UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-51644
VOCUS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 58-1806705 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
12051 Indian Creek Court
Beltsville, Maryland 20705
(301) 459-2590
(Address including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, par value $.01 per share | NASDAQ Global Market | |
| (Title of Class) | (Names of Each Exchange on which Registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | x | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the common stock held by nonaffiliates of the registrant (19,699,395 shares) based on the $10.52 closing price of the registrant’s common stock as reported on the NASDAQ Global Market on June 30, 2013, was approximately $207,237,635. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of February 28, 2014, there were 21,621,817 outstanding shares of the registrant’s common stock.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for the 2014 Annual Meeting of Stockholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this Form 10-K.
2
CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to:
| • | our plans to develop and market new products and the timing of these development programs; |
| • | our estimates regarding our capital requirements and our needs for additional financing; |
| • | our estimates of expenses and future revenues and profitability; |
| • | our estimates of the size of the markets for our solutions; |
| • | the rate and degree of market acceptance of our solutions; and |
| • | the success of other competing technologies that may become available. |
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.
This report also contains estimates made by independent parties and by us relating to market size and growth and other industry data. These estimates involve a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
3
PART I
| Item 1. | Business |
Overview
We are a leading provider of cloud-based marketing and public relations software that enables companies to acquire and retain customers. We offer products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness.
Our cloud solutions address key areas of digital marketing and public relations, including social media marketing, search marketing and news distribution, email marketing and publicity. Our software is designed for marketers to attract customers through search engines, increase and engage their followers on social networks such as Facebook, LinkedIn and Twitter, communicate with prospects and customers via email and generate and track visibility in traditional and online media. Our buyers primarily consist of marketing and public relations professionals that share a common goal of marketing.
Our sales organization is focused on adding new customers, renewing customer subscriptions and expanding relationships with existing customers. We believe that we have one of the largest sales organizations devoted to selling cloud marketing and public relations solutions in the U.S. and Europe. Most of our sales teams sell primarily over the telephone and Internet, but our large market sales team travels onsite to meet with larger organizations. In addition to new business sales teams, we have sales representatives focused on account management, including renewal and add-on sales to existing customers.
We deliver our solutions over the Internet using a secure, scalable application and system architecture that allows our customers to quickly deploy and adopt our software. As a pioneer in cloud-based software, our solutions are now used in multiple languages by thousands of organizations worldwide.
Our Company
We initially formed in 1988 as First Data Software Publishing, Inc., a Florida corporation, and in 1992 we began selling desktop software for government relations. In 1999, we reincorporated as a Delaware corporation.
Industry Background
The Internet has had an impact on almost every aspect of business across all functional areas, with some of the most profound changes happening in the area of consumer behavior and prospect buying patterns. The ubiquity of the Internet, along with the adoption of search engines and the explosive growth in social networking have all rapidly accelerated the availability of quality content and shared buyer experiences.
A new buying process has emerged that takes place prior to engaging with a vendor, and it is taking place online and on social networks, centered on research, references and trusted sources. Internet search engines are replacing yellow pages, local newspapers and television as a primary source for finding vendors, and social networks are now the most popular online activity, with nearly four out of five Internet users visiting social network sites. We believe the traditional seller-driven approach that has been a cornerstone of marketing for the last fifty years is steadily losing effectiveness due to these new buying patterns. As company-led direct marketing continues to become less effective, organizations are increasingly relying on new digital marketing channels to attract, engage and retain customers. These new channels include social media marketing, search marketing and news distribution, email marketing and publicity, which generate online information, referrals and recommendations that influence buying behavior. Marketing has evolved, and in order to succeed in today’s world, marketers must leverage new digital marketing channels to ensure they are working together to generate brand awareness, demand and revenue.
According to Forrester Research, Inc.’sU.S. Interactive Marketing Forecast, 2011 To 2016 , U.S. marketers plan to increase spending on interactive channels (defined as display, search, email, mobile and social media) as a percentage of total advertising spending from 16% in 2011 to 26% in 2016, creating a projected $77.0 billion market in the U.S. by 2016, of which email, mobile and social media marketing is expected to grow from approximately $4.8 billion in 2011 to nearly $15.7 billion by 2016, representing a compound annual growth rate of 27%. As marketers spend more money on these channels, they will also spend more on information technology (IT). According to Gartner, Inc.’sGartner Webinar: Profile of Marketing as a Technology Buyer, CMOs will spend more than CIOs on IT by 2017.
Our Solutions
Our cloud marketing and public relations suites address the critical functions of digital marketing including social media marketing, search marketing and news distribution, email marketing and publicity.
4
We provide easy-to-use suites to small and mid-sized businesses to help them acquire and retain customers online, across social networks and through the media. For larger organizations, we also provide an in-depth workflow that helps manage publicity campaigns and media relations activities. The key benefits of our solutions include:
Integrated marketing across multiple channels. Our solutions help attract, engage and retain customers across multiple communications and marketing channels including social networks such as Facebook, Twitter and LinkedIn, search engines such as Google and Bing, media sites including major news sites and thousands of blogs and email communications to prospects and customers.
Improved productivity. Our solutions incorporate features and best practices that automate many marketing functions, freeing users from repetitive, low-value tasks and allowing them to focus on high-value strategic initiatives. Core technology including our Recommendation Engine™ and Buying Signals ™ monitors and analyzes large volumes of data and content. For the user, these features identify leads in social media and make easy-to-follow recommendations, which are intended to maximize marketing results in much less time. Other features, such as landing pages, workflow automation and CRM integration, are designed to allow marketing teams to create marketing campaigns that can attract, capture and nurture a lead into a customer.
ROI based analytics. Our solutions provide a variety of performance-based analytics and reporting that help companies evaluate the success of their marketing and public relations campaigns, their search engine marketing and their success online in expanding friends, followers, prospects and customers.
Enhanced collaboration. Our solutions provide shared, real-time access to a central repository of information related to contacts, relationships, activities, news, social media, documents and reporting. This enables companies to maintain a history of marketing activities, build better relationships with the media, prospects and customers, and work together more effectively in a team or department environment.
Rapid time-to-value. Our cloud-based software can be provisioned quickly and deployed easily, without the need for special consulting services or marketing expertise. Customers can be up and running in less than thirty minutes, getting relevant news and social content, sending online news releases or launching campaigns on Facebook.
Our Growth Strategy
Our objective is to be the leading provider of cloud marketing and public relations services. Key elements of our growth strategy include:
Expand our cloud marketing suite. We believe our current marketing suite addresses key elements of digital marketing including social media marketing, search marketing, email marketing and publicity. As new marketing tactics and channels continue to emerge, we believe that we have the opportunity to add other features or modules such as lead tracking and scoring, advanced analytics, app integration, content marketing and mobile marketing to our cloud marketing suite.
Provideadditional consultingservices. As we continue to expand our cloud marketing suite, we believe that we have the opportunity to provide additional consulting services as part of our subscriptions, including the development and execution of marketing campaigns, integration with third-party platforms, analysis of cross channel marketing activities and custom reporting, among other services. We will continuously evaluate ways to strengthen our portfolio of services which we believe will help us increase our average selling prices and subscription renewal rates. We expect sales of additional consulting services and our cloud marketing suite to represent an increasing portion of our revenues in the future.
Increasebrandawareness.We have invested in promoting and strengthening the brand of our cloud marketing suite to seek to increase awareness and loyalty within the marketing automation space. We intend to continue to promote our brand and build awareness by investing in content marketing, social marketing, webinars, public relations and marketing events. We expect that our branding efforts will also include integration of our solutions with third-party applications and platforms, including CRM, ERP, HRIS and e-commerce, in order to increase our visibility to customers in markets other than marketing and public relations. We believe increasing awareness of our brand in the cloud marketing space will help us generate a more cost effective demand for our solutions and a higher return on our sales and marketing investments.
Expand mid-market presence.We believe there is a substantial opportunity to increase the presence of our cloud marketing solutions within mid-sized enterprises. We believe that selling our products to marketing professionals at mid-sized organizations represents a significant market opportunity that will allow us to continue our growth for the foreseeable future. The mid-market opportunity, combined with our strategy of selling an integrated marketing suite on a subscription basis at higher selling prices is essential to our long-term growth and profitability.
Our Products
Our marketing and public relations suites address the critical functions of marketing including social media marketing, search marketing and news distribution, email marketing, publicity and media monitoring and analytics. Key components of our suites include the following:
Social Media Marketing. We provide social media software solutions that help customers run social marketing campaigns, including apps and landing pages that power coupons, promotions and special fan-only offers. Our social media solutions also help customers monitor and analyze conversations across multiple social networks and other online websites in order to understand what is being said about their brands, products and industry. In addition, our social media solutions help identify key influencers and allow customers to identify and engage with prospects and customers on Facebook and Twitter.
Search Marketing and News Distribution. Our PRWeb online news distribution service helps customers increase their online visibility and organic search engine rankings with press releases that are optimized for search engines and other online distribution sites.
Email Marketing. Our email marketing service provides an easy-to-use method of keeping in touch with prospects and customers by using professional looking emails to send newsletters, special offers and other useful content.
Publicity. We provide a comprehensive media database, news distribution and publicity opportunities that help companies increase their media exposure and manage relationships with reporters.
Media Monitoring and Analytics. Our media monitoring tracks online, print and broadcast news coverage, tweets, blog mentions, comments and more across traditional and social media, helping our customers discover and analyze trends as they unfold in the traditional and social media.
5
Due to our flexible design and technology architecture, we are able to sell some of our components as stand-alone solutions, or combine different components and features into integrated suites to meet the needs and budgets of any size organization.
Small businesses tend not to be marketing experts and are typically focused on running their businesses. They are generally interested in using our products to grow their business with minimal time investment and without learning to be a marketing expert.
Mid-sized companies typically have a dedicated marketing and/or public relations resource that will invest more time in marketing activities and consequently tend to buy suites with more features at higher price points.
For larger organizations, we sell primarily to their public relations department, which is typically the same size as the marketing department in a mid-sized company. Similar to our other customers, public relations departments are interested in building their brand and reaching and influencing buyers online and across social networks. In addition, they typically spend more time than our other buyers focused on managing relationships with the media and monitoring traditional news.
Our solutions are generally offered on a subscription basis, including our stand-alone email marketing solution which is available on our iContact website. However, our search marketing and news distribution service is also offered on a per-transaction basis on our PRWeb website.
Technology, Development and Operations
Technology
We were an early pioneer in cloud-based software, launching our first version in 1999. Our software solutions leverage a highly scalable, multi-tenant architecture and code written primarily for the .NET framework. We use commercially available hardware, and a combination of proprietary, open source and commercially available software, with a bias towards Microsoft products. We have developed proprietary core services that are designed specifically for our architecture to enhance our ability to meet our delivery goals. We have a seamless delivery environment that allows users to be routed in the most optimal way to multiple servers, eliminating the restrictions that come with binding a user to a single server. This seamless delivery environment, coupled with our proprietary core services, allows us to quickly and cost effectively scale our software deliverability systems as we add additional customers.
Our cloud-based software manages all customers as logically separate tenants in central applications and databases. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business quickly to meet changes in demand for our products.
Every page of our cloud-based software is dynamically rendered for each specific user, including a choice of multiple languages. Our customers access our solutions through any web browser without installing software or downloading Java applets, Microsoft ActiveX, or .NET controls. Performance, functional depth and usability of our solutions drive our technology decisions and product direction.
Development
Our research and development efforts are focused on improving and enhancing our existing solutions as well as developing new features and functionality. Because of our multi-tenant architecture, we are able to provide all of our customers with a single version of our solutions, which allows us to maintain relatively low research and development expenses, as compared to other software business models that support multiple versions.
Site Operations
We serve all of our customers from third-party data center facilities and hosted computing platforms in the United States and Europe. These facilities provide a combination of security personnel, photo ID/access cards, biometric hand scanners and sophisticated fire systems. The overall security of each data center (inside and outside) and network operations center are monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant electrical generators and environmental control devices are used to keep servers up and running. We own or lease all of the hardware on which our applications run in the third-party data center facilities.
We continuously monitor the performance of our software delivery systems. Our site operations team provides system management, maintenance, monitoring and back-up. We use custom, proprietary tools as well as commercially available tools to monitor our solutions. We run tests to ensure adequate response from of our sites. We also monitor site availability and latency from various geographic points around the world.
To facilitate loss recovery, we operate a multi-tiered system configuration with load balanced web server pools, standby database servers and fault tolerant storage devices. Databases are backed up and replicated frequently to standby databases and servers, which are designed to provide near real-time fail-over service in the event of a malfunction with a primary database or server. Backups of databases take place nightly and are archived to tape. These tapes are rotated off-site to a separate third-party managed facility. We also maintain a redundant site for our U.S. facility, which would serve as our primary site in the event that a disaster was to render one of the third-party sites inoperable.
6
Customer Support
We believe that superior customer support is critical to retaining and expanding our customer base. Our customer support group is responsible for new customer implementations, consulting services, news release editing services and general help desk services. Our help desk services include identifying, analyzing and solving customer problems or issues. Our customers are able to obtain support from us through their preferred channel, as we offer services to customers on-site, by telephone, and over the Internet through email, live chat and social media. We also offer a variety of product training on-site and online through live or pre-recorded web-based classes. Customer support is available during standard business hours in the U.S. and Europe and is also available 24/7 for some support tasks or at an additional charge.
Sales and Marketing
We sell our cloud-based solutions primarily through our direct sales organization, and over the Internet in an e-commerce model and to a lesser extent through indirect sales channels. Our direct sales organization is separated into groups that focus either on selling to new customers or selling to existing customers. In our new customer sales group, we employ inside sales and field sales personnel to provide product demonstrations to prospects and close sales with new customers. Our existing customer sales group focuses on renewing customer relationships and expanding those relationships by selling software with expanded functionality at higher price points. We also employ lead generation personnel who qualify prospects and setup product demonstrations for our new sales personnel. We currently have sales offices in the United States and Europe.
We also sell some of our products over the Internet in an e-commerce model. Through various marketing activities we drive prospects to websites that offer either a free trial or a free account for one of our cloud based solutions. Some prospects then go on to purchase either a monthly subscription or a single transaction. Going forward we may create additional websites to sell other products over the Internet in an e-commerce model.
Our marketing strategy is to generate qualified sales leads, build our brand and create market awareness of our cloud marketing and public relations software. We also conduct seminars, participate in trade shows and industry conferences, host an annual conference, publish white papers and develop customer reference programs. We also use our website to provide company and product information and to attract prospects through organic search.
Our Customers
As of December 31, 2013, we had 16,854 active annual subscription customers. These customers represent a wide variety of industries, as well as government agencies, not-for-profit organizations and educational institutions. No single end-user customer accounted for more than 1.0% of our revenue in 2013.
The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with monthly or multi-year terms. We invoice our subscription customers in advance of their subscription term, with payment terms that generally require our customers to pay us within 30 days of invoice. We had approximately $10.4 million and $9.6 million of unbilled amounts at December 31, 2012 and 2013, respectively. These amounts may fluctuate from year-to-year depending on varying billing cycles for our subscription agreements, including seasonality in our sales cycle, the timing of renewal agreements and the amount of multi-year subscription agreements. Such fluctuations may not be indicative of our future revenue.
Competition
The cloud marketing space is fragmented, competitive and rapidly evolving, and there are limited barriers to entry. We expect to encounter new and evolving competition as the market consolidates and matures and as organizations become more aware of the advantages and efficiencies that can be attained from the use of cloud marketing software. Currently, we primarily face competition from companies such as HubSpot, Marketo, Act-On and Infusionsoft, who provide a product suite that is focused on a limited or different subset of the components we offer in our cloud marketing suite.
We currently face competitors for our cloud public relations suite including Cision, NASDAQ OMX, BurrellesLuce, Gorkana, PRNewswire and Meltwater, who provide a product suite that is focused on a limited or different subset of the components than we offer.
We believe that our primary competitive edge is our ability to offer integrated suites that are both comprehensive and unique. Our suites integrate key components of digital marketing, including social media marketing, search marketing and news distribution, email marketing and publicity.
We believe the principal factors that generally determine a company’s competitive advantage in our industry include the following:
| • | broad product functionality and depth of integration; |
| • | ease of use; |
| • | low total cost of ownership and easily demonstrable cost-effective benefits for customers; |
| • | flexibility and configurability to meet customer requirements; |
| • | rapid deployment and adoption; |
| • | speed, reliability and functionality; |
| • | system performance, security and scalability; |
7
| • | ease of integration with existing applications and data; |
| • | availability and quality of implementation, training and help-desk services; and |
| • | competitive sales and marketing capabilities. |
Intellectual Property and Proprietary Content
We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have registered, and applied for the registration of U.S. and international trademarks, service marks and domain names. Additionally, we have filed U.S. patent applications covering certain of our proprietary technology and have one issued patent. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.
We currently license content included in our cloud-based software from several providers pursuant to data reseller, data distribution and license agreements with these providers. These agreements provide us with content such as news coverage from print and Internet news sites, as well as contact information for journalists, analysts, public officials, media outlets and publicity opportunities. The licenses for this content are non-exclusive. The agreements vary in length, and generally renew automatically subject to certain cancellation provisions available to the parties. Fees for the content provided are generally either fixed amounts per subscriber or based upon the number of concurrent users at a subscriber. Such fees are generally paid quarterly or monthly. During 2005, we developed our own United States content which replaced a significant portion of our acquired third-party content and began providing our internally-developed content to our customers. In 2008, we developed and began providing to our customers our own content for the United Kingdom and Ireland. In 2010, we acquired a media database through our acquisition of Data Presse SAS and began providing this content to our customers in France. We do not believe that any of our content providers are single source suppliers, the loss of whom would substantially affect our business.
If a claim is asserted that we have infringed the intellectual property of a third-party, we may be required to seek licenses to that technology. In addition, we license third-party technologies that are incorporated into some elements of our services. Licenses from third parties may not continue to be available to us at a reasonable cost, or at all. Additionally, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services.
Employees
As of December 31, 2013, we had 1,380 full-time and part-time employees. Certain of our employees are subject to collective bargaining agreements and have local work councils. We have never experienced a significant work stoppage and believe we have good relations with our employees.
Executive Officers and Key Employees
Our executive officers and key employees and their respective ages and positions as of February 28, 2014 are as follows:
Name | Age | Position | ||||
Richard Rudman* | 52 | Chief Executive Officer, President and Chairman | ||||
Stephen Vintz* | 45 | Executive Vice President, Chief Financial Officer, Treasurer and Secretary | ||||
Steven Pogorzelski* | 52 | Chief Revenue Officer | ||||
Mark Heys* | 42 | Chief Technology Officer | ||||
You Mon Tsang | 48 | Chief Marketing Officer | ||||
Holly Paul | 43 | Chief Human Resources Officer | ||||
Darren Stewart | 45 | Senior Vice President, Customer Services | ||||
James Bruno | 49 | Senior Vice President, International | ||||
| * | Denotes an executive officer |
Richard Rudman co-founded Vocus and has served as our Chief Executive Officer, President and Chairman since 1992. From 1986 through 1992, Mr. Rudman served as a senior executive at Dataway Corporation, a software development company. From 1984 through 1986, Mr. Rudman served as an accountant and systems analyst at Barlow Corporation, a privately held real estate development and management company. From 1979 through 1983, Mr. Rudman served in the United States Air Force. Mr. Rudman holds a B.S. degree in Accounting from the University of Maryland and is a Certified Public Accountant.
Stephen Vintz has served as our Chief Financial Officer and Treasurer since January 2001 and in October 2010 was also named as an Executive Vice President. From November 1996 to January 2001, Mr. Vintz was Vice President of Strategic Planning and Analysis at Snyder Communications, Inc., a marketing services company. Prior to November 1996, Mr. Vintz was a manager at Ernst & Young LLP. Mr. Vintz holds a B.B.A. degree in Accounting from Loyola University of Maryland and is a Certified Public Accountant.
8
Steven Pogorzelski has served as our Chief Revenue Officer since February 3, 2014. From January 2009 to December 2013, Mr. Pogorzelski served as Chief Executive Officer of ClickFuel, a SaaS company providing marketing analytics software and services. From September 2005 until January 2008, he was Group President International for Monster Worldwide, Inc., and from April 2002 until September 2005 he was President of Monster North America. Mr. Pogorzelski earned his Bachelor of Arts in Journalism and Advertising from the University of Wisconsin-Madison. Mr. Pogorzelski serves on the Board of Directors of MoBolt Inc., Assured Labor and StartDate Labs.
Mark Heys has served as our Chief Technology Officer since February 2008. From December 1998 to February 2008, Mr. Heys was our Vice President, Development. From February 1996 through November 1998, Mr. Heys served as Development Manager at T4G Limited, a privately held company. Prior to T4G, Mr. Heys was the founder and CEO of Definitive Ideas, a software company focused on Point-of-Sale applications.
You Mon Tsang has served as our Chief Marketing Officer since December 2013. From December 2010 to December 2013, Mr.Tsang was our Senior Vice President, Products. From March 2006 to December 2010, Mr. Tsang served as Chief Executive Officer of Boxxet, Inc., a content aggregation company, and founded Engine140, a social marketing company. From January 2000 to March 2010, Mr. Tsang served in various positions including as the Chief Executive Officer, Chief Marketing Officer and Chairman, of Biz360, a marketing and communications performance monitoring company. From January 1988 to December 1999, Mr. Tsang held various product management and executive positions at Brio Technology, Milktruck, Traveling Software and Xerox. Mr. Tsang holds a B.A. degree in Urban Studies from Yale University and an M.B.A. degree from the University of California, Berkeley’s Walter A. Haas School of Business.
Holly Paul has served as our Chief Human Resources Officer since January 2013. From September 1994 to January 2013, Ms. Paul served in various positions at PricewaterhouseCoopers, a professional services firm, including the U.S. Talent Acquisition Leader and Human Resource Leader for strategic internal firm services. Ms. Paul holds a B.A. degree in Anthropology with a concentration in Accounting from Lafayette College, is a member of the Society for Human Resource Management and is a certified Senior Professional in Human Resources.
Darren Stewart has served as our Senior Vice President, Customer Services since February 1996. From January 1994 through February 1996, Mr. Stewart worked for Information Systems Group, a software consulting company. From September 1992 through January 1994, Mr. Stewart was Manager of Customer Service for Job Files Corporation, a privately held HR software and services company. Mr. Stewart holds a B.S. degree in Business Administration and Finance from the University of Colorado.
James Bruno has served as our Senior Vice President, International since May 2012. From May 2010 to May 2012, Mr. Bruno was our Senior Vice President, Corporate Development. From June 2009 to May 2010, Mr. Bruno served as Vice President, Sales for Remedi SeniorCare, a provider of institutional pharmacy services. From August 2008 to December 2008, Mr. Bruno served as Senior Vice President, Commercial Operations, North America, for Arpida, a pharmaceutical company. Mr. Bruno served as Vice President, Sales at MiddleBrook Pharmaceuticals from December 2003 to October 2007. From February 2003 to November 2003, Mr. Bruno worked as an Account Manager for Thompson West. From April 2000 to July 2002, Mr. Bruno served as Vice President, International Marketing at MedImmune, a biotechnology company. Mr. Bruno holds a B.S. degree in Marketing from St. Joseph’s University and an M.B.A. degree from Drexel University.
Available Information
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our website address iswww.vocus.com.
| Item 1A. | Risk Factors |
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us that we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
Risks Related to Our Business and Industry
Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.
Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:
| • | our ability to retain and increase sales to existing customers and attract new customers; |
| • | changes in our target market; |
| • | changes in the volume and mix of our solutions sold in a particular quarter; |
| • | seasonality of our business cycle, given that our subscription volumes are normally lowest in the first quarter and highest in the fourth quarter; |
9
| • | the timing and success of new product introductions or upgrades by us or our competitors; |
| • | the discontinuance of existing products by us or our competitors; |
| • | costs associated with acquisitions of technologies and businesses; |
| • | the rate of expansion and productivity of our sales force; |
| • | changes in our pricing policies or those of our competitors; |
| • | changes in the payment terms for our products and services; |
| • | the amount and timing of non-recurring charges or expenditures related to expanding or discontinuing our operations; |
| • | changes in accounting policies or the adoption of new accounting standards; |
| • | our policy of expensing sales commissions at the time our customers are invoiced for a subscription agreement, while the majority of such revenue is recognized ratably over future periods; |
| • | changes in the estimates and assumptions used to determine the fair value of contingent consideration associated with our acquisitions; |
| • | fluctuations in our effective tax rate including changes in the mix of earnings in the various jurisdictions in which we operate, the valuation of deferred tax assets and liabilities and the deductibility of certain expenses and changes in uncertain tax positions; |
| • | foreign currency exchange rates; |
| • | the timing of customer payments and payment defaults by customers; |
| • | the purchasing and budgeting cycles of our customers; and |
| • | extraordinary expenses such as litigation or other dispute-related settlement payments. |
Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.
Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.
The markets for our cloud marketing software are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.
The market for cloud-based software specifically designed for marketing is relatively new and emerging, making our business and future prospects difficult to evaluate. We have three distinct types of customers: small business owners, marketing professionals and PR professionals. These professionals work at companies of all sizes with PR professionals generally concentrated in large and mid-sized organizations and marketing professionals and small business owners generally concentrated in small and mid-sized organizations. Many large and mid-sized companies have often invested substantial personnel and financial resources in their PR departments, and may be reluctant or unwilling to migrate to cloud-based software and services specifically designed to address the marketing market. Many small businesses may have a single individual fulfilling multiple roles for marketing, if they have any marketing resource at all. Our success will depend to a substantial extent on the willingness of companies of every size to increase their use of or begin using cloud-based solutions in general and for cloud marketing software and services in particular. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market of cloud marketing solutions. These challenges, risks and difficulties include the following:
| • | generating sufficient revenue to attain or, if attained, maintain profitability; |
| • | managing growth in our operations; |
| • | managing the risks associated with developing new services and modules and discontinuing existing product and services; |
| • | attracting and retaining customers; and |
| • | attracting and retaining key personnel. |
We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Further, if businesses do not perceive the benefits of our cloud-based solutions, then the market may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.
10
A majority of our solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements, renew these agreements for fewer modules or users, or renew these agreements for less expensive services, our business, financial condition and results of operations will be adversely affected.
A portion of our solutions are sold pursuant to subscription agreements and our customers have no obligation to renew these agreements. As a result, we may not be able to consistently and accurately predict future renewal rates. Our subscription customers’ renewal rates may decline or fluctuate or our subscription customers may renew for fewer modules or users or for less expensive services as a result of a number of factors, including their level of satisfaction with our solutions, budgetary or other concerns, and the availability and pricing of competing products. Additionally, we may lose our subscription customers due to the high turnover rate in the marketing or PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.
Because we recognize subscription revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.
We recognize revenue from our subscription customers over the terms of their subscription agreements. The majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our model also makes it difficult for us to rapidly increase our subscription-based revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
We are subject to risks related to credit card payments we accept. If we fail to be in compliance with applicable credit card rules and regulations, we may incur additional fees, fines and ultimately the revocation of the right to accept credit card payments, which would have a material adverse effect on our business, financial condition or results of operations.
Some of the customers of our services pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating expenses and adversely affect our net income. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted making it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers which could have an adverse effect on our business, revenue, financial condition and results of operations.
We might not generate increased business from our current customers, which could limit our revenue in the future.
The success of our strategy is dependent, in part, on the success of our efforts to sell additional services to our existing customers. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.
Our business model continues to evolve, which may cause our results of operations to fluctuate or decline.
Our business continues to evolve, expanding into new markets and new service areas, and is therefore subject to additional risk and uncertainty. For example, in 2008 we began offering solutions specifically for small businesses, in June 2010, we began providing social media monitoring services to our customers, in October 2011 we began offering a marketing suite targeted at small to mid-sized businesses, and in February 2012, we acquired iContact Corporation (iContact) which provides email marketing services. We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of our cloud marketing and public relations suites.
As some of our sales efforts are targeted at small business customers that are more substantively affected by economic conditions than the large and mid-sized business sectors, economic downturns may cause potential and existing small business customers to fail to purchase our solutions or renew existing subscriptions, which could limit our revenue in the future.
We sell some our services to small organizations, including small businesses, associations and non-profits that frequently have limited budgets and may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may be more likely to spend the limited funds that they have on items other than our solutions. Additionally, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, which would negatively affect demand for our solutions, increase customer attrition and adversely affect our business, revenue, financial condition and results of operations.
We depend on search engines to attract new 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 and our business may be harmed.
We rely on search engines to attract new customers, and many of our customers locate our websites by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are determined and organized solely by automated criteria set by the search engine and a ranking
11
level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers’ websites. We rely on both algorithmic and purchased listings to attract customers to our websites. 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, then our websites may not appear at all or may appear less prominently in search results which could result in fewer customers clicking through to our websites, requiring us to resort to other potentially costly resources to advertise and market our services. 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. Additionally, the cost of purchased search listing advertising is rapidly increasing as demand for these channels grows, and further increases could greatly increase our expenses.
Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. If we further expand our direct sales force and marketing efforts, it may require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force and marketing efforts if we are unable to hire and develop talented 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 personnel. We also may not achieve anticipated revenue growth from our existing third-party channel partners if we are unable to maintain or renew such relationships, if any existing 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 competing products and services.
If we fail to develop our brands, our business may suffer.
We believe that developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. 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 brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract 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.
If our information databases do not maintain market acceptance, our business, financial condition and results of operations could be adversely affected.
We have developed our own content that is included in the information databases that we make available to our customers through our cloud-based software. If our internally-developed content does not maintain market acceptance, current customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new customers.
We rely on third-parties to provide certain content for our solutions, and if those third-parties discontinue providing their content, our business, financial condition and results of operations could be adversely affected.
We rely on third-parties to provide or make available certain data for our information databases, our news monitoring service and our social media monitoring service. These third-parties may not renew agreements to provide content to us or may increase the price they charge for their content. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third-parties. In the event we are unable to use such third-party content or are unable to enter into agreements with third-parties, current customers may not renew their subscription agreements with us or continue purchasing solutions from us, and it may be difficult to acquire new customers.
We depend on search engines for the placement of our customers’ online news releases, and if those search engines change their listings or our relationship with them deteriorates or terminates, our reputation will be harmed and we may lose customers or be unable to attract new customers.
Our news distribution service depends upon the placement of our customers’ online press releases. If search engines on which we rely modify their algorithms or purposefully block our content, then information distributed via our news distribution service may not be displayed or may be displayed less prominently in search results, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.
If the delivery of our customers’ emails is limited or blocked, customers may cancel their accounts.
Internet service providers (ISP) 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. 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, authentication technologies or other policies, then customers may cancel their accounts which could harm our business and financial performance.
12
Various private spam blacklists may 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 journalists, social media influencers, and 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 exceed legal requirements and classify certain email solicitations that comply with 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. If a company’s 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 entity’s service or purchases its blacklist. If our services are blacklisted our customers may be unable to effectively use our services, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.
Our customers’ use of our services and websites to transmit negative messages or links to harmful websites or applications could damage our reputation, and subject us to liability.
Our customers could use our services or websites to transmit negative messages or links to harmful websites or applications, reproduce and distribute copyrighted and trademarked material without permission, or report inaccurate or fraudulent data or information. Any such use of our services could damage our reputation and we could face claims for damages, infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our services may not comply with federal, state and foreign laws. Facilitating these activities may expose us to liability including fines or penalties, or expend resources to remedy any damages caused by such actions.
We have incurred operating losses in the past and may incur operating losses in the future.
We have incurred operating losses in the past and we may incur operating losses in the future. Our recent operating losses were $4.2 million for 2011, $21.9 million for 2012 and $20.3 million for 2013. We expect our operating expenses to increase as we continue to expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to generate operating income.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if we experience a change in ownership, or if taxable income does not reach sufficient levels.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We may experience ownership changes in the future. As a result, we may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. Federal and state income tax purposes and the utilization of other tax attributes to reduce the Company’s Federal and state income tax expense.
Unanticipated changes in our effective tax rate could adversely affect our future results.
We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions.
Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in jurisdictions with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles. Changes in our effective tax rate could materially affect our net results.
In addition, we are subject to income tax audits by certain tax jurisdictions throughout the world. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
If we are required to collect sales and use or other taxes on our solutions, we may be subject to liability for past sales and our business, financial condition and results of operations may be adversely affected.
Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other 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 and ecommerce transactions in general in various jurisdictions is a complex and evolving issue. It is possible that we could face sales tax audits and an assertion that we should be collecting sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes. The imposition of Internet usage taxes or enhanced enforcement of sales tax laws could result in substantial tax liabilities for past sales or could have an adverse effect on our business, financial condition and results of operations.
We face competition, and our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.
The market for marketing solutions is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition from:
| • | generic desktop software and other commercially available software not specifically designed for marketing; |
13
| • | marketing solution providers offering products specifically designed for marketing; |
| • | outsourced marketing service providers; |
| • | custom-developed solutions; |
| • | software companies offering social media solutions; |
| • | email marketing providers; and |
| • | press release distribution providers. |
Many of our current and potential competitors have longer operating histories, a larger presence in the marketing market, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential customer, that customer may be unwilling to switch vendors due to existing time and financial commitments with our competitors.
We also expect that new competitors, such as enterprise software vendors and cloud-based service providers that have traditionally focused on enterprise resource planning or back office applications, will enter the cloud marketing market with competing products as the cloud marketing market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third-parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.
Traditional press release distribution providers now offer press release distribution services through the Internet. We had or continue to have partnerships with these providers to co-market and sell our press release distribution services. It is possible that these competitors could rapidly acquire significant market share.
We expect that many companies will offer solutions designed to help businesses promote themselves across social media channels. Given the rapid adoption of social media and the dynamic nature of the vendors in this market, it is possible that these new competitors could rapidly acquire significant market share.
If we fail to respond to evolving industry standards, our solutions may become obsolete or less competitive.
The market for our solutions is characterized by changes in customer requirements, changes in protocols, new technologies and evolving industry standards. If we are unable to enhance or develop new features for our existing solutions or develop acceptable new solutions that keep pace with these changes, our cloud-based software and services may become obsolete, less marketable and less competitive and our business will be harmed. The success of any enhancements or new services depends on several factors, including timely completion, introduction and market acceptance of our solutions. Failure to produce acceptable new offerings and enhancements may significantly impair our revenue growth and reputation.
If there are interruptions or delays in providing our solutions due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with customers and subject us to liability.
Our solutions reside on hardware that we own or lease and operate. Our hardware is currently located in various third-party data center facilities maintained and operated in the U.S. and Europe. Our third-party facility providers do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility providers’ ability to protect systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangements are terminated, or there is a lapse of service or damage to such third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.
Our disaster recovery computer hardware and systems, which are located at third-party data center facilities, have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. Any or all of these events could cause our customers to lose access to our cloud-based software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in such service or impede our ability to scale our operations.
We architect 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 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 in turn could 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 adversely affect our business, financial condition and results of operations.
14
Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.
One of our business strategies is to selectively acquire companies which either expand our solutions’ functionality, provide access to new customers or markets, or both. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from subscription customers obtained through acquisitions than our typical renewal rates. Moreover, we cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized, that we would not be exposed to unknown liabilities, or that such an acquisition will be viewed positively by our customers, stockholders, analysts or the financial markets. In connection with one or more of these transactions, we may:
| • | issue additional equity securities that would dilute the ownership of our stockholders; |
| • | use cash that we may need in the future to operate our business; |
| • | be unable to achieve the anticipated benefits from our acquisitions; |
| • | incur or assume debt on terms unfavorable to us or that we are unable to repay; |
| • | incur large charges or substantial liabilities; |
| • | encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; |
| • | encounter problems arising from differences in the revenue, licensing or support of the acquired business; and |
| • | become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. |
In 2011, we acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social). In 2012, we acquired all of the outstanding shares of iContact, an email marketing company.
The consideration paid in connection with an acquisition also affects our financial results. If we should proceed with one or more significant acquisitions in which the consideration includes cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition. For example, the purchase price of the iContact acquisition included approximately $90.5 million in cash. To the extent that we issue shares of stock or other rights to purchase stock, existing stockholders may be diluted and earnings per share may decrease. For example, as part of the purchase price for iContact, we issued 406,554 shares of our common stock and 1,000,000 shares of preferred stock that are initially convertible into 3,025,600 shares of our common stock.
In addition, acquisitions may result in our incurring additional debt, material one-time write-offs, or purchase accounting adjustments and restructuring charges. They may also result in recording goodwill and other intangible assets in our financial statements which may be subject to future impairment charges or ongoing amortization costs, thereby reducing future earnings. In addition, from time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as incurring expenses that may impact operating results.
We may dispose of or discontinue existing products and services, which may adversely affect our business, financial condition and results of operations.
We continually evaluate our various products and services in order to determine whether any should be discontinued or, to the extent possible, divested. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the right products or services to dispose of or discontinue, or that our decision to dispose of or discontinue various investments, products or services is prudent. There are no assurances that the discontinuance of various products or services will reduce our operating expenses or will not cause us to incur material charges with such a decision. The disposal or discontinuance of existing solutions presents various risks, including, but not limited to the inability to find a purchaser for a product or service or the purchase price obtained will not be equal to at least the book value of the net assets for the product or service, managing the expectations of, and maintaining good relations with, our customers who previously purchased discontinued solutions, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with our disposal or discontinuance of solutions, including, but not limited to employee severance costs and excess facilities costs, all of which could have an adverse effect on our business, financial condition and results of operations.
We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.
The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party data center facilities to meet our capacity requirements. In addition, computer viruses and
15
intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.
Moreover, because our solutions are cloud-based, the amount of data that we store for our customers on our servers is ever-increasing. Any systems failure or compromise of our security that results in the release of our customers’ data could seriously limit the adoption of our solutions and harm our reputation causing our business to suffer. In addition, any person who circumvents our security measures could steal proprietary or confidential customer information or cause interruptions in our operations. We incur significant costs to protect against security breaches, and may incur significant additional costs to alleviate problems caused by any breaches. Customers’ concerns about security could deter them from using the Internet to conduct transactions that involve confidential information, so our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business and financial results.
Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on acceptable terms, or at all. In addition, we cannot provide assurance that this policy will 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 management’s attention.
If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.
Our cloud-based software may contain undetected errors or defects that may result in product failures or otherwise cause our solutions to fail to perform in accordance with customer expectations. Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing subscription customers could elect to not renew. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ failure or defect. We do not currently maintain any warranty reserves.
Product liability claims could require us to spend significant time and money in litigation or arbitration/dispute resolution or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claim successfully brought against us could cause our business to suffer.
Our news distribution service is a trusted information source, and our customers rely on our email services to communicate with journalists, social media influencers, and their customers and members. To the extent we were to distribute an inaccurate or fraudulent press release or our customers used our services to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted and trademarked material without permission, or report inaccurate or fraudulent data or information, our reputation could be harmed, even though we are not responsible for the content distributed via our services. Additionally, if our services are blacklisted, our customers may be unable to effectively use our services, and as a result, we could lose customers or fail to attract new customers and our results of operations could be adversely affected.
Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our solution and adversely affect our business.
We provide contact information to our customers and our customers can use our service to store contact and other personal or identifying information regarding their marketing contacts. Federal, state and foreign government agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from individuals. Other proposed legislation could, if enacted, prohibit or limit the use of certain technologies that track individuals’ activities on web pages, in emails or on the Internet. In addition to government activity, privacy advocacy groups and the technology and marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us or our customers which could reduce demand for our solutions.
The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to us and to the businesses of our customers may reduce demand for our solutions, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws and could negatively impact our ability to effectively market our solutions. Even the perception of privacy concerns, whether or not valid, could cause our business to suffer.
16
Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium and the use of email and social media for marketing or other consumer communications. In addition, certain government agencies or private organizations have begun to impose taxes, fees or other charges for accessing the Internet or for sending commercial email. These laws or changes could limit the growth of Internet-related commerce or communications which could result in a decline in the use of the Internet and the viability of Internet-based services such as ours and reduce the demand for our products.
The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.
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 establishes financial penalties for non-compliance, which could increase the costs of our business.
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. 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.
If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business.
If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our solutions. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise infringing on our intellectual property rights. Existing laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed do not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.
To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.
Source code, the detailed program commands for our software programs, is critical to our business. Although we take measures to protect our source code, unauthorized disclosure or reverse engineering of a significant portion of our source code could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our business.
If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.
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 may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. We cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties, as currently pending patent applications are not publicly available. We expect that the number of infringement claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:
| • | divert management’s 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; or |
| • | require us to redesign our solutions to avoid infringement. |
17
We may be liable or alleged to be liable to third parties for software or content that we provide to our customers if the software or content violates a third party’s intellectual property rights, or if our customers violate such rights by providing content using our solutions.
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 customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third-parties’ 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’s time, which could adversely affect our business.
Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.
Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between January 1, 2011 and December 31, 2013, the number of our full-time equivalent employees increased from 655 to 1,356. We anticipate that additional growth will be required to address increases in our customer base, as well as expansion into new geographic areas.
Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, 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, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
We are dependent on our executive officers and other key personnel, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.
Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services. The loss of one or more of our key employees could seriously harm our business.
We may not be able to attract and retain the highly skilled employees we need to support our planned growth.
To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing software. 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 retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options and awards 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 employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
Because we conduct operations in foreign jurisdictions, which accounted for approximately 10% of our 2013 revenues, our business is susceptible to risks associated with international operations.
Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:
| • | fluctuations in currency exchange rates; |
| • | unexpected changes in foreign regulatory requirements; |
| • | difficulties in managing and staffing international operations; |
| • | potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; and |
| • | the burdens of complying with a wide variety of foreign laws and different legal standards. |
The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally.
18
Our debt covenants restrict our operational flexibility.
Our revolving credit facility contains a number of operational covenants, which, among other things, impose certain limitations on us with respect to expansion of our lines of business, effecting mergers, investments and acquisitions, incurring additional indebtedness, paying dividends or distributions, repurchasing shares of our common stock, entering into guarantees, and incurring liens and encumbrances. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets and of our subsidiaries, by a pledge of our and certain of our subsidiaries’ stock and by a guarantee of our subsidiaries. If the amounts outstanding under the credit facility were accelerated due to an event of default, the lender could proceed against such available collateral by forcing the sale of all or some of these assets.
We might require additional capital to support business growth or to meet our stock redemption obligations, and this capital might not be available.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. We may also require additional funds to pay the redemption price of our Series A convertible preferred stock, which is subject to mandatory redemption in February 2017. Accordingly, we may need to engage in further equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
Economic and market conditions may adversely affect our business, financial condition and results of operations.
Economic downturns, which have resulted in declines in corporate spending, decreases in consumer confidence and tightening in the credit markets, may adversely affect our financial condition and the financial condition and liquidity of our customers and suppliers. Among other things, these economic and market conditions may result in:
| • | reductions in the corporate budgets, including technology spending of our customers and potential customers; |
| • | declines in demand for our solutions; |
| • | decreases in collections of our customer receivables; |
| • | insolvency of our key vendors and suppliers; and |
| • | volatility in interest rates and decreases in investment income. |
Any of these events, which are outside of our scope of control, would likely have an adverse effect on our business, financial condition, results of operations and cash flows.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
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 these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive.
Many new laws, regulations and standards have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices and have created uncertainty for public companies. These new laws, regulations and standards are subject to interpretations due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by varying regulatory bodies. This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities. Any unanticipated difficulties in implementing these reforms could result in material delays in complying with these new laws, regulations and standards or significantly increase our operating costs.
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 Act’s requirements relating to internal control over financial reporting, we incur substantial accounting expense and expend significant management time on compliance-related issues. If 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 controls over financial reporting that are deemed to be material, the market price of our stock may decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC or other regulatory authorities.
Litigation could have a material adverse impact on our results of operations, financial condition and liquidity.
From time to time we have been, and may be in the future, subject to litigation. We are currently subject to the lawsuit described in Item 3 of this Form 10-K. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. While we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim or may not provide coverage at all, and there can be no assurance as to the continued availability of this insurance. Any such proceedings may result in substantial costs and divert management’s attention and resources.
19
Risks Related to our Common Stock and the Securities Markets
JMI Equity’s significant ownership interest dilutes the interests of our common stockholders, may discourage, delay or prevent a change in control of our company and grants important rights to JMI Equity.
The 1,000,000 shares of Series A convertible preferred stock that we issued in February 2012 to JMI Equity Fund VI, L.P. (JMI Equity) were immediately convertible into shares of our common stock at an initial conversion rate of 3.0256 shares of common stock per share of Series A convertible preferred stock (subject to customary adjustments, and subject to increase if we fail to fulfill our obligation to redeem the preferred stock on February 24, 2017). The investment currently equates to an ownership interest of approximately 12%, assuming the full conversion of each share of preferred stock into the company’s common stock. Any sales in the public market of the shares of common stock issuable upon such conversion after that date could adversely affect prevailing market prices of our common stock.
On February 24, 2017, we will be required to redeem each issued and outstanding share of Series A convertible preferred stock for $77.30 per share from our legally available funds, or such lesser amount of shares as we may then redeem under Delaware law. The shares of preferred stock will vote on an as-converted basis with the common stock, voting together as a single class, provided that the holders of the preferred stock shall vote separately as a class on certain matters affecting the preferred stock. If any shares of preferred stock are outstanding on or after February 24, 2017, the holders of the preferred stock will have the right to vote separately as a class on additional actions by Vocus related to acquisitions, redemptions, dividends, capital stock, and indebtedness. In addition, for so long as the outstanding shares of Series A convertible preferred stock continue to represent at least 5% of the total outstanding shares of our common stock, calculated assuming the conversion of all outstanding shares of Series A convertible preferred stock into shares of common stock, the holders of the Series A convertible preferred stock, voting as a separate class, will have the exclusive right to elect one director to our board of directors (the Series A Director). Furthermore, pursuant to an Investor Rights Agreement with JMI Equity, the holders of the preferred stock have the right to nominate a director to the board of directors for as long as they hold 5% or more of our issued and outstanding capital stock (which nominee shall be the Series A Director for so long as the holders of preferred stock have the right to elect the Series A Director). These provisions, as well as other terms of the Series A convertible preferred stock, may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company.
There can be no assurance that the interests of JMI Equity or any subsequent holders of the Series A convertible preferred stock are or will be aligned with those of our other stockholders. Investor interests can differ from each other and from other corporate interests and it is possible that this significant stockholder may have interests that differ from management and those of other stockholders. If JMI Equity or any subsequent holders of the preferred stock were to sell, or otherwise transfer, all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities.
A portion of the voting power of our stock is concentrated in a limited number of stockholders, and their interests may be different from yours.
A certain portion of the voting power of our stock is concentrated in the hands of a few stockholders. As a result, if such persons act together, they may have substantial control over matters submitted to our stockholders for approval, including the election and removal of directors, changes in our capital structure, governance, stockholder approvals and the approval of any merger, consolidation or sales of all or substantially all of our assets. These stockholders may have different interests than the other holders of our stock and may make decisions that are adverse to your interests.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.
Volatility of our stock price could adversely affect stockholders.
The market price of our common stock could fluctuate significantly as a result of:
| • | quarterly variations in our operating results; |
| • | seasonality of our business cycle; |
| • | interest rate changes; |
| • | changes in the market’s expectations about our operating results; |
| • | our operating results failing to meet the expectation of securities analysts or investors in a particular period; |
| • | changes in financial estimates and recommendations by securities analysts concerning our company or the cloud-based software industry in general; |
| • | operating and stock price performance of other companies that investors deem comparable to us; |
20
| • | news reports relating to trends in our markets; |
| • | changes in laws and regulations affecting our business; |
| • | threatened or actual litigation; |
| • | material announcements by us or our competitors including new product or service introductions, changes in business strategy and financial estimates, and acquisitions or divestitures of businesses, products, technologies or services; |
| • | sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; |
| • | any major change in our board of directors or management; |
| • | economic conditions including a slowdown in economic growth and uncertainty in equity and credit markets; and |
| • | general political conditions such as acts of war or terrorism. |
In addition, the stock market in general, and the market for cloud-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
Provisions in our amended and restated certificate of incorporation and bylaws, our stockholders’ rights plan or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.
Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
| • | establish a classified board of directors so that not all members of our board of directors are elected at one time; |
| • | provide that directors may only be removed “for cause” and only with the approval of 66 2/3 percent of our stockholders; |
| • | require super-majority voting to amend our bylaws or specified provisions in our amended and restated certificate of incorporation; |
| • | authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt; |
| • | limit the ability of our stockholders to call special meetings of stockholders; |
| • | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
| • | provide that the board of directors is expressly authorized to adopt, amend, or repeal our bylaws; and |
| • | establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition to the above, in May 2013, the Board adopted a stockholders rights plan and declared a dividend distribution of one preferred stock purchase right (Right) for each outstanding share of our common stock and 3.0256 Rights for each outstanding share of our Series A Convertible Preferred Stock to stockholders of record at the close of business on May 13, 2013. Our rights plan is intended to protect stockholders in the event of an unfair or coercive offer to acquire our Company and to provide our Board with adequate time to evaluate unsolicited offers. The rights plan may discourage, delay or prevent a change of control or the acquisition of a substantial amount of our common stock and may make any future unsolicited acquisition attempts more difficult. Under the rights plan:
| • | each Right entitles registered holders to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock at a price of $46.00 per one one-thousandth of a share, subject to adjustment; |
| • | the Rights will be exercisable only if a person or group acquires 20% or more of the Company’s outstanding common stock (subject to certain exceptions), or if a person or group announces a tender or exchange offer, resulting in beneficial ownership of 20% or more of the outstanding common stock. The Rights also will be exercisable if a person or group that already beneficially owns or has the right to acquire 20% or more of the Company’s outstanding common stock acquires additional shares equal to 1% or more of the Company’s then outstanding common stock (except in the case of a certain stockholder who, under limited circumstances, is permitted to beneficially own more than 20%, but less than 25%, of the Company’s outstanding common stock, subject to certain exceptions); and |
| • | the rights plan will cause substantial dilution to a person or group that attempts to acquire us on terms that our Board does not believe are in our best interests and those of our stockholders and may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. |
21
Further, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.
Future sales, or the availability for sale, of our common stock may cause our stock price to decline.
Our directors and officers hold shares of our common stock that they generally are currently able to sell in the public market. We have also registered shares of our common stock that are subject to outstanding stock options, or reserved for issuance under our stock award plan, which shares can generally be freely sold in the public market upon issuance. Moreover, from time to time, our executive officers and directors have established trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.
| Item 1B. | Unresolved Staff Comments |
Not applicable.
| Item 2. | Properties |
Our corporate headquarters, including our principal administrative, marketing, sales, technical support and research and development facilities, are located in Beltsville, Maryland, where we lease approximately 118,000 square feet under an agreement that expires in 2023. Our content research division is located in College Park, Maryland where we lease approximately 7,300 square feet of space under an agreement that expires in 2020. We also currently occupy several domestic and international sales and service offices in California, North Carolina, Virginia, Washington, England, France and the Philippines, where we lease an aggregate of approximately 117,000 square feet under multiple leases, which have terms that expire at various times through 2017.
We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
| Item 3. | Legal Proceedings |
On January 23, 2014, North Venture Partners, LLC (NVP) filed a complaint that named us as a defendant in a lawsuit in the U.S. District Court for the Northern District of California (Civil Action No. C14-0337). The complaint, which was served to us on January 27, 2014, alleges that we failed to pay the full amount of the earn-out payment due under an Asset Purchase Agreement dated February 24, 2011 in which we acquired certain assets of NVP. NVP’s complaint seeks an award for damages of approximately $6.4 million. This litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. We believe we have meritorious defenses and intend to vigorously defend the lawsuit.
From time to time, we are named as a defendant in other legal actions arising from our normal business activities. We are not currently subject to any other material legal proceedings that in our opinion will have a material effect on our financial positions, operating results or cash flows.
| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market for Common Stock
Since December 7, 2005, our common stock has been listed on the NASDAQ Global Market under the symbol “VOCS.” Prior to such time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported by NASDAQ, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
| High | Low | |||||||
Fiscal Year Ended December 31, 2012 | ||||||||
First Quarter | $ | 24.19 | $ | 12.32 | ||||
Second Quarter | 18.60 | 12.34 | ||||||
Third Quarter | 20.45 | 16.48 | ||||||
Fourth Quarter | 19.77 | 14.73 | ||||||
Fiscal Year Ended December 31, 2013 | ||||||||
First Quarter | $ | 18.09 | $ | 12.83 | ||||
Second Quarter | 13.80 | 8.22 | ||||||
Third Quarter | 11.42 | 9.24 | ||||||
Fourth Quarter | 11.57 | 8.27 | ||||||
22
As of February 28, 2014, there were approximately 60 holders of record of our common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.
Dividends
We have never declared or paid any cash dividends on our capital stock and do not expect to pay any cash dividends for the foreseeable future. We intend to retain any future earnings, if any, in the operation and expansion of our business. Any future determination to pay cash dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of the revolving credit facility that we entered into in February 2012 preclude us from paying cash dividends.
Issuer Purchases of Equity Securities
In November 2008, our Board of Directors authorized a stock repurchase program for up to $30.0 million of our shares of common stock, and in August 2011 authorized up to an additional $30.0 million. The shares may be purchased from time to time in the open market, and there is no expiration date specified for the program. During the year ended December 31, 2013, we did not purchase any shares of our common stock under the program. As of February 28, 2014, $20.0 million remained available for purchases under the program; however, the terms of our revolving credit facility limit the dollar value of shares that we may purchase.
The following table sets forth a summary of our purchases of our common stock during the three months ended December 31, 2013, of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Dollar Value of Shares That May Yet be Purchased Under the Plan | |||||||||||||
October 1 – October 31 | ||||||||||||||||
Share repurchase program(1) | — | — | — | $ | 20,000,520 | |||||||||||
Employee transactions(2) | — | — | — | N/A | ||||||||||||
November 1 – November 30 | ||||||||||||||||
Share repurchase program(1) | — | — | — | $ | 20,000,520 | |||||||||||
Employee transactions(2) | — | — | — | N/A | ||||||||||||
December 1 – December 31 | ||||||||||||||||
Share repurchase program(1) | — | — | — | $ | 20,000,520 | |||||||||||
Employee transactions(2) | 1,655 | $ | 11.36 | — | N/A | |||||||||||
| (1) | There were no shares purchased though our publicly announced share repurchase program in the fourth quarter of 2013. |
| (2) | All shares were delivered to us by employees to satisfy the minimum statutory tax withholding obligations with respect to the taxable income recognized by these employees upon the vesting of their stock awards. |
Performance Graph
The following line graph compares cumulative total stockholder returns for the period December 31, 2008 through December 31, 2013 for (1) our common stock; (2) the Nasdaq Composite Index; and (3) the Nasdaq Computer Index. The graph assumes an investment of $100 on December 31, 2008. The calculations of cumulative stockholder return on the Nasdaq Composite Index and the Nasdaq Computer Index include reinvestment of dividends, but the calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay dividends during the measurement period. The performance shown is not necessarily indicative of future performance.
| 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | |||||||||||||||||||
Vocus, Inc. | $ | 100.00 | $ | 98.85 | $ | 151.89 | $ | 121.31 | $ | 95.44 | $ | 62.55 | ||||||||||||
Nasdaq Composite | $ | 100.00 | $ | 143.89 | $ | 168.22 | $ | 165.19 | $ | 191.47 | $ | 264.84 | ||||||||||||
Nasdaq Computer Index | $ | 100.00 | $ | 170.82 | $ | 200.62 | $ | 201.60 | $ | 226.76 | $ | 299.19 | ||||||||||||
23
| Item 6. | Selected Financial Data |
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013, and the consolidated balance sheet data at December 31, 2012 and 2013, are derived from audited consolidated financial statements included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2009 and 2010, and the consolidated balance sheet data at December 31, 2009, 2010 and 2011 are derived from audited financial statements not included in this report. The historical results are not necessarily indicative of results to be expected in any future period.
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2010(2) | 2011(2) | 2012(2) | 2013 | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
Consolidated Statement of Operations: | ||||||||||||||||||||
Revenues | $ | 84,579 | $ | 96,760 | $ | 114,874 | $ | 170,804 | $ | 186,931 | ||||||||||
Cost of revenues(1) | 15,461 | 18,932 | 21,857 | 33,749 | 38,220 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | 69,118 | 77,828 | 93,017 | 137,055 | 148,711 | |||||||||||||||
Operating expenses:(1) | ||||||||||||||||||||
Sales and marketing | 41,123 | 49,620 | 57,543 | 97,873 | 109,768 | |||||||||||||||
Research and development | 4,675 | 5,891 | 7,561 | 13,272 | 10,649 | |||||||||||||||
General and administrative | 21,018 | 23,587 | 30,129 | 40,651 | 40,753 | |||||||||||||||
Amortization of intangible assets | 1,926 | 2,298 | 2,021 | 7,157 | 7,841 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 68,742 | 81,396 | 97,254 | 158,953 | 169,011 | |||||||||||||||
Income (loss) from operations | 376 | (3,568 | ) | (4,237 | ) | (21,898 | ) | (20,300 | ) | |||||||||||
Interest and other income (expense), net | 454 | 71 | 279 | (266 | ) | (301 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) before provision for income taxes | 830 | (3,497 | ) | (3,958 | ) | (22,164 | ) | (20,601 | ) | |||||||||||
Provision for income taxes | 2,854 | 178 | 10,619 | 1,427 | 1,205 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net loss | $ | (2,024 | ) | $ | (3,675 | ) | $ | (14,577 | ) | $ | (23,591 | ) | $ | (21,806 | ) | |||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net loss per share, basic and diluted | $ | (0.11 | ) | $ | (0.21 | ) | $ | (0.78 | ) | $ | (1.21 | ) | $ | (1.09 | ) | |||||
| (1) | Cost of revenues and operating expenses include stock-based compensation expense from equity awards in the following amounts: |
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Cost of revenues | $ | 1,453 | $ | 1,590 | $ | 1,575 | $ | 1,514 | $ | 1,356 | ||||||||||
Sales and marketing | 3,753 | 3,253 | 4,126 | 4,299 | 3,162 | |||||||||||||||
Research and development | 989 | 1,506 | 2,079 | 2,646 | 1,933 | |||||||||||||||
General and administrative | 6,697 | 6,453 | 7,135 | 6,413 | 5,876 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 12,892 | $ | 12,802 | $ | 14,915 | $ | 14,872 | $ | 12,327 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (2) | The consolidated statements of operations include financial results in the relevant periods since the acquisition dates of Datapresse and BDL Media in April 2010, HARO in June 2010, Engine140 in December 2010, North Social in February 2011 and iContact in February 2012. Please refer to Note 3, Business Combinations of the Notes to Consolidated Financial Statements for further discussion of our recent acquisitions. |
| December 31, | ||||||||||||||||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents and investments | $ | 104,669 | $ | 100,414 | $ | 108,179 | $ | 34,091 | $ | 34,740 | ||||||||||
Working capital (deficit) | 70,594 | 60,085 | 53,662 | (32,632 | ) | (29,010 | ) | |||||||||||||
Total assets | 159,240 | 173,880 | 195,743 | 292,814 | 281,380 | |||||||||||||||
Total debt | 245 | 344 | 1,030 | 1,605 | 1,355 | |||||||||||||||
Total deferred revenue | 47,750 | 56,576 | 62,997 | 79,333 | 84,517 | |||||||||||||||
Stockholders’ equity | 104,381 | 104,434 | 102,721 | 100,779 | 91,302 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Item 1A.
24
Overview
We are a leading provider of cloud marketing and public relations software that enables businesses to acquire and retain customers. We offer products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness. Our cloud marketing solutions addresses key areas of digital marketing, including social media marketing, search marketing and news distribution, email marketing and publicity. Our sales organization is focused on adding new customers, renewing customer subscriptions and expanding relationships with existing customers. We deliver our solutions over the Internet using a secure, scalable application and system architecture that allows our customers to quickly deploy and adopt our software.
As of December 31, 2013, we had 16,854 active subscription customers who purchased our products and services. These customers represent a wide variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an annual active subscription and have not been suspended for non-payment.
We plan to continue to expand our cloud marketing suite, provide additional consulting services as part of our subscriptions, expand our marketing activities to continue to increase brand awareness and increase the presence of our cloud marketing solutions with mid-sized organizations.
Acquisitions
iContact
On February 24, 2012, we acquired all of the outstanding shares of iContact Corporation (iContact), a provider of cloud-based email and social marketing software that enables organizations to create and publish professional-quality emails to engage, educate and retain customers. The acquisition provided an email capability component to our cloud marketing suite. The purchase price consisted of approximately $89.8 million of cash, a promissory note in the amount of $669,000, 406,554 shares of our common stock with a deemed value at issuance of approximately $9.1 million and 1.0 million shares of our newly-created Series A convertible preferred stock, with a deemed value at issuance of $77.5 million, aggregating approximately $167.1 million of total consideration, net of $10.0 million cash acquired. The acquisition was accounted for under the purchase method of accounting. Our consolidated financial statements include the operating results of iContact from the acquisition date. We incurred acquisition-related transaction costs of $2.9 million and paid severance costs of $2.1 million for the year ended December 31, 2012. We recorded $5.6 million of net tangible assets, $32.6 million of identifiable intangible assets and $138.9 million of goodwill which is not deductible for tax purposes.
North Social
On February 24, 2011, we acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social), a provider of Facebook applications that enable users to create, manage and promote their business on Facebook. The acquisition broadened our social media solution. The purchase price at the acquisition date consisted of approximately $7.0 million of cash paid at closing and $5.1 million of contingent consideration for the achievement of certain financial milestones within the following 24 months. The contingent consideration could have resulted in additional payments of up to $15.0 million. We recorded $101,000 of identifiable intangible assets, $11.9 million of goodwill which is deductible for tax purposes and $78,000 of other net tangible assets. Acquisition-related costs incurred for the acquisition were not material.
The fair value of the contingent consideration liability was estimated based on a discounted probability-weighted income approach derived from revenue and earnings estimates and a probability assessment with respect to the likelihood of achieving the milestone criteria. Increases or decreases in the probability of achievement of these certain financial and performance milestones resulted in changes to the estimated fair value. The additional expense of $1.9 million, $1.2 million and $3.5 million was included in general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013, respectively. During 2013, the fair value of the contingent consideration was adjusted based on the final earn-out calculations which were impacted by higher revenues in the first quarter of 2013 resulting from the increase in the number of North Social subscription customers due to additional marketing efforts near the conclusion of the earn-out period. The remaining liability for contingent consideration was paid in the second quarter of 2013.
On February 4, 2014, we announced the discontinuance of the North Social platform as it does not align with our current strategic direction. We are in the process of evaluating the impact to our consolidated financial statements.
For more information, please refer to Note 3,Business Combinations of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Sources of Revenues
We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements are primarily for our marketing and public relations suites and iContact products. The subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, news distribution services, hosting services, content and content updates and customer support and may also include implementation and training services. The typical term of our subscription agreements of our marketing and public relations suites are one year; however, our customers may purchase subscriptions with multi-year terms. The typical term of our subscription agreements of our iContact products are monthly; however, our customers may purchase
25
subscriptions with varying terms. We separately invoice our customers in advance of their subscription, with payment terms that generally require our customers to pay us within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced.
Additionally, we derive revenue on a per-transaction basis from our PRWeb news distribution services. We generally receive payment in advance of the online distribution of the news release.
Professional services revenue consists primarily of data migration, custom development and training. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us generally within 30 days of invoice.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution costs, acquisition, maintenance and amortization of the information database, amortization of purchased technology from business combinations, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.
We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their marketing efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect in 2014, cost of revenues will increase in absolute dollars and as a percentage of revenues.
Sales and Marketing. Sales and marketing expenses are our largest operating expense. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues. We expect in 2014, sales and marketing expenses will decrease in absolute dollars and as a percentage of revenues.
Research and Development. Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted solutions, we are able to provide our customers with a single, shared version of our most recent application, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in 2014, research and development expenses will remain flat in absolute dollars and as a percentage of revenues.
General and Administrative. General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, including acquisition-related expenses, third-party payment processing and credit card fees, facilities rent, other corporate expenses, fair value adjustments to contingent consideration and allocated overhead. We expect that in 2014, general and administrative expenses will decrease in absolute dollars and as a percentage of revenues.
Amortization of Intangible Assets. Amortized intangible assets consist of customer relationships and trade names acquired in business combinations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, self-insurance, revenue recognition, fair value of stock-based awards and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.
26
We believe that of our significant accounting policies, which are described in Note 2,Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K, the following accounting policies involve a greater degree of judgment or complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition. We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. We allocate consideration to each deliverable in our multiple element arrangements based on the relative selling prices and recognize revenue as the respective services are delivered or performed.
Our separate units of accounting consist of subscription services, news distribution services and professional services. Our subscription agreements generally include the use of our cloud-based software, hosting services, content and content updates and customer support. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements do not provide customers the right to take possession of the software at any time.
We also distribute individual news releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.
Our professional services consist primarily of data migration, custom development and training. Our cloud-based software does not require significant modification and customization services.
We established vendor-specific objective evidence (VSOE) of selling price for certain of our news distribution services as the selling price for a substantial majority of stand-alone sales falls within a narrow range around the median selling price. We determined third-party evidence (TPE) of selling price is not available for any of our services due to differences in the features and functionality compared to competitor’s products. Therefore, we use the estimated selling prices (ESP) for the remaining deliverables by analyzing multiple factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.
Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenues.
Sales Commissions. Sales commissions are expensed when a subscription agreement is executed by the customer. As a result, we incur sales expense before the recognition of the related revenues.
Stock-Based Compensation. We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We use the daily historical volatility of our stock price over the expected life of the options to calculate the expected volatility. The expected term of option awards is determined using a combination of historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term for outstanding awards. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.
Self-Insurance. In 2011, we enrolled in a self-insured plan for a majority of our U.S. employee health insurance costs, including claims filed and claims incurred but not reported (IBNR) subject to certain stop loss provisions. We estimate the liability based upon management’s judgment, historical data and the assistance of third-party actuaries in determining an adequate liability for self-insurance claims. Our IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity and deductible limits.
Business Combinations. We have completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. Definite-lived intangible assets consist of acquired customer relationships, trade names and purchased technology. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from two to seven years. We recognize all of the assets acquired, liabilities assumed and contingent consideration at their fair values on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. Accounting for these acquisitions requires us to make determinations about the fair value of assets acquired, useful lives for definite-lived tangible and intangible assets, and liabilities assumed that involve estimates and judgments.
Goodwill and Long-Lived Assets. Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on our fair value as a whole. When assessing goodwill for impairment, we use an income approach based on discounted cash flows to determine the fair value of our reporting unit. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage our operations. Based on the results of our most recent annual assessment performed on November 1, 2013, we concluded that the fair value of our reporting unit exceeded its carrying amount.
27
We also review the carrying amount of our reporting unit to its fair value based on quoted market prices of our common stock, or market capitalization. Our market capitalization exceeded our carrying amount on November 1, 2013. No events or circumstances occurred from the date of the assessments through December 31, 2013 that would impact our conclusions.
We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the year ended December 31, 2011, 2012 and 2013 were $100,000, $709,000 and $301,000, respectively.
Income taxes. We use the asset and liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences between the respective reported amounts and tax bases of assets and liabilities, as well as for operating losses and tax-credit carryforwards. Net deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In 2011, based on operating results and our projections of future losses, we established a full valuation allowance on our U.S. federal and state net deferred tax assets as we concluded that it is more likely than not that we will not realize the benefits of our deferred tax assets. We have historically maintained a full valuation allowance on net deferred tax assets of certain of our foreign subsidiaries because we determined that it is more likely than not that we will not realize the benefits of our foreign deferred tax assets.
Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. We file income tax returns in U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2013.
Results of Operations
The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
Revenues | 100 | % | 100 | % | 100 | % | ||||||
Cost of revenues | 19 | 20 | 20 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 81 | 80 | 80 | |||||||||
Operating expenses: | ||||||||||||
Sales and marketing | 50 | 57 | 59 | |||||||||
Research and development | 7 | 8 | 6 | |||||||||
General and administrative | 26 | 24 | 22 | |||||||||
Amortization of intangible assets | 2 | 4 | 4 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 85 | 93 | 91 | |||||||||
Loss from operations | (4 | ) | (13 | ) | (11 | ) | ||||||
Interest and other income (expense), net | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Loss before provision for income taxes | (4 | ) | (13 | ) | (11 | ) | ||||||
Provision for income taxes | 9 | 1 | 1 | |||||||||
|
|
|
|
|
| |||||||
Net loss | (13 | )% | (14 | )% | (12 | )% | ||||||
|
|
|
|
|
| |||||||
Years Ended December 31, 2013 and 2012
Revenues. Revenues for 2013 were $186.9 million, an increase of $16.1 million, or 9%, over revenues of $170.8 million for 2012. Revenue for our marketing suite product increased $12.7 million from $4.5 million for the year ended December 31, 2012 to $17.2 million for the year ended December 31, 2013. In 2014, we anticipate revenues related to our marketing suite product will grow as a percentage of total revenues due to our continued emphasis on the product. Total active subscription customers increased to 16,854 as of December 31, 2013 from 16,494 as of December 31, 2012. The increase in active subscription customers was the result of additional sales and marketing personnel focused on acquiring new customers and renewing existing customers. Additionally, revenue for iContact increased $5.1 million from $41.4 million for the year ended December 31, 2012 to $46.5 million for the year ended December 31, 2013. iContact revenues for the year ended December 31, 2012 included operations from iContact subsequent to the acquisition in February 2012 as compared to revenues for the year ended December 31, 2013 which included a full year of operations. Total deferred revenue at December 31, 2013 was $84.5 million, representing an increase of $5.2 million, or 7%, over total deferred revenue of $79.3 million at December 31, 2012.
28
Cost of Revenues. Cost of revenues for 2013 was $38.2 million, an increase of $4.5 million, or 13%, over cost of revenues of $33.7 million for 2012. The increase in cost of revenues was primarily due to increases of $3.7 million in employee-related costs from additional personnel, $926,000 in third-party license and royalty fees for content, $352,000 in amortization of technology primarily from our acquisition of iContact and $363,000 in equipment maintenance and software support costs, offset by a decrease of $851,000 in contracted labor costs. Cost of revenues for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 396 full-time employee equivalents in our professional and other support services group at December 31, 2013, compared to 298 full-time employee equivalents at December 31, 2012.
Sales and Marketing Expenses. Sales and marketing expenses for 2013 were $109.8 million, an increase of $11.9 million, or 12%, over sales and marketing expenses of $97.9 million for 2012. The increase was primarily due to an increase of $9.1 million in employee related costs from additional sales personnel hired throughout the year, $2.1 million in sales commissions and incentive compensation and $1.5 million in professional fees, offset by a decrease in stock-based compensation of $1.1 million and $691,000 of severance for iContact personnel incurred in 2012. Sales and marketing expenses for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 784 full-time sales and marketing employee equivalents at December 31, 2013, compared to 789 full-time employee equivalents at December 31, 2012.
Research and Development Expenses. Research and development expenses for 2013 were $10.6 million, a decrease of $2.7 million, or 20%, compared to research and development expenses of $13.3 million for 2012. The decrease in research and development was primarily due to a decrease of $619,000 in employee-related costs primarily due to turnover in personnel as a result of the acquisition of iContact, $637,000 of severance for iContact personnel incurred in 2012 and $713,000 in stock-based compensation. For the years ended 2013 and 2012, we capitalized $802,000 and $175,000, respectively, of research and development employee-related costs for internally developed software. Research and development expenses for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 66 full-time employee equivalents in research and development at December 31, 2013, compared to 63 full-time employee equivalents at December 31, 2012.
General and Administrative Expenses. General and administrative expenses for 2013 were $40.8 million, an increase of $102,000, over general and administrative expenses of $40.7 million for 2012. The slight increase in general and administrative expenses was primarily due to increases of $2.3 million in expense related to the fair value of the contingent consideration for acquisitions, $934,000 in employee-related costs due to additional personnel and $931,000 in rent and facility costs relating to the expansion and relocation of certain of our offices. These increases were offset by decreases of $2.9 million in non-recurring professional fees and transaction costs for the acquisition of iContact, $537,000 in stock-based compensation and $691,000 of severance for iContact personnel incurred in 2012. General and administrative expenses for the year ended December 31, 2012 included costs from iContact subsequent to the acquisition in February 2012 as compared to a full year of costs for the year ended December 31, 2013. We had 110 full-time employee equivalents in our general and administrative group at December 31, 2013, compared to 98 full-time employee equivalents at December 31, 2012.
Amortization of Intangible Assets. Amortization of intangible assets for 2013 was $7.8 million, an increase of $684,000, or 10%, compared to amortization of intangible assets of $7.2 million for 2012. The increase in amortization expense is primarily related to the acquisition of iContact in 2012.
Other Income (Expense). Other expense for 2013 was $301,000, an increase of $35,000, or 13%, compared to other expense of $266,000 for 2012. The increase is primarily due to changes in foreign currency exchange gains and losses.
Provision for Income Taxes. The provision for income taxes for 2013 was $1.2 million, a decrease of $222,000, or 16%, compared to $1.4 million for 2012. Our effective tax rate for 2013 differs from the U.S. federal statutory rates primarily due to operating losses in U.S. and foreign jurisdictions for which no tax benefit is currently available, an increase in a U.S. deferred tax liability that cannot serve as a source of taxable income for the recognition of a deferred tax asset, non-deductible stock-based compensation, non-deductible acquisition-related transaction costs and to a lesser extent, state income taxes and certain other non-deductible expenses.
Years Ended December 31, 2012 and 2011
Revenues. Revenues for 2012 were $170.8 million, an increase of $55.9 million, or 49%, over revenues of $114.9 million for 2011. The increase in revenue was primarily due to incremental revenue from the acquisition of iContact of $41.4 million for the year ended December 31, 2012, net of the fair value adjustment of $2.2 million and to an increase in the number of total active subscription customers to 16,494 as of December 31, 2012 from 11,907 as of December 31, 2011. Revenue growth from the increase in active subscription customers, excluding revenue from the acquisition, was $14.6 million. Total deferred revenue at December 31, 2012 was $79.3 million, representing an increase of $16.3 million, or 26%, over total deferred revenue of $63.0 million at December 31, 2011.
Cost of Revenues. Cost of revenues for 2012 was $33.7 million, an increase of $11.8 million, or 54%, over cost of revenues of $21.9 million for 2011. The increase in cost of revenues was due to an increase of $4.6 million in employee related costs from additional personnel, including increases in headcount from our acquisition of iContact, $3.4 million in amortization of technology primarily from our acquisition of iContact, $1.7 million in contracted labor costs, $763,000 in hosting facility fees and $298,000 in third-party license and royalty fees for content. We had 298 full-time employee equivalents in our professional and other support services group at December 31, 2012, compared to 210 full-time employee equivalents at December 31, 2011.
29
Sales and Marketing Expenses. Sales and marketing expenses for 2012 were $97.9 million, an increase of $40.4 million, or 70%, over sales and marketing expenses of $57.5 million for 2011. The increase was primarily due to an increase of $12.0 million in employee related costs from additional sales personnel, including increases in headcount from our acquisition of iContact, $691,000 in severance costs for iContact personnel, $4.8 million in sales commissions and incentive compensation and $17.7 million in marketing program costs, primarily for iContact. We had 789 full-time sales and marketing employee equivalents at December 31, 2012, compared to 446 full-time employee equivalents at December 31, 2011.
Research and Development Expenses. Research and development expenses for 2012 were $13.3 million, an increase of $5.7 million, or 76%, compared to research and development expenses of $7.6 million for 2011. The increase in research and development was primarily due to an increase of $3.2 million in employee-related costs from additional personnel, including increases in headcount from our acquisition of iContact, $637,000 in severance costs for iContact personnel and $567,000 in stock-based compensation. For the years ended 2012 and 2011, we capitalized $175,000 and $258,000, respectively, of research and development employee-related costs for internally developed software. We had 63 full-time employee equivalents in research and development at December 31, 2012, compared to 43 full-time employee equivalents at December 31, 2011.
General and Administrative Expenses. General and administrative expenses for 2012 were $40.7 million, an increase of $10.6 million, or 35%, over general and administrative expenses of $30.1 million for 2011. The increase in general and administrative expenses was primarily due to increases of $1.8 million in employee-related costs from additional personnel, including increases in headcount from our acquisition of iContact, $691,000 in severance costs for iContact personnel, $2.9 million in non-recurring professional fees and transaction costs for the acquisition of iContact, $1.7 million increase in credit card fees and $5.0 million in rent and facility costs and depreciation relating to the relocation of our headquarters in 2011 and expansion of certain of our other offices in 2012 in addition to rent from our acquisition of iContact, offset by decreases of $722,000 in stock-based compensation and $765,000 in expense related to the fair value adjustments of contingent consideration for acquisitions. We had 98 full-time employee equivalents in our general and administrative group at December 31, 2012, compared to 80 full-time employee equivalents at December 31, 2011.
Amortization of Intangible Assets. Amortization of intangible assets for 2012 was $7.2 million, an increase of $5.2 million, or 254%, compared to amortization of intangible assets of $2.0 million for 2011. The increase in amortization is primarily attributable to the intangible assets related to the acquisition of iContact.
Other Income (Expense). Other expense for 2012 was $266,000, an increase of $545,000, or 195%, compared to other income of $279,000 for 2011. The increase is primarily due to changes in foreign currency exchange gains and losses and interest expense from fees for our revolving credit facility.
Provision for Income Taxes. The provision for income taxes for 2012 was $1.4 million, a decrease of $9.2 million, or 87%, compared to $10.6 million for 2011. The decrease primarily relates to the establishment of the valuation allowance against our U.S. deferred tax assets in 2011. Our effective tax rate for 2012 differs from the U.S. federal statutory rates primarily due to operating losses in U.S. and foreign jurisdictions for which no tax benefit is currently available, an increase in a U.S. deferred tax liability that cannot serve as a source of taxable income for the recognition of a deferred tax asset, state income taxes and certain other non-deductible expenses.
Our effective tax rate for 2011 differed from the U.S. federal statutory rates due to non-deductible stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and, to a lesser extent, state income taxes and certain other non-deductible expenses.
Liquidity and Capital Resources
As of December 31, 2013, our principal sources of liquidity were cash and cash equivalents totaling $34.7 million and net accounts receivable totaling $28.9 million. Our cash equivalents and investments primarily consisted of money market funds and certificates of deposit. Cash, cash equivalents and investments held by our international operations totaled $10.2 million and $10.1 million at December 31, 2012 and 2013, respectively. Based on our business plan, we expect that cash held overseas will continue to be used for our international operations and therefore do not anticipate repatriating these funds. If we were to repatriate these amounts, we do not believe that the resulting withholding taxes payable would have a material impact on our liquidity.
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2013 was $6.8 million, reflecting a net loss of $21.8 million, non-cash charges for depreciation and amortization of $17.5 million, stock-based compensation of $12.3 million, $1.1 million for payments of contingent consideration for business acquisitions in excess of fair value on acquisition date, net of the fair value adjustments recorded in 2013, and a net change of $5.3 million in accounts receivable and deferred revenue due to growth in our subscription agreements invoiced in 2013. Net cash provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.
Investing Activities. Net cash used in investing activities for the year ended December 31, 2013 was $3.9 million, which primarily resulted from investments in property, equipment, software, and software development costs of $5.9 million, offset by net sales and maturities of investments of $2.0 million.
Financing Activities. Net cash used in financing activities for the year ended December 31, 2013 was $642,000 which primarily resulted from our purchase of 35,695 shares of our common stock at an aggregate cost of $477,000 and payments on notes payable and capital lease obligations of $850,000, offset by proceeds from notes payable of $600,000.
30
We have various non-cancelable operating leases, primarily related to office real estate, that expire through 2023 and generally contain renewal options for up to five years. As of December 31, 2013, minimum required payments in future years under these leases are $4.0 million in each of the years 2014 and 2015 and $3.9 million, $2.7 million, $2.0 million and $8.6 million in the years 2016, 2017, 2018 and 2019 and thereafter, respectively. As of December 31, 2013, we have a total of $1.3 million in letters of credit outstanding substantially in favor of landlords for certain of our office spaces. These letters of credit expire at various dates through May 2023.
On February 27, 2012, we established a $15.0 million revolving credit facility (Revolver) with a major lending institution which was available for use until February 27, 2013. In February 2013, the Revolver was amended to extend the availability for use until April 15, 2014. The Revolver is intended to be used for general working capital purposes and to provide increased liquidity and financial flexibility and bears interest equal to the BBA LIBOR Daily Floating Rate plus 2.25%. In addition, we pay a monthly fee equal to 0.4% on any unused funds under the Revolver. As collateral for extension of this credit, we granted security interests in favor of the institution of substantially all of our assets and pledged the stock of our directly owned domestic subsidiaries and 65% of the shares of our foreign subsidiaries. As of December 31, 2013, the Revolver was reduced by our outstanding letters of credit of $1.3 million. As such, we had $13.7 million available to borrow under the Revolver.
As of December 31, 2013, $20.0 million remains available for purchases under our stock repurchase program. Although we repurchased stock during the years ended December 31, 2010 and 2011, we may or may not do so in future periods, and our revolving credit facility limits our ability to engage in stock repurchases.
As of December 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
As of December 31, 2013, we had net operating loss (NOL) carryforwards for federal and state tax purposes of approximately $85.0 million and $41.7 million, respectively, which will begin to expire in 2025. Our foreign subsidiaries generated NOL carryforwards of $15.7 million which will begin to expire in 2020 and may be indefinite lived. Included in these amounts at December 31, 2013 are approximately $5.4 million in cumulative income tax deductions on the exercise of stock options and the vesting of restricted stock awards. This income tax benefit will be recorded to additional paid-in-capital when realized.
We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our cash and cash equivalents together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures, contractual obligations, commitments and other liquidity requirements associated with our operations for at least the next twelve months. Our cash requirements in the future may also be financed through our revolving credit facility or additional equity financing. There can be no assurance that financing would come at favorable terms, if at all.
In February 2014, we made a decision to shut-down our sales operations in our Philippines office. As a result, during the next three to six months, we expect to incur estimated expenses totaling $5.0 million for costs relating to the termination of the lease, impairment of assets and severance from the reduction in the workforce.
The following table summarizes our contractual obligations as of December 31, 2013 that requires us to make future cash payments:
| Payments due by period (in thousands) | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Operating lease obligations | $ | 25,196 | $ | 4,025 | $ | 7,828 | $ | 4,746 | $ | 8,597 | ||||||||||
Purchase obligations | 9,584 | 5,756 | 3,828 | — | — | |||||||||||||||
Long-term debt under notes payable obligations | 36 | 36 | — | — | — | |||||||||||||||
Capital lease obligations | 344 | 150 | 193 | 1 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total obligations | $ | 35,160 | $ | 9,967 | $ | 11,849 | $ | 4,747 | $ | 8,597 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
In addition, our other liabilities include $1.1 million related to uncertain tax positions as of December 31, 2013. Due to uncertainties in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain, and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond twelve months. As a result, this amount is not included in the above table.
In connection with our acquisition of iContact, on February 24, 2017, we will be required to redeem each issued and outstanding share of Series A convertible preferred stock for $77.30 per share from our legally available funds, or such lesser amounts as we may then redeem under Delaware corporate law. Each share of Series A convertible preferred stock is convertible into shares of our common stock at any time at the option of the holder. For conversions occurring on or before February 24, 2017, each share of Series A convertible preferred stock may be converted into 3.0256 shares of common stock (subject to customary adjustments, and subject to increase if we fail to fulfill our obligation to redeem the preferred stock on February 24, 2017). On or after February 25, 2017, each share of Series A convertible preferred stock which has not been redeemed may be converted into 3.3282 shares of common stock (subject to customary adjustments). Any redemption value is not included in above table due to the uncertainty of conversion or redemption.
31
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling, euro and Philippine peso. As a result, we are exposed to movements in the exchange rates of currencies against the U.S. dollar. For the year ended December 31, 2011, revenues denominated in a foreign currency were approximately 14% of our total revenues. For each of the years ended December 31, 2012 and 2013, revenues denominated in a foreign currency were approximately 10% of our total revenues. Exchange rate fluctuations have not significantly impacted our results of operations and cash flows. Our future results of operations and cash flows may be affected by changes in foreign currency exchange rates. Historically, we have not utilized derivative financial instruments to hedge our foreign exchange exposure; however, we may choose to use such contracts in the future.
Interest Rate Sensitivity
Our cash consists of interest and non-interest bearing accounts. Our cash equivalents consist primarily of money market funds and certificates of deposit. Our interest income is subject to interest rate risk. For the year ended December 31, 2013, a fluctuation in interest rates of 1 percentage point would not materially change interest income.
Our interest-bearing long-term borrowings as of December 31, 2013 were not material. In the event that we borrow under our revolving credit facility, which bears interest equal to the BBA LIBOR Daily Floating Rate plus 2.25%, we would be exposed to interest rate fluctuations.
| Item 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements and related notes required by this item are set forth as a separate section of this report. See Part IV, Item 15 of this Form 10-K.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
32
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to further periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, our management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2013 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework).
Based on its evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
33
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Vocus, Inc. and Subsidiaries,
We have audited Vocus, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Vocus, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Vocus, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2012 and 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Vocus, Inc. and subsidiaries and our report dated March 7, 2014 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
McLean, VA
March 7, 2014
34
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
A listing of our executive officers, key employees and their biographies are included under the caption “Executive Officers and Key Employees” under Item 1 of this Form 10-K. The remaining information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual Meeting of Stockholders.
| Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual Meeting of Stockholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual Meeting of Stockholders.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual Meeting of Stockholders.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual Meeting of Stockholders.
35
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)Documents filed as part of this report:
1. Consolidated Financial Statements:
| • | Report of Independent Registered Public Accounting Firm; |
| • | Consolidated Balance Sheets as of December 31, 2012 and 2013; |
| • | Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013; |
| • | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2012 and 2013; |
| • | Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2012 and 2013; |
| • | Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013; and |
| • | Notes to Consolidated Financial Statements. |
2. Consolidated Financial Statement Schedule:
| • | Schedule II — Valuation and Qualifying Accounts. |
Schedules not listed above have been omitted because they are not applicable, or are not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
(b)Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VOCUS, INC. | ||
| By: | /s/ RICHARD RUDMAN | |
Richard Rudman Chief Executive Officer, President and Chairman | ||
Date: March 7, 2014
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Rudman and Stephen Vintz, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature | Title | Date | ||
/S/ RICHARD RUDMAN Richard Rudman | Chief Executive Officer, President and Chairman (Principal Executive Officer) | March 7, 2014 | ||
/S/ STEPHEN VINTZ Stephen Vintz | Chief Financial Officer, Executive Vice President and Treasurer (Principal Financial and Accounting Officer) | March 7, 2014 | ||
/S/ KEVIN BURNS Kevin Burns | Director | March 7, 2014 | ||
/S/ GARY GOLDING Gary Golding | Director | March 7, 2014 | ||
/S/ GARY GREENFIELD Gary Greenfield | Director | March 7, 2014 | ||
/S/ RONALD KAISER Ronald Kaiser | Director | March 7, 2014 | ||
/S/ ROBERT LENTZ Robert Lentz | Director | March 7, 2014 | ||
/S/ JIT SINHA Jit Sinha | Director | March 7, 2014 | ||
37
Vocus, Inc. and Subsidiaries
Index to Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Vocus, Inc. and Subsidiaries,
We have audited the accompanying consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2012 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vocus, Inc. and subsidiaries at December 31, 2012 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vocus, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 7, 2014 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
McLean, VA
March 7, 2014
F-2
Consolidated Balance Sheets
| December 31, | ||||||||
| 2012 | 2013 | |||||||
(Dollars in thousands , except per share data) | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 32,107 | $ | 34,740 | ||||
Short-term investments | 662 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts of $236 and $234 at December 31, 2012 and December 31, 2013, respectively | 29,841 | 28,862 | ||||||
Current portion of deferred income taxes | 1,478 | 271 | ||||||
Prepaid expenses and other current assets | 2,933 | 4,728 | ||||||
|
|
|
| |||||
Total current assets | 67,021 | 68,601 | ||||||
Long-term investments | 1,322 | — | ||||||
Property, equipment and software, net | 20,068 | 20,134 | ||||||
Intangible assets, net | 26,751 | 14,805 | ||||||
Goodwill | 177,011 | 177,264 | ||||||
Deferred income taxes, net of current portion | — | 105 | ||||||
Other assets | 641 | 471 | ||||||
|
|
|
| |||||
Total assets | $ | 292,814 | $ | 281,380 | ||||
|
|
|
| |||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,125 | $ | 1,004 | ||||
Accrued compensation | 5,443 | 5,895 | ||||||
Accrued expenses | 12,133 | 8,900 | ||||||
Current portion of notes payable and capital lease obligations | 854 | 137 | ||||||
Current portion of deferred revenue | 77,098 | 81,675 | ||||||
|
|
|
| |||||
Total current liabilities | 99,653 | 97,611 | ||||||
Notes payable and capital lease obligations, net of current portion | 751 | 1,218 | ||||||
Other liabilities | 6,786 | 6,371 | ||||||
Deferred income taxes | 5,120 | 4,546 | ||||||
Deferred revenue, net of current portion | 2,235 | 2,842 | ||||||
|
|
|
| |||||
Total liabilities | 114,545 | 112,588 | ||||||
Commitments and contingencies | ||||||||
Redeemable convertible preferred stock: | ||||||||
Series A redeemable convertible preferred stock, $0.01 par value, 1,000,000 shares designated from authorized preferred stock; issued and outstanding at December 31, 2012 and December 31, 2013 | 77,490 | 77,490 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 1,000,000 shares designated as Series A redeemable convertible preferred stock and issued and outstanding at December 31, 2012 and December 31, 2013; no other shares issued and outstanding at December 31, 2013 | — | — | ||||||
Common stock, $0.01 par value, 90,000,000 shares authorized; 21,910,301 and 21,949,509 issued at December 31, 2012 and December 31, 2013, respectively; 19,670,168 and 20,207,652 shares outstanding at December 31, 2012 and December 31, 2013, respectively | 219 | 219 | ||||||
Additional paid-in capital | 215,226 | 227,699 | ||||||
Treasury stock, 2,240,133 and 1,741,858 shares at December 31, 2012 and December 31, 2013, respectively, at cost | (41,909 | ) | (42,320 | ) | ||||
Accumulated other comprehensive loss | (426 | ) | (159 | ) | ||||
Accumulated deficit | (72,331 | ) | (94,137 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 100,779 | 91,302 | ||||||
|
|
|
| |||||
Total liabilities, redeemable convertible preferred stock and stockholders’ equity | $ | 292,814 | $ | 281,380 | ||||
|
|
|
| |||||
See accompanying notes.
F-3
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||
Revenues | $ | 114,874 | $ | 170,804 | $ | 186,931 | ||||||
Cost of revenues | 21,857 | 33,749 | 38,220 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 93,017 | 137,055 | 148,711 | |||||||||
Operating expenses: | ||||||||||||
Sales and marketing | 57,543 | 97,873 | 109,768 | |||||||||
Research and development | 7,561 | 13,272 | 10,649 | |||||||||
General and administrative | 30,129 | 40,651 | 40,753 | |||||||||
Amortization of intangible assets | 2,021 | 7,157 | 7,841 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 97,254 | 158,953 | 169,011 | |||||||||
Loss from operations | (4,237 | ) | (21,898 | ) | (20,300 | ) | ||||||
Other income (expense): | ||||||||||||
Interest and other income (expense) | 317 | (41 | ) | (156 | ) | |||||||
Interest expense | (38 | ) | (225 | ) | (145 | ) | ||||||
|
|
|
|
|
| |||||||
Total other income (expense) | 279 | (266 | ) | (301 | ) | |||||||
Loss before provision for income taxes | (3,958 | ) | (22,164 | ) | (20,601 | ) | ||||||
Provision for income taxes | 10,619 | 1,427 | 1,205 | |||||||||
|
|
|
|
|
| |||||||
Net loss | $ | (14,577 | ) | $ | (23,591 | ) | $ | (21,806 | ) | |||
|
|
|
|
|
| |||||||
Net loss per share: | ||||||||||||
Basic | $ | (0. 78 | ) | $ | (1.21 | ) | $ | (1.09 | ) | |||
Diluted | $ | (0. 78 | ) | $ | (1.21 | ) | $ | (1.09 | ) | |||
Weighted average shares outstanding used in computing per share amounts: | ||||||||||||
Basic | 18,743,305 | 19,437,076 | 20,058,231 | |||||||||
Diluted | 18,743,305 | 19,437,076 | 20,058,231 | |||||||||
See accompanying notes.
F-4
Consolidated Statements of Comprehensive Income (Loss)
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net loss | $ | (14,577 | ) | $ | (23,591 | ) | $ | (21,806 | ) | |||
Other comprehensive income (loss), net of taxes: | ||||||||||||
Foreign currency translation adjustment | (442 | ) | 189 | 269 | ||||||||
Unrealized net gain (loss) on available-for-sale investments, net of taxes | 10 | (8 | ) | (2 | ) | |||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), net of taxes | (432 | ) | 181 | 267 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive loss | $ | (15,009 | ) | $ | (23,410 | ) | $ | (21,539 | ) | |||
|
|
|
|
|
| |||||||
See accompanying notes.
F-5
Consolidated Statements of Stockholders’ Equity
| Common Stock | Additional Paid-In | Treasury | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Income (Loss) | Deficit | Equity | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
Balance at January 1, 2011 | 20,374,267 | $ | 204 | $ | 166,985 | $ | (28,417 | ) | $ | (175 | ) | $ | (34,163 | ) | $ | 104,434 | ||||||||||||
Exercise of stock options | 1,219,643 | 12 | 18,940 | — | — | — | 18,952 | |||||||||||||||||||||
Vesting of restricted stock awards | 156,615 | 2 | (2 | ) | — | — | — | — | ||||||||||||||||||||
Tax deficiency from equity awards | — | — | (586 | ) | — | — | — | (586 | ) | |||||||||||||||||||
Repurchase of 978,709 shares of common stock | — | — | — | (20,006 | ) | — | — | (20,006 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 14,936 | — | — | — | 14,936 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (14,577 | ) | (14,577 | ) | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (432 | ) | — | (432 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2011 | 21,750,525 | 218 | 200,273 | (48,423 | ) | (607 | ) | (48,740 | ) | 102,721 | ||||||||||||||||||
Exercise of stock options | 10,391 | — | 72 | — | — | — | 72 | |||||||||||||||||||||
Vesting of restricted stock awards | 149,385 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||||
Issuance of 401,672 shares of common stock from treasury shares for business acquisition | — | — | — | 9,600 | — | — | 9,600 | |||||||||||||||||||||
Tax deficiency from equity awards | — | — | (3 | ) | — | — | — | (3 | ) | |||||||||||||||||||
Repurchase of 143,789 shares of common stock | — | — | — | (3,086 | ) | — | — | (3,086 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 14,885 | — | — | — | 14,885 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (23,591 | ) | (23,591 | ) | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | 181 | — | 181 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2012 | 21,910,301 | 219 | 215,226 | (41,909 | ) | (426 | ) | (72,331 | ) | 100,779 | ||||||||||||||||||
Exercise of stock options | 11,583 | — | 85 | — | — | — | 85 | |||||||||||||||||||||
Vesting of restricted stock awards | 27,625 | — | — | — | — | — | — | |||||||||||||||||||||
Issuance of 4,882 shares of common stock from treasury shares | — | — | — | 66 | — | — | 66 | |||||||||||||||||||||
Repurchase of 35,695 shares of common stock | — | — | — | (477 | ) | — | — | (477 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 12,388 | — | — | — | 12,388 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (21,806 | ) | (21,806 | ) | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | 267 | — | 267 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at December 31, 2013 | 21,949,509 | $ | 219 | $ | 227,699 | $ | (42,320 | ) | $ | (159 | ) | $ | (94,137 | ) | $ | 91,302 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
See accompanying notes.
F-6
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (14,577 | ) | $ | (23,591 | ) | $ | (21,806 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization of property, equipment and software | 2,655 | 4,844 | 5,501 | |||||||||
Amortization of intangible assets | 2,501 | 10,999 | 12,034 | |||||||||
(Gain) loss on disposal of assets | 68 | 59 | (4 | ) | ||||||||
Impairment of long-lived assets | 100 | 709 | 301 | |||||||||
Stock-based compensation | 14,915 | 14,872 | 12,327 | |||||||||
Common stock issued for consulting services | — | 482 | — | |||||||||
Adjustments to fair value of contingent consideration | 1,941 | 1,176 | 3,453 | |||||||||
Provision for doubtful accounts | 408 | 408 | 638 | |||||||||
Deferred income taxes | 9,789 | 835 | 505 | |||||||||
Excess tax benefit from equity awards | (34 | ) | — | — | ||||||||
Payments of contingent consideration for business acquisitions in excess of fair value on acquisition date | (147 | ) | (2,435 | ) | (4,560 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (3,081 | ) | (6,558 | ) | 439 | |||||||
Prepaid expenses and other current assets | 1,910 | (307 | ) | (1,723 | ) | |||||||
Other assets | (230 | ) | (120 | ) | (231 | ) | ||||||
Accounts payable | 66 | 2,005 | (3,130 | ) | ||||||||
Accrued compensation | 337 | 353 | 421 | |||||||||
Accrued expenses | 2,173 | 1,215 | (1,827 | ) | ||||||||
Deferred revenue | 6,523 | 14,383 | 4,869 | |||||||||
Other liabilities | 5,827 | (504 | ) | (362 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 31,144 | 18,825 | 6,845 | |||||||||
Cash flows from investing activities: | ||||||||||||
Business acquisitions, net of cash acquired | (6,947 | ) | (79,801 | ) | — | |||||||
Purchases of property, equipment and software | (13,758 | ) | (4,695 | ) | (5,193 | ) | ||||||
Software development costs | (305 | ) | (360 | ) | (742 | ) | ||||||
Proceeds from disposal of assets | 14 | 5 | 8 | |||||||||
Purchases of available-for-sale securities | (22,907 | ) | (4,301 | ) | — | |||||||
Sales of available-for-sale securities | — | 5,835 | 1,328 | |||||||||
Maturities of available-for-sale securities | 18,390 | 6,402 | 651 | |||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (25,513 | ) | (76,915 | ) | (3,948 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Repurchases of common stock | (20,006 | ) | (3,086 | ) | (477 | ) | ||||||
Proceeds from exercises of stock options | 18,952 | 73 | 85 | |||||||||
Excess tax benefit from equity awards | 34 | — | — | |||||||||
Payments of contingent consideration for business acquisitions | (1,289 | ) | (5,171 | ) | — | |||||||
Proceeds from notes payable | 440 | — | 600 | |||||||||
Payments on notes payable and capital lease obligations | (177 | ) | (204 | ) | (850 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash used in financing activities | (2,046 | ) | (8,388 | ) | (642 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (219 | ) | 301 | 378 | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 3,366 | (66,177 | ) | 2,633 | ||||||||
Cash and cash equivalents at beginning of year | 94,918 | 98,284 | 32,107 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 98,284 | $ | 32,107 | $ | 34,740 | ||||||
|
|
|
|
|
| |||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | $ | 22 | $ | 214 | $ | 101 | ||||||
Cash paid for income taxes, net of refunds | $ | (251 | ) | $ | (399 | ) | $ | (733 | ) | |||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
Issuance of Series A redeemable convertible preferred stock in connection with acquisition | $ | — | $ | 77,490 | $ | — | ||||||
Issuance of common stock in connection with acquisition | $ | — | $ | 9,118 | $ | — | ||||||
Issuance of promissory note in connection with acquisition | $ | — | $ | 669 | $ | — | ||||||
Assets acquired under capital leases and other financing arrangements | $ | 440 | $ | 106 | $ | — | ||||||
See accompanying notes.
F-7
Notes to Consolidated Financial Statements
1. Business Description
Organization and Description of Business
Vocus, Inc. (Vocus or the Company) is a provider of cloud marketing and public relations software that enables businesses to acquire and retain customers. The Company offers products and services to help customers attract and engage prospects, capture and keep customers and measure and improve marketing effectiveness. The Company’s integrated suites address the key areas of digital marketing and public relations, including social marketing, search marketing, email marketing and publicity. The Company is headquartered in Beltsville, Maryland with sales and other offices in the United States, Europe and Asia.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Vocus, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, software development costs, useful lives of property, equipment and software, intangible assets and goodwill, contingent liabilities, self-insurance, revenue recognition, fair value of stock-based awards and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of three months or less at the time of purchase to be cash equivalents.
Investments
Management determines the appropriate classification of investments at the time of purchase and evaluates such a determination as of each balance sheet date. The Company’s investments were classified as available-for-sale securities and were stated at fair value at December 31, 2012. There were no available-for-sale securities at December 31, 2013. Realized gains and losses are included in other income (expense) based on the specific identification method. Realized gains or losses for the years ended December 31, 2011, 2012, and 2013 were not material. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income (loss), net of tax. As of December 31, 2012, the net unrealized gains or losses on available-for-sale securities were not material. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value.
Fair Value Measurements
The Company measures certain financial assets at fair value pursuant to a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 | — | Inputs are quoted prices in active markets for identical assets or liabilities. | ||||
Level 2 | — | Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. | ||||
Level 3 | — | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
Allowance for Doubtful Accounts
Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to the estimated net realizable value. These estimates are made by analyzing the status of significant past-due receivables and by establishing provisions for estimated losses by analyzing current and historical bad debt trends. Actual collection experience has not varied significantly from prior estimates.
F-8
Software Development and Information Database Costs
The Company incurs software development costs related to its cloud-based software. Qualifying costs incurred during the application development stage are capitalized. These costs primarily consist of internal labor and are amortized using the straight-line method over the estimated useful life of the software, which is generally two years. All other development costs are expensed as incurred. The Company capitalized the initial costs to acquire and develop its proprietary information database, which consists of media contacts and outlets and other relevant data integrated as part of the Company’s cloud-based solutions. These costs are amortized using the straight-line method over the estimated useful lives of nine to thirteen years. Costs to maintain and update the information database are expensed as cost of revenues as incurred. For the years ended December 31, 2011, 2012 and 2013, the Company recorded amortization expense of $581,000, $499,000 and $490,000, respectively.
Property, Equipment and Software
Property, equipment and software are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: three to five years for purchased software and computer and office equipment and five to seven years for furniture and fixtures. Assets acquired under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the leases. Amortization of assets acquired under capital leases is included in depreciation expense. Repairs and maintenance costs are charged to expense as incurred. When assets are retired or otherwise disposed of, the asset and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recorded in the results of operations.
Long-Lived Assets
Long-lived assets include property, equipment and software and intangible assets with finite lives. Intangible assets consist of customer relationships, trade names and purchased technology acquired in business combinations. Intangible assets are amortized using the straight-line method over their estimated useful lives ranging from two to seven years. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the years ended December 31, 2011 and 2013 were $100,000 and $301,000, respectively. Impairment charges for long-lived assets for the year ended December 31, 2012 were $709,000, which primarily related to leasehold improvements no longer used.
Business Combinations
The Company has completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. The Company recognizes all of the assets acquired, liabilities assumed and contingent consideration at their fair values on the acquisition date. The Company uses significant estimates and assumptions, including fair value estimates, as of the acquisition date and refines those estimates that are provisional, as necessary, during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which new information may be gathered about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are recorded to the consolidated statements of operations. Acquisition-related costs are expensed as incurred separately from the acquisition and generally are included in general and administrative expenses in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. The Company performs its annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. The Company operates under one reporting unit, and as a result, evaluates goodwill impairment based on the fair value of the Company as a whole. When assessing goodwill for impairment, the Company uses an income approach based on discounted cash flows to determine the fair value of its reporting unit. The Company’s cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage the Company’s operations. Based on the results of the Company’s most recent annual assessment performed on November 1, 2013, the Company concluded that the fair value of its reporting unit exceeded its carrying amount. The Company also reviews the carrying amount of the reporting unit to its fair value based on quoted market prices of the Company’s common stock, or market capitalization. The market capitalization of the Company exceeded its carrying amount on November 1, 2013. No events or circumstances occurred from the date of the assessments through December 31, 2013 that would impact these conclusions.
Foreign Currency and Operations
The reporting currency for all periods presented is the U.S. dollar. The functional currency for the Company’s foreign subsidiaries is the local currency. The financial statements of these subsidiaries are translated into U.S. dollars using exchange rates in effect at the balance sheet date for assets and liabilities and average exchange rates during the period for revenues and expenses. The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Transaction gains and losses in currencies other than the functional currency are included in other income (expense) in the consolidated statements of operations. Amounts resulting from foreign currency transactions were not material for the years ended December 31, 2011, 2012 and 2013.
F-9
Comprehensive Income (Loss)
Comprehensive income (loss) includes the Company’s net income (loss) as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. Other comprehensive income (loss) includes foreign currency translation adjustments and net unrealized gains and losses on investments classified as available-for-sale securities.
Revenue Recognition
The Company derives its revenues from subscription arrangements and related services permitting customers to access and utilize the Company’s cloud-based software. The Company also derives revenues from news distribution services sold separately from its subscription arrangements. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fee to be paid by the customer is fixed or determinable. The Company allocates consideration to each deliverable in multiple element arrangements based on the relative selling prices and recognizes revenue as the respective services are delivered or performed.
The Company’s separate units of accounting consist of its subscription services, news distribution services and professional services. These elements generally include access to the Company’s cloud-based software, hosting services, content and content updates and customer support. The Company’s subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if the Company materially breaches its obligations under the agreement. Subscription agreements do not provide customers the right to take possession of the software at any time.
The Company also distributes individual news releases to the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. The Company recognizes revenue on a per-transaction basis when the press releases are made available to the public.
The Company’s professional services primarily consist of data migration, custom development and training. The Company’s cloud-based software does not require significant modification and customization services.
The Company established vendor-specific objective evidence (VSOE) of the fair value for the selling price for certain of its news distribution services as the selling price for a substantial majority of stand-alone sales fall within a narrow range around the median selling price. The Company determined third-party evidence (TPE) of selling price is not available for any of its services due to differences in the features and functionality compared to competitors’ products. Therefore, the Company uses its estimated selling prices (ESP) for the remaining deliverables by analyzing multiple factors such as historical pricing trends, discounting practices, gross margin objectives and other market conditions.
Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenues.
Deferred Revenue
Deferred revenue consists of payments received from or billings to customers in advance of revenue recognition. Deferred revenue to be recognized in the succeeding twelve month period is included in current deferred revenue with the remaining amounts included in non-current deferred revenue.
Sales Commissions
Sales commissions are expensed when a subscription agreement is executed by the customer.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2011, 2012 and 2013 were $8.9 million, $23.4 million and $22.7 million, respectively.
Stock-Based Compensation
The Company’s share-based arrangements include stock option awards and restricted stock awards. The Company recognizes compensation expense for its equity awards on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest and applies estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. The Company uses the quoted closing market price of its common stock on the grant date to measure the fair value of restricted stock awards and the Black-Scholes option pricing model to measure the fair value of stock option awards. The Company uses the daily historical volatility of its stock price over the expected life of the options to calculate the expected volatility. The Company uses a combination of its historical exercise data with expected future exercise patterns using the average midpoint between vesting and the contractual term to determine the expected term of option awards. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero.
F-10
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. The Company generally maintains its cash and cash equivalents with various nationally recognized financial institutions. Investments consisted of investment grade, interest bearing securities. Customers are granted credit on an unsecured basis. Management monitors the creditworthiness of its customers and believes that it has adequately provided for any exposure to potential credit losses.
The Company provides cloud-based software and related services to various customers across several industries. As of December 31, 2012 and 2013, no individual customer accounted for 10% or more of net accounts receivable. For the years ended December 31, 2011, 2012 and 2013, no individual customer accounted for 10% or more of revenue. As of December 31, 2012 and 2013, assets located outside the United States were approximately 9% and 10% of total assets, respectively. Revenues from sales to customers outside the United States were approximately 16%, 11%, and 10% of total revenues for the years ended December 31, 2011, 2012 and 2013, respectively.
Income Taxes
Income taxes are determined utilizing the asset and liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences between the respective reported amounts and tax bases of assets and liabilities, as well as for operating loss and tax-credit carryforwards. Net deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Beginning in 2011, based on the operating results and the Company’s projections of future losses, the Company established a full valuation allowance on its U.S. federal and state net deferred tax assets because it was able to conclude that it is more likely than not that it will not realize the benefits of its deferred tax assets. The Company historically maintained a full valuation allowance on net deferred tax assets of certain of its foreign subsidiaries because it determined that it is more likely than not that it will not realize the benefits of its foreign deferred tax assets.
The Company’s estimates related to liabilities for uncertain tax positions require it to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If it determines it is more likely than not that a tax position will be sustained based on its technical merits, the Company records the impact of the position in its consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. The estimates are updated at each reporting date based on the facts, circumstances and information available. The Company is also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to its unrecognized tax benefits will occur during the next twelve months. The Company files income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and is subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2013.
Earnings Per Share
Basic net income or loss per share attributable to common stockholders is computed by dividing net income or loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Nonvested shares of restricted stock are not included in the computation of basic net income per share until vested. The Company’s outstanding grants of restricted stock do not contain non-forfeitable dividend rights. Diluted net income per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, nonvested shares of restricted stock and shares of redeemable convertible preferred stock are considered to be common stock equivalents.
As the Company has issued shares of Series A redeemable convertible preferred stock that participate in dividends with the common stock, the Company is required to apply the two-class method to compute the net income per share attributable to common stockholders. In periods of sufficient earnings, the two-class method assumes an allocation of undistributed earnings to both participating stock classes.
For the years ended December 2011, 2012 and 2013, the Company incurred net losses and, therefore, the effect of the Company’s outstanding stock options, nonvested shares of restricted stock and redeemable convertible preferred stock was not included in the calculation of diluted loss per share as the effect would be anti-dilutive. For the years ended December 31, 2011, 2012 and 2013, diluted earnings per share excluded the impact of 1,757,240, 2,555,943 and 3,205,153 outstanding stock options, respectively, and 1,282,323, 979,790 and 937,536 nonvested shares of restricted stock, respectively and for the years ended December 31, 2012 and 2013, 1,000,000 shares of Series A redeemable convertible preferred stock as the result would be anti-dilutive.
Segment Data
The Company’s chief operating decision maker manages the Company’s operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company reports on its business as one segment.
F-11
3. Business Combinations
Acquisition of iContact
On February 24, 2012, the Company acquired all of the outstanding shares of capital stock of iContact Corporation (iContact), a privately-held provider of cloud-based email and social marketing software that enables organizations to create and publish professional-quality emails designed to engage, educate and retain customers. The acquisition of iContact added an email capability component to the Company’s cloud marketing suite. During the year ended December 31, 2012, the Company incurred acquisition-related transaction costs of $2.9 million, which are included in general and administrative expense in the consolidated statements of operations. During the year ended December 31, 2012, the Company incurred severance costs of $2.1 million, of which $52,000, $691,000, $637,000 and $691,000, were included in cost of revenues, sales and marketing, research and development and general and administrative expenses, respectively, in the consolidated statement of operations. All amounts were paid as of December 31, 2012. The acquisition was accounted for under the purchase method of accounting. The operating results of iContact are included in the accompanying consolidated financial statements from the date of acquisition.
The purchase consideration consisted of the following (in thousands):
Cash | $ | 89,801 | ||
Note payable | 669 | |||
Common stock | 9,118 | |||
Series A redeemable convertible preferred stock | 77,490 | |||
|
| |||
Total purchase consideration | $ | 177,078 | ||
|
|
The purchase price consisted of $90.5 million in cash, of which $669,000 was held back in the form of a promissory note, 406,554 shares of the Company’s common stock with a deemed value at issuance of $9.1 million and 1,000,000 shares of the Company’s newly-created Series A convertible preferred stock with a deemed value at issuance of $77.5 million, aggregating approximately $167.1 million of total consideration, net of $10.0 million cash acquired. For more information about the promissory note, please refer to Note 8,Debt,and for more information about the Series A redeemable convertible preferred stock, please refer to Note 9,Stockholders’ Equity. At the closing of the acquisition, a portion of the consideration, consisting of 72,656 shares of common stock, 85,090 shares of the Series A redeemable convertible preferred stock, $6.1 million in cash and the $669,000 promissory note, were deposited in escrow for a period of one year to satisfy potential indemnification claims by the Company against iContact with respect to breaches by iContact of its representations, warranties and covenants, or any post-closing purchase price adjustments or outstanding appraisal claims by iContact stockholders. All amounts were released from escrow in the first quarter of 2013.
The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The identifiable intangible assets include a trade name, customer relationships and purchased technology and are being amortized over three years on a straight-line basis. The Company, with the assistance of a third-party appraiser, assessed the fair value of these assets. The trade name and purchased technology were valued using the relief from royalty method and the customer relationships were valued using a discounted cash flow method. The relief from royalty method assesses the royalty savings an entity realizes since it owns the asset and does not have to pay a license fee to a third-party for its use. These methods require several judgments and assumptions to determine the fair value of the intangible assets including royalty rates, discount rates, customer attrition rates, useful lives of assets and expected levels of cash flows, earnings and revenues. The royalty rates used in the relief from royalty method ranged from 0.7% to 12% based on an analysis of market comparable rates. The discount rate used to estimate future cash flows was approximately 13%. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill which is not deductible for tax purposes.
The Company recognized a deferred tax asset in the amount of $20.3 million relating to acquired net operating losses, established a deferred tax liability of $14.0 million relating to the step up in basis of identifiable intangibles and property plant and equipment, and recorded a valuation allowance of $6.3 million. The Company determined that while the acquired net operating loss is subject to the limitation provided in Section 382 of the Internal Revenue Code, this limitation will not preclude the company from fully realizing the acquired net operating losses.
Goodwill was primarily attributable to the assembled work force of iContact and the expected synergies resulting from the transaction.
The purchase price as of the acquisition date was as follows (in thousands):
| Estimated Useful Life | Estimated Fair Value | |||||||
Cash and cash equivalents | $ | 10,000 | ||||||
Accounts receivable, net | 96 | |||||||
Prepaid and other current assets | 478 | |||||||
Property, equipment and software, net | 2,625 | |||||||
Trade name | 3 years | 1,400 | ||||||
F-12
Customer relationships | 3 years | 19,166 | ||||||
Purchased technology | 3 years | 12,041 | ||||||
Goodwill | 138,860 | |||||||
Accounts payable and accrued liabilities | (5,911 | ) | ||||||
Deferred revenue | (1,645 | ) | ||||||
Other liabilities | (32 | ) | ||||||
|
| |||||||
Total purchase price | $ | 177,078 | ||||||
|
|
The following unaudited pro forma consolidated results of operations for years ended December 31, 2011 and 2012 assumes that the iContact acquisition occurred at the beginning of 2011. The unaudited pro forma information combines the historical results for the Company with the historical results for iContact for the same period. The unaudited pro forma financial information for the years ended December 31, 2011 and 2012 includes adjustments for amortization of acquired intangible assets of $10.4 million and $1.5 million, respectively. The unaudited pro forma financial information for the year ended December 31, 2012 excludes acquisition-related transaction and severance costs of $5.0 million and the fair value adjustment for deferred revenue of $2.2 million. The following unaudited pro forma information is not intended to be indicative of future operating results (dollars in thousands, except per share data):
| Year Ended December 31, | ||||||||
| 2011 | 2012 | |||||||
Pro forma revenues | $ | 162,743 | $ | 180,403 | ||||
Pro forma net loss | $ | (30,883 | ) | $ | (19,279 | ) | ||
Pro forma net loss per share: | ||||||||
Basic and diluted | $ | (1.61 | ) | $ | (0.99 | ) | ||
The Company recognized revenue and incurred a net loss from iContact of $41.4 million and $4.5 million, respectively, since the date of acquisition through December 31, 2012.
Acquisition of North Social
On February 24, 2011, the Company acquired substantially all of the assets and assumed certain liabilities of North Venture Partners, LLC (North Social), a provider of Facebook applications that enable users to create, manage and promote their business on Facebook. The acquisition of North Social broadened the Company’s social media solution. The acquisition was accounted for under the purchase method of accounting. The operating results of North Social are included in the accompanying consolidated financial statements from the date of acquisition.
The purchase consideration at the acquisition date consisted of approximately $7.0 million in cash and $5.1 million of contingent cash consideration for the achievement of certain financial milestones within the following 24 months. In 2012 and 2013, the Company paid $7.0 million and $4.6 million, respectively of contingent consideration for the achievement of certain financial milestones. The Company recorded approximately $101,000 of identifiable intangible assets, $11.9 million of goodwill that is deductible for tax purposes, and $78,000 of other net tangible assets. Goodwill was primarily attributable to North Social’s knowledge of applications for Facebook and the opportunity to expand into the rapidly growing social media market. Acquisition-related costs associated with the acquisition were not material. For more information about the contingent consideration for the acquisition of North Social, please refer to Note 5,Fair Value Measurements.
4. Cash Equivalents and Investments
The components of cash equivalents and investments at December 31, 2012 were as follows (in thousands):
| Unrealized | Fair Market | |||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 11,290 | $ | — | $ | — | $ | 11,290 | ||||||||
Certificates of deposit | 1,322 | — | — | 1,322 | ||||||||||||
Short-term investments: | ||||||||||||||||
Certificates of deposit | 660 | 2 | — | 662 | ||||||||||||
Long-term investments: | ||||||||||||||||
Certificates of deposit | 1,322 | — | — | 1,322 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 14,594 | $ | 2 | $ | — | $ | 14,596 | ||||||||
|
|
|
|
|
|
|
| |||||||||
F-13
The components of cash equivalents and investments at December 31, 2013 were as follows (in thousands):
| Unrealized | Fair Market | |||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 5,302 | $ | — | $ | — | $ | 5,302 | ||||||||
Certificates of deposit | 6,907 | — | — | 6,907 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 12,209 | $ | — | $ | — | $ | 12,209 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Cash equivalents have original maturity dates of three months or less. Short-term investments have original maturity dates greater than three months but less than one year. Long-term investments have original maturity dates between one and five years.
5. Fair Value Measurements
The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis at December 31, 2012 were as follows (in thousands):
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents | $ | 12,612 | $ | 12,612 | $ | — | $ | — | ||||||||
Short-term investments | 662 | 662 | — | — | ||||||||||||
Long-term investments | 1,322 | 1,322 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets measured at fair value | $ | 14,596 | $ | 14,596 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Accrued expenses: | ||||||||||||||||
Accrued contingent consideration, current portion | $ | 1,107 | $ | — | $ | — | $ | 1,107 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities measured at fair value | $ | 1,107 | $ | — | $ | — | $ | 1,107 | ||||||||
|
|
|
|
|
|
|
| |||||||||
The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis at December 31, 2013 were as follows (in thousands):
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents | $ | 12,209 | $ | 12,209 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets measured at fair value | $ | 12,209 | $ | 12,209 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Cash equivalents and short-term investments are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices or alternative pricing sources that utilize market observable inputs.
The Company had incurred contingent consideration liabilities in connection with its business acquisitions in 2010 and 2011. Contingent consideration liabilities were classified as Level 3 of the fair value hierarchy since they were valued using unobservable inputs. The contingent consideration liability represented the estimated fair value of the additional cash consideration payable that was contingent upon the achievement of certain financial and performance milestones through respective target dates in 2011 through 2013. The fair value of this Level 3 liability was estimated based on a discounted probability-weighted income approach derived from revenue and earnings estimates and a probability assessment with respect to the likelihood of achieving the milestone criteria. Increases or decreases in the probability of achievement of these certain financial and performance milestones resulted in changes to the estimated fair value. The additional expense of $1.9 million, $1.2 million and $3.5 million was included in general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2011, 2012, and 2013, respectively. During 2013, the fair value of the contingent consideration was adjusted based on the final earn-out calculations which were impacted by higher revenues in the first quarter of 2013 resulting from the increase in the number of North Social subscription customers due to additional marketing efforts near the conclusion of the earn-out period. The remaining liability for contingent consideration was paid in the second quarter of 2013.
The changes in the fair value of the Company’s acquisition related contingent consideration for the years ended December 31, 2012 and 2013, were as follows (in thousands):
| December 31, | ||||||||
| 2012 | 2013 | |||||||
Balance as of beginning of period | $ | 7,537 | $ | 1,107 | ||||
Adjustments to fair value measurements | 1,176 | 3,453 | ||||||
Payment of contingent consideration | (7,606 | ) | (4,560 | ) | ||||
|
|
|
| |||||
Balance as of end of period | $ | 1,107 | $ | — | ||||
|
|
|
| |||||
F-14
6. Property, Equipment and Software
Property, equipment and software consisted of the following (in thousands):
| December 31, | ||||||||
| 2012 | 2013 | |||||||
Purchased software, computer and office equipment | $ | 12,539 | $ | 14,397 | ||||
Furniture and fixtures | 2,030 | 2,397 | ||||||
Leasehold improvements | 11,499 | 13,471 | ||||||
Equipment under capital lease obligations | 569 | 560 | ||||||
Capitalized software development costs | 1,960 | 2,762 | ||||||
Information database costs | 2,839 | 2,839 | ||||||
|
|
|
| |||||
| 31,436 | 36,426 | |||||||
Less accumulated depreciation and amortization | (11,368 | ) | (16,292 | ) | ||||
|
|
|
| |||||
Property, equipment and software, net | $ | 20,068 | $ | 20,134 | ||||
|
|
|
| |||||
Depreciation and amortization expense, including depreciation on equipment under capital leases, was $2.7 million, $4.8 million and $5.5 million for the years ended December 31, 2011, 2012 and 2013, respectively.
7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2013 were as follows (in thousands):
| December 31, | ||||||||
| 2012 | 2013 | |||||||
Balance as of beginning of period | $ | 38,029 | $ | 177,011 | ||||
Goodwill acquired | 138,860 | — | ||||||
Effects of foreign currency translation | 122 | 253 | ||||||
|
|
|
| |||||
Balance as of end of period | $ | 177,011 | $ | 177,264 | ||||
|
|
|
| |||||
Intangible assets at December 31, 2012 consisted of the following (in thousands):
| Weighted-Average Amortization Period | Gross Carrying Amount | Amortization | Net Carrying Amount | |||||||||||
Customer relationships | 3.7 | $ | 23,221 | $ | (7,014 | ) | $ | 16,207 | ||||||
Trade names | 5.9 | 5,686 | (4,192 | ) | 1,494 | |||||||||
Purchased technology | 3.1 | 13,460 | (4,410 | ) | 9,050 | |||||||||
|
|
|
|
|
| |||||||||
Total | $ | 42,367 | $ | (15,616 | ) | $ | 26,751 | |||||||
|
|
|
|
|
| |||||||||
Intangible assets at December 31, 2013 consisted of the following (in thousands):
| Weighted-Average Amortization Period | Gross Carrying Amount | Amortization | Net Carrying Amount | |||||||||||
Customer relationships | 3.7 | $ | 23,376 | $ | (14,074 | ) | $ | 9,302 | ||||||
Trade names | 5.9 | 5,695 | (5,058 | ) | 637 | |||||||||
Purchased technology | 3.1 | 13,496 | (8,630 | ) | 4,866 | |||||||||
|
|
|
|
|
| |||||||||
Total | $ | 42,567 | $ | (27,762 | ) | $ | 14,805 | |||||||
|
|
|
|
|
| |||||||||
The Company’s goodwill and intangible assets for certain of its foreign subsidiaries are recorded in their functional currency, which is their local currency, and therefore are subject to foreign currency translation adjustments.
Amortization expense of intangible assets for the years ended December 31, 2011, 2012 and 2013 was $2.5 million, $11.0 million and $12.0 million, respectively. Future expected amortization of intangible assets at December 31, 2013 was as follows (in thousands):
2014 | $ | 11,720 | ||
2015 | 2,352 | |||
2016 | 575 | |||
2017 | 158 | |||
|
| |||
Total | $ | 14,805 | ||
|
|
F-15
8.Debt
Term Loans
The Company entered into loan agreements with the State of Maryland in the amounts of $400,000 in 2011 and $500,000 in 2013 with terms ending on December 31, 2020 and with Prince George’s County in the amounts of $40,000 in 2011 with a term ending on December 31, 2020 and $100,000 in 2013 with a term ending on December 31, 2016. The proceeds of the loans were used in the initial renovation and further expansion of its corporate headquarters in Beltsville, Maryland. The borrowings bear interest at 3.0%. The conditions of the loans stipulate that principal and related accrued interest be forgiven if specified employment levels are achieved and maintained and the Company maintains the Beltsville, Maryland location as the corporate headquarters through the end of the loans. As of December 31, 2013, the Company has met the conditions of the loans, however, the conditions are required to be met throughout the term of the loan and, as such, the loans are recorded as long-term liabilities. The outstanding balance of these loans was $1.0 million and is included in notes payable and capital lease obligations, net of current portion. The related accrued interest is included in other liabilities, but was not material as of December 31, 2012 and 2013.
Notes Payable
A portion of the purchase consideration for the acquisition of iContact was held back in the form of a promissory note (Escrow Note) in the amount of $669,000. The Escrow Note accrued interest at a rate of 1% per annum and was held in escrow until payment in 2013. As of December 31, 2012 outstanding borrowings were $669,000. The Escrow note and related accrued interest were paid in full in February 2013.
Revolving Credit Facility
On February 27, 2012, the Company established a $15.0 million revolving credit facility (Revolver) with a major lending institution which was originally available for use until February 27, 2013. In February 2013, the Revolver was amended to extend the availability for use until April 15, 2014. The Revolver is intended to be used for general working capital purposes and to provide increased liquidity and financial flexibility and bears interest equal to the BBA LIBOR Daily Floating Rate plus 2.25%. In addition, the Company pays a monthly fee equal to 0.4% on any unused funds under the revolving facility. As collateral for extension of credit under the facility, the Company and certain of its subsidiaries granted security interests in favor of the institution of substantially all of their assets, and the Company pledged the stock of its directly owned domestic subsidiaries and 65% of the shares of its foreign subsidiaries. As of December 31, 2013, there were no outstanding borrowings, however, the, facility was reduced by the Company’s outstanding letters of credit of $1.3 million. As such, the Company had $13.7 million available to borrow under the Revolver.
9. Stockholders’ Equity
Preferred Stock
The Company’s Certificate of Incorporation authorizes 10,000,000 undesignated shares of preferred stock. The Company’s Board of Directors (Board) is authorized to establish one or more classes or series from the undesignated shares, to designate each share or class or series, and to fix the relative rights and preferences of each class or series, which rights and preferences may be superior to those of any of the common shares. In February 2012, the Board designated 1,000,000 shares of the Company’s authorized preferred stock as Series A convertible preferred stock in connection with the acquisition of iContact. On February 24, 2012, the Company issued 1,000,000 shares of Series A Redeemable Convertible Preferred Stock (Series A Preferred Stock). In May 2013, the Board designated 100,000 shares of the Company’s authorized preferred stock as Series B Junior Participating Preferred Stock (Series B Preferred Stock), however, no shares of Series B Preferred Stock are issued and outstanding.
Series A Redeemable Convertible Preferred Stock
In connection with the acquisition of iContact in February 2012, the Company issued 1,000,000 shares of Series A Preferred Stock with a deemed fair value at issuance of $77.5 million. The Company does not adjust the carrying value to the redemption amount of the convertible preferred stock as the carrying amount exceeds the redemption amount. There have been no changes to the recorded amount of the Series A Preferred Stock since the issuance of the shares.
Each share of the Series A Preferred Stock has a liquidation preference equal to the greater of $77.30 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization affecting the Series A Preferred Stock) or the value of the shares of common stock that would be issued in respect thereof upon conversion of such share of Series A Preferred Stock. The Series A Preferred Stock does not provide for interest and is entitled to participate in any dividends declared on the Company’s common stock on an as-converted basis. On February 24, 2017, the Company will be required to redeem each issued and outstanding share of the Series A Preferred Stock for $77.30 per share from its legally available funds, or such lesser amount of shares as it may then redeem under Delaware law. Each share of the Series A Preferred Stock is convertible into shares of the Company’s common stock at any time at the option of the holder. For conversions occurring on or before February 24, 2017, each share of Series A Preferred Stock will be convertible into 3.0256 shares of common stock (subject to customary adjustments). On and after February 25, 2017, each share of the Series A Preferred Stock which has not been redeemed will be convertible into 3.3282 shares of common stock (subject to customary adjustments).
F-16
The holders of Series A Preferred Stock vote on an as-converted basis with the common stock, voting together as a single class, provided that the holders of the Series A Preferred Stock are entitled to vote separately as a class on certain matters affecting the Series A Preferred Stock. If any shares of Series A Preferred Stock are outstanding on or after February 24, 2017, the holders of the Series A Preferred Stock will have the right to vote separately as a class on additional actions by the Company related to acquisitions, redemptions, dividends, capital stock, and indebtedness. In addition, for so long as the outstanding shares of Series A Preferred Stock continue to represent at least 5% of the total outstanding shares of the Company’s common stock, calculated assuming the conversion of all outstanding shares of Series A Preferred Stock into shares of common stock, the holders of the Series A Preferred Stock, voting as a separate class, will have the exclusive right to elect one director to the Company’s Board of Directors (Series A Director).
In connection with the acquisition of iContact, the Company also entered into, on February 24, 2012, an Investor Rights Agreement (Investor Rights Agreement) whereby the holders of the Series A Preferred Stock have the right to nominate a director to the Company’s Board for as long as they hold 5% or more of the Company’s issued and outstanding capital stock (which nominee shall be the Series A Director for so long as the holders of Series A Preferred Stock have the right to elect the Series A Director pursuant to the Certificate of Designation). In addition, subject to the terms and conditions of the Investor Rights Agreement, the holders of the Series A Preferred Stock shall have demand and piggyback registration rights and the right to participate in certain repurchases of common stock by the Company.
Stockholder Rights Plan
On May13, 2013, the Board authorized and declared a dividend distribution of one preferred stock purchase right (Right) for each outstanding share of the Company’s common stock and 3.0256 Rights for each outstanding share of the Company’s Series A Convertible Preferred Stock to stockholders of record at the close of business on May 13, 2013.
Each Right entitles registered holders to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock at a price of $46.00 per one one-thousandth of a share, subject to adjustment. The definitive terms of the Rights are set forth in a Rights Agreement, dated May 13, 2013. The Rights will be exercisable only if a person or group acquires 20% or more of the Company’s outstanding common stock (subject to certain exceptions), or if a person or group announces a tender or exchange offer, resulting in beneficial ownership of 20% or more of the outstanding common stock. The Rights also will be exercisable if a person or group that already beneficially owns or has the right to acquire on May 13, 2013, 20% or more of the Company’s outstanding common stock acquires additional shares equal to 1% or more of the Company’s then outstanding common stock (except in the case of a certain stockholder who, under limited circumstances, is permitted to beneficially own more than 20%, but less than 25%, of the Company’s outstanding common stock, subject to certain exceptions).
The Board can redeem the Rights for $0.0001 per Right at any time prior to the earlier of the occurrence of a “trigger event” or the expiration date. Additionally, prior to an acquisition of 50% or more of the Company’s common stock, the Board may direct the mandatory exchange of the Rights (other than Rights owned by the acquiring person) at an exchange ratio of one newly issued share of common stock for each right.
The Rights will expire on May 13, 2016 or 30 days after the Company’s 2014 annual meeting of stockholders if the continuation of the rights plan is not approved by the Company’s stockholders at its 2014 annual meeting, if not exercised or redeemed.
Common Stock Repurchases
In November 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $30.0 million of the Company’s shares of common stock, and in August 2011 authorized up to an additional $30.0 million. The shares may be purchased from time to time in the open market. During the year ended December 31, 2011, the Company purchased an aggregate of 850,031 shares of its common stock for $16.8 million. The Company did not purchase any shares of its common stock under the stock repurchase program for the years ended December 31, 2012 and 2013. During the years ended December 31, 2011, 2012 and 2013, the Company also purchased 128,678, 143,789 and 35,695 shares of restricted stock for $3.2 million, $3.1 million and $477,000, respectively, which were withheld from employees to satisfy the minimum statutory tax withholding obligations upon the vesting of their restricted stock awards.
10. Stock-Based Compensation
The Company’s 1999 Stock Option Plan and 2005 Stock Award Plan (the “Plans”) provide for the grant of stock options, restricted stock, stock appreciation rights and other equity awards to employees, consultants, officers and directors. The 2005 Stock Award Plan was adopted by the Board of Directors and stockholders in November 2005 in conjunction with the Company’s initial public offering. Under the 2005 Stock Award Plan, 9,409,919 shares have been reserved for issuance, subject to annual increases. The Plans are administered by the Compensation Committee of the Board of Directors, which has the authority, among other things, to determine which individuals receive awards pursuant to the Plans, and the terms of the awards. Stock options granted under the Plans have a 10-year term and generally vest annually over a four-year period. Restricted stock awards generally vest annually over a four-year period. The Company’s outstanding equity awards include stock option awards and restricted stock awards. At December 31, 2013, 714,301 shares were available for future grants. All shares available for future grant are restricted to the 2005 Stock Award Plan.
F-17
The following table sets forth the stock-based compensation expense for equity awards recorded in the consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
Cost of revenues | $ | 1,575 | $ | 1,514 | $ | 1,356 | ||||||
Sales and marketing | 4,126 | 4,299 | 3,162 | |||||||||
Research and development | 2,079 | 2,646 | 1,933 | |||||||||
General and administration | 7,135 | 6,413 | 5,876 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 14,915 | $ | 14,872 | $ | 12,327 | ||||||
|
|
|
|
|
| |||||||
Stock Option Awards
The following weighted-average assumptions were used in calculating stock-based compensation for stock option awards granted during the years ended December 31, 2011, 2012 and 2013:
| Year Ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
Stock price volatility | 57 | % | 60 | % | 59 | % | ||||||
Expected term (years) | 6.1 | 5.7 | 6.1 | |||||||||
Risk-free interest rate | 2.2 | % | 1.1 | % | 1.2 | % | ||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||||
The summary of stock option activity for the year ended December 31, 2013 is as follows:
| Number of Options | Range of Exercise Prices | Weighted- Average Exercise Price per Share | Weighted- Average Contractual Term | Aggregate Intrinsic Value as of December 31, 2013 (in thousands) | ||||||||||||||||
Balance outstanding at January 1, 2013 | 2,555,943 | $ | 2.46 –$35.98 | $ | 15.93 | |||||||||||||||
Granted | 946,355 | 8.22 – 17.54 | 13.33 | |||||||||||||||||
Exercised | (11,583 | ) | 2.46 – 9.00 | 7.44 | ||||||||||||||||
Forfeited or cancelled | (285,562 | ) | 2.46 – 31.03 | 14.37 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Balance outstanding at December 31, 2013 | 3,205,153 | $ | 3.99 – 35.98 | $ | 15.33 | 7.0 | $ | 1,202 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Vested and expected to vest at December 31, 2013 | 3,124,090 | $ | 3.99 – 35.98 | $ | 15.37 | 7.0 | $ | 1,189 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance exercisable at December 31, 2013 | 1,433,554 | $ | 3.99 – 35.98 | $ | 15.78 | 5.2 | $ | 1,038 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2011, 2012 and 2013 was $13.03, $7.36 and $7.29, respectively. The aggregate fair value of stock options that vested during the years ended December 31, 2011, 2012 and 2013 was $4.8 million, $3.5 million and $4.4 million, respectively. As of December 31, 2013, $10.6 million of total unrecognized stock-based compensation cost is related to nonvested stock option awards and is expected to be recognized over a weighted-average period of 2.5 years.
The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying equity awards and the quoted closing price of the Company’s common stock at the last day of the year multiplied by the number of shares that would have been received by the stock option holders had all holders exercised their stock options on the last day of each respective year. The aggregate intrinsic value of options exercised during the years ended December 31, 2011, 2012 and 2013 was $15.5 million, $105,000 and $36,000, respectively.
The following details the outstanding stock options at December 31, 2013:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Outstanding as of 12/31/13 | Weighted- Average Remaining Contractual Term | Weighted- Average Exercise Price per Share | Exercisable as of 12/31/13 | Weighted- Average Exercise Price per Share | |||||||||||||||
$3.99 – $ 10.00 | 479,193 | 3.1 | $ | 8.88 | 402,729 | $ | 8.81 | |||||||||||||
$10.01 – $13.00 | 215,888 | 8.3 | 12.47 | 51,621 | 12.55 | |||||||||||||||
$13.01 – $13.25 | 555,962 | 8.1 | 13.25 | 169,311 | 13.24 | |||||||||||||||
$13.26 – $14.00 | 675,391 | 9.2 | 13.94 | 12,190 | 13.94 | |||||||||||||||
$14.01 – $17.00 | 475,177 | 6.4 | 14.79 | 322,033 | 14.75 | |||||||||||||||
$17.01 – $23.00 | 253,996 | 6.4 | 19.03 | 129,996 | 19.58 | |||||||||||||||
$23.01 – $35.98 | 549,546 | 6.9 | 24.68 | 345,674 | 25.21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| 3,205,153 | 7.0 | $ | 15.33 | 1,433,554 | $ | 15.78 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
F-18
Restricted Stock Awards
The fair value of the restricted stock awards is determined based on the quoted closing market price of the Company’s common stock on the grant date.
The summary of restricted stock award activity for the year ended December 31, 2013 is as follows:
| Number of Shares Underlying Stock Awards | Weighted-Average Grant Date Fair Value | |||||||
Balance nonvested at January 1, 2013 | 979,790 | $ | 17.12 | |||||
Awarded | 654,485 | 13.17 | ||||||
Vested | (556,714 | ) | 16.23 | |||||
Forfeited | (140,025 | ) | 15.19 | |||||
|
|
|
| |||||
Balance nonvested at December 31, 2013 | 937,536 | $ | 15.18 | |||||
|
|
|
| |||||
As of December 31, 2013, $10.4 million of total unrecognized stock-based compensation cost is related to nonvested shares of restricted stock and is expected to be recognized over a weighted-average period of 2.4 years.
11. Employee Benefit Plans
The Company sponsors defined-contribution, profit-sharing and other benefit plans in the United States, the United Kingdom and France. Total expenses for the plans for the years ended December 31, 2011, 2012 and 2013 were approximately $747,000, $1.0 million and $1.1 million, respectively.
12. Income Taxes
For the years ended December 31, 2011, 2012 and 2013, the U.S. and foreign components of loss before income taxes were as follows (in thousands):
| 2011 | 2012 | 2013 | ||||||||||
Domestic | $ | (4,906 | ) | $ | (20,848 | ) | $ | (17,700 | ) | |||
Foreign | 948 | (1,316 | ) | (2,901 | ) | |||||||
|
|
|
|
|
| |||||||
Total loss before income taxes | $ | (3,958 | ) | $ | (22,164 | ) | $ | (20,601 | ) | |||
|
|
|
|
|
| |||||||
For the years ended December 31, 2011, 2012 and 2013, income tax provision consisted of the following (in thousands):
| 2011 | 2012 | 2013 | ||||||||||
Current expense | ||||||||||||
Federal | $ | 26 | $ | — | $ | — | ||||||
State | 6 | 34 | (25 | ) | ||||||||
Foreign | 665 | 696 | 727 | |||||||||
|
|
|
|
|
| |||||||
Total current expense | 697 | 730 | 702 | |||||||||
Deferred expense | ||||||||||||
Federal | 9,282 | 751 | 723 | |||||||||
State | 884 | 94 | 73 | |||||||||
Foreign | (244 | ) | (148 | ) | (293 | ) | ||||||
|
|
|
|
|
| |||||||
Total deferred expense | 9,922 | 697 | 503 | |||||||||
|
|
|
|
|
| |||||||
Total provision for income taxes | $ | 10,619 | $ | 1,427 | $ | 1,205 | ||||||
|
|
|
|
|
| |||||||
F-19
A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate for the years ended December 31, 2011, 2012 and 2013 is as follows:
| 2011 | 2012 | 2013 | ||||||||||
Statutory federal tax rate | 35 | % | 35 | % | 35 | % | ||||||
State income taxes, net of benefit | 6 | 2 | 4 | |||||||||
Effect of foreign losses | (5 | ) | (1 | ) | — | |||||||
Non-deductible transaction costs | — | (3 | ) | — | ||||||||
Non-deductible compensation | (19 | ) | (3 | ) | (1 | ) | ||||||
Other non-deductible expenses | 13 | — | (2 | ) | ||||||||
Effect of uncertain tax positions | (5 | ) | (1 | ) | (1 | ) | ||||||
Changes in valuation allowance | (293 | ) | (35 | ) | (41 | ) | ||||||
|
|
|
|
|
| |||||||
| (268 | )% | (6 | )% | (6 | )% | |||||||
|
|
|
|
|
| |||||||
The provision for income taxes for the year ended December 31, 2011 differed from the expected tax provision computed by applying the U.S. federal statutory rate to income or loss before income taxes primarily due to the establishment of the valuation allowance and, to a lesser extent, state income taxes and certain non-deductible expenses including stock-based compensation and operating losses in foreign jurisdictions for which no tax benefit is currently available.
In 2011, the Company established a valuation allowance against its U.S. federal and state net deferred tax assets because management concluded that it is more likely than not that it will not realize the tax benefits of its deferred tax assets based on recent operating results and current projections of future losses and, therefore, recorded a valuation allowance to reduce the carrying value of these net deferred tax assets. As a result, the valuation allowance on the Company’s net U.S. deferred tax assets increased by $11.8 million during the year ended December 31, 2011. As of December 31, 2011, the Company maintained a net valuation allowance against certain of its foreign deferred tax assets. The Company has historically maintained a net valuation allowance on deferred tax assets of certain of its foreign subsidiaries because management determined that it is more likely than not that it will not realize the tax benefits of its foreign deferred tax assets and, therefore, recorded a valuation allowance to reduce the carrying value of these foreign deferred tax assets to zero.
The provision for income taxes for the year ended December 31, 2012 and 2013 differed from the expected tax provision computed by applying the U.S. federal statutory rate to loss before income taxes primarily due to the recognition of the U.S. valuation allowance, operating losses in foreign jurisdictions for which no tax benefit is currently available, non-deductible stock-based compensation, non-deductible acquisition-related transaction costs and to a lesser extent, state income taxes and certain other non-deductible expenses.
As of December 31, 2012 and 2013, the Company maintained a full valuation allowance on its U.S. and certain of its foreign deferred tax assets because management determined that it was more likely than not that it will not realize the tax benefits of these deferred tax assets.
The Company’s deferred tax components consisted of the following (in thousands):
| December 31, | ||||||||
| 2012 | 2013 | |||||||
Deferred tax assets: | ||||||||
NOL carryforwards | $ | 27,481 | $ | 29,864 | ||||
Allowance for doubtful accounts | 51 | 47 | ||||||
Deferred revenue | 258 | 452 | ||||||
Accrued expenses | 2,188 | 906 | ||||||
Intangible asset amortization | — | — | ||||||
Stock-based compensation | 6,334 | 7,377 | ||||||
Capital loss carryforward | 1,787 | 1,786 | ||||||
Other | 1,274 | 1,528 | ||||||
|
|
|
| |||||
Total deferred tax assets | 39,373 | 41,960 | ||||||
Valuation allowance | (31,005 | ) | (39,402 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | 8,368 | 2,558 | ||||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Capitalized software development | (590 | ) | (754 | ) | ||||
Depreciation | (3,048 | ) | (2,280 | ) | ||||
Goodwill and intangible asset amortization | (8,227 | ) | (3,394 | ) | ||||
Other | (143 | ) | (302 | ) | ||||
|
|
|
| |||||
Total deferred tax liabilities | (12,008 | ) | (6,730 | ) | ||||
|
|
|
| |||||
Net deferred tax liability | $ | (3,640 | ) | $ | (4,172 | ) | ||
|
|
|
| |||||
The Company has not provided for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences of foreign subsidiaries as they are considered indefinitely reinvested outside of the U.S.
F-20
At December 31, 2013, the amount of temporary differences related to undistributed earnings of investments in foreign subsidiaries upon which United States income taxes have not been provided was zero.
As of December 31, 2013, the Company had net operating loss (NOL) carryforwards for federal and state tax purposes of approximately $85.0 million and $41.7 million, respectively, which will expire between 2025 and 2033. The Company also has $1.0 million of federal and state R&D tax credit that will expire between 2017 and 2033, $390,000 of non-expiring Alternative Minimum Tax credit and $285,000 of state employment tax credits that will expire between 2014 and 2017. The Company’s foreign subsidiaries generated NOL carryforwards of $15.7 million including $14.4 million of non-expiring losses and $1.3 million that will expire between 2020 and 2023. Included in these amounts at December 31, 2013 are approximately $5.4 million in cumulative income tax deductions on the exercise of stock options and the vesting of restricted stock awards. This income tax benefit will be recorded to additional paid-in-capital when realized.
Certain of the Company’s federal and state NOL carryforwards are subject to annual limitations under Section 382 of Internal Revenue Code. The limitations imposed under Section 382 will not preclude the Company from realizing these NOLs but may operate to limit their utilization of the NOLs in any given tax year in the event that the Company’s federal and state taxable income exceeds the limitation imposed by Section 382.
The Company recorded a tax deficiency from equity awards to additional paid-in capital for the years ended December 31, 2011 and 2012, as certain equity awards that vested and were exercised resulted in a shortfall, however, as the Company generated sufficient excess tax benefits in the previous years, the shortfall only reduced the cumulative additional paid-in capital from excess tax benefits. The Company has elected to use the “with and without” method for recognition of excess tax benefits related to equity awards.
The Company elected not to record the impact of the French 3% dividend withholding tax with respect to its wholly owned French subsidiary deferred tax assets and liabilities as the Company does not anticipate declaring and distributing any dividends out of the available accumulated earnings of its wholly owned French subsidiary. In the event that the Company would cause its wholly owned French subsidiary to declare and distribute a future dividend the Company would record the impact of the French withholding tax that will be due to the French government at the time that it declares and distribute such dividend. The available accumulated earnings that could be distributed by the Company’s wholly owned French subsidiary are $5.0 million. In the event that the Company declares and distributes a dividend that equals to the total available accumulated earnings of its wholly owned French subsidiary, the Company would record an additional income tax expense of $150,000. This tax expense will be recorded as a discrete item in the period that the distribution occurs.
As of December 31, 2012 and 2013, the Company had unrecognized tax benefits of $933,000 and $1.1 million, respectively included in other liabilities, including interest and penalties of $492,000 and $567,000, respectively. As of December 31, 2012, the total amount of gross unrecognized tax benefits was $1.1 million, if recognized, would favorably impact the Company’s effective tax rate. As of December 31, 2013, the total amount of gross unrecognized tax benefits was $1.3 million if recognized, would favorably impact the Company’s effective tax rate. For the years ended December 31, 2012 and 2013, the Company recognized $56,000 and $76,000, respectively of interest expense in connection with tax matters which is included in income tax expense. The Company does not believe its unrecognized tax positions will materially change over the next twelve months.
The change in unrecognized tax benefits, excluding accrued interest, for the years ended December 31, 2012 and 2013, were as follows (in thousands):
| December 31, | ||||||||
| 2012 | 2013 | |||||||
Balance as of beginning of period | $ | 501 | $ | 585 | ||||
Additions based on tax positions taken in the current year | 80 | 78 | ||||||
Additions for tax positions of prior years | 4 | 76 | ||||||
|
|
|
| |||||
Balance as of end of period | $ | 585 | $ | 739 | ||||
|
|
|
| |||||
The Company files income tax returns in U.S. federal jurisdictions and various state and foreign jurisdictions and is subject to U.S. federal, state, and foreign tax examinations for years ranging from 2003 to 2013.
13. Commitments and Contingencies
Leases
The Company has various non-cancelable operating leases, primarily related to office real estate, that expire through 2023 and generally contain renewal options for up to five years. Lease incentives, payment escalations and rent holidays specified in the lease agreements are accrued or deferred as appropriate as a component of rent expense which is recognized on a straight-line basis over the terms of occupancy. As of December 31, 2012, deferred rent of $752,000 and $5.7 million is included in accrued expenses and other liabilities, respectively. As of December 31, 2013, deferred rent of $783,000 and $5.0 million is included in accrued expenses and other liabilities, respectively.
The Company also leases computer and office equipment under non-cancelable capital leases and other financing arrangements that expire through 2017.
F-21
Future minimum lease payments under non-cancelable operating and capital leases at December 31, 2013 are as follows (in thousands):
| Operating Leases | Capital Leases | |||||||
2014 | $ | 4,025 | $ | 150 | ||||
2015 | 3,976 | 110 | ||||||
2016 | 3,852 | 83 | ||||||
2017 | 2,722 | 1 | ||||||
2018 | 2,024 | — | ||||||
2019 and thereafter | 8,597 | — | ||||||
|
|
|
| |||||
Total future minimum payments | $ | 25,196 | 344 | |||||
|
| |||||||
Less amount representing interest | (64 | ) | ||||||
Less current portion | (102 | ) | ||||||
|
| |||||||
Long-term capital lease obligations | $ | 178 | ||||||
|
| |||||||
Rent expense was $2.9 million, $5.0 million and $5.2 million for the years ended December 31, 2011, 2012, and 2013, respectively.
Purchase Commitments
The Company entered into agreements with various vendors in the ordinary course of business. As of December 31, 2013, minimum required payments in future years under these arrangements are $5.8 million, $2.8 million and $1.0 million in 2014, 2015 and 2016, respectively.
Letters of Credit
As of December 31, 2013, the Company had a total of $1.3 million in letters of credit outstanding substantially in favor of landlords for certain of its office spaces. These letters of credit do not require compensating balances and expire at various dates through May 2023.
Self-Insurance
In 2011, the Company enrolled in a self-insured plan for a majority of its U.S. employee health insurance costs, including claims filed and claims incurred but not reported (IBNR) subject to certain stop loss provisions. The Company estimates the liability based upon management’s judgment, historical data and the assistance of third-party actuaries in determining an adequate liability for self-insurance claims. The Company’s IBNR accrual and expenses may fluctuate due to the number of plan participants, claims activity and deductible limits.
Litigation and Claims
On January 23, 2014, North Venture Partners, LLC (NVP) filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court for the Northern District of California (Civil Action No. C14-0337). The complaint, which was served to the Company on January 27, 2014, alleges that it failed to pay the full amount of the earn-out payment due under an Asset Purchase Agreement dated February 24, 2011 in which the Company acquired certain assets of NVP. For more information, please refer to Note 14,Subsequent Events.
The Company from time to time is subject to lawsuits, investigations and claims arising out of the ordinary course of business, including those related to commercial transactions, contracts, government regulation and employment matters. In the opinion of management based on all known facts, all other matters are either without merit or are of such kind, or involve such amounts that would not have a material effect on the financial position or results of operations of the Company if disposed of unfavorably.
14. Subsequent Events
On January 23, 2014, NVP filed a complaint that named the Company as a defendant in a lawsuit in the U.S. District Court for the Northern District of California (Civil Action No. C14-0337). The complaint, which was served to the Company on January 27, 2014, alleges that it failed to pay the full amount of the earn-out payment due under an Asset Purchase Agreement dated February 24, 2011 in which the Company acquired certain assets of NVP. NVP’s complaint seeks an award for damages of approximately $6.4 million. This litigation is in its early stages, therefore, neither the outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses are determinable at this time. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit.
On February 4, 2014 the Company decided to discontinue its North Social platform, a stand-alone product that provided Facebook applications for small businesses, because it did not align with the current strategic direction of the Company. The Company is in the process of evaluating the impact to its consolidated financial statements.
Also in February 2014, the Company made a decision to shut-down its sales operations in its Philippines office. As a result, during the next three to six months, the Company is expected to incur estimated expenses totaling $5.0 million for costs relating to the termination of the lease, impairment of assets and severance from the reduction in the workforce.
F-22
15. Quarterly Financial Information (Unaudited)
| March 31, 2012(1) | June 30, 2012 | September 30, 2012 | December 31, 2012 | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | |||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Summary consolidated statement of operations data: | ||||||||||||||||||||||||||||||||
Revenues | $ | 34,853 | $ | 43,620 | $ | 45,217 | $ | 47,114 | $ | 46,247 | $ | 46,617 | $ | 46,615 | $ | 47,452 | ||||||||||||||||
Gross profit | 27,539 | 34,920 | 36,285 | 38,311 | 36,495 | 36,813 | 37,314 | 38,089 | ||||||||||||||||||||||||
Net loss | (10,825 | ) | (5,189 | ) | (3,845 | ) | (3,732 | ) | (8,125 | ) | (5,892 | ) | (3,851 | ) | (3,938 | ) | ||||||||||||||||
Net loss per share: | ||||||||||||||||||||||||||||||||
Basic and diluted | $ | (0.57 | ) | $ | (0.27 | ) | $ | (0.20 | ) | $ | (0.19 | ) | $ | (0.41 | ) | $ | (0.29 | ) | $ | (0.19 | ) | $ | (0.20 | ) | ||||||||
Weighted average shares outstanding used in computing per share amounts: | ||||||||||||||||||||||||||||||||
Basic and diluted | 19,042,761 | 19,540,700 | 19,570,459 | 19,600,644 | 19,790,692 | 20,099,700 | 20,151,494 | 20,185,672 | ||||||||||||||||||||||||
| (1) | During the three months ended March 31, 2012, the Company incurred $2.9 million of acquisition-related transaction costs and $2.1 million of employee severance costs in connection with its acquisition of iContact. |
Vocus, Inc.
Schedule II — Valuation and Qualifying Accounts
| Balance at Beginning of Period | Charged to Costs or Expenses | Additions (Deductions) | Additions Acquired from Business Combinations (2) | Balance at End of Period | ||||||||||||||||
Allowance for doubtful accounts (in thousands): | ||||||||||||||||||||
Year ended December 31, 2011 (1) | $ | 182 | $ | 408 | $ | (346 | ) | $ | — | $ | 244 | |||||||||
Year ended December 31, 2012 (1) | 244 | 408 | (416 | ) | — | 236 | ||||||||||||||
Year ended December 31, 2013 (1) | 236 | 638 | (640 | ) | — | 234 | ||||||||||||||
Deferred tax valuation allowance (in thousands): | ||||||||||||||||||||
Year ended December 31, 2011 | $ | 1,997 | $ | 11,657 | $ | — | $ | — | $ | 13,654 | ||||||||||
Year ended December 31, 2012 | 13,654 | 8,236 | 2,859 | 6,256 | 31,005 | |||||||||||||||
Year ended December 31, 2013 | 31,005 | 9,308 | (911 | ) | — | 39,402 | ||||||||||||||
| (1) | Deductions include actual accounts written-off, net of recoveries. |
| (2) | Valuation allowance established from the acquisition of iContact. |
F-23
Index to Exhibits
Exhibit Numbers | Exhibits | |
| 3.1(5) | Fifth Amended and Restated Certificate of Incorporation. | |
| 3.2(17) | Amended and Restated Bylaws. | |
| 3.3(19) | Amendment to Second Amended and Restated Bylaws. | |
| 4.1(3) | Specimen common stock certificate. | |
| 4.2(15) | Certificate of Designation of Series A Convertible Preferred Stock as of February 24, 2012. | |
| 4.3(15) | Investor Rights Agreement by and between Vocus, Inc. and JMI Equity Fund VI, L.P., dated February 24, 2012. | |
| 4.4(18) | Certificate of Designation of Series B Junior Participating Preferred Stock as of May 13, 2013. | |
| 4.5(18) | Rights Agreement, dated May 13, 2013, between Vocus, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent. | |
| 4.6(18) | Letter Agreement, dated May 13, 2013, between Vocus, Inc. and JMI Equity Fund VI, L.P. | |
| 10.1(1) | 1999 Stock Option Plan. | |
| 10.2(1) | Form of Option Agreement under Registrant’s 1999 Stock Option Plan. | |
| 10.3(4) | 2005 Stock Award Plan. | |
| 10.4* | Form of Option Agreement for executive officers under Registrant’s 2005 Stock Award Plan (adopted in February 2014). | |
| 10.5(9) | Form of Option Agreement for non-employee directors under Registrant’s 2005 Stock Award Plan. | |
| 10.6(11) | Deed of Lease dated March 30, 2010 between Indian Creek Investors, LLC and Registrant. | |
| 10.7(16) | Form of Indemnification Agreement entered into by the Registrant and each of its executive officers and directors. | |
| 10.8(2) | License Agreement between the Registrant and PR Newswire Association LLC, dated August 1, 2003, as amended. | |
| 10.9(9) | Amended and Restated Agreement between the Registrant and PR Newswire Association, Inc., dated August 1, 2006. | |
| 10.10(6) | Form of Employment Agreement for Stephen Vintz, and schedule of details omitted therefrom. | |
| 10.11(6) | Form of Employment Agreement for Norman Weissberg, and schedule of details omitted therefrom. | |
| 10.12(7) | Employment Agreement for William Wagner dated July 17, 2006. | |
| 10.13(7) | Indemnification Agreement for William Wagner dated July 17, 2006. | |
| 10.14(8) | Asset Purchase Agreement, dated August 4, 2006, among the Registrant, Vocus PRW Holdings LLC, PRWeb, LLC and the sole stockholder of PRWeb International, Inc. and sole owner of PRWeb, LLC. | |
| 10.15(12) | Sale and Purchase Agreement dated April 16, 2010 between Registrant and Data Presse SAS. | |
| 10.16(13) | Asset Purchase Agreement between the Registrant and North Venture Partners, LLC dated February 24, 2011. | |
| 10.17(15) | Agreement and Plan of Merger, dated February 24, 2011. | |
| 10.18(15) | Loan Agreement between Bank of America, N.A. and Vocus Inc. dated February 27, 2012. | |
| 10.19* | Form of Restricted Stock Agreement for executive officers under Registrant’s 2005 Stock Award Plan (adopted in February 2014). | |
| 10.20(10) | Form of Restricted Stock Agreement for non-employee directors under Registrant’s 2005 Stock Award Plan. | |
| 10.21(14) | Summary of board of directors’ compensation. | |
| 10.22* | Form of Restricted Stock Unit Agreement for executive officers under Registrant’s 2005 Stock Award Plan. | |
| 10.23(20) | Employment Agreement for Richard Rudman dated May 30, 2013. | |
| 10.24(21) | Employment Agreement for Steven Pogorzelski dated February 3, 2014. | |
Exhibit Numbers | Exhibits | |
| 21.1* | List of subsidiaries. | |
| 23.1* | Consent of Ernst & Young LLP. | |
| 24.1* | Power of Attorney (included on the signature page to this report). | |
| 31.1* | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. | |
| 31.2* | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. | |
| 32.1** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Incorporated by reference to an exhibit to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on June 15, 2005. |
| (2) | Incorporated by reference to an exhibit to Amendment No. 2 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on August 5, 2005. |
| (3) | Incorporated by reference to an exhibit to Amendment No. 5 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on November 9, 2005. |
| (4) | Incorporated by reference to an exhibit to Amendment No. 6 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on December 6, 2005. |
| (5) | Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006. |
| (6) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on December 12, 2005. |
| (7) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on July 20, 2006. |
| (8) | Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2006. |
| (9) | Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2007. |
| (10) | Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008. |
| (11) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on March 30, 2010. |
| (12) | Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2010. |
| (13) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on March 1, 2011. |
| (14) | Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2011. |
| (15) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on February 28, 2012. |
| (16) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on June 29, 2012. |
| (17) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on December 18, 2012. |
| (18) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on May 13, 2013. |
| (19) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on August 30, 2013. |
| (20) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus,Inc. filed with the Securities and Exchange Commission on May 30, 2013. |
| (21) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus,Inc. filed with the Securities and Exchange Commission on February 4, 2014. |