ITEM 1A.
RISK FACTORS
Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ
materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Quarterly
Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will
be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
If we
are unable to attract new customers and retain existing customers, our business and results of operations will be affected adversely.
To succeed,
we must continue to attract and retain customers. We rely on a variety of methods to attract new customers, such as paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other
links that direct customers to our website, television and radio advertising, the efforts of our partners and the inclusion of a link to our website in substantially all of our customers emails. In addition, we are committed to providing our
customers with a high level of support. As a result, we believe many of our new customers are referred to us by existing customers. However, customers cancel their accounts for many reasons, including economic concerns, business failure or a
perception that they do not use our products effectively, the service is not a good value and that they can manage their online marketing efforts without our products. In some cases, we terminate an account because the customer fails to comply with
our standard terms and conditions. As our customer base continues to grow, even if our customer retention rates remain the same on a percentage basis, the absolute number of customers we lose each month will increase. We must continually add new
customers to replace customers whose accounts are cancelled or terminated, which may involve significantly higher marketing expenditures than we currently anticipate. If we are unable to use any of our current marketing initiatives or the cost of
such initiatives were to significantly increase or such initiatives or our efforts to satisfy our existing customers are not successful, we may not be able to attract new customers or retain existing customers on a cost-effective basis and, as a
result, our business and results of operations would be affected adversely.
Beginning in April 2014, we formally launched Constant Contact Toolkit, our
integrated online marketing platform, to all new customers. We have relatively little experience selling an integrated product. To the extent that offering this integrated platform leads to a decline in the number of customers or a decline in
revenue, or negatively impacts our existing customers, our business and results of operations may be affected adversely.
Our business is
substantially dependent on the market for email marketing services for small organizations.
We derive, and expect to continue to derive, a
substantial portion of our revenue from our email marketing product for small organizations, including small businesses, associations and non-profits. For the three months ended March 31, 2014, our revenue from our email marketing product alone
was approximately 84% of our total revenue. Widespread acceptance of email marketing among small organizations will continue to be critical to our future growth and success. There is no certainty regarding how the market for email marketing will
continue to develop, or whether it will experience any significant contractions. Our ability to attract and retain customers will depend in part on our ability to make email marketing convenient, effective and affordable. If small organizations
determine that email marketing does not sufficiently benefit them or utilize alternative or new electronic methods of communicating with their customers, existing customers may cancel their accounts and potential customers may decide not to adopt
email marketing. If the market for email marketing services fails to continue to grow or grows more slowly than we currently anticipate, demand for our services may decline and our revenue would suffer.
26
Our growth strategy requires us to expand our product offerings beyond email marketing and this expansion
may not be successful.
We have traditionally focused our business on providing our email marketing product for small organizations, but in the
last few years we have significantly expanded our product offerings. In 2007, we introduced our survey product and our add-on email archive service that enables our customers to archive their past email campaigns. In 2009, we launched our event
marketing product. Through our acquisition of Nutshell Mail, Inc., which we completed in May 2010, we provide a tool for small organizations to monitor and engage with social media networks. In January 2012, we launched our Social Campaigns product
which allows small businesses the ability to run multi-step, results-oriented campaigns on their social networks. Also, in January 2012, we acquired CardStar, a leading developer of mobile applications that extend the use of loyalty, rewards and
membership cards and mobile coupons among consumers. In February 2012, we introduced our SaveLocal product, which makes it quick and easy for our customers to create, run and manage local deals. In June 2012, we acquired SinglePlatform, Corp. or
SinglePlatform, a company that helps small businesses get discovered through web and mobile searches by providing a single place to update relevant business information. Our efforts to introduce new products beyond our email marketing product or to
offer a bundled offering of two or more of our products may not result in significant revenue growth, may not be complementary to our email marketing product, may not be timely, may divert management resources from our existing operations and
require us to commit significant financial resources to an unproven business or product or may be confusing to our customers, any of which may harm our financial performance and impede our long-term growth strategy.
If the security of our customers confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our
reputation may be severely harmed, we may be exposed to liability and we may lose the ability to offer our customers a credit card payment option.
Our system stores our customers proprietary email contacts lists, credit card information and other critical data. Any accidental or willful security
breaches or other unauthorized access could expose us to liability for the loss of such information, adverse regulatory action by federal and state governments, time-consuming and expensive litigation and other possible liabilities as well as
negative publicity, which could severely damage our reputation. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a
result, a third party obtains unauthorized access to any of our customers data, our relationships with our customers will be severely damaged, and we could incur significant liability. Because techniques used to obtain unauthorized access or
to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures.
In addition, as we continue to grow our customer base and our brand becomes more widely known and recognized, we may become a more inviting target for third parties seeking to compromise our security systems.
The federal government and many states, including Massachusetts, have enacted laws requiring companies to notify individuals of data security breaches
involving certain types of personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security measures. Any
security breach, whether actual or perceived, would harm our reputation, and we could lose customers and fail to acquire new customers. In addition, failure to maintain compliance with the data protection policy standards adopted by the major credit
card issuers may limit our ability to offer our customers a credit card payment option. Any loss of our ability to offer our customers a credit card payment option would harm our reputation and make our products less attractive to many small
organizations by negatively impacting our customer experience and significantly increasing our administrative costs related to customer payment processing.
Our existing general liability insurance may not cover any, or cover only a portion of any, potential claims related to security breaches to which we are
exposed or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage would increase our operating expenses and
reduce our net income.
U.S. federal legislation and the laws of many foreign countries impose certain obligations on the senders of commercial
emails, which could minimize the effectiveness of our products, particularly our email marketing product, and establish financial penalties for non-compliance, which could increase the costs of our business.
The 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
27
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 or other 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 products. Moreover, non-compliance
with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email such as
the laws of Canada and the United Kingdom, whether as a result of violations by our customers or if we were deemed to be 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 business, and our reputation would suffer. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers
or could increase our operating costs.
The market in which we participate is highly competitive and, if we do not compete effectively, our
operating results could be harmed.
The market for our products is highly competitive and rapidly changing, and the barriers to entry are
relatively low. 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, limit customer attrition and
maintain our prices.
Our principal email marketing competitors include providers of email marketing products for small to medium size businesses such as
AWeber Systems, Inc., iContact Corporation, a subsidiary of Vocus, Inc., Protus, a subsidiary of j2 Global Communications, Inc. (Campaigner), The Rocket Science Group LLC (MailChimp), VerticalResponse, Inc., a subsidiary of Deluxe Corporation, and
Vistaprint N.V. These vendors typically charge a low monthly fee or a low fee per number of emails sent and, in some cases, they have a free offering. Competition could result in reduced sales, reduced margins or the failure of our email marketing
product to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, there are a number of other vendors that are focused on providing email marketing products for larger organizations, including
Alterian, a subsidiary of SDL, plc, CheetahMail, Inc., a subsidiary of Experian Group Limited, ExactTarget, Inc., a subsidiary of Salesforce.com, Inc., Responsys Inc. and Eloqua Limited, subsidiaries of Oracle Corporation, Silverpop Systems Inc.,
and StrongMail Systems, Inc. While we do not compete currently with vendors of email marketing products serving larger customers, we may compete with these providers in the future. Finally, in the future, our email marketing product may experience
competition from ISPs, advertising and direct marketing agencies and other large established businesses, possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to
develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating
results could be harmed. In addition, one or more of these entities could decide to offer a competitive email marketing product at no cost or low cost in order to generate revenue as part of a larger product offering.
Our other products also face intense competition. EventSpot, our event marketing product, competes with offerings by Eventbrite, Inc., Evite, LLC, a
wholly-owned, operating business of IAC/InterActiveCorp, Regonline, a division of The Active Network, Inc., and Cvent, Inc. Our Social Campaigns product competes with offerings by Offerpop Corporation, Pagemodo, a subsidiary of VistaPrint N.V.,
Vocus Social Media LLC doing business as North Social and Wildfire Interactive, a subsidiary of Google Inc. Our survey product competes with similar offerings by Surveymonkey.com Corporation and Widgix, LLC doing business as SurveyGizmo. Our
SaveLocal product competes with offerings by Groupon, Inc., LivingSocial, Inc., Amazon Local and Googleoffers. Our SinglePlatform product competes with offerings by Yext, Inc. and Locu Inc, a subsidiary of GoDaddy.com, LLC. In addition, our bundled
product offerings could face competition from new competitors who are different from the companies we currently compete with on our individual products.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote
greater resources to the development, promotion, sale and support of their products. Our current and potential competitors may have more extensive customer bases and broader customer relationships than we have. In addition, these companies may have
longer operating histories and greater name recognition than we have and may be able to bundle email marketing, event marketing or survey products with other
28
products that have already gained widespread market acceptance and offer them at no cost or low cost. These competitors may be better able to respond quickly to new technologies and to undertake
more extensive marketing campaigns. If we are unable to compete with such companies, the demand for our products could substantially decline.
Any
significant disruption in service on our website or in our computer systems, or in our customer support services, could result in a loss of customers.
The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level
of customer service, reputation and ability to attract new customers and retain existing customers. In providing our services, we rely on third-party hosting facilities, bandwidth providers, ISPs and mobile networks. Our production system hardware
and the disaster recovery operations for our production system hardware are co-located in third-party hosting facilities. These facilities do not guarantee that our customers access to our products will be uninterrupted, error-free or secure.
Our operations also depend on the ability of our third-party hosting facilities to protect their and our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and
other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our third-party hosting arrangements are terminated, or there is a lapse of service or damage to these
facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. In addition, our customer support services, which are located at our headquarters in Waltham, Massachusetts and at our
sales and support office in Loveland, Colorado, would experience interruptions as a result of any disruption of electrical, phone or any other similar facility support services. Any interruptions or delays in access to our products or customer
support, whether as a result of third-party error, our own error, natural disasters, security breaches or malicious actions, such as denial-of-service or similar attacks, whether accidental or willful, could harm our relationships with customers and
our reputation. 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 could damage our brand and reputation, divert our employees attention, reduce
our revenue, subject us to liability and cause customers to cancel their accounts, any of which could adversely affect our business, financial condition and results of operations.
Our production disaster recovery system is located at one of our third-party hosting facilities. Our corporate disaster recovery system is located at our
headquarters in Waltham, Massachusetts. Neither system provides real-time backup or has been tested under actual disaster conditions and neither system may have sufficient capacity to recover all data and services in the event of an outage. In the
event of a disaster in which our production system hardware and the disaster recovery operations for our production system hardware are irreparably damaged or destroyed, we would experience interruptions in access to our products. Moreover, our
headquarters and one of the third-party facilities that hosts our production system hardware are located within several miles of each other. As a result, any regional disaster could affect these locations equally. Any or all of these events could
cause our customers to lose access to our products, which will harm our business and results of operations.
Third parties have asserted, and may in
the future assert, claims that we are infringing their intellectual property, which, whether successful or not, could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely
affected.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by
frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties, including so-called non-practicing entities, which are entities that have no operating business but exist purely as
collectors of patents, have asserted, and in the future may assert, patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other forms of communication. These claims, whether or not successful,
could:
|
|
|
divert managements attention;
|
|
|
|
result in costly and time-consuming litigation;
|
|
|
|
require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all;
|
|
|
|
in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or
|
|
|
|
require us to redesign our software and services to avoid infringement.
|
29
As a result, any third-party intellectual property claims against us could increase our expenses and adversely
affect our business. In addition, many of our agreements with our partners and others require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any
such claim. Even if we have not infringed any third partys intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require
significant financial resources and management time. Finally, if a third party successfully asserts a claim that our products infringe its proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at
all and we may be required to pay significant monetary damages to such third party.
We may be subject to time-consuming and costly litigation.
From time to time, we may be subject to various claims and lawsuits by partners, customers, or other parties arising in the ordinary course of
business, including lawsuits alleging patent infringement. We are currently a party to the actions that are described in Part II, Item 1 Legal Proceedings included elsewhere in this Quarterly Report on Form 10-Q. These matters can
be time-consuming, divert managements attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our results of operations, financial condition
and cash flows.
If the delivery of our customers emails is limited or blocked or our customers emails are directed to an alternate or
tabbed section of the recipients inbox, customers may cancel their accounts.
ISPs can block emails from reaching their users.
The implementation of new or more restrictive policies by ISPs may make it more difficult to deliver our customers emails. We continually improve our own technology and work closely with ISPs to maintain our deliverability rates. In addition,
some ISPs have started to categorize as promotional or otherwise emails that originate from email service providers and, as a result, direct them to an alternate or tabbed section of the recipients inbox. If ISPs materially limit
or halt the delivery of our customers emails, or if we fail to deliver our customers emails in a manner compatible with ISPs email handling or authentication technologies or other policies, or if the open rates of our
customers emails are negatively impacted by the actions of ISPs to categorize emails, then customers may question the effectiveness of our products and cancel their accounts. This, in turn, could harm our business and financial performance.
If we fail to promote and maintain our brands in a cost-effective manner, we may lose market share and our revenue may decrease.
We believe that developing and maintaining awareness of the Constant Contact brands in a cost-effective manner is critical to our goal of achieving widespread
acceptance of our online marketing platform and attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our industry increases. Successful promotion of our brands will depend largely
on the effectiveness of our marketing efforts and the effectiveness and affordability of our products for our target customer demographic. Historically, our efforts to build our brands have involved significant expense, and it is likely that our
future marketing efforts will require us to incur additional significant expenses. Such brand promotion activities may not yield increased revenue and, even if they do, any revenue increases may not offset the expenses we incur to promote our
brands. If we fail to promote and maintain our brands successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may lose our existing customers to our competitors or be unable to attract new
customers, which would cause our revenue to decrease.
30
We depend on search engines to attract a significant percentage of our customers, and if those search
engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers, which would adversely affect our business and results of operations.
Many of our customers located our website by clicking through on search results displayed by search engines such as Google, Yahoo! and Bing
®
. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a
set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract a significant percentage of the customers we
serve to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, this could result in fewer
potential customers clicking through to our website, requiring us to resort to other costly resources to attempt to replace this traffic, which, in turn, could reduce our revenue and negatively impact our operating results, harming our business. If
one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. The cost of purchased search listing advertising
fluctuates and may increase as demand for these channels grows, and any such increases could negatively affect our financial results.
The success
of our business depends on the continued growth and acceptance of email as a communications tool and the related expansion and reliability of the Internet infrastructure. If consumers do not continue to use email or alternative communications tools
gain popularity, such as social media or text messaging, demand for our email marketing product may decline.
The future success of our business
depends on the continued and widespread adoption of email as a primary means of communication. Security problems such as viruses, worms and other malicious programs or reliability issues arising from outages and damage to the
Internet infrastructure could create the perception that email is not a safe and reliable means of communication, which would discourage businesses and consumers from using email. Use of email by businesses and consumers also depends on the ability
of ISPs to prevent unsolicited bulk email, or spam, from overwhelming consumers inboxes. In recent years, ISPs have developed new technologies to filter unwanted messages before they reach users inboxes. In response, spammers
have employed more sophisticated techniques to reach consumers inboxes. Although companies in the anti-spam industry have started to address the techniques used by spammers, if security problems become widespread or frequent or if ISPs cannot
effectively control spam, the use of email as a means of communication may decline as consumers find alternative ways to communicate. In addition, if alternative communications tools, such as social media or text messaging, gain widespread
acceptance, the need for email may lessen. Any decrease in the use of email would reduce demand for our email marketing product and harm our business.
Various private spam blacklists have in the past interfered with, and may in the future interfere with, the effectiveness of our products and our
ability to conduct business.
We depend on email to market to and communicate with our customers, and our customers rely on email to communicate
with their customers and members. 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, ISPs 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.
Some of our Internet protocol addresses currently are listed with one or more blacklisting entities and, in the future, our other Internet protocol addresses
may also be listed with these and other blacklisting entities. There can be no guarantee that we will not continue to be blacklisted or that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere
with our ability to market our products and services and communicate with our customers and could undermine the effectiveness of our customers marketing campaigns, all of which could have a material negative impact on our business and results
of operations.
31
Our customers use of our products and website to transmit negative messages or website links to
harmful applications in violation of our policies or otherwise could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via our products.
Our customers could use our products or website to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted
material or the trademarks of others without permission, or report inaccurate or fraudulent data or information. Any such use of our products could damage our reputation and we could face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers promotion of their products and services through our products may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities
would expose us to liability under these laws. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers activities, we
could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
Current economic conditions may further negatively affect the small business sector, which may cause our customers to terminate existing accounts with
us or cause potential customers to fail to purchase our products, resulting in a decrease in our revenue and impairing our ability to operate profitably.
Our products are designed specifically for small organizations. These organizations frequently have limited budgets and are often resource and
time-constrained and, as a result, may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. We believe that small organizations continue to experience some amount of economic hardship.
As a result, small organizations may choose to spend the limited funds that they have on items other than our products and may experience higher failure rates. Moreover, if small organizations experience economic distress, they may be unwilling or
unable to expend time and financial resources on marketing, which would negatively affect the overall demand for our products, increase customer attrition and could cause our revenue to decline. There can be no assurance, therefore, that current
economic conditions or worsening economic conditions, or a recurring recession, will not have a significant adverse impact on our operating and financial results.
Our customers use of our SaveLocal product may negatively impact our reputation and could subject us to legal and regulatory risks, each of which
could harm our business and results of operations.
Our brand and reputation may be harmed by our customers use of our SaveLocal product.
Any shortcomings of one or more of our SaveLocal customers, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold or such customers fraudulent or deceptive conduct, may be attributed
to us, potentially damaging our reputation and brand value, reducing our ability to attract new customers or retain our current customers and subjecting us to potential liability, thereby negatively affecting our results of operations.
The application of certain U.S. and international laws and regulations to SaveLocal deals and to our role in facilitating our customers offer of
SaveLocal deals is uncertain. These include laws and regulations such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, the laws of most states, which contain provisions governing product terms and
conditions of gift cards, gift certificates, stored value or pre-paid cards or coupons, and unclaimed and abandoned property laws. These laws may include provisions prohibiting or limiting the use of expiration dates on gift cards or the amount of
fees charged in connection with gift cards or requiring specific disclosures on or in connection with gift cards and the imposition of certain fees.
If
we are required to alter our business practices as a result of any laws or regulations, our revenue could decrease, our costs could increase and our business could otherwise be harmed. In addition, the costs and expenses associated with defending
any actions related to such additional laws and regulations and any payments of related penalties, judgments or settlements could adversely impact our financial results.
In addition, if any laws or regulations require that the face value of SaveLocal coupons have a minimum expiration period beyond the period desired by our
SaveLocal customers for their promotional programs, or no expiration period, this may affect the willingness of our customers to use our SaveLocal product in jurisdictions where these laws apply.
Our business may be negatively impacted by seasonal trends.
Sales of our products are impacted by seasonality. Small organizations are typically less active during the summer months. Thus, we generate fewer new
customers during this time. As a result, we adjust our sales and marketing activities accordingly. If these seasonality trends change materially, our financial and operating results for any given quarter may be negatively impacted and may differ
materially from results in prior quarterly periods.
32
If we fail to enhance our existing products, develop new products or offer a bundle of our products that
our customers and prospective customers find compelling, our products may become obsolete or less competitive and we could lose customers.
If we
are unable to enhance our existing products successfully, including our current recent enhancements to our contact management functionality and our plans to update our editing environment, or develop new products that keep pace with rapid
technological developments and meet our customers needs, our business will be harmed. Creating and designing such enhancements and new products entails significant technical and business risks and requires substantial expenditures and
lead-time, and there is no guarantee that such enhancements and new products will be completed in a timely fashion, nor is there any guarantee that any new product offerings will anticipate our customers needs or gain acceptance among our
customers or in the broader market. In addition, such enhancements and new products may not be profitable for a number of years, if at all, and even if they are profitable, operating margins for new products may not be as high as the margins we have
experienced historically. Our existing customers and prospective new customers may be dissatisfied with our enhancements to our existing products and may leave us or choose competing providers, or may not view any new product as complementary to our
other product offerings and not purchase such additional products.
Similarly, if we offer a bundle of our products that our customers and prospective
customers do not find compelling, our business will also be harmed. Creating, designing and marketing these packages (and converting our current customer base to these new packages) entails significant technical and business risks and requires
substantial expenditures and lead-time, and there is no guarantee that such packages will anticipate our customers needs or gain acceptance among our customers or in the broader market.
If we cannot successfully enhance our existing services or develop new products or if we are not successful in implementing such enhancements and selling new
products and/or new packages of our products to our customers, we could lose customers or have difficulty attracting new customers, which would adversely impact our financial performance.
Our relationships with our partners may not be as successful in generating new customers as we anticipate, which could adversely affect our ability to
increase our customer base.
We maintain a network of different types of partners, some of whom refer customers to us through links on their
websites and outbound promotion to their customers, resell our products and create integrations with our products. We have invested and will continue to invest in programs to enhance our partners effectiveness; however, these programs could
require substantial investment while providing no assurance of return or incremental revenue. We also rely on some of our partners to create integrations with third-party applications and platforms used by our customers. If we fail to encourage our
partners to create such integrations, demand for our products could decrease, which would harm our business and operating results. If we are unable to maintain our contractual relationships with existing partners or establish new contractual
relationships with potential partners, we may experience delays and increased costs in adding customers, which could have a material adverse effect on us. The number of customers we are able to add through these relationships is dependent on the
marketing efforts of our partners over which we exercise very little control, and a significant decrease in the number of new customers generated through these relationships or failure of our investment in partner programs to be effective could
adversely affect the size of our customer base and revenue.
Competition for employees in our industry is intense, and we may not be able to attract
and retain the highly skilled employees whom we need to support our business.
Competition for highly skilled engineering and marketing personnel
is intense and we continue to face difficulty identifying and hiring qualified personnel in certain areas of our business and in certain locations. We may not be able to hire and retain such personnel at compensation levels consistent with our
existing compensation and salary structure. In particular, candidates making employment decisions, particularly in high-technology industries, often consider the value of any equity they may receive in connection with their employment. As a result,
any significant volatility in the market price of our common stock may adversely affect our ability to attract or retain highly skilled engineering and marketing personnel.
In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we
fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect on our
business.
33
The success of our SinglePlatform offering is based, in part, on the quality of the content provided by our
SinglePlatform customers and our ability to maintain a strong network of publishers.
Our SinglePlatform customers provide us with current
information about their business that we, in turn, provide to our network of electronic publishers, including but not limited to Yelp, foursquare, YP.com and Urbanspoon. The success of the SinglePlatform offering depends, in part, on our ability to
provide these publishers and their consumers with the information they seek, which in turn depends on the quantity and quality of the content provided by our SinglePlatform customers. For example, we may be unable to provide these publishers and
their consumers with the information they seek if our customers do not contribute content that is helpful, reliable and up-to-date, or if they remove content they previously submitted. If our SinglePlatform product does not provide content that is
helpful, reliable and up-to-date, our ability to maintain our current network of electronic publishers and sign up new publishers could be harmed. If we are unable to provide our electronic publishers and their consumers with the information they
seek, or if they can find equivalent content on other services, they may stop or reduce their use of our product, which could negatively impact our ability to retain existing customers and obtain new customers and our business would be harmed.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive
officers and other key technical and marketing personnel, each of whom would be difficult to replace. In particular, Gail F. Goodman, our Chairman, President and Chief Executive Officer, is critical to the management of our business and operations
and the development of our strategic direction. The loss of the services of Ms. Goodman or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense, may take longer
than anticipated and may significantly delay or prevent the achievement of our business objectives.
If we are unable to protect the confidentiality
of our unpatented proprietary information, processes and know-how and trade secrets, the value of our technology and products could be adversely affected.
We rely heavily upon unpatented proprietary technology, processes and know-how and trade secrets. Although we try to protect this information in part by
executing confidentiality agreements with our employees, consultants and third parties, such agreements may offer only limited protection and may be breached. Any unauthorized disclosure or dissemination of our proprietary technology, processes and
know-how or our trade secrets, whether by breach of a confidentiality agreement or otherwise, may cause irreparable harm to our business, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise be
independently developed by our competitors or other third parties. If we are unable to protect the confidentiality of our proprietary information, processes and know-how or our trade secrets are disclosed, the value of our technology and services
could be adversely affected, which could negatively impact our business, financial condition and results of operations.
Our use of open source
software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although
we monitor our use of open source software closely, the terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that such licenses could be construed in a manner
that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to
discontinue sales of our products, or to release our software code under the terms of an open source license, any of which could materially adversely affect our business. Given the nature of open source software, there is also a risk that third
parties may assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs.
Our anticipated growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to
manage our anticipated growth, we may not be able to implement our business plan successfully.
We are currently experiencing a period of rapid
growth in our headcount and operations, which has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting
infrastructure. Our success will depend in part on the ability of our senior management to manage this expected growth effectively. To do so, we believe we will need to continue to hire, train and manage new employees as needed. If our new hires
perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations
and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems. The expected addition of new employees and the capital investments that we anticipate will be necessary to
manage our anticipated growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to manage our anticipated growth successfully, we will be
unable to execute our business plan successfully.
34
Providing our products to customers outside the United States exposes us to risks inherent in international
business.
Customers in more than 180 countries and territories currently use our products. We have two regional development directors in Canada
and a marketing office in the United Kingdom. We may continue to expand our international operations in the future. Accordingly, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United
States. The risks and challenges associated with providing our products to customers outside the United States include:
|
|
|
localization of our products, including translation into foreign languages and associated expenses;
|
|
|
|
laws and business practices favoring local competitors;
|
|
|
|
compliance with multiple, conflicting and changing governmental laws and regulations, including those relating to tax, email, privacy and data protection;
|
|
|
|
foreign currency fluctuations;
|
|
|
|
different pricing environments;
|
|
|
|
difficulties in staffing and maintaining foreign operations; and
|
|
|
|
regional economic and political conditions.
|
If we fail to meet these risks and challenges, we will be unable
to execute our business plan and may be subject to fines and regulatory actions.
Failure to maintain effective internal control over financial
reporting and disclosure controls and procedures would have a material adverse effect on our business.
The Sarbanes-Oxley Act of 2002 requires,
among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In order to comply with Section 404 of the Sarbanes-Oxley Acts requirements relating to internal control over
financial reporting, we incur substantial accounting expense and expend significant management time on compliance-related issues. We expect to continue to incur such expenses and expend such time in the future. If in the future we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the
market price of our stock would likely decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to use net operating loss carry-forwards in the United States may be limited.
As of December 31, 2013, we had net operating loss carry-forwards of $33.5 million for U.S. federal tax purposes and $849,000 for state tax purposes.
These loss carry-forwards expire at varying dates between 2014 and 2033. To the extent available, we intend to use these net operating loss carry-forwards to reduce the corporate income tax liability associated with our operations. Section 382
of the Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carry-forwards that may be used to offset taxable income when a corporation has undergone significant changes in stock
ownership. While our analysis shows that our public stock offerings and prior private financings have not resulted in ownership changes that would limit our ability to utilize net operating loss carry-forwards, any subsequent ownership changes could
result in such a limitation. To the extent our use of net operating loss carry-forwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carry-forwards,
which could have a negative effect on our financial results.
Our quarterly results may fluctuate and if we fail to meet the expectations of
analysts or investors, our stock price could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to meet or
exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:
|
|
|
our ability to attract new customers, retain existing customers and satisfy our customers requirements;
|
|
|
|
general economic conditions;
|
|
|
|
average revenue per customer;
|
|
|
|
our cost to acquire new customers;
|
|
|
|
changes in our pricing or product bundling;
|
35
|
|
|
our ability to expand our business;
|
|
|
|
our ability to execute successfully on our strategy;
|
|
|
|
new product and service introductions;
|
|
|
|
technical difficulties or interruptions in our services as a result of our actions or those of third parties;
|
|
|
|
the timing of additional investments in our hardware and software systems;
|
|
|
|
the seasonal trends in our business;
|
|
|
|
regulatory compliance costs;
|
|
|
|
costs associated with future acquisitions of technologies and businesses and our ability to successfully integrate these acquisitions; and
|
|
|
|
extraordinary expenses such as litigation or other dispute-related settlement payments.
|
Some of these factors
are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not
be relied upon as an indication of future performance.
We may engage in future acquisitions that could disrupt our business, dilute stockholder
value and harm our business, operating results or financial condition.
We have completed several acquisitions in the past three years, including
our most recent acquisition of SinglePlatform in June 2012. We have, from time to time, evaluated other acquisition opportunities and may pursue acquisition opportunities in the future. Acquisitions involve numerous risks, including:
|
|
|
an inability to locate a suitable acquisition candidate or technology or acquire a desirable candidate or technology on favorable terms;
|
|
|
|
difficulties in integrating personnel and operations from the acquired business or acquired technology with our existing technology and products and in retaining and motivating key personnel from the acquired business;
|
|
|
|
disruptions in our ongoing operations and the diversion of our managements attention from their day-to-day responsibilities associated with operating our business;
|
|
|
|
increases in our expenses that adversely impact our business, operating results and financial condition;
|
|
|
|
potential write-offs of acquired assets and increased amortization expense related to identifiable assets acquired; and
|
|
|
|
potentially dilutive issuances of equity securities or the incurrence of debt.
|
In addition, any acquisitions
we complete may not ultimately strengthen our competitive position or achieve our goals, or such an acquisition may be viewed negatively by our customers, stockholders or the financial markets.
We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute the ownership of our
existing stockholders.
We have historically relied on cash from operations to fund our operations, capital expenditures and growth. We may
require additional capital from equity or debt financing in the future to:
|
|
|
respond to competitive pressures;
|
|
|
|
take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and
|
|
|
|
develop new products or enhancements to existing products.
|
36
We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any
additional financing may place limits on our financial and operating flexibility. If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could
suffer significant dilution, and any new securities we issue could have rights, preferences and privileges senior to those of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we
require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
RISKS RELATED TO THE
OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various
factors. Some of the factors that may cause the market price of our common stock to fluctuate include:
|
|
|
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
|
|
|
|
quarterly unique customer additions and customer retention rates;
|
|
|
|
changes in estimates of our financial results or recommendations by securities analysts;
|
|
|
|
changes in general economic, industry and market conditions;
|
|
|
|
failure of any of our products to achieve or maintain market acceptance;
|
|
|
|
changes in market valuations of similar companies;
|
|
|
|
success of competitive products;
|
|
|
|
our ability to successfully integrate acquisitions;
|
|
|
|
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
|
|
|
|
announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;
|
|
|
|
regulatory developments in the United States, foreign countries or both;
|
|
|
|
litigation involving our company, our general industry or both;
|
|
|
|
additions or departures of key personnel;
|
|
|
|
investors general perception of us; and
|
|
|
|
the total number of shares of our common stock that have been sold short.
|
In addition, if the market for
technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the
foregoing occurs, it could cause our stock price to fall and may expose us to litigation that, even if unsuccessful, could be costly to defend and a distraction to management.
If securities or industry analysts do not continue to publish research or publish inaccurate 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. We do not control these analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate 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, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
37
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a
change of control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover
provisions of the Delaware General Corporation Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an
interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and second amended and restated bylaws may discourage, delay or prevent a change in our
management or control over us that stockholders may consider favorable. Among other things, our restated certificate of incorporation and second amended and restated bylaws:
|
|
|
authorize the issuance of blank check preferred stock that could be issued by our board of directors to impede or delay a takeover attempt;
|
|
|
|
establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual
meeting following their election;
|
|
|
|
require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
|
|
|
|
provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
|
|
|
|
limit who may call special meetings of stockholders;
|
|
|
|
prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
|
|
|
|
require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and second amended and restated bylaws.
|
We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a return on an investment in our common stock
will depend on appreciation in the price of our common stock.
We do not expect to pay cash dividends on our common stock. Any future dividend
payments are within the absolute discretion of our board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions,
business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock.