ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider all the risk factors and uncertainties
described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, before deciding whether to invest in our common stock. If any of the following
risks were to materialize, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. The trading price of our common stock could decline as a result of any of these risks, and
you could lose part or even all of your investment in our common stock.
Risks Related to Our Business
We have a history of losses and may not achieve consistent profitability in the future.
We generated net losses of approximately $1.5 million in 2010, $6.2 million in 2011 and $7.6 million for the nine months ended
September 30, 2012. As of September 30, 2012, we had an accumulated deficit of approximately $240.9 million. We will need to generate and sustain increased revenue levels in future periods in order to become consistently profitable, and,
even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to expend significant funds to expand our marketing and direct sales force, develop and enhance our solutions and for general corporate
purposes, including marketing, services and sales operations, hiring additional personnel, upgrading our infrastructure and expanding into new geographical markets. Our efforts to grow our business may be more costly than we expect, and we may not
be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this Quarterly Report on Form 10-Q, and unforeseen
expenses, difficulties, complications and delays and other unknown events. We will need to generate significant additional revenue to achieve profitability, and we cannot assure any prospective investor that we will be able to do so. Likewise, we
cannot assure you of our ability to sustain or increase such profitability on a quarterly or annual basis in the future. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.
Economic uncertainties or downturns in the general economy or the industries in which our customers operate could
disproportionately affect the demand for our solutions and negatively impact our results of operations.
General
worldwide economic conditions have experienced a significant downturn, and market volatility and uncertainty remain widespread, making it extremely difficult for our customers and us to accurately forecast and plan future business activities. In
addition, these conditions could cause our customers or prospective customers to reduce their marketing and sales budgets, which could decrease corporate spending on our solutions, resulting in delayed and lengthened sales cycles, a decrease in new
customer acquisition and/or loss of customers. Furthermore, during challenging economic times our customers may face issues in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to
make timely payments to us and adversely affect our revenue. If that were to occur, we may be required to increase our allowance for doubtful accounts and our financial results would be harmed. Further, the current challenging economic conditions
also may impair the ability of our customers to pay for the solutions they have purchased and, as a result, our reserves, allowances for doubtful accounts and write-offs of accounts receivable could increase. From 2008 through the first half of
2010, these conditions impacted our business, as many businesses cut marketing and sales budgets, resulting in limited resources for purchasing third-party solutions.
We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens from present levels, our business
could be harmed. In particular, a downturn in the technology sector may disproportionately affect us because a significant portion of our customers are technology companies. In addition, even if the overall economy improves, we cannot assure you
that the market for revenue performance management solutions will experience growth or that we will experience growth.
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Our future performance will depend in part on the acceptance and adoption of the new
revenue performance management market.
The market for revenue performance management, or RPM, solutions is new and
evolving. Although the marketing automation market has gained traction over the past several years, our recent shift to focus on RPM exposes us to an additional degree of uncertainty. For example, we have only recently begun to sell, and currently
have a limited customer base with respect to, our Revenue Suite product. As a result, at this time we cannot assure you that our Revenue Suite product will gain further acceptance with our customer base or our broader addressable market. Our success
will depend to a substantial extent on the willingness of businesses to accept and adopt RPM principles. We expect that we will continue to need intensive marketing and sales efforts to educate prospective customers about the uses and benefits of
our RPM solutions. If businesses do not perceive the value proposition of RPM in general and our RPM solutions in particular, then a viable market for our RPM solutions may not develop, or it may develop more slowly than we expect, either of which
would significantly and adversely affect our business and operating results.
We have experienced rapid growth in recent
periods and our recent growth rates may not be indicative of our future growth.
Our revenue has increased
substantially since our inception, but we may not be able to sustain revenue growth consistent with recent history, or at all. We believe growth of our revenue depends on a number of factors, including our ability to:
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price our services effectively so that we are able to attract and retain customers without compromising our profitability;
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attract new customers, increase our existing customers use of our services and provide our customers with excellent customer support;
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introduce our services to new markets outside of the United States;
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increase awareness of our brand on a global basis; and
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leverage and grow our revenue performance management business.
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We cannot assure you that we will be able to successfully accomplish any of these tasks.
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and
customer satisfaction or adequately address competitive challenges.
We have experienced, and may continue to
experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. We have also experienced significant growth in the number of users
and transactions and in the amount of data that our SaaS hosting infrastructure supports. Finally, our organizational structure is becoming more complex as we improve our operational, financial and management controls as well as our reporting
systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, teamwork and attention to
customer success that has been central to our growth so far. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our solutions may suffer, which could negatively
affect our brand and reputation and harm our ability to retain and attract customers.
We have established several
international offices, including offices in the United Kingdom, Canada and Singapore, and we may continue to expand our international operations into other countries in the future. Our expansion has placed, and our expected future growth will
continue to place, a significant strain on our managerial, customer operations, research and development, marketing and sales, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results
could suffer.
Part of the challenge that we expect to face in the course of our expansion is to maintain a high level of
customer service and customer satisfaction. To the extent our customer base grows, we will need to expand our
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account management, customer service and other personnel, and third-party channel partners, in order to provide personalized account management and customer service. If we are not able to
continue to provide high levels of customer service, our reputation, as well as our business, results of operations and financial condition, could be harmed.
We may experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could cause our operating results to fall below
expectations.
Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of
our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as indicative of our future performance. If our revenue or operating results fall below the
expectations of investors or securities analysts, the price of our common stock could decline substantially.
Our operating
results have varied in the past. In addition to other risk factors listed in this section, factors that may affect our quarterly operating results include the following:
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demand for our solutions and related services and the size and timing of sales;
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customer renewal rates, and the pricing of those agreements that are renewed;
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customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors;
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market acceptance of our current and future products and services;
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changes in spending on marketing services or information technology and software by our current and/or prospective customers;
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budgeting cycles of our customers;
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changes in the competitive dynamics of our industry, including consolidation among competitors or customers;
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our lengthy sales cycle;
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the addition or loss of larger customers, including through acquisitions or consolidations;
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the amount and timing of operating expenses, particularly marketing and sales, related to the maintenance and expansion of our business, operations and
infrastructure;
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network outages or security breaches and any associated expenses;
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foreign currency exchange rate fluctuations;
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write-downs, impairment charges or incurrence of unforeseen liabilities in connection with acquisitions;
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failure to successfully manage any acquisitions; and
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general economic and political conditions in our domestic and international markets.
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Based upon all of the factors described above, we have a limited ability to forecast the amount and mix of future revenue and expenses,
and as a result, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.
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Our quarterly results reflect seasonality in the sale of our on-demand software and
professional services, which can make it difficult to achieve sequential revenue growth or could result in sequential revenue declines.
We have historically experienced seasonal variations in our signing of new customer contracts. We sign a significantly higher number of agreements with new customers in the fourth quarter of each year as
compared to the preceding quarters. As a result, a significantly higher number of renewals occur in the first quarter of each year, as the terms of most of our customer agreements are measured in full-year increments and begin upon our provision of
log-in credentials to the customer, which generally occurs within ten days following the end of the quarter in which the agreement was executed. We expect this seasonality to continue in the future, which may cause fluctuations in certain of our
operating results and financial metrics, and thus limit our ability to predict future results. Although these seasonal factors can be common in the marketing sector, historical patterns should not be considered indicative of our future sales
activity or performance.
If we fail to forecast our revenue accurately, or if we fail to match our expenditures with
corresponding revenue, our results of operations and financial condition could be adversely affected.
Because our
recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. Additionally, the lengthy sales cycle for the evaluation and implementation of our solutions,
which typically extends for several months, may also cause us to experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Accordingly, we may be unable to prepare accurate internal financial
forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors, and our results of operations in future reporting periods may be significantly below the expectations of the public market, equity
research analysts or investors, which could harm the price of our common stock.
Because we recognize revenue from
subscriptions and support services over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.
As a SaaS company, we recognize revenue over the term of our contracts, which is typically 12 to 24 months. As a result, much of the
revenue we report each quarter is the recognition of deferred revenue from contracts entered into during previous quarters. Consequently, a shortfall in demand for our solutions and professional services or a decline in new or renewed contracts in
any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our services is not reflected in full
in our results of operations until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the
applicable term of the contracts.
If we are unable to attract new customers or sell additional functionality and
services to our existing customers, our revenue growth will be adversely affected.
To increase our revenue, we must
add new customers, sell additional functionality to existing customers and encourage existing customers to renew their subscriptions on terms favorable to us. As the interactive marketing industry matures, as interactive channels develop further, or
as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to compete with respect to pricing, technology and functionality could be impaired. In such event, we may be unable
to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have a material adverse effect on our revenue, gross margin
and other operating results.
If we fail to adapt and respond effectively to rapidly changing technology, evolving
industry standards and changing customer needs or requirements, our revenue performance management solutions may become less competitive or obsolete.
Our future success will depend on our ability to adapt and innovate our revenue performance management solutions. To attract new customers and increase revenue from existing customers, we will need to
enhance and improve our offerings to meet customer needs, add functionality and address technological advancements. If we are
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unable to develop new solutions that address and advance RPM principles for our customers and prospective customers, or to enhance and improve our solutions in a timely manner or to position and
price our solutions to meet market demand, we may not be able to achieve or maintain adequate market acceptance of our solutions. The success of any enhancement or new feature depends on several factors, including timely completion, introduction and
market acceptance. If we are unable to successfully develop or acquire new features or enhance our existing solutions to meet customer needs, our business and operating results will be adversely affected.
Our ability to grow is also subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver
RPM solutions at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
If we fail to enhance our brand cost-effectively, our ability to expand our customer base will be impaired and our financial condition may suffer.
We believe that developing and maintaining awareness of the Eloqua brand in a cost-effective manner is critical to achieving widespread
acceptance of our existing and future solutions and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of
our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. In the past, our efforts to build our brand have involved significant expenses. Brand
promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses
in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could
suffer.
Our brand and reputation are dependent on the continued participation and level of service of our third-party
service providers.
We currently utilize a combination of internal support personnel and third-party service
providers. These third-party service providers, which are not in our control, may harm our reputation and damage the brand loyalty among our customer base. In the event that we are not able to maintain our brand reputation because of the actions of
our third-party service providers, we may face difficulty in maintaining or have reduced demand for our products, which could negatively impact our business, results of operations and financial condition. In addition, if a significant number of
third-party providers were to terminate their contracts, it could materially adversely impact our business, results of operations and financial condition.
If we fail to offer high quality customer support, our business and reputation would suffer.
Once our solutions are deployed to our customers, our customers rely on our support services to resolve any related issues. High-quality education and customer support is important for the successful
marketing and sale of our solutions and for the renewal of existing customers. The importance of high quality customer support will increase as we expand our business and pursue new enterprise customers. If we do not help our customers quickly
resolve post-deployment issues and provide effective ongoing support, our ability to sell additional services to existing customers would suffer and our reputation with existing or potential customers would be harmed. Also, certain of our
maintenance agreements contain service level agreements under which we guarantee specified availability of the Eloqua Platform. Failure to meet these requirements could result in contractual penalties or the loss of the contract and/or customers and
materially adversely impact our business, results of operations and financial condition.
Failure to effectively develop
and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
Our ability to increase our customer base and achieve broader market acceptance of our solutions will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to
continue expanding our direct sales force and engaging additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously
harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct
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sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales
personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated third-party channel partners, if any existing or future third-party channel partners fail
to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support the products and services of these other providers.
Future product development is dependent on adequate research and development resources.
In order to remain competitive, we must continue to develop new products, applications and enhancements to our existing solutions,
especially as we further expand our capabilities. Maintaining adequate research and development resources, such as the appropriate personnel and development technology, to meet the demands of the market is essential. If we are unable to develop
solutions internally due to certain constraints, such as high employee turnover, lack of management ability or a lack of other research and development resources, we may be forced to expand into a certain market or strategy via an acquisition for
which we could potentially pay too much or unsuccessfully integrate into our operations. In addition, our research and development organization is located primarily in Toronto, Canada and Vienna, Virginia, and we may have difficulty hiring suitably
skilled personnel in these regions or expanding our research and development organization to facilities located in other geographic locations. Further, many of our competitors expend a considerably greater amount of funds on their respective
research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors research and development programs. Our failure to maintain adequate research and development
resources or to compete effectively with the research and development programs of our competitors would present an advantage to such competitors.
As a result of our customers increased usage of our on-demand software, we will need to continually improve our computer network and infrastructure to avoid service interruptions or slower
system performance.
As usage of our on-demand software grows and as customers use it for more complicated tasks, we
will need to devote additional resources to improving our computer network, our application architecture and our infrastructure in order to maintain the performance of our platform. Any failure or delays in our computer systems could cause service
interruptions or slower system performance. If sustained or repeated, these performance issues could reduce the attractiveness of the Eloqua Platform to customers. These performance issues could result in lost customer opportunities and lower
renewal rates, any of which could hurt our revenue growth, customer loyalty and reputation. We may need to incur additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand if our systems
cannot handle current or higher volumes of usage.
If our solutions fail to perform properly due to defects or similar
problems, and if we fail to develop an enhancement to resolve any defect or other software problem, we could lose customers, become subject to product liability, performance or warranty claims or incur significant costs, and our business may be
harmed and our results of operations and financial condition could be materially adversely affected.
Our operations
are dependent upon our ability to prevent system interruption. The software applications underlying our platform are inherently complex and may contain material defects or errors, which may cause disruptions in availability or other performance
problems. The costs incurred in correcting any material defects or errors in our software may be substantial and could materially adversely affect our operating results. We have from time to time found defects in our solutions and may discover
additional defects in the future. We may not be able to detect and correct defects or errors before installing our solutions. Consequently, we or our customers may discover defects or errors after our solutions have been implemented. We implement
bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services and
related system outages, customers could elect not to renew, or delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.
The occurrence of any defects, errors, disruptions in service or other performance problems with our platform, whether in connection with the day-to-day operation, upgrades or otherwise, could result in:
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lost or delayed market acceptance and sales of our solutions;
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delays in payment to us by customers;
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injury to our reputation;
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diversion of our resources;
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legal claims, including warranty and product liability claims, against us;
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increased service and warranty expenses or financial concessions; and
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increased insurance costs.
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Interruptions or delays in service from our single third-party data center provider could impair our ability to deliver our services to our customers, resulting in customer dissatisfaction, damage
to our reputation, loss of customers, limited growth and reduction in revenue.
We currently serve our customers from
a single third-party data center hosting facility located in Toronto, Canada. Our operations depend, in part, on our third-party facility providers ability to protect this facility against damage or interruption from natural disasters, power
or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangement is terminated, or if there is a lapse of service or damage to this facility, we could experience interruptions in our service as
well as delays and additional expenses in arranging new facilities and services.
Any damage to, or failure of, the systems of
our third-party providers could result in interruptions to our service. Despite precautions taken at our data center, the occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the facility without adequate
notice, or other unanticipated problems at this facility could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery arrangements, our business could be harmed.
We design the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical
errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error,
our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our revenue. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us
for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could materially adversely affect
our business.
If our security measures are breached and unauthorized access is obtained to a customers stored
consumer data or any consumer data that we may store from time to time or if data is lost due to hardware failures or errors, our solutions may be perceived as not being secure, customers may curtail or stop using our solutions and we may incur
significant legal liability and financial exposure.
Our solutions involve the storage and transmission of
customers proprietary information, including certain buyer data, and security breaches could expose us to a risk of loss or unauthorized disclosure of this information, litigation and possible liability, as well as damage our relationships
with our customers. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, or during transfer of data to additional data centers or at any time, and, as a result, someone obtains
unauthorized access to our data or our customers data, our reputation could be damaged, our business may suffer and we could incur significant liability.
Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these
techniques or to
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implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers.
Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition.
Moreover, if a high profile security breach occurs with respect to another SaaS provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain
existing customers or attract new ones.
Additionally, third parties may attempt to fraudulently induce employees or customers
into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data or our customers data, which could result in significant legal and financial exposure and a loss of confidence in the
security of our service and ultimately harm our future business prospects. A party who is able to compromise the security of our facilities could misappropriate either our proprietary information or the personal information of our customers, or
cause interruptions or malfunctions in our operations. We may be required to expend significant capital and financial resources to protect against such threats or to alleviate problems caused by breaches in security.
Furthermore, our ability to collect and report data may be interrupted by a number of other factors, including our inability to access
the internet, the failure of our network or software systems or variability in user traffic on customer websites. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to
litigation.
Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms,
or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert managements attention.
If we are unable to expand and maintain our relationships with third parties such as system integrators, marketing service
providers, marketing agencies, complementary software vendors or other business alliance partners, our revenue or revenue growth and our results of operations could be materially and adversely impacted.
Many of our customers were made aware of our solutions by third parties, including system integrators, marketing service providers,
marketing agencies and complementary software vendors, with whom we have maintained strategic relationships. We may not be able to develop or maintain strategic relationships with these, or other, third parties for a number of reasons, including
their existing relationships with our competitors or prospective competitors. If we are unsuccessful in establishing or maintaining our strategic relationships, our ability to compete in the marketplace or to grow our revenue could be impaired, and
our results of operations would suffer. Additionally, if we cannot leverage our sales and services resources through our strategic relationships with third parties, we may need to hire and train additional qualified sales personnel and incur
additional costs associated with providing services, which may adversely affect our operating results. Even if we are successful in establishing and maintaining these relationships, we cannot assure you that these will result in increased customers
or revenue.
If we do not or cannot maintain the compatibility of our solutions with third-party applications that our
customers use in their businesses, demand for our solutions could decline.
The functionality of our on-demand
software depends, in part, on our ability to integrate it with third-party applications and data management systems that our customers use and from which they obtain buyer data. In addition, we rely on access to third-party application programming
interfaces, or APIs, to provide our social media channel offerings through social media platforms. Third-party providers of marketing applications and APIs may change the features of their applications and platforms, restrict our access to their
applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party
applications and platforms with our on-demand software, which could negatively impact our offerings and harm our business. Further, if we fail to integrate our software with new third-party applications and platforms that our customers use for
marketing purposes, or to adapt to the data transfer requirements of such third-party applications and platforms, we may not be able to offer the functionality that our customers need, which would negatively impact our offerings and, as a result,
harm our business.
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We face significant competition from both established and new companies offering
applications and other marketing software, as well as internally developed software, which may have a negative effect on our ability to add new customers, retain existing customers and grow our business.
The services we provide are also offered by others and in the future may be offered by an increasing number of parties. The market for
marketing automation and revenue performance management software is evolving, highly competitive and significantly fragmented, and we expect competition to continue to increase in the future. With the introduction of new technologies and the influx
of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. We face intense competition from software companies that develop marketing
technologies and from marketing services companies that provide interactive marketing services.
Our competitors vary with
each challenge that our solutions address, but some of these providers include:
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plan and spend management software vendors, such as Oracle Corporation and SAP AG;
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workflow, project management and brand management vendors, such as marketing agencies who develop custom systems for their clients;
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email marketing software vendors, including Responsys, Inc., ExactTarget, Inc., Constant Contact, Inc. and numerous other email marketing companies;
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campaign management software vendors, such as Oracle Corporation, SAS Institute Inc., Aprimo, Inc. (a division of Teradata Corporation), and Unica
Corporation (a division of International Business Machines Corporation, or IBM); and
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lead management software vendors, such as Oracle Corporation, Genius.com, Incorporated, Marketo, Inc., Neolane Inc., Pardot LLC (acquired by Exact
Target, Inc.), SilverPop Systems, Inc., and smartFOCUS Group plc.
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We expect to face additional competition
with the continued development and expansion of the revenue performance management and marketing automation software markets. We also expect competition to increase as a result of software industry consolidation, including through possible mergers
or partnerships of two or more of our competitors or the acquisition of our competitors by larger and better-funded companies. For instance, in December 2010, Teradata completed its acquisition of Aprimo and in October 2010, IBM completed its
acquisition of Unica.
We also expect that new competitors, such as enterprise software vendors that have traditionally
focused on enterprise resource planning or back office applications, will continue to enter the marketing automation market with competing products, which could have an adverse effect on our business, results of operations and financial condition.
For example, due to the growing popularity of new development models such as SaaS, the traditional barriers to entry to the marketing automation market continue to decrease and we expect to face additional competition from SaaS application vendors.
In addition, sales force automation and customer relationship management system vendors, such as Microsoft Corporation, NetSuite Inc., Oracle Corporation, Sage Software, Inc., salesforce.com, inc. and SAP AG, could acquire or develop solutions that
compete with our offerings.
Our current and potential competitors may have significantly more financial, technical, marketing
and other resources than we have, are able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive customer bases and broader customer relationships than we have, and may have
longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In some cases, these vendors may also
be able to offer interactive marketing applications at little or no additional cost by bundling them with their existing applications. If we are unable to compete with such companies, the demand for our solutions could substantially decline. To the
extent any of our competitors have existing relationships with potential customers, those customers may be unwilling to purchase our solutions because of those existing relationships with that competitor.
Competition could significantly impede our ability to sell additional solutions on terms favorable to us. Businesses may continue to
enhance their internally developed software, rather than investing in commercial
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software solutions such as ours. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less
competitive. In addition, if these competitors develop products with similar or superior functionality to our solutions, we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current
pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive
pressures will not materially adversely affect our business, results of operations and financial condition.
Consolidation among our competitors and our competitors strategic partnerships may adversely affect our business.
If one or more of our competitors were to merge or partner with another of our competitors, the change in the
competitive landscape could adversely affect our ability to compete effectively. For example, in October 2012, ExactTarget, Inc. acquired Pardot LLC. Our competitors may also establish or strengthen cooperative relationships with our current or
future strategic distribution and technology partners or other parties with whom we have relationships, thereby limiting our ability to promote and implement our solutions. Disruptions in our business caused by these events could reduce our revenue.
Failure or perceived failure by us to comply with our privacy policy or legal or regulatory requirements in one or
multiple jurisdictions could result in proceedings, actions or penalties against us.
The effectiveness of our
solutions relies on our customers storage and use of data concerning their customers. Our customers collection and use of data for consumer profiling may raise privacy and security concerns and negatively impact the demand for our
solutions. We have implemented various features intended to enable our customers to better comply with privacy and security requirements, such as opt-out or opt-in messaging and checking, the use of anonymous identifiers for sensitive data and
restricted data access, but these security measures may not be effective against all potential privacy concerns and security threats. If a breach of customer data security were to occur, our solutions may be perceived as less desirable, which would
negatively affect our business and operating results.
In addition, governments in some jurisdictions have enacted or are
considering enacting consumer data privacy legislation, including laws and regulations applying to the solicitation, collection, processing and use of consumer data. Because many of the features of our applications use, store and report on personal
information from our customers, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm
our business. There are numerous lawsuits in process against various technology companies that collect and use personal information. If those lawsuits are successful, it would increase our liability and hurt our business. Furthermore, the costs of
compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our on-demand software and reduce overall demand for it. Privacy concerns,
whether or not valid, may inhibit market adoption of our on-demand software.
If our on-demand software is perceived to cause
or is otherwise unfavorably associated with invasions of privacy, whether or not illegal, it may subject us or our customers to public criticism. Existing and potential future privacy laws and increasing sensitivity of consumers to unauthorized
disclosures and use of personal information may create negative public reactions related to interactive marketing, including marketing practices of our customers. Public concerns regarding data collection, privacy and security may cause some of our
customers customers to be less likely to visit their websites or otherwise interact with them. If enough consumers choose not to visit our customers websites or otherwise interact with them, our customers could stop using our on-demand
software. This discontinuance in use, in turn, would reduce the value of our service and inhibit or reverse the growth of our business.
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The standards that private entities use to regulate the use of email have in the past
interfered with, and may in the future interfere with, the effectiveness of our on-demand software and our ability to conduct business.
Our customers rely on email to communicate with their existing or prospective customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often
advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain blacklists of
companies and individuals, and the websites, internet service providers and internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations
that the blacklisting entity believes are appropriate. If a companys internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address
that subscribes to the blacklisting entitys service or purchases its blacklist.
From time to time, some of our internet
protocol addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type
could interfere with our ability to market our on-demand software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers email
marketing campaigns, all of which could have a material negative impact on our business and results of operations.
Existing federal, state and foreign laws regulating email and text messaging marketing practices impose certain obligations on the
senders of commercial emails and text messages, which could minimize the effectiveness of our on-demand software or increase our operating expenses to the extent financial penalties are triggered.
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes certain requirements for
commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails
to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the
CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult content or content regarding harmful
products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing solution. Moreover,
noncompliance with the CAN-SPAM Act carries significant financial penalties. We also may be required to change one or more aspects of the way we operate our email marketing software solution business.
In addition, certain foreign jurisdictions, such as Australia, Canada and the European Union, have enacted laws that regulate sending
email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has
opted-in to receiving it. A requirement that recipients opt into, or the ability of recipients to opt out of, receiving commercial emails may minimize the effectiveness of our on-demand software.
In addition, the CAN-SPAM Act and regulations implemented by the Federal Communications Commission pursuant to the CAN-SPAM Act, and the
Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent.
Non-compliance with these laws and regulations carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating
the distribution of commercial email or text messages, whether as a result of violations by our customers or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would
adversely affect our financial performance and significantly harm our reputation and our business.
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In addition, U.S., state or foreign jurisdictions may in the future enact legislation or
laws restricting the ability to conduct interactive marketing activities in mobile, social and web channels. Any such restrictions could require us to change one or more aspects of the way we operate our business, which could impair our ability to
attract and retain customers or increase our operating costs or otherwise harm our business.
Changes in laws,
regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions.
The level of our customers and potential customers activity in the business processes our solutions are used to support is sensitive to many factors beyond our control, including governmental
regulation and regulatory policies. Many of our customers and potential customers in the healthcare, financial and other industries are subject to substantial regulation and may be the subject of further regulation in the future. Accordingly,
significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and could cause the demand for and sales of our solutions to decrease. Any change in
the scope of applicable regulations that negatively impacts our customers use of our solutions would have a material adverse impact on our business, results of operations and financial condition. Moreover, we may have to reconfigure our
existing services or develop new services to adapt to new regulatory rules and policies which will require additional expense and time. Such changes could adversely affect our business, results of operations and financial condition.
As internet commerce develops, federal, state and foreign governments may propose and implement new taxes and new laws to regulate
internet commerce, which may negatively affect our business.
As internet commerce continues to evolve, increasing
regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to interactive marketing. The cost to
comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign
governmental or regulatory agencies may decide to impose taxes on services provided over the internet or via email. Such taxes could discourage the use of the internet and email as a means of commercial marketing, which would adversely affect the
viability of our on-demand software.
Evolving regulations and standards concerning data privacy may restrict our
customers ability to solicit, collect, process, disclose and use data necessary to conduct effective marketing campaigns and analyze the results or may increase their costs, which could harm our business.
Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation,
collection, processing, disclosure or use of personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by
such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals consent to use personal information for certain purposes. Other proposed legislation could, if enacted,
impose additional requirements and prohibit the use of certain technologies that track individuals activities on web pages or that record when individuals click through to an internet address contained in an email message. Such laws and
regulations could restrict our customers ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our solutions.
If we fail to adequately protect our proprietary rights, our competitive position could be impaired and we may lose valuable
assets, generate reduced revenue and incur costly litigation to protect our rights.
Our success is dependent, in
part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and
services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual
property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting
against unauthorized use, copying, transfer
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and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the
same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality
agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information.
Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions.
To date, we have two U.S. patent applications and one international patent application pending. The process of seeking patent protection can be lengthy and expensive. Any of our pending or future patent
applications, whether or not challenged, may not be issued with the scope of the claims we seek, if at all. We are unable to guarantee that additional patents will issue from pending or future applications or that, if patents issue, they will not be
challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Some of our technologies are not covered by any patent or patent application. The
confidentiality agreements on which we rely to protect certain technologies may be breached and may not be adequate to protect our proprietary technologies. In addition, we depend, in part, on technology of third parties licensed to us for our
solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, reduced service levels or delayed sales of our solutions.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these
rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and
distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking
the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our managements attention and
resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or
injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms or at
all. Although we do not expect that our inability to license this technology in the future would have a material adverse effect on our business or operating results, our inability to license this technology could adversely affect our ability to
compete.
Our results of operations may be adversely affected if we are subject to a protracted infringement claim or a
claim that results in a significant damage award.
We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors grows and the functionality of products in different industry segments overlaps. Our competitors or other third parties may challenge the validity or scope of our intellectual
property rights. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:
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require costly litigation to resolve and the payment of substantial damages, including treble damages if we are found to have willfully infringed a
third partys patents or copyrights;
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require significant management time;
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cause us to enter into unfavorable royalty or license agreements;
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require us to discontinue the sale of our products;
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require us to indemnify our customers or third-party service providers; or
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require us to expend additional development resources to redesign our products.
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We use open source software in our products, which could subject us to litigation or
other actions.
We use open source software in our products and may use more open source software in the future. From
time to time, there have been claims challenging companies that incorporate open source software into their products on the basis that the company failed to comply with the license terms governing use of such open source software. We, too, could be
subject to similar claims. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products. In
addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products. If we
inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products or take other remedial actions.
Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute
stockholder value and adversely affect our results of operations and financial condition.
We may in the future seek
to acquire or invest in businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may
divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. In addition, we do not have any experience in acquiring other
businesses. If we acquire additional businesses, we may not be able to integrate successfully the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition.
We can provide no assurances that we will be able to find and identify desirable acquisition targets or that we will be successful in
entering into an agreement with any one target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to
meet our expectations, our operating results, business and financial condition may suffer.
Changes in tax laws or
regulations that are applied adversely to us or our customers could increase the costs of our on-demand software and professional services and adversely impact our business.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could
adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to
us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise
our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our on-demand software and professional services in the future. Additionally, new, changed, modified or newly interpreted
or applied tax laws could increase our customers and our compliance, operating and other costs, as well as the costs of our on-demand software and professional services. Further, these events could decrease the capital we have available to
operate our business. Any or all of these events could adversely impact our business and financial performance.
We are
a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax
laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised
interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax,
interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material
impact on us and the results of our operations.
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Our business may be subject to additional obligations to collect and remit sales tax
and other taxes, and we may be subject to tax liability for past sales. Any successful action by state, foreign or other authorities to collect additional or past sales tax could adversely harm our business.
States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and
regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. We have recorded sales tax liabilities of $0.2 million as
of September 30, 2012 with respect to sales and use tax liabilities in various states and local jurisdictions. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax
authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to states and international jurisdictions for
which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in
substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.
We file sales tax returns in certain states within the United States as required by law and certain customer contracts for a portion of the solutions that we provide. We do not collect sales or other
similar taxes in other states and many of the states do not apply sales or similar taxes to the vast majority of the solutions that we provide. However, one or more states or foreign authorities could seek to impose additional sales, use or other
tax collection and record-keeping obligations on us or may determine that such taxes should have, but have not been, paid by us. Liability for past taxes may also include substantial interest and penalty charges. Any successful action by state,
foreign or other authorities to compel us to collect and remit sales tax, use tax or other taxes, either retroactively, prospectively or both, could adversely affect our results of operations and business.
The loss of key members of our senior management team or software development personnel could prevent us from executing our
business strategy.
Our success depends largely upon the continued services of our executive officers and other key
personnel. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our services and technologies. We do not have long-term employment agreements with any of our key personnel.
The loss of one or more of our key employees, including our engineering and technical staff, could seriously harm our business.
Competition for qualified personnel is intense and we may not be successful in attracting and retaining the key personnel that we need to
compete effectively. The value of our common stock may adversely affect our efforts to motivate the performance of our key personnel. It may be difficult to retain those employees who have substantial in-the-money, vested options or other equity
awards. Conversely, if options granted to our employees have exercise prices that are substantially above our then-current share price, it may be difficult to motivate and retain those employees. Additionally, if the market price of our common stock
does not increase or declines, it may limit our ability to attract new employees with equity incentives.
The failure to
attract and retain additional qualified personnel could prevent us from executing our business strategy.
To execute
our business strategy, we must attract and retain highly qualified personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the
future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications.
Many of
the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or
other equity incentives they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key
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employees. Furthermore, changes to generally accepted accounting principles in the United States relating to the treatment of stock options as a company expense may discourage us from granting
the size or type of stock-based compensation that job candidates require to join our company, and may result in our paying additional cash compensation or other stock-based compensation to job candidates to offset reduced stock option grants. If we
fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
Our international operations expose us to several risks, such as significant currency fluctuations and unexpected changes in the regulatory requirements of multiple jurisdictions.
During 2010 and 2011, revenue generated outside of the United States and Canada was 11% and 10% of total revenue,
respectively, based on the location of the legal entity of the customer with which we contracted. Our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates, particularly changes in the Canadian dollar,
due to our compensation expenses payable in local currencies. Although a majority of our revenue and operating expenses is denominated in U.S. dollars and we prepare our financial statements in U.S. dollars, a portion of our expenses is paid in
foreign currencies.
Our primary research and development operations are located in Toronto, Canada and Vienna, Virginia, but
we conduct research and development in other international locations as well. We currently have international offices outside of North America in Singapore, the United Kingdom, Germany and Belgium, which focus primarily on selling and implementing
our solutions in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:
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localization of our services, including translation into foreign languages and adaptation for local practices;
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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
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differing labor regulations, especially in the European Union and Canada, where labor laws are generally more advantageous to employees as compared to
the United States, including deemed hourly wage and overtime regulations in these locations;
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more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in
the European Union and Canada;
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reluctance to allow personally identifiable data related to non-U.S. citizens to be stored in databases within the United States, due to concerns over
the U.S. governments right to access information in these databases or other concerns;
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changes in a specific countrys or regions political or economic conditions;
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challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement
appropriate systems, policies, benefits and compliance programs;
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risks resulting from changes in currency exchange rates and the implementation of exchange controls, including restrictions promulgated by the Office
of Foreign Assets Control of the U.S. Department of the Treasury, and other trade protection regulations and measures;
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limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;
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limited or unfavorable intellectual property protection;
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exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and
regulations in other jurisdictions; and
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restrictions on repatriation of earnings.
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We have limited experience in marketing, selling and supporting our products and services
abroad. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our
international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in
establishing operations in other countries will produce desired levels of revenue or profitability.
We have not engaged in
currency hedging activities to limit risk of exchange rate fluctuations. Changes in exchange rates affect our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our
stockholders equity.
Changes in financial accounting standards or practices may cause adverse, unexpected
financial reporting fluctuations and affect our reported results of operations.
Generally accepted accounting
principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate
accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and
varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
For example, we have recently adopted and applied a new revenue recognition standard, which may in the future be subject to varying interpretations that could materially impact how we recognize revenue. Accounting for revenue from sales of
subscriptions to software is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve as FASB continues to consider applicable accounting standards in this area.
For example, we recognize subscription revenue in accordance with Accounting Standards Update 2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements a Consensus of the Emerging Issues Task Force
, or ASU 2009-13 (formerly known as EITF 08-01). The American Institute of Certified Public Accountants and the SEC continue to issue
interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. As a result of future interpretations or
applications of existing accounting standards, including ASU 2009-13, by regulators or our internal or independent accountants, we could be required to delay revenue recognition into future periods, which would adversely affect our operating
results.
Certain factors have in the past and may in the future cause us to defer recognition for license fees beyond
delivery. For example, the inclusion in our software arrangements of customer acceptance testing, specified upgrades or other material non-standard terms could require the deferral of license revenue beyond delivery.
Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software
revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales
cycle, and we may accept terms and conditions that do not permit revenue recognition at the time of delivery.
The
Investment Canada Act or the Competition Act (Canada) may apply to prevent or delay a change of control of our company.
Under the Investment Canada Act, any investment by a non-Canadian (which includes any entity which is not controlled or
beneficially owned by Canadians) involving the direct acquisition of control of a Canadian Business is subject to review by the Investment Review Division of Industry Canada if, in the case of an investment by or from an investor from a
state that is a member of the World Trade Organization, the asset value of the entity or entities being acquired is equal to or exceeds CDN$330 million (indexed annually to account for inflation). A Canadian Business is defined to
comprise any business carried on in Canada that has:
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a place of business in Canada;
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one or more employees or self-employed individuals working in connection with the business; and
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assets in Canada used in carrying out the business.
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Based on this definition, we currently have a Canadian Business which is operated through our consolidated Canadian subsidiary, Eloqua Corporation. A reviewable acquisition may not proceed unless the
relevant Minister is satisfied that the investment is likely to be a net benefit to Canada. An investment by a non-Canadian involving the acquisition of control of a Canadian Business that does not meet the CDN$330 million threshold still requires
the acquirer to make a formal notification under the Investment Canada Act within 30 days after closing.
The sale of our
company may also be subject to formal pre-notification obligations under Canadas Competition Act if certain thresholds are met. For acquisitions of more than 20% of the issued and outstanding shares of a public company, the thresholds are
CDN$400 million for the combined size of the parties to the transaction and their affiliates, and CDN$77 million for the size of the target company. Independent of pre-notification obligations, the sale of our company may also raise competition law
issues under the merger provisions of the Competition Act that could be scrutinized by the Canadian Commissioner of Competition.
The application of the Investment Canada Act or the Competition Act (Canada) could prevent or delay an acquisition of control of our company and may limit strategic opportunities for our stockholders to
sell their common stock.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your
shares at or above the price at which you purchase it.
The trading prices of the securities of technology companies
have historically been highly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the price at which you purchase it. The market price of our common stock may fluctuate significantly in response to
numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations of investors;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital
commitments;
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announcements by us of negative conclusions about our internal controls and our ability to accurately report our financial results;
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changes in operating performance and stock market valuations of software or other technology companies, or those in our industry in particular;
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price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a
whole;
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lawsuits threatened or filed against us;
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business our industry;
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changes in key personnel;
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sales of common stock by us, members of our management team or our stockholders;
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the granting or exercise of employee stock options or other equity awards;
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events; and
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the realization of any risks described under Risk Factors.
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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market
prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted
securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and
adversely affect our business.
We do not currently intend to pay dividends on our common stock and, consequently, your
ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have
never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our existing credit facilities prohibit us from paying cash dividends, and any future financing agreements
may prohibit us from paying any type of dividends. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success
of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the
only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash
dividends should not purchase our common stock.
Anti-takeover provisions in our charter documents and Delaware law may
delay or prevent an acquisition of our company.
Our amended and restated certificate of incorporation, amended and
restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:
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authorize blank check preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation,
dividend and other rights superior to our common stock;
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create a classified board of directors whose members serve staggered three-year terms;
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specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive
officer or the president;
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stockholder action by written consent will be prohibited;
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establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to our board of directors;
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provide that our directors may be removed only for cause;
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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
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specify that no stockholder is permitted to cumulate votes at any election of directors;
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our board of directors will be expressly authorized to modify, alter or repeal our amended and restated bylaws; and
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require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.
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These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.
Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from
growing.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to
raise additional funds to expand our marketing and sales and product development efforts or to make acquisitions. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we
may be unable to fund the expansion of our marketing and sales and research and development efforts or take advantage of acquisition or other opportunities, which could seriously harm our business and results of operations. If we incur debt, the
debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional
equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting
their interest.
Our business is subject to changing regulations regarding corporate governance, disclosure controls,
internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently
enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial
compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending
December 31, 2013, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act will require
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that we incur substantial accounting expense and expend significant management efforts. Prior to our initial public offering, we had never been required to test our internal controls within a
specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies persist.
We will be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent
registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be
filed with the SEC, or the date we are no longer an emerging growth company as defined in the recently enacted Jumpstart Our Business Startups Act of 2012, or the JOBS Act, if we take advantage of the exemption to auditor attestation
required by Section 404(b) of the Sarbanes-Oxley Act available under the JOBS Act.
If we are not able to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or
other regulatory authorities, which would require additional financial and management resources.
Any failure to develop or
maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal
controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC,
beginning for our fiscal year ending December 31, 2013 under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence
in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing
accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce
accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the
Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could
decline.
In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, and qualified executive officers.
If we fail to maintain
proper and effective internal controls, our business and results of operations could be impaired.
Ensuring that we
have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We are in the process of
documenting, reviewing and, if appropriate, improving our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act. Although we did not conduct a formal internal control audit, during the course of the audit of
our financial statements for the year ended December 31, 2011, three deficiencies in internal control that were considered to be significant deficiencies were identified to our audit committee: (i) a lack of process and controls in place
over the review of certain account reconciliations; (ii) a lack of a formal, documented review process over entries recorded into the accounting system; and (iii) inadequate procedures and controls over the timely processing of accounts
payable and the related classification of expenses.
A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention by those charged with an entitys governance.
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Absent remediation, a significant deficiency adversely affects an entitys ability to initiate, authorize, record, process or report financial data reliably in accordance with generally
accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entitys financial statements that is more than inconsequential will not be prevented or detected by the entitys internal control.
We have made substantial progress in addressing each of the deficiencies identified to our audit committee. Our remediation to date has included the expansion and enhancement of our accounting resources. We formalized the monthly closing and
reporting process and developed a formal procedure for the preparation and review of the monthly reconciliations and journal entries. In addition, we have increased the efficiency surrounding the processing of accounts payable and developed a formal
review process for the classification of expenses. We cannot currently provide assurances about when the remediation efforts will be completed or that the steps taken will fully remediate the deficiencies identified above.
Further, the process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to
anticipate and react to changes in our business and economic and regulatory environments. Our testing, or the subsequent testing by our independent auditors, may reveal additional deficiencies in our internal controls over financial reporting,
including those deemed to be significant deficiencies or material weaknesses. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our
results of operations, our ability to operate our business, our stock price and investors views of us.
We are an
emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, only two years of audited financial statements in addition to any required interim financial statements and correspondingly reduced disclosure in managements discussion and analysis of financial condition and results of
operations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval
of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth
company upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (ii) the date we qualify as a large accelerated filer, with at least $700 million of
equity securities; (iii) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; and (iv) December 31, 2017. We may choose to take advantage of some but
not all of these reduced reporting burdens. We have not taken advantage of any of these reduced reporting burdens, although we may choose to do so in future filings and if we do, the information that we provide our security holders may be different
than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
However, we have elected to opt out of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging
growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
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Our stock price could decline due to the large number of outstanding shares of our
common stock eligible for future sale.
Sales of a substantial number of shares of our common stock in the public
market or the market perception that the holder or holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. These sales could also make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
As of September 30, 2012, we had an aggregate of
34,010,609 shares of common stock outstanding. Of these shares, approximately 24.8 million shares will be eligible for sale upon the expiration of lock-up agreements with us or with the underwriters for our initial public offering, subject
in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act. The lock-up agreements expire 180 days after the date of the prospectus for our initial public offering of August 1, 2012, subject to potential
extension in the event we release earnings results or material news or a material event relating to us occurs near the end of the lock-up period. J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., as representatives of the underwriters,
may, in their discretion and at any time, release all or any portion of the securities subject to lock-up agreements with the underwriters. We registered 12,092,730 shares of our common stock that have been issued or reserved for future issuance
under our stock incentive plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the lock-up agreements, unless they are
held by affiliates, as that term is defined in Rule 144 of the Securities Act.
We may also issue shares of our
common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price
of our common stock to decline.
The concentration of our capital stock ownership with insiders will likely limit your
ability to influence corporate matters including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
Our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially own approximately 61.3% percent of our common stock. As a result, these
stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even
if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
Our management will have broad discretion over the use of the proceeds we received in our initial public offering and might not
apply the proceeds in ways that increase the value of your investment.
Our management will have broad discretion to
use the net proceeds from our initial public offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of our initial public offering in ways that
increase the value of your investment. Until we use the net proceeds from our initial public offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from our
initial public offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
If securities or industry analysts do not continue to publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry
analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes
incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, or downgrades our common stock, demand for our
stock could decrease, which could cause our stock price or trading volume to decline.
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