
offerings that have guaranteed a minimum number of qualified sales leads have
been delivered within the original contractual term. Historically, integrated
ROI program offerings have not required a deferral of more than $25,000 in any
quarter during 2007, nor has the Company been required to refund or extend
payment terms to customers to account for these guarantees. These integrated ROI
program offerings represented approximately 35% and 29% of online revenues, and
23% and 19% of total revenues for the years ended December 31, 2007 and
2006, respectively.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
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 our 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 items over the term of the arrangement.
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; (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 ranging from one to nine 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.
Allowance
for Doubtful Accounts
The
Company reduces gross trade accounts receivable by an allowance for doubtful
accounts. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company reviews its allowance for doubtful accounts on a regular
basis and all past due balances are reviewed individually for collectibility.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. Provisions for allowance for doubtful accounts are recorded in general
and administrative expenses.
Below is
a summary of the changes in the Company's allowance for doubtful accounts for
the years ended December 31, 2007, 2006, and 2005.
|
|
Balance
at Beginning of Period
|
|
|
Provision
|
|
|
Write-offs
|
|
|
Balance
at End of Period
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property
and equipment is stated at cost. Property and equipment acquired through
acquisitions of businesses are initially recorded at fair value. Depreciation is
calculated on the straight-line method based on the month the asset is placed in
service over the following estimated useful lives:
|
Estimated
Useful
Life
|
|
|
Computer
equipment and software
|
|
Internal-use
software and website development costs
|
|
|
Shorter
of useful life or life of
lease
|
Property
and equipment consists of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment and software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use
software and website development costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $1,610, $1,144 and $1,792 for the years ended December 31,
2007, 2006 and 2005, respectively. Repairs and maintenance charges that do not
increase the useful life of the assets are charged to operations as incurred.
Effective January 1, 2006, the Company changed the estimated useful life for
computer equipment and software from two years to three years to more closely
approximate the service lives of computer equipment and software assets placed
in service to date. The change in accounting estimate did not have a material
effect on the Company's results from operations for the year ended
December 31, 2006. Management does not expect this change in accounting
estimate to have a material effect on results of operations in future
periods. During 2007, the Company reviewed its fixed assets and wrote
off approximately $5.8 million of fully depreciated assets that were no longer
in service.
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 $950,
$659 and $495 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Concentrations
of Credit Risk and Off-Balance Sheet Risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist mainly of cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents principally in accredited financial
institutions of high credit standing. The Company routinely assesses the credit
worthiness of its customers. The Company generally has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or area. The Company does not require collateral. Due to
these factors, no additional credit risk beyond amounts provided for collection
losses is believed by management to be probable in the Company's accounts
receivable.
No single
customer represented 10% or more of total accounts receivable at
December 31, 2007. One customer accounted for 15% of total
accounts receivable at December 31, 2006. No other customer represented 10%
or more of total accounts receivable at December 31, 2006. No
single customer accounted for more than 10% of revenue for the year ended
December 31, 2007. One customer accounted for 11% of revenue for
the year ended December 31, 2006. No other customer accounted for more than
10% of revenue for the year ended December 31, 2006. During fiscal
year 2005, no single customer accounted for greater than 10% of the
Company's total revenue.
Derivative
Instruments
The
Company has adopted the accounting and disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative
Instruments and Hedging Activities
. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. In September, 2006, the Company entered into an interest rate swap
agreement to mitigate interest rate fluctuations on its variable rate bank term
loan, as further described in Note 7. Under SFAS No. 133, the interest
rate swap agreement is deemed to be a cash flow hedge and qualifies for hedge
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. The Company has no foreign exchange
contracts, option contracts, or other hedging arrangements.
Advertising
Expense
Advertising
expense primarily includes promotional expenditures and are expensed as
incurred. Advertising expense was $30, $102 and $129 for the years ended
December 31, 2007, 2006 and 2005, 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
December 31, 2005, the Company had one stock-based employee compensation
plan which is more fully described in Note 11. 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 the Company's common stock and the exercise or purchase price
multiplied by the number of stock options or 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, FASB issued SFAS No. 123(R), 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 in 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 SFAS
No. 123(R)'s adoption 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 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-based awards granted.
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. Other comprehensive income (loss) includes
changes in the fair value of the Company’s interest rate swap. For
the year ended December 31, 2005, comprehensive income (loss) was
equal to the reported net income (loss).
Net
Income (Loss) Per Share
The
Company calculates net income (loss) per share in accordance with SFAS No.
128,
Earnings
Per Share
(SFAS No. 128). Through May 17, 2007, the Company calculated
net income per share in accordance with SFAS No. 128, 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.
Effective for periods beginning after March 31, 2004, EITF Issue No. 03-6
provides guidance on how to determine whether a security should be considered a
"participating security" for purposes of computing earnings per share and how
earnings should be allocated to a participating security when using the
two-class method for computing basic earnings per share. The Company determined
that its convertible preferred stock represented a participating security and
therefore adopted the provisions of EITF Issue No. 03-6.
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.
As of May
16, 2007, the effective date of the Company’s initial public offering, 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. In calculating diluted
earnings per share for the period January 1, 2007 to May 16, 2007 shares
related to redeemable convertible preferred stock were excluded because they
were anti-dilutive. In calculating diluted earnings per share for 2006 and 2006
shares related to redeemable convertible preferred stock and outstanding stock
options and warrants were excluded because they were anti-dilutive.
Subsequent to the
Company's initial public offering, basic earnings per share is computed based
only on the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding during the period, plus the dilutive effect of
potential future issuances of common stock relating to stock option programs and
other potentially dilutive securities using the treasury stock method. In
calculating diluted earnings per share, the dilutive effect of stock options is
computed using the average market price for the respective period. In addition,
under SFAS No. 123(R), the assumed proceeds under the treasury stock method
include the average unrecognized compensation expense 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.
A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net income (loss) per share is as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,166
|
|
|
$
|
7,173
|
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock dividends
|
|
|
3,948
|
|
|
|
10,762
|
|
|
|
10,621
|
|
Total
net income applicable to preferred stockholders
|
|
|
3,948
|
|
|
|
10,762
|
|
|
|
10,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
4,218
|
|
|
$
|
(3,589
|
)
|
|
$
|
(1,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
28,384,303
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
28,384,303
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
Effect
of potentially dilutive shares
|
|
|
2,962,435
|
|
|
|
-
|
|
|
|
-
|
|
Total
weighted average shares of common stock outstanding
|
|
|
31,346,738
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of Net Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
4,218
|
|
|
$
|
(3,589
|
)
|
|
$
|
(1,735
|
)
|
Weighted
average shares of stock outstanding
|
|
|
28,384,303
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
Net
income (loss) per common share
|
|
$
|
0.15
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
4,218
|
|
|
$
|
(3,589
|
)
|
|
$
|
(1,735
|
)
|
Weighted
average shares of stock outstanding
|
|
|
31,346,738
|
|
|
|
7,824,374
|
|
|
|
7,370,680
|
|
Net
income (loss) per common share
|
|
$
|
0.13
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.24
|
)
|
Recent
Accounting Pronouncements
In
December 2007, the FASB released SFAS No. 141 (revised 2007),
Business Combinations,
or
SFAS No. 141R, which replaces FASB Statement No. 141. SFAS No. 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. SFAS No. 141R is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal
year that begins after December 15, 2008. The Company is currently evaluating
the potential impact, if any, of the adoption of SFAS No. 141R on its
consolidated financial position and results of operations.
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.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, or
SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 applies
under other accounting pronouncements that require or permit fair value
measurements, our board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS No. 157 does not require any new fair value measurements.
SFAS No. 157 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 to
have a material impact on its results of operations or financial
position.
3.
Acquisitions
KnowledgeStorm,
Inc.
On
November 6, 2007 the Company acquired KnowledgeStorm, Inc. (KnowledgeStorm),
which was a privately held company based in Alpharetta, Georgia, for $51,730 in
cash and 359,820 shares of unregistered common stock of TechTarget valued at
$6,000, as well as $230 in transaction costs. 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 acquisition of
KnowledgeStorm strengthens the Company’s industry leadership position
and increases its scale, customer penetration and product offerings for
advertisers. Once KnowledgeStorm has been fully integrated, the Company
feels that cost savings can be achieved as a result of sales and operating
efficiencies from the combined operations. Additionally, the Company
anticipates that integration of KnowledegeStorm employees into its workforce
will increase its capabilities against product development, product
management and search engine optimization and marketing.
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 KnowledgeStorm constituted
the acquisition of a business. In connection with the acquisition,
the Company recorded $45,101 of goodwill and $11,620 of other intangible
assets related to customer relationships, technology, trade name, customer
backlog and non-compete agreements with estimated useful lives ranging from 12
to 108 months. Of the goodwill recorded in conjunction with the
acquisition, none is deductible for income tax purposes.
The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition
.
|
|
As
of November 6, 2007
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
|
|
|
|
|
|
|
Within
approximately thirty days from the acquisition date, the Company’s management
completed its reorganization plan to consolidate KnowledgeStorm
operations. Liabilities assumed in the acquisition include
approximately $627 of involuntary termination benefits payable to terminated
employees through May 2008, as well as approximately $111 of costs associated
with exiting certain operating leases on office space leased by KnowledgeStorm
under noncancelable leases that expire through December 2008. As of
December 31, 2007, approximately $616 remained payable under these obligations,
all of which is expected to be paid by December 31, 2008.
The
estimated fair value of $11,620 of acquired intangible assets is assigned as
follows:
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Member
database intangible asset
|
|
|
|
|
|
Trade
name intangible asset
|
|
|
|
|
|
Customer
order backlog intangible asset
|
|
|
|
|
|
SEO/SEM
process intangible asset
|
|
|
|
|
|
Non-compete
agreement intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of
KnowledgeStorm. 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 KnowledgeStorm
were tax affected using an effective rate of 41% and then discounted using a
discount rate of 20.6%. 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 member
database intangible asset, a replacement cost methodology approach was
used. The replacement cost of the member database was determined by
applying the actual costs incurred to register a new member to the total number
of registered members in the acquired database. Additionally,
opportunity costs and the present value of the sum of projected tax benefits
were added to arrive at the total fair value of the member database intangible
asset.
To value the
trade name intangible asset a relief from royalty method was used to estimate
the pre-tax royalty savings to the Company related to the KnowledgeStorm trade
name. The projected net cash flows from the pre-tax royalty savings
were tax affected using an effective rate of 41% and then discounted using a
discount rate of 20.6% to calculate the value of the trade name intangible
asset. To value the Search Engine Optimization (SEO)/ Search Engine
Marketing (SEM) process intangible asset, a comparative business valuation
method was used. Based on an expected life of three years, management
projected net cash flows for the Company with and without the SEO/SEM process in
place. The present value of the sum of the difference between the net
cash flows with and without the SEO/SEM process in place was calculated using a
discount rate of 20.6%. Additionally, the present value of the sum of projected
tax benefits was added to arrive at the total fair value of the SEO/SEM process
intangible asset.
The
following pro forma results of operations for the years ended December 31, 2007
and 2006 have been prepared as though the acquisition of KnowledgeStorm had
occurred on January 1, 2006. This pro forma unaudited financial
information is not indicative of the results of operations that may occur in the
future.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of operations for KnowledgeStorm have been included in the Company’s results of
operations since the acquisition date of November 6, 2007.
TechnologyGuide,
Inc.
On April
26, 2007, the Company acquired substantially all of the assets of
TechnologyGuide, Inc. (TechGuide), which was a privately-held company based in
Cincinnati, OH, for $15,000 in cash, plus $15 in acquisition related
transaction costs. TechGuide is a network of five online websites
which includes; 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 material
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 TechGuide 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:
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Developed
websites intangible asset
|
|
|
|
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Non-compete
agreements intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of TechGuide. 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 TechGuide have been included in the Company’s results of
operations since the acquisition date of April 26, 2007.
Ajaxian.com
On
February 27, 2007, the Company acquired substantially all of the assets of
Ajaxian, Inc. (Ajaxian) for a purchase price of $1,013 in
cash. Ajaxian is a provider of a website and two events dedicated to
providing information and support for the community of developers for “Ajax”
(Asynchronous Javascript and XML), a web development technique for creating
interactive web applications.
The
Company applied the guidance included in EITF Issue No. 98-3 to conclude
that the acquisition of Ajaxian constituted the acquisition of
assets. The Company did not acquire any tangible assets from
Ajaxian. The following table summarizes the estimated fair value of
the intangible assets acquired by the Company at the date of
acquisition:
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Non-compete
agreement intangible asset
|
|
|
|
|
|
Trade
name intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
payments of $150 in May 2008 and $250 in May 2009 are due if certain event
revenue and website traffic milestones are met as defined in the purchase
agreement. Operating expense will be recorded in the period in which
payment of these respective obligations becomes probable under the terms of the
agreement.
2020Software.com
On
May 3, 2006, the Company acquired substantially all of the assets
associated with 2020Software.com (2020Software), which was a privately-held
company based in Los Angeles, California, for $15,000 in cash, plus $17 in
acquisition related transaction costs. 2020Software is a website focused on
providing detailed feature-comparison information and access to trial software
for businesses seeking trial versions of customer relationship management,
accounting, and other business software. The acquisition provides the Company
with an opportunity for growth within segments and in other markets in which it
currently does not have a presence, primarily vertical software applications and
enterprise markets.
The
Company applied the guidance included in EITF Issue No. 98-3 to conclude
the acquisition of 2020Software constituted the acquisition of a business. In
connection with this acquisition, the Company purchased $397 of accounts
receivable, recorded $9,440 million of goodwill and recorded
$5,180 million of intangible assets related to customer relationships,
customer order backlog and a non-compete agreement, with estimated useful lives
ranging from one to five years.
The
estimated fair value of $5,180 million of acquired intangible assets is
assigned as follows:
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Non-compete
agreement intangible asset
|
|
|
|
|
|
Customer
order backlog intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of 2020Software. 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 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%.
4.
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:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper corporate debt securities
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
|
|
|
|
|
|
|
As of
December 31, 2007, short-term investments consist of 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, except as discussed below, the 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.
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 fair market value, which approximates cost, therefore the Company has no
realized or unrealized gains or losses from these investments.
Short-term
investments consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate demand notes
|
|
|
|
|
|
|
|
|
Total
short-term investments
|
|
|
|
|
|
|
|
|
As of
December 31, 2007, auction rate securities have maturity dates that range from
2008 to 2032. Municipal bonds and variable rate demand notes all have
contractual maturity dates within one year. All income generated from these
short-term investments is recorded as interest income.
At March
27, 2008, the Company held $6.2 million in auction rate securities. Dutch
auctions have historically provided a liquid market for these
securities. In February and March 2008, the Company’s investment in
auction rate securities of $6.2 million failed at auction due to sell orders
exceeding buy orders. The Company's ability to liquidate its auction rate
securities and fully recover the carrying value of its auction rate securities
in the near term may be limited or not exist and the Company may in the future
be required to record an impairment charge on these investments. The vast
majority of the Company's auction rate securities, including those that have
failed, were rated AAA at the time of purchase. The Company believes it will be
able to liquidate its investments without significant loss within the next year,
and the Company currently believes these securities are not impaired, primarily
due to the credit worthiness of the issuers of the underlying securities and
their ability to refinance if auctions continue to fail. However, it could take
until the final maturity of the underlying notes (up to 25 years) to realize its
investments' recorded value.
5.
Goodwill
The
changes in the carrying amount of goodwill for the years ended December 31,
2007 and 2006, are as follows:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Balance
as of beginning of period
|
|
|
|
|
|
|
|
|
Goodwill
acquired during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of end of period
|
|
|
|
|
|
|
|
|
6.
Intangible Assets
The
following table summarizes the Company's intangible assets, net:
|
|
|
|
|
As
of December 31, 2007
|
|
|
|
Estimated
Useful Lives (Years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer,
affiliate and advertiser relationships
|
|
|
1 -
9
|
|
|
$
|
19,077
|
|
|
$
|
(9,140
|
)
|
|
$
|
9,937
|
|
Developed
websites, technology and patents
|
|
|
3 -
6
|
|
|
|
5,976
|
|
|
|
(1,176
|
)
|
|
|
4,800
|
|
Trademark,
trade name and domain name
|
|
|
5 -
7
|
|
|
|
1,994
|
|
|
|
(521
|
)
|
|
|
1,473
|
|
Proprietary
user information database and Internet traffic
|
|
|
3 -
5
|
|
|
|
4,750
|
|
|
|
(174
|
)
|
|
|
4,576
|
|
Non-compete
agreements
|
|
|
1 -
3
|
|
|
|
1,735
|
|
|
|
(582
|
)
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
33,532
|
|
|
$
|
(11,593
|
)
|
|
$
|
21,939
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
Estimated
Useful Lives (Years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer,
affiliate and advertiser relationships
|
|
|
1 -
5
|
|
|
$
|
11,025
|
|
|
$
|
(6,010
|
)
|
|
$
|
5,015
|
|
Developed
websites, technology and patents
|
|
|
3
|
|
|
|
576
|
|
|
|
(400
|
)
|
|
|
176
|
|
Trademark,
trade name and domain name
|
|
|
5
|
|
|
|
768
|
|
|
|
(321
|
)
|
|
|
447
|
|
Non-compete
agreements
|
|
|
3
|
|
|
|
550
|
|
|
|
(122
|
)
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
12,919
|
|
|
$
|
(6,853
|
)
|
|
$
|
6,066
|
|
Intangible
assets are amortized over their estimated useful lives, which range
from one to nine years, using methods of amortization that are
expected to reflect the estimated pattern of economic use. The remaining
amortization expense will be recognized over a weighted-average period of
approximately 3.2 years.
Amortization
expense was $4,740, $5,029 and $5,172 for the years ended December 31,
2007, 2006 and 2005, respectively.
The
Company expects amortization expense of intangible assets to be as
follows:
Years
Ending December 31:
|
|
Amortization
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
Bank Term Loan Payable
The
Company previously maintained a term loan and security agreement (the "Bank Term
Loan") with a bank. The outstanding balance due under the Bank Term Loan was
$22.0 million at December 31, 2005. In August 2006, the Company
entered into a credit agreement (the "Credit Agreement") with a commercial bank,
which included a $10.0 million term loan (the "Term Loan") and a
$20.0 million revolving credit facility (the "Revolving Credit Facility").
Initial borrowings under the Term Loan were used to repay the remaining
principal and accrued interest balance of the Bank Term Loan.
The
Revolving Credit Facility matures on August 30, 2011. Unless earlier
payment is required by an event of default, all principal and unpaid interest
will be due and payable on August 30, 2011. At the Company's option, the
Revolving Credit Facility bears interest at either the Prime Rate less 1.00% or
the LIBOR rate plus the applicable LIBOR margin. The 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 0.25%. As of December 31, 2007, unused
availability under the Revolving Credit Facility totaled
$20.0 million.
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 December 31, 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
December 31, 2007, the outstanding balance due under the Term Loan was
$6.0 million. There was no accrued interest on the Term Loan at
December 31, 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 6.98% for the Term Loan. The interest rate swap
agreement terminates in December 2009. Under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities,
the interest rate swap agreement is
deemed to be a cash flow hedge and qualifies for special accounting using the
shortcut method. Accordingly, changes in the fair value of the interest rate
swap agreement are recorded in "accumulated other comprehensive loss" on the
consolidated statements of redeemable convertible preferred stock and
stockholders' equity (deficit). As of December 31, 2007 and 2006, the fair
value of the cash flow hedge was $102 and $56, respectively, and is recorded in
other liabilities.
Borrowings
under the Credit Agreement are collateralized by a security interest in
substantially all assets of the Company. Covenants governing the Credit
Agreement require the maintenance of certain financial ratios. The Company was
in compliance with all financial covenants as of December 31,
2007.
The
future maturities of the Term Loan agreement at December 31, 2007 are as
follows:
Years
Ending December 31:
|
|
Principal
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
Commitments and Contingencies
Operating
Leases
The
Company conducts its operations in leased office facilities under various
noncancelable operating lease agreements that expire through January, 2013.
Certain of the Company's operating leases include escalating payment amounts and
are renewable for varying periods. In accordance with SFAS No. 13,
Accounting for Leases
, the
Company is recognizing the related rent expense on a straight-line basis over
the term of the lease. Total rent expense under these leases was approximately
$1,775, $1,447 and $1,348 for the years ended December 31, 2007, 2006 and
2005, respectively.
Future
minimum lease payments under noncancelable operating leases at December 31,
2007, net of minimum sublease rental payments of $76 are as
follows:
Years
Ending December 31:
|
|
Minimum
Lease Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
From time
to time and in the ordinary course of business, the Company may be subject to
various claims, charges, and litigation. At December 31, 2007
and 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.
9. Stock-based
Compensation
Stock
Option Plans
In
September 1999, the Company approved a stock option plan (the 1999 Plan) that
provides for the issuance of up to 12,384,646 shares of common stock
incentives. The 1999 Plan provides for the granting of incentive
stock options (ISOs), nonqualified stock options (NSOs), and stock grants. These
incentives may be offered to the Company’s employees, officers, directors,
consultants, and advisors, as defined. ISOs may be granted at no less
than fair market value on the date of grant, as determined by the Company’s
Board of Directors (the Board) (no less than 110% of fair market value on the
date of grant for 10% or greater stockholders), subject to limitations, as
defined. Each option shall be exercisable at such times and subject to such
terms as determined by the Board, generally four years, and shall expire
within ten years of issuance.
In April
2007, the Board approved the 2007 Stock Option and Incentive Plan (the 2007
Plan), which was approved by the stockholders and became effective upon the
consummation of the Company’s IPO in May 2007. Effective upon the consummation
of the IPO, no further awards will be made pursuant to the 1999 Plan, but any
outstanding awards under the 1999 Plan will remain in effect and will continue
to be subject to the terms of the 1999 Plan. The 2007 Plan allows the
Company to grant ISOs, NSOs, stock appreciation rights, deferred stock awards,
restricted stock and other awards. Under the 2007 Plan, stock options may
not be granted at less than fair market value on the date of grant, and grants
generally vest over a four year period. Stock options granted under the
2007 Plan expire no later than ten years after the grant date. The Company
has reserved for issuance an aggregate of 2,911,667 shares of common stock under
the 2007 Plan plus an additional annual increase to be added automatically on
January 1 of each year, beginning on January 1, 2008, equal to the lesser of (a)
2% of the outstanding number of shares of common stock (on a fully-diluted
basis) on the immediately preceding December 31 and (b) such lower number of
shares as may be determined by our compensation committee. The number
of shares available for issuance under the 2007 Plan is subject to
adjustment in the event of a stock split, stock dividend or other change in
capitalization. Generally, shares that are forfeited or canceled from
awards under the 2007 Plan also will be available for future
awards. In addition, shares subject to stock options returned to the
1999 Plan, as a result of their expiration, cancellation or termination, are
automatically made available for issuance under the 2007 Plan. As of
December 31, 2007 a total of 1,475,768 shares were available for grant
under the 2007 Plan.
Stock
Options
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an option award. The Company calculated the fair values
of the options granted using the following assumptions:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
grant date fair value per share
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
2006. In 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 2007.
The
Company has historically granted stock options at exercise prices no less than
the fair market value as determined by the Board, with input from management.
The Board exercised judgment in determining the estimated fair value of the
Company's common stock on the date of grant based on a number of objective and
subjective factors, including operating and financial performance, external
market conditions affecting the Company's industry sector, an analysis of
publicly-traded peer companies, the prices at which shares of convertible
preferred stock were sold, the superior rights and preferences of securities
senior to common stock at the time of each grant and the likelihood of achieving
a liquidity event such as an initial public offering or sale of the Company. On
April 18, 2006, July 25, 2006 and September 27, 2006 the Board granted stock
options to purchase an aggregate of 167,000, 9,000 and 4,017,500 shares of
common stock, respectively, with an exercise price of $7.36 per share. On
October 30, 2006, the Board granted an additional option to purchase 50,000
shares of common stock at $7.80 per share. At the time of these grants, the
exercise price was determined by the Board with input by management based on the
various objective and subjective factors mentioned above. In addition, for
certain stock option grants in 2006, the Company engaged an unrelated third
party valuation specialist to assist management in preparing contemporaneous
valuation reports to document the fair value of its common stock for income tax
considerations.
In
connection with the preparation of its consolidated financial statements for the
year ended December 31, 2006 and in preparing for the initial public offering of
its common stock, management reexamined the valuations of its common stock
during 2006. In connection with this reexamination, the Company engaged a
valuation specialist to assist management in preparing retrospective valuation
reports of the fair value of its common stock for accounting purposes as of July
31, 2006, September 30, 2006 and October 27, 2006. Management believes that the
valuation methodologies used in the retrospective valuations are consistent
with the Practice Aid of the American Institute of Certified Public Accountants
entitled Valuation of Privately Held Company Equity Securities Issued as
Compensation. In its retrospective valuations, the Company determined that the
fair value of its common stock on July 31, 2006, September 30, 2006 and October
27, 2006 was $6.92, $7.44 and $7.80 per share, respectively. A retrospective
valuation for the April 18, 2006 grants was not prepared.
In each
retrospective valuation, a probability-weighted combination of the guideline
public company method and the discounted future cash flow method was used to
estimate the aggregate enterprise value of the Company at the applicable
valuation date. The guideline public company method estimates the fair market
value of a company by applying to that company market multiples, in this case
revenue and EBITDA multiples, of publicly traded firms in similar lines of
business. The companies used for comparison under the guideline public company
method were selected based on a number of factors, including but not limited to,
the similarity of their industry, business model, financial risk and other
factors to those of the Company's. Equal weighting has been applied to the
valuations derived from the using the revenue and EBITDA multiples in
determining the guideline public company fair market value estimate. The
discounted future cash flow method involves applying appropriate risk-adjusted
discount rates of approximately 17% to estimated debt-free cash flows, based on
forecasted revenues and costs. The projections used in connection with this
valuation were based on the Company's expected operating performance over the
forecast period. There is inherent uncertainty in these estimates; if different
discount rates or assumptions had been used, the valuation would have been
different.
In order
to allocate the enterprise value determined under the guideline public company
method and the discounted future cash flow method to its common stock, the
Company used the probability-weighted expected return method. Under the
probability-weighted expected return method, the fair market value of the common
stock is estimated based upon an analysis of future values for the Company
assuming various future outcomes, the timing of which is based on the plans of
its board and management. Share value is based on the probability-weighted
present value of expected future investment returns, considering each of the
possible outcomes available as well as the rights of each share class. The fair
market value of the Company's common stock was estimated using a
probability-weighted analysis of the present value of the returns afforded to
its shareholders under each of three possible future scenarios. Two of the
scenarios assume a shareholder exit, either through an initial public offering,
or IPO, or a sale of the Company. The third scenario assumes operations continue
as a private company and no exit transaction occurs. For the IPO scenario, the
estimated future and present values for the Company's common stock was
calculated using assumptions including; the expected pre-money valuation
(pre-IPO) based on the guideline public company method discussed above; the
expected dates of the future expected IPO; and an appropriate risk-adjusted
discount rate. For the sale scenario, the estimated future and present values
for the Company's common stock was calculated using assumptions including: an
equal weighting of the guideline public company method and the discounted cash
flow method discussed above; the expected dates of the future expected sale and
an appropriate risk-adjusted discount rate. For the private company with no exit
scenario, an equal weighting of the guideline public company method and the
discounted cash flow method based on present day assumptions was used. Finally,
the present value calculated for the Company's common stock under each scenario
was probability weighted based on management's estimate of the relative
occurrence of each scenario. The probability associated with the occurrence of
an IPO was increased from 40% in July 2006 to 45% in September 2006 to 50% in
October 2006. The probability associated with the occurrence of a sale was
decreased from 40% in July 2006 to 35% in September 2006 to 30% in October 2006.
The probability of continuing operations as a private company remained constant
at 20% in each valuation. The estimated fair market value of the Company's
common stock at each valuation date is equal to the sum of the probability
weighted present values for each scenario.
The
Company has incorporated the fair values determined in the retrospective
valuations into the Black-Scholes option pricing model when calculating the
compensation expense to be recognized for the stock options granted in July,
September and October of 2006. In determining the fair value of the April 2006
grants using the Black-Scholes option pricing model, it was assumed that the
fair market value of the common stock was equal to the exercise price of the
stock options.
The
following table details the effect on net income and net income (loss) per share
had stock-based compensation expense been recorded in 2005 based on the
fair-value method under SFAS No. 123,
Accounting for Stock-Based
Compensation.
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value-based method for all awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net loss per share:
|
|
|
|
|
Basic
and diluted - as reported
|
|
|
|
|
Basic
and diluted - pro forma
|
|
|
|
|
A summary
of the stock option activity under the Company's stock option plan for the year
ended December 31, 2007 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted-Average
Exercise Price Per Share
|
|
|
Weighted-Average
Remaining Contractual Term in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested or expected to vest at December 31, 2007
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In
addition to the vested options, the Company expects a portion of the
unvested options to vest at some point in the future. Options expected to
vest is calculated by applying an estimated forfeiture rate to the
unvested options.
|
During
the years ended December 31, 2007 and 2006, 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 $13,760 and $2,196,
respectively, and the total amount of cash received by the Company from exercise
of these options was $2,472 and $554, 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 year ended December 31, 2007
was $6,223. None of the options granted after the adoption of SFAS
No. 123(R) on January 1, 2006 vested during the year ended
December 31, 2006.
Unrecognized
stock-based compensation expense of non-vested stock options of
$18.9 million is expected to be recognized using the straight line method
over a weighted-average period of 1.65 years.
Restricted
Stock Awards
Restricted
stock awards are valued at the market price of a share of the Company’s
common stock on the date of the grant. A summary of the restricted
stock award activity under the Company's stock option plan for the year ended
December 31, 2007 is presented below:
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value Per Share
|
|
|
Aggregate
Intrinsic Value
|
|
Nonvested
outstanding at December 31, 2006
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Granted
|
|
|
630,269
|
|
|
|
14.52
|
|
|
|
|
|
Vested
|
|
|
(15,494
|
)
|
|
|
14.78
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Nonvested
outstanding at December 31, 2007
|
|
|
614,775
|
|
|
$
|
14.52
|
|
|
$
|
9,086
|
|
Unrecognized
stock-based compensation expense of non-vested restricted stock awards of
$8.7 million is expected to be recognized using the straight line method
over a weighted-average period of 2.05 years.
10.
Stockholders' Equity (Deficit)
Shares
Authorized
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.
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.
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 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. In 2007, the seller exercised their warrants to purchase 30,981
shares of common stock using the conversion rights in the
warrants. As result of the exercise using the conversion rights, the
Company issued 26,024 shares of common stock to the seller and cancelled the
4,957 shares received in lieu of payment of the exercise price. At
December 31, 2007 and 2006, there were 9,644 and 73,003 shares, respectively, of
the Company’s common stock reserved for the exercise of all
warrants.
Reserved
Common Stock
As of
December 31, 2007, the Company has reserved common stock for the
following:
|
|
Number
of Shares
|
|
|
|
|
|
Options
outstanding and available for grant under stock option
plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
Income Taxes
As of
December 31, 2007, the Company had U.S. federal and state net operating
loss (NOL) carryforwards of approximately $18.1 million and $18.2 million,
respectively, which may be used to offset future taxable income. The NOL
carryforwards expire through 2027, and are subject to review and possible
adjustment by the Internal Revenue Service. The Internal Revenue Code contains
provisions that limit the NOL and tax credit carryforwards available to be used
in any given year in the event of certain changes in the ownership interests of
significant stockholders. The federal NOL carry forwards of $18.1 million
available at December 31, 2007 were acquired from KnowledgeStorm and are
subject to limitations on their use in future years.
The
income tax provision (benefit) for the years ended December 31, 2007, 2006
and 2005 consisted of the following:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,321
|
|
|
$
|
4,321
|
|
|
$
|
248
|
|
State
|
|
|
1,646
|
|
|
|
1,316
|
|
|
|
67
|
|
Total
current
|
|
|
6,967
|
|
|
|
5,637
|
|
|
|
315
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(720
|
)
|
|
|
185
|
|
|
|
(2,553
|
)
|
State
|
|
|
(201
|
)
|
|
|
(11
|
)
|
|
|
(443
|
)
|
Total
deferred
|
|
|
(921
|
)
|
|
|
174
|
|
|
|
(2,996
|
)
|
|
|
$
|
6,046
|
|
|
$
|
5,811
|
|
|
$
|
(2,681
|
)
|
The
income tax provision (benefit) for the years ended December 31, 2007, 2006
and 2005 differs from the amounts computed by applying the statutory federal
income tax rate to the consolidated income (loss) before income taxes as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Provision
(benefit) computed at statutory rate
|
|
$
|
4,974
|
|
|
$
|
4,544
|
|
|
$
|
2,120
|
|
Increase
(reduction) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,497
|
)
|
Tax
exempt interest income
|
|
|
(712
|
)
|
|
|
-
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
624
|
|
|
|
427
|
|
|
|
-
|
|
Other
nondeductible expenses
|
|
|
208
|
|
|
|
88
|
|
|
|
72
|
|
State
income tax provision (benefit)
|
|
|
939
|
|
|
|
849
|
|
|
|
(376
|
)
|
Other
|
|
|
13
|
|
|
|
(97
|
)
|
|
|
-
|
|
Provision
for (benefit from) income taxes
|
|
$
|
6,046
|
|
|
$
|
5,811
|
|
|
$
|
(2,681
|
)
|
Significant
components of the Company's net deferred tax assets and liabilities are as
follows:
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
7,429
|
|
|
$
|
1,331
|
|
Intangible
asset amortization
|
|
|
-
|
|
|
|
671
|
|
Purchase
price adjustments
|
|
|
152
|
|
|
|
101
|
|
Accruals
and allowances
|
|
|
463
|
|
|
|
352
|
|
Depreciation
|
|
|
90
|
|
|
|
257
|
|
Stock-based
compensation
|
|
|
1,503
|
|
|
|
223
|
|
Deferred
rent expense
|
|
|
144
|
|
|
|
204
|
|
Gross
deferred tax assets
|
|
|
9,781
|
|
|
|
3,139
|
|
Less
valuation allowance
|
|
|
(940
|
)
|
|
|
-
|
|
Total
deferred tax assets
|
|
|
8,841
|
|
|
|
3,139
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
asset amortization
|
|
|
(2,984
|
)
|
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
(2,984
|
)
|
|
|
-
|
|
Net
deferred tax assets
|
|
$
|
5,857
|
|
|
$
|
3,139
|
|
|
|
|
|
|
|
|
|
|
As
reported:
|
|
|
|
|
|
|
|
|
Current
deferred tax assets
|
|
$
|
2,947
|
|
|
$
|
1,784
|
|
Non-current
deferred tax assets
|
|
|
2,910
|
|
|
|
1,355
|
|
Total
deferred tax assets
|
|
$
|
5,857
|
|
|
$
|
3,139
|
|
In
evaluating the ability to realize the net deferred tax asset, the Company
considers all available evidence, both positive and negative, including past
operating results, the existence of cumulative losses in the most recent fiscal
years, tax planning strategies that are prudent, and feasible and forecasts of
future taxable income. In considering sources of future taxable income, the
Company makes certain assumptions and judgments that are based on the plans and
estimates that are used to manage the underlying business of the Company.
Changes in the Company's assumptions and estimates may materially impact income
tax expense for the period. In 2005, the Company reversed a $6,751
valuation allowance because management determined that sufficient positive
evidence existed to conclude that it was more likely than not that the Company
would be able to realize its deferred tax assets. This conclusion was based on
the Company's operating performance over the previous few years and its
operating plans for the foreseeable future. The valuation allowance
of $940 at December 31, 2007 relates to state deferred tax assets acquired from
KnowledgeStorm that the Company determined were not likely to be realized based
on projections of future taxable income in Georgia. To the extent
realization of the state deferred tax assets becomes probable, recognition of
these acquired tax benefits would reduce goodwill.
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 December 31, 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
2004 through 2007 are subject to examination by the federal and state taxing
authorities. There are no income tax examinations currently in
process.
12.
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:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
401(k) Plan
The
Company maintains a 401(k) retirement savings plan (the Plan) whereby employees
may elect to defer a portion of their salary and contribute the deferred portion
to the Plan. The Company contributes an amount equal to 100% of the employee's
contribution to the Plan, up to an annual limit of one thousand five
hundred dollars. The Company contributed $622, $492, and $482 to the Plan
for the years ended December 31, 2007, 2006 and 2005, respectively.
Employee contributions and the Company's matching contributions are invested in
one or more collective investment funds at the participant's direction. The
Company's matching contributions vest 25% annually and are 100% vested after
four consecutive years of service.
14.
Quarterly Financial Data (unaudited)
|
|
For
the Three Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Mar.
31
|
|
|
Jun.
30
|
|
|
Sep.
30
|
|
|
Dec.
31
|
|
|
Mar.
31
|
|
|
Jun.
30
|
|
|
Sep.
30
|
|
|
Dec.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|