XNAS:SDBT Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

OR

 

¨ 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: 001-33790

 

 

SoundBite Communications, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   04-3520763

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

22 Crosby Drive

Bedford, Massachusetts 01730

(Address of Principal Executive Offices) (Zip Code)

(781) 897-2500

(Registrant’s Telephone Number, Including Area Code)

 

 

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 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 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   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 31, 2012, there were 16,430,601 shares of the registrant’s common stock, $.001 par value per share, outstanding.

 

 

 


Table of Contents

SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

         Page No.  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011      3   
 

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011

     4   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     5   
  Notes to Unaudited Condensed Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

  Controls and Procedures      21   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      22   

Item 1A.

  Risk Factors      24   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 5.

  Other Information      37   

Item 6.

  Exhibits      39   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 16,979      $ 17,706   

Short-term investments

     7,240        10,976   

Accounts receivable, net of allowance for doubtful accounts of $164 at June 30, 2012 and $166 at December 31, 2011

     8,053        8,163   

Prepaid expenses and other current assets

     1,738        1,419   
  

 

 

   

 

 

 

Total current assets

     34,010        38,264   

Property and equipment, net

     1,991        2,081   

Intangible assets, net

     3,622        2,036   

Goodwill

     6,594        4,286   

Other assets

     114        118   
  

 

 

   

 

 

 

Total assets

   $ 46,331      $ 46,785   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 1,729      $ 767   

Accrued expenses

     4,037        3,445   

Other current liabilities

     211        561   
  

 

 

   

 

 

 

Total current liabilities

     5,977        4,773   

Long-term contingent consideration payable

     879        966   

Other liabilities

     223        277   
  

 

 

   

 

 

 

Total liabilities

     7,079        6,016   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value—75,000,000 shares authorized; 16,807,874 and 16,666,206 shares issued at June 30, 2012 and December 31, 2011; 16,421,280 and 16,410,427 shares outstanding at June 30, 2012 and December 31, 2011

     17        17   

Additional paid-in capital

     71,305        70,681   

Treasury stock, at cost—386,594 shares at June 30, 2012 and 255,779 shares at December 31, 2011

     (635     (273

Accumulated other comprehensive loss

     (72     (72

Accumulated deficit

     (31,363     (29,584
  

 

 

   

 

 

 

Total stockholders’ equity

     39,252        40,769   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 46,331      $ 46,785   
  

 

 

   

 

 

 

See notes to the unaudited condensed consolidated financial statements.

 

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SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Revenues

   $ 10,977      $ 9,552      $ 22,058      $ 18,715   

Cost of revenues

     4,715        4,070        9,102        7,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,262        5,482        12,956        10,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     1,762        1,448        3,456        2,994   

Sales and marketing

     4,109        3,388        7,978        6,781   

General and administrative

     1,919        1,778        4,223        3,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,790        6,614        15,657        13,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,528     (1,132     (2,701     (2,609

Interest and other (expense) income, net

     (4     (9     35        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (1,532     (1,141     (2,666     (2,607

Income tax benefit

     —          905        887        905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,532   $ (236   $ (1,779   $ (1,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

        

Basic and Diluted

   $ (0.09   $ (0.01   $ (0.11   $ (0.10

Weighted average common shares outstanding:

        

Basic and Diluted

     16,428,469        16,428,793        16,412,420        16,408,925   

See notes to the unaudited condensed consolidated financial statements.

 

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SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (1,779   $ (1,702

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation of property and equipment

     674        667   

Amortization of intangible assets

     914        150   

Amortization of premiums paid on short-term investments

     10        —     

Adjustment to contingent consideration

     (166     —     

Provision for bad debts

     1        40   

Stock-based compensation

     487        609   

Deferred taxes

     (887     (905

Gain on disposal of equipment

     —          (3

Change in operating assets and liabilities, net of effect of acquisition:

    

Accounts receivable

     574        60   

Prepaid expenses and other current assets

     (194     (592

Other assets

     4        64   

Accounts payable

     719        (134

Accrued expenses and other liabilities

     237        (852
  

 

 

   

 

 

 

Net cash used in operating activities

     594        (2,598
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Cash paid related to Mobile Collect acquisition

     (498     (309

Cash paid related to SmartReply acquisition

     —          (2,559

Cash paid related to 2ergo Americas acquisition

     (3,773     —     

Proceeds from sale of equipment

     —          3   

Purchases of short-term investments

     (6,425     —     

Sales and maturities of short-term investments

     10,151        —     

Purchases of property and equipment

     (548     (395
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,093     (3,260
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     137        43   

Treasury stock purchases

     (365     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     (228     43   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (727     (5,815

Cash and cash equivalents, beginning of period

     17,706        34,157   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 16,979      $ 28,342   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for income taxes

   $ 6      $ 4   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing activities:

    

Property and equipment, included in accounts payable

   $ 148      $ 118   
  

 

 

   

 

 

 

Contingent cash payment to Mobile Collect, included in other current liabilities

   $ 0      $ 166   
  

 

 

   

 

 

 

See notes to the unaudited condensed consolidated financial statements.

 

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SOUNDBITE COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. NATURE OF BUSINESS

SoundBite Communications, Inc. (the Company) provides cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications. The Company was incorporated in Delaware in 2000, and its principal operations are located in Bedford, Massachusetts. The Company’s clients are located in the United States and Europe. The Company operates as and reports its operations as a single operating segment and single reporting unit.

 

2. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2012 and its results of operations and cash flows for the three and six months ended June 30, 2012 and 2011. The results for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. No subsequent events requiring adjustment or disclosure were identified. These condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto as of and for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Short-term Investments

The Company invests any excess cash balances in short-term marketable securities, including high-grade commercial paper. These investments are classified as available-for-sale. The average remaining maturity of the marketable securities as of June 30, 2012 was four months. Gains or losses on the sale of investments classified as available-for-sale, if any, are recognized on the specific identification method. Unrealized gains or losses are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ deficit until the security is sold or until a decline in fair value is determined to be other than temporary. The unrealized gain or loss as of June 30, 2012 and December 31, 2011 was immaterial.

Revenues

The Company derives substantially all of its revenues by providing its service for use by clients in communicating with their customers through voice, text and email messages. The Company provides its services under a combination of usage and subscription-based pricing models. Under the usage-based model, prices are calculated on a per-message or per-minute basis in accordance with the terms of its pricing agreements with clients. The Company primarily invoices its clients on a monthly basis. The substantial majority of the pricing agreements do not require minimum levels of usage or payments.

The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the client; (3) the amount of fees to be paid by the client is fixed or determinable; and (4) the collection of fees from the client is reasonably assured. Generally, this occurs when the services are performed.

The Company’s client management organization provides ancillary services to assist clients in selecting service features and adopting best practices that help clients make the best use of the Company’s on-demand service. The Company provides varying levels of support through these ancillary services, from managing an entire campaign to supporting self-service clients. In some cases, ancillary services may be billed to clients based upon a fixed fee or a fixed hourly rate. Revenue from these arrangements are

 

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measured using management’s estimated selling price, as determined from a standard rate card. These services typically are of short duration, typically less than one month, and do not involve future obligations. The Company recognizes revenue from these services within the calendar month in which the ancillary services are completed if the four criteria set forth above are satisfied. Revenues attributable to ancillary services are not material and accordingly were not presented as a separate line item in the statements of operations.

Basic and Diluted Loss per Common Share

Net loss per common share attributable to common stockholders has been computed using the weighted average number of shares of common stock outstanding during each period. Basic and diluted shares outstanding were the same for the periods presented as the impact of all potentially dilutive securities outstanding was anti dilutive. The following table presents the potentially dilutive securities outstanding that were excluded from the computation of diluted net loss per common share because their inclusion would have had an anti dilutive effect:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Stock options

     3,680,431         3,338,394         3,680,431         3,338,394   

Restricted stock

     34,543         60,759         34,543         60,759   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,714,974         3,399,153         3,714,974         3,399,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive Loss

For the three and six months ended June 30, 2012 and 2011, the total comprehensive loss was equal to the net loss.

 

4. ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Payroll related items

   $ 1,208       $ 1,089   

Professional fees

     605         247   

Telephony

     567         503   

Sales and use tax

     423         510   

Other

     1,234         1,096   
  

 

 

    

 

 

 

Total

   $ 4,037       $ 3,445   
  

 

 

    

 

 

 

 

5. COMMITMENTS AND CONTINGENCIES

Indemnification Regarding Karayan Litigation

Over the past several months, class action litigation has been initiated against a number of banks and retailers, including some of the Company’s clients, alleging that “mobile termination” text messages violate the U.S. Telephone Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers. When a business receives a text message indicating that the sender wishes to “opt out” of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any additional text messages.

On October 21, 2011, the Company received a notice from GameStop Corp. and GameStop Inc., which together the Company refers to as GameStop, requesting indemnification in connection with a class action litigation entitled Karayan v. GameStop Corp. and GameStop Inc., which the Company refers to as the Karayan Litigation, which had been initiated against GameStop based in part on mobile termination text messages. The Company is not a named defendant or other party in the Karayan Litigation.

On January 6, 2012, the Company delivered a letter agreement to GameStop, in which the Company agreed to indemnify GameStop in relation to the Karayan Litigation. After investigation, it was determined to deliver the letter agreement dated January 6, 2012 in order to, pursuant to the provisions of the Company’s Master Pricing Agreement with GameStop, (a) indemnify GameStop for damages,

 

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losses and fees resulting from the aspects of the Karayan Litigation relating to mobile termination text messages and (b) confirm that the Company will take sole control over the defense, and any settlement, of the Karayan Litigation. In addition to claims relating to mobile termination text messages, the Karayan Litigation also asserts claims alleging that GameStop is liable to certain of its customers because it failed to obtain prior express consent to the delivery of text messages. In the letter agreement, the Company reserved its rights concerning any argument that it may have as to its obligation to indemnify GameStop with respect to the aspects of the Karayan Litigation relating to the alleged lack of prior express consent. The Company has filed a motion to dismiss or in the alternative stay the litigation pending a determination by the Federal Communications Commission in relation to the Company’s Petition for Declaratory Ruling on mobile termination messages. In response to the motion, plaintiff agreed to seek a stay of the litigation from the court until such time as the Federal Communications Commission has ruled on the Company’s Petition for Declaratory Ruling.

The Company intends to defend vigorously against the claims in the Karayan Litigation that allege GameStop violated provisions of the TCPA in delivering mobile termination text messages. The Company is continuing to investigate this matter. At this time it is not possible to estimate the amount of damages, losses, fees and other expenses that will be incurred as the result of the Company’s indemnification obligations to GameStop, but such an amount could have a material adverse effect on its business, financial condition and operating results. Even if the Company succeeds in defending against the Karayan Litigation, it is likely to incur substantial costs and management’s attention will be diverted from its operations.

Sager Litigation

On January 11, 2012, a class action litigation, which the Company refers to as the Sager Litigation, was filed against Bank of America and the Company as co-defendants. The Sager Litigation alleges that the Company and Bank of America sent text messages to the plaintiff without the plaintiff’s prior express consent, in violation of the TCPA. Plaintiff is seeking confirmation of a class of individuals who received unauthorized text message solicitations sent on behalf of the Company. On June 21, 2012, the Company moved to stay the litigation pending, among other things, a determination by the Federal Communications Commission in relation to the Company’s Petition for Declaratory Ruling on mobile termination messages. The hearing on the motion to stay is set for September 14, 2012. The Company intends to defend vigorously against the claims in the Sager Litigation that allege it violated provisions of the TCPA in delivering text messages. The Company is continuing to investigate this matter. At this time it is not possible for the Company to estimate the amount of damages, losses, fees and other expenses that it will incur as the result of the Sager Litigation, but such an amount could have a material adverse effect on its business, financial condition and operating results. Even if the Company succeeds in defending against the Sager Litigation, it is likely to incur substantial costs and management’s attention will be diverted from its operations.

On June 18, 2012 the Company received a notice from Bank of America requesting indemnification in connection with the Sager Litigation. The Company is investigating this matter to evaluate the extent, if any, to which it is required to indemnify the client for damages, losses and fees resulting from the lawsuit. At this time it is not possible to estimate the amount, if any, for which the Company may be responsible under its indemnification obligations to Bank of America, but it is possible that such an amount may be substantial.

A2P SMS Antitrust Litigation

On April 5, 2012, a class action litigation, which the Company refers to as the Club Texting Litigation, was filed against numerous defendants, including the Company. On April 6, 2012, a related class action litigation, which the Company refers to as the TextPower Litigation, was filed against numerous defendants, including the Company. On May 10, 2012, a further related class action litigation, which the Company refers to as the iSpeedBuy litigation, was filed against numerous defendants, including the Company. On June 14, 2012, a consolidated class action complaint, which the Company refers to as the A2P SMS Antitrust Litigation, was filed that amended and consolidated the Club Texting Litigation, TextPower Litigation and iSpeedBuy Litigation. In the A2P SMS Antitrust Litigation, the Company is named as alleged successor-in-interest to 2ergos Americas, which the Company acquired in February 2012. The A2P SMS Antitrust Litigation alleges that the named mobile telecom companies and alleged aggregators violated antitrust provisions set forth in the Sherman Act through the use of various common short code requirements related to the sending of text messages by businesses to consumers. Further, both the A2P SMS Antitrust Litigation is seeking confirmation of a class of entities and persons who leased a common short code from Neustar, Inc. and sent or received text messages through one or more aggregators. All of the alleged violations occurred prior to the Company’s acquisition of 2ergo Americas, and the Company has served an indemnification claim on 2ergo Group plc, the former parent company of 2ergo Americas, in relation to the A2P SMS Antitrust Litigation. In connection with the acquisition, $750,000 was deposited in an escrow account to secure claims by the Company for breaches of representations and warranties made with respect to 2ergo Americas (see Note 9). The Company intends to defend vigorously against the claims in the A2P SMS Antitrust Litigation that allege violations of the Sherman Act. At this time it is not possible for the Company to estimate the amount of damages, losses, fees and other expenses that it will incur as the result of the A2P SMS Antitrust Litigation, but such an amount could have a material adverse effect on its business, financial condition and operating results. Even if the Company succeeds in defending against the A2P SMS Antitrust Litigation, it is likely to incur substantial costs and management’s attention will be diverted from its operations.

 

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Other Proceedings

The customer communications industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, the Company may be involved in various legal proceedings from time to time.

The Company’s recently acquired subsidiary 2ergos Americas received a notice from one of its clients requesting indemnification in connection with a patent infringement lawsuit initiated against the client based in part on various alleged web and mobile applications supplied by 2ergos Americas to that client. The Company is investigating this matter to evaluate the extent, if any, to which it is required to indemnify the client for damages, losses and fees resulting from the lawsuit. At this time it is not possible to estimate the amount, if any, for which the Company may be responsible under its indemnification obligations to this client, but it is possible that such an amount may be substantial. The Company has served an indemnification claim on 2ergo Group plc, the former parent company of 2ergo Americas, in relation to this request.

 

6. STOCK-BASED COMPENSATION

The following table presents stock-based compensation expense included in the condensed consolidated statements of operations (in thousands):

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2012      2011      2012      2011  

Cost of revenues

   $ 10       $ 11       $ 21       $ 21   

Research and development

     43         52         97         106   

Sales and marketing

     76         113         148         229   

General and administrative

     116         124         221         253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 245       $ 300       $ 487       $ 609   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012, the total compensation cost related to stock-based awards granted to employees and directors but not yet recognized was $1.4 million, net of estimated forfeitures. These costs will be amortized on a straight-line basis over a weighted average period of 2.3 years.

 

7. GOODWILL AND INTANGIBLES

In February 2008, the Company acquired substantially all of the assets of Mobile Collect, Inc (Mobile Collect). Mobile Collect was a privately held company that provided text messaging and mobile communications solutions. The acquisition included cash payments of $500,000 upon closing and contingent cash payments of up to $2.0 million payable through 2013 upon Mobile Collect achieving certain established financial targets. The contingent cash payments are recognized as additions to goodwill as the consideration is determined and becomes payable. The $2.0 million target was reached during the three month period ended March 31, 2012 and the final payment of $227,000 was made during the three month period ended June 30, 2012.

In June 2011, the Company acquired key assets and assumed certain liabilities of SmartReply, a mobile marketing company located in Irvine, California. The acquisition included cash payments of $3.2 million. Approximately $1.0 million of the purchase price was deposited in escrow to secure the seller’s representations and indemnifications and, subject to claims for damages, is expected to be distributed to the seller in installments over the two years following the acquisition. Contingent consideration arrangements in the form of an earn-out require cash payments currently estimated at $1.4 million, but up to a maximum of $8.9 million. The first earn-out period was completed as of June 30, 2012 and a payment of $211,000 will be made in the third quarter of 2012. Subsequent annual payments will be determined over the next two years based upon year-over-year revenue growth in the Company’s mobile marketing business.

In February 2012, the Company acquired 2ergo Americas. Refer to Note 9 for further details of the transaction.

 

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The change in the carrying amount of goodwill during the six-month period ended June 30, 2012, which is subject to future impairment considerations, is as follows (in thousands):

 

Balance at January 1, 2012

   $ 4,286   

Mobile Collect contingent payments

     227   

2ergo Americas acquisition (Note 9)

     2,081   
  

 

 

 

Balance at June 30, 2012

   $ 6,594   
  

 

 

 

Intangible assets consisted of the following (in thousands):

 

     Gross
Value
     Accumulated
Amortization
     Net
Carrying
Value
 

June 30, 2012

        

Technology

   $ 600       $ 76       $ 524   

Non-compete agreements

     40         20         20   

Customer relationships

     4,540         1,754         2,786   

Tradenames

     28         14         14   

Internal-use software

     500         222         278   
  

 

 

    

 

 

    

 

 

 
   $ 5,708       $ 2,086       $ 3,622   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

Technology

   $ 10       $ 10       $ —     

Non-compete agreements

     20         15         5   

Customer relationships

     2,650         1,000         1,650   

Tradenames

     28         8         20   

Internal-use software

     500         139         361   
  

 

 

    

 

 

    

 

 

 
   $ 3,208       $ 1,172       $ 2,036   
  

 

 

    

 

 

    

 

 

 

The Company is amortizing the 2ergo Americas, SmartReply and Mobile Collect identifiable intangible assets, as well as its internal-use software, over their estimated useful lives of two to five years using methods that most closely relate to the depletion of these assets. Estimated annual amortization expense related to these intangible assets for the next five years is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2012

   $ 1,772   

2013

     1,570   

2014

     1,055   

2015

     139   

2016

     —     
  

 

 

 

Total

   $ 4,536   
  

 

 

 

 

8. FAIR VALUE

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Other inputs that are directly or indirectly observable in the marketplace

Level 3 – Unobservable inputs that are supported by little or no market activity

The carrying value of the Company’s financial instruments, including cash, short-term investments, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The Company measures cash equivalents, which are comprised of money market fund deposits, short-term investments, which are comprised of commercial paper, certificate of deposits and U.S. government agency bonds, and a contingent liability at fair value. If measured at fair value, accounts receivable and accounts payable would be classified as Level 3 in the fair value hierarchy.

 

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At June 30, 2012 and December 31, 2011, the money market funds and U.S. government agency bonds were valued based upon quoted prices for the specific securities in an active market and therefore classified as Level 1. At June 30, 2012 and December 31, 2011, the commercial paper and certificate of deposits were valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security, and are therefore classified as Level 2.

The Level 3 liability consists of contingent consideration related to the SmartReply acquisition in the form of an earn-out for a maximum of $8.9 million that may become payable in annual installments over the three years following the acquisition, based upon year-over-year revenue growth in the Company’s mobile marketing business. The fair value of the contingent consideration was estimated by applying an income approach. The measure is based on significant inputs that are unobservable in the market. Key assumptions include a discount rate of 18.5% and probability weighted estimates of future revenues of the acquired business. The most sensitive assumption relates to the projected future revenues of the acquired business. Significant increases (decreases) in this input, in isolation, would result in a significant increase (decrease) in the measurement of the fair value of the liability for contingent consideration.

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of June 30, 2012 and December 31, 2011 (in thousands):

 

     Fair Value Measurements at Reporting Date Using  
     Quoted Prices in
Active Markets for
Identical
Instruments

(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable  Inputs

(Level 3)
     Total Balance  

June 30, 2012:

           

Assets:

           

Money market fund deposits

   $ 16,248       $ —         $ —         $ 16,248   

Short-term investments

           

Commercial paper

     —           6,450         —           6,450   

Certificate of deposit

     —           800         —           800   

Liabilities:

           

Liability for contingent consideration

     —           —           1,090         1,090   

December 31, 2011:

           

Assets:

           

Money market fund deposits

     16,273         —           —           16,273   

Short-term investments

           

Commercial paper

     —           5,594         —           5,594   

U.S. government agency bonds

     4,583         —           —           4,583   

Certificate of deposit

     —           799         —           799   

Liabilities:

           

Liability for contingent consideration

   $ —         $ —         $ 1,256       $ 1,256   

The liability for contingent consideration decreased $166,000 from December 31, 2011 to June 30, 2012 due to a fair value adjustment based upon the passage of time and a decrease in the revenue assumptions for the acquired business. A reconciliation of the beginning and ending liability for contingent consideration is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  

Beginning Balance

   $ 1,310      $ —         $ 1,256      $ —     

Additions

     —          1,158         —          1,158   

Changes in fair value (included within general and administrative expenses)

     (220     —           (166     —     

Payments

       —          —             —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 1,090      $ 1,158       $ 1,090      $ 1,158   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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9. ACQUISITION

In February 2012, the Company acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million, with $750,000 of this deposited into an escrow account. 2ergo Americas was a mobile marketing business and marketing solutions company located in Arlington, Virginia. The Company purchased 2ergo Americas in order to extend its client base to include leading companies in the telecom, media and consumer packaged goods industries while enhancing its existing mobile marketing offering. The purchase of 2ergo Americas is consistent with the Company’s strategy to expand its capabilities and customer base in mobile marketing and the excess of the purchase price over the net assets acquired represents potential revenue enhancements/synergies from its existing customer base and the assembled workforce of 2ergo Americas. The Company allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the closing date and recorded the excess of purchase price over the aggregate fair values as goodwill. Revenues generated from clients acquired as part of the 2ergo Americas acquisition during the three and six months ended June 30, 2012 were $785,000 and $1.1 million, respectively. Operating loss for the three and six months ended June 30, 2012 was $500,000 and $556,000, respectively.

Transaction costs related to the 2ergo Americas acquisition totaled approximately $250,000 and have been reported in the Consolidated Statement of Operations within general and administrative expenses for the six month period ended June 30, 2012. The acquisition has been accounted for under the purchase method of accounting and accordingly, the results of operations of 2ergo Americas have been included in the accompanying financial statements in the periods following the date of acquisition. The Company recorded deferred tax liabilities of $887,000, primarily related to the intangible assets acquired with 2ergo Americas, and released a corresponding amount of its deferred tax asset valuation allowance. The $887,000 release of the valuation allowance was recognized as a benefit for income taxes during the six months ending June 30, 2012. Pro forma results of 2ergo Americas’ operations have not been presented because the effect of this acquisition was not material to the Consolidated Statement of Operations.

The purchase price has been allocated to the assets acquired and liabilities assumed based on fair value, with any excess recorded as goodwill. None of the acquired intangible assets, including goodwill, are deductible for tax purposes. The allocation of the purchase price is preliminary and is pending finalization of the valuation of the intangible assets, as well as finalization of the accounting for income taxes. The components of the purchase price allocation are as follows (in thousands):

 

Purchase Price:

  

Cash paid, net of $27 cash acquired

   $ 3,773   

Allocations:

  

Current assets

   $ 590   

Property and equipment

     38   

Intangible assets:

  

Customer relationships (3 years)

     1,890   

Technology (3 years)

     590   

Non-compete agreement (3 years)

     20   

Goodwill

     2,081   
  

 

 

 

Total assets acquired

     5,209   
  

 

 

 

Current liabilities assumed

     (479

Deferred tax liability

     (957
  

 

 

 

Total liabilities assumed

     (1,436
  

 

 

 

Total net assets acquired

   $ 3,773   
  

 

 

 

The Company is amortizing its identifiable intangible assets acquired in connection with the 2ergo Americas’ transaction over the estimated useful life of three years using method that most closely relate to the depletion of these assets. Estimated annual amortization expense for the next five years related to the intangible assets is as follows (in thousands):

 

Year ending December 31,

   Amount  

2012

   $ 695   

2013

     833   

2014

     833   

2015

     139   

2016

     —     
  

 

 

 

Total

   $ 2,500   
  

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investors should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause differences from our expectations include those described in Part II, Item 1A. “Risk Factors” below and elsewhere in this report.

Overview

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications that are relevant, timely, personalized and engaging.

Our services are provided using a multi-tenant, cloud-based architecture that enables us to serve all of our clients cost-effectively. “Cloud-based” refers to the delivery of technology services through the Internet, which includes delivery of software as a service or SaaS. Because our services are cloud-based, businesses using our services do not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively.

We serve two global markets: hosted contact centers and mobile marketing. Our hosted contact center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our mobile marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

We derive, and expect to continue to derive for the foreseeable future, a substantial majority of our revenues from the hosted contact center market. Our strategy for achieving long-term, sustained growth in our revenues and net income is focused on building upon our leadership position in the hosted contact center market and executing on our key initiatives. For example, one of our strategic initiatives is targeted on the high growth area of mobile marketing, which leverages our text capabilities. In line with this strategy, in February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc. 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia.

Key Components of Results of Operations

Revenues

We currently derive a substantial portion of our revenues by providing our services for use by clients in communicating with their customers through voice, text and email messages. We provide our services under a combination of usage and subscription-based models. Under our usage-based model, prices are calculated on a per-message or per-minute basis in accordance with the terms of pricing agreements with clients. We primarily invoice our clients on a monthly basis.

Our pricing agreements with a substantial majority of our clients either do not require any minimum usage or payments, or require only an immaterial level of usage or payments. Each executed message represents a transaction from which we derive revenues, and we therefore recognize revenue based on actual usage within a calendar month. We do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable.

Cost of Revenues

Cost of revenues consist primarily of telephony and text message charges, compensation expense for our operations personnel, depreciation and maintenance expense for our platforms, amortization of acquired technology and lease costs for our data center facilities. As we continue to grow our business and add features to our platforms, we expect cost of revenues will continue to increase on an absolute dollar basis. Our annual gross margin was 59.1% in 2011, 59.6% in 2010 and 60.4% in 2009. We currently are targeting a gross margin of 58% to 60% for the foreseeable future. Our gross margin may vary significantly from our target range for a number of reasons, including revenue levels, the mix of types of messaging campaigns executed, as well as the extent to which we build our infrastructure through, for example, significant acquisitions of hardware or material increases in leased data center facilities.

 

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Operating Expenses

Research and Development. Research and development expenses consist primarily of compensation expenses and depreciation expense of certain equipment related to the development of our services. We have historically focused our research and development efforts on improving and enhancing our platforms, as well as developing new features and offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We expect to further invest in developing our marketing strategy and activities to extend brand awareness and generate additional leads for our sales staff.

General and Administrative. General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, accounting and legal professional fees and other corporate expenses.

Recent Developments

2ergo Americas Acquisition. In February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million (subject to post closing adjustment). 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia and has a current annualized revenue run rate of approximately $3.5 million. Revenues generated from clients acquired as part of the 2ergo Americas acquisition during the three and six months ended June 30, 2012 were $785,000 and $1.1 million, respectively. Operating loss for the three and six months ended June 30, 2012 was $500,000 and $556,000, respectively.

SmartReply Asset Acquisition. In June 2011 we acquired key assets of SmartReply. During the three and six months ended June 30, 2012, revenues generated from clients acquired as part of the acquisition were $1.2 million and $2.5 million, respectively.

Additional Key Measures of Financial Performance

We present information below with respect to free cash flow and certain revenue metrics. None of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP. Management believes the following financial measures are useful to investors because they permit investors to view our performance using the same tools that management uses to gauge progress in achieving our goals.

Free Cash Flow

Free cash flow is a measure of financial performance calculated as cash flow from operating activities less payments of contingent purchase price and purchases of property and equipment. Management uses this metric to track business performance. Due to the current economic environment, management decisions are based in part on a goal of maintaining positive cash flow from operating activities and free cash flow. We believe this metric is a useful measure of the performance of our business because, in contrast to statement of operations metrics that rely principally on revenue and profitability, cash flow from operating activities and free cash flow capture the changes in operating assets and liabilities during the year and the effect of noncash items such as depreciation and stock-based compensation. We believe that, for similar reasons, this metric is often used by security analysts, investors and other interested parties in the evaluation of companies offering cloud-based or other software solutions.

The term “free cash flow” is not defined under GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary expenditures. Free cash flow has limitations as an analytical tool and when assessing our operating performance, you should not consider free cash flow in isolation from or as a substitute for data, such as net income (loss), derived from financial statements prepared in accordance with GAAP.

 

     Six Months Ended
June 30,
 
     2012     2011  
     (in thousands)  

Cash generated from (used in) operating activities

   $ 594      $ (2,598

Contingent purchase price payments to Mobile Collect

     (498     (309

Purchases of property and equipment

     (548     (395
  

 

 

   

 

 

 

Free cash flow (non-GAAP)

   $ (452   $ (3,302
  

 

 

   

 

 

 

 

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Table of Contents

Our operating activities provided net cash in the amount of $594,000 for the six months ended June 30, 2012 reflecting a net loss of $1.8 million, which was offset by non-cash charges and changes in working capital of $2.4 million consisting primarily of (a) depreciation and amortization expense of $1.6 million, (b) an increase in account payable and accrued expenses of $1.0 million, (c) stock-based compensation expense of $487,000 and (d) a net decrease in accounts receivable and prepaid expenses of $380,000, primarily due to the timing of receipts from our clients. These increases were partially offset by a deferred income tax benefit (non-cash) of $887,000.

Free cash flow in each of the periods presented reflects, in addition to the factors driving cash flows from operating activities, our purchases of property and equipment, which consists primarily of computer equipment and software, and our payments of contingent purchase price in connection with our acquisition of the assets of Mobile Collect in 2008.

Revenue Metrics

Management tracks revenues by mobile, voice and other in order to review and evaluate our delivery channels. Mobile revenues are generated from any form of consumer interaction through a mobile device, excluding any of the voice channels. Voice revenues are generated from automated voice messaging and our hosted dialer. Other revenues include revenue attributable to email, professional services and access fees. For the three months ended June 30, 2012, voice revenues were $7.2 million, mobile revenues were $3.2 million and other revenues were $600,000, or 65%, 29% and 6% of total revenues, respectively. For the three months ended June 30, 2011, voice revenues were $7.3 million, mobile revenues were $1.7 million and other revenues were $600,000, or 77%, 17% and 6% of total revenues, respectively. The dollar and percentage increases in mobile revenues reflected both (a) growth in our existing business, which increased by 23% on a dollar basis, and (b) additional revenue from our acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Management also tracks revenues by certain quarterly client metrics:

 

   

Management evaluates client concentration in part by monitoring the aggregate percentage of total revenue generated in a quarter from our 20 largest clients (by revenue) in that quarter. Our 20 largest clients for the three months ended June 30, 2012 accounted for 68% of total revenues, compared to 74% in the three months ended June 30, 2011. The percentage decrease was primarily due to our acquisitions of the SmartReply and 2ergo Americas operations, which typically generate revenue at a lower level per client than our existing operations.

 

   

Management evaluates client retention in part by reviewing the aggregate percentage of total revenue generated in a quarter from the 50 largest clients in the previous quarter. Our 50 largest clients in the three months ended March 31, 2012 generated 87% of our total revenues in the three months ended June 30, 2012. In comparison, our 50 largest clients in the three months ended March 31, 2011 generated 89% of our total revenues in the three months ended June 30, 2011. The lower percentage was primarily due to the lower level of revenue per client attributable to the SmartReply and 2ergo Americas operations.

 

   

Management evaluates client momentum in part by tracking the number of clients that generated greater than $250,000 of revenue in a quarter. Thirteen clients, three of which were legacy clients of SmartReply, generated more than $250,000 in revenue for the three months ended June 30, 2012, as compared to eight in the comparable period of 2011.

 

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Results of Operations

The following table sets forth selected statements of operations data for the three and six months ended June 30, 2012 and 2011 indicated as percentages of revenues.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Statement of Operations Data:

        

Revenues

     100.0     100.0     100.0     100.0

Cost of revenues

     43.0        42.6        41.3        41.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     57.0        57.4        58.7        58.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     16.1        15.2        15.7        16.0   

Sales and marketing

     37.4        35.5        36.2        36.2   

General and administrative

     17.5        18.6        19.1        19.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     71.0        69.3        71.0        72.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (14.0     (11.9     (12.3     (13.9

Interest and other (expense) income

     0.0        0.0        0.2        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (14.0     (11.9     (12.1     (13.9

Income tax benefit

     0.0        9.4        4.0        4.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (14.0 )%      (2.5 )%      (8.1 )%      (9.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Three Months Ended June 30, 2012 and 2011

Revenues

 

     Three Months Ended June 30,     Quarter-to-
Quarter Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)  

Revenues

   $ 10,977         100.0   $ 9,552         100.0   $ 1,425         14.9

The $1.4 million increase in revenues for the three months ended June 30, 2012 as compared to the same period in 2011 was mainly due to the acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012. Revenues from legacy clients of SmartReply and 2ergo Americas accounted for $1.7 million of the increase, which was offset in part by a decrease of $287,000 in organic revenue. Overall, voice revenues decreased $130,000, mobile revenues increased $1.6 million and other revenues remained relatively flat for the three months ended June 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 65%, 29% and 6% in the second quarter of 2012, respectively, compared to 77%, 17% and 6% in the same period in 2011, respectively. We expect mobile revenues to continue to increase, both in dollars and as a percentage of total revenues, for the foreseeable future.

Cost of Revenues and Gross Profit

 

     Three Months Ended June 30,     Quarter-to-
Quarter Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)  

Cost of revenues

   $ 4,715         43.0   $ 4,070         42.6   $ 645         15.8

Gross profit

     6,262         57.0        5,482         57.4        780         14.2   

The $645,000 increase in cost of revenues for the three months ended June 30, 2012 as compared to the same period in 2011 reflected a $417,000 increase in text message costs due to higher client usage, a $123,000 increase in telephony expense due to higher delivery charges, and a $49,000 increase in amortization expense for acquired technology. The decrease in gross margin for the three months ended June 30, 2012 as compared to the same period in 2011 reflected changes in our client and service mix.

 

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Operating Expenses

 

     Three Months Ended June 30,     Quarter-to-
Quarter Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)  

Research and development

   $ 1,762         16.1   $ 1,448         15.2   $ 314         21.7

Sales and marketing

     4,109         37.4        3,388         35.5        721         21.3   

General and administrative

     1,919         17.5        1,778         18.6        141         7.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 7,790         71.0   $ 6,614         69.3   $ 1,176         17.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Research and Development. The $314,000 increase in research and development expenses for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to a $294,000 increase in personnel related costs and a $32,000 increase in travel related costs, partially offset by a $45,000 decrease in consulting fees. Of the $294,000 increase in personnel related costs, $126,000 consisted of expenses attributable to five employees added in connection with the SmartReply and 2ergo Americas acquisitions.

Sales and Marketing. The $721,000 increase in sales and marketing expenses for the three months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from a $329,000 increase in amortization expense for customer lists and other acquired intangibles, a $299,000 increase in personnel related costs, primarily due to a net addition of five employees in connection with recent acquisitions, and a $91,000 increase in facility overhead costs.

General and Administrative. The $141,000 increase in general and administrative expenses for the three months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from a $374,000 increase in legal fees mainly due to ongoing litigation as described in Note 5 to our consolidated financial statements, a $164,000 increase in consulting fees for various administrative projects, a $64,000 increase in accounting service fees, and a $55,000 increase in public company costs. These increases were partially offset by a $279,000 decrease in merger and acquisition related costs and a $220,000 fair value adjustment to the liability for contingent consideration related to the SmartReply acquisition.

Operating Loss and Other Expense

 

     Three Months Ended June 30,     Quarter-to-
Quarter Change
 
     2012     2011    
     Amount     Percentage of
Revenues
    Amount     Percentage of
Revenues
    Amount     Percentage
Change
 
     (dollars in thousands)  

Operating loss

   $ (1,528     (14.0 )%    $ (1,132     (11.9 )%    $ (396     (35.0 )% 

Interest and other expense, net

     (4     0.0        (9     0.0        5        55.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss before income tax benefit

   $ (1,532     (14.0 )%    $ (1,141     (11.9 )%    $ (391     (34.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The $5,000 decrease in interest and other expense, net for the three months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from higher interest income earned on our investments.

Income Tax Benefit and Net Loss

We recognized a net loss of $1.5 million for the three months ended June 30, 2012 as compared to a net loss of $236,000 for the same period in 2011. This difference principally reflects a decrease in our operating loss for the three months ended June 30, 2012 and an income tax benefit of $905,000 recorded during the period ended June 30, 2011. The tax benefit resulted from the release of valuation allowance against our deferred tax assets in June 2011 that arose when we recorded deferred tax liabilities for the acquisition of intangibles from SmartReply.

 

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Table of Contents

Comparison of Six Months Ended June 30, 2012 and 2011

Revenues

 

     Six Months Ended June 30,     Six Month
Period Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)  

Revenues

   $ 22,058         100.0   $ 18,715         100.0   $ 3,343         17.9

The $3.3 million increase in revenues for the six months ended June 30, 2012 as compared to the same period in 2011 was due to the acquisitions of SmartReply in June 2011 and 2ergo Americas in February 2012. Revenues from legacy clients of SmartReply and 2ergo Americas accounted for $2.2 million and $1.1 million of the increase, respectively. Overall, voice revenues increased $453,000, mobile revenues increased $2.8 million and other revenues increased $126,000 for the six months ended June 30, 2012 as compared to the same period in 2011. Voice, mobile and other revenues as a percentage of total revenues were 68%, 27% and 6% for the six months ended June 30, 2012, respectively, compared to 77%, 17% and 6% in the same period in 2011, respectively.

Cost of Revenues and Gross Profit

 

     Six Months Ended June 30,     Six Month
Period Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)  

Cost of revenues

   $ 9,102         41.3   $ 7,832         41.8   $ 1.270         16.2

Gross profit

     12,956         58.7        10,883         58.2        2,073         19.0   

The $1.3 million increase in cost of revenues for the six months ended June 30, 2012 as compared to the same period in 2011 reflected a $710,000 increase in text message costs due to higher client usage, a $487,000 increase in telephony expense due to higher delivery charges and client usage, and a $66,000 increase in amortization expense for acquired technology. Gross margin increased slightly for the six months ended June 30, 2012 as compared to the same period in 2011 reflecting changes in our client and service mix.

Operating Expenses

 

     Six Months Ended June 30,     Six Month-
Period Change
 
     2012     2011    
     Amount      Percentage of
Revenues
    Amount      Percentage of
Revenues
    Amount      Percentage
Change
 
     (dollars in thousands)         

Research and development

   $ 3,456         15.7   $ 2,994         16.0   $ 462         15.4

Sales and marketing

     7,978         36.2        6,781         36.2        1,197         17.7   

General and administrative

     4,223         19.1        3,717         19.9        506         13.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 15,657         71.0   $ 13,492         72.1   $ 2,165         16.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Research and Development. The $462,000 increase in research and development expenses for the six months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to a $491,000 increase in personnel related costs and a $62,000 increase in travel related costs, partially offset by a $141,000 decrease in consulting fees. Of the $491,000 increase in personnel related costs, $207,000 consisted of expenses attributable to five employees added in connection with the SmartReply and 2ergo Americas acquisitions.

Sales and Marketing. The $1.2 million increase in sales and marketing expenses for the six months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from a $677,000 increase in amortization expense for customer lists and other intangibles, a $280,000 increase in personnel related costs, primarily due to a net addition of five employees in connection with recent acquisitions, and a $146,000 increase in facility overhead costs.

General and Administrative. The $506,000 increase in general and administrative expenses for the six months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from a $543,000 increase in legal fees mainly due to ongoing litigation as described in Note 5 to our consolidated financial statements, a $277,000 increase in consulting fees for various administrative projects,

 

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an $87,000 increase in accounting services fees, and a $79,000 increase in public company costs. These increases were partially offset by a $335,000 decrease in merger and acquisition related costs and a $166,000 fair value adjustment to the liability for contingent consideration related to the acquisition of SmartReply.

Operating Loss and Other Income

 

     Six Months Ended June 30,     Six Month
Period Change
 
     2012     2011    
     Amount     Percentage of
Revenues
    Amount     Percentage of
Revenues
    Amount     Percentage
Change
 
     (dollars in thousands)  

Operating loss

   $ (2,701     (12.3 )%    $ (2,609     (13.9 )%    $ (92     (3.5 )% 

Interest and other income, net

     35        0.2        2        0.0        33        1,650.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss before income tax benefit

   $ (2,666     (12.1 )%    $ (2,607     (13.9 )%    $ (59     (2.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The $33,000 increase in interest and other income, net for the six months ended June 30, 2012 as compared to the same period in 2011 resulted primarily from higher interest income earned on our investments.

Income Tax Benefit and Net Loss

We recognized a net loss of $1.8 million for the six months ended June 30, 2012 as compared to a net loss of $1.7 million for the same period in 2011. This difference principally reflects a decrease in our operating loss for the six months ended June 30, 2012 and an $18,000 decrease in income tax benefit for the six months ended June 30, 2012 as compared to the same period in 2011. We recorded an income tax benefit of $887,000 during the six months ended June 30, 2012 related to the acquisition of intangibles from 2ergo Americas in February 2012 and an income tax benefit of $905,000 during the six months ended June 30, 2011 related to the acquisition of intangibles from SmartReply in June 2011.

Liquidity and Capital Resources

Resources

Since our inception, we have funded our operations primarily with proceeds from private placements of preferred stock and our initial public offering of common stock, borrowings under credit facilities and, more recently, cash flow from operations.

We believe our existing cash and cash equivalents, our projected cash flow from operating activities, and our borrowings available under our existing credit facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rates of our revenue growth, our introduction of new features for our on-demand service, and our expansion of research and development and sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

Credit Facility Borrowings

On February 18, 2011 we renewed a credit facility with Silicon Valley Bank that provides a working capital line of credit at an interest rate of 4.5% per annum for up to the lesser of (a) $1.5 million or (b) 80% of eligible accounts receivable, subject to specified adjustments. Accounts receivable serve as collateral for any borrowings under the credit facility. There are certain financial covenant requirements as part of the facility, including an adjusted quick ratio and certain minimum quarterly revenue requirements, none of which are restrictive to our overall operations. The credit facility will expire by its terms on February 18, 2013 and any amounts outstanding must be repaid on that date.

As of June 30, 2012, no amounts were outstanding under the existing credit agreement. As of June 30, 2012, letters of credit totaling $426,000 had been issued in connection with our facility leases.

Operating Cash Flow

For a discussion of our cash flow from operating activities, see “– Additional Key Measures of Financial Performance.”

 

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Working Capital

The following table sets forth selected working capital information:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Cash and cash equivalents

   $ 16,979       $ 17,706   

Short-term investments

     7,240         10,976   

Accounts receivable, net of allowance for doubtful accounts

     8,053         8,163   

Working capital

   $ 28,033       $ 33,491   

Our cash and cash equivalents at June 30, 2012 were unrestricted and held for working capital purposes. These funds were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes.

Our short-term investments are comprised of commercial paper, certificate of deposits and U.S. government agency bonds.

Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations vary depending on cash collections, client mix and the volume of monthly usage of our services.

Requirements

Capital Expenditures

In recent years, we have made capital expenditures primarily to acquire computer hardware and software and, to a lesser extent, furniture and leasehold improvements to support the growth of our business. Our capital expenditures totaled $548,000 for the six months ended June 30, 2012. We intend to continue to invest in our infrastructure in an effort to ensure our continued ability to enhance our platform, introduce new features and maintain the reliability of our network. We also intend to continue to make investments in our computer equipment and systems. We expect our capital expenditures for these purposes will approximate $800,000 for the last six months of 2012.

Stock Repurchase Program

On March 26, 2010, we announced that the board of directors had authorized the repurchase of up to $2.5 million of common stock from time to time on the open market or in privately negotiated transactions. We will determine the timing and amount of any shares repurchased based on an evaluation of market conditions and other factors. Repurchases may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time.

As of June 30, 2012, we had repurchased 191,209 shares of our common stock at a cost of $503,000 under the program.

See “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for additional information regarding share repurchases under the program in the three month period ended June 30, 2012.

Contractual Obligations and Requirements

In February 2008, we acquired substantially all of the assets of Mobile Collect, a privately held company that provided text messaging and mobile communications solutions. The acquisition price included cash payments of $500,000 upon closing and requires contingent cash payments of up to $2.0 million payable quarterly through 2013 in the event that certain established financial targets are satisfied through the operation of the acquired assets. The final contingent cash payments related to the acquisition of Mobile Collect were made in the second quarter of 2012.

In June 2011, we acquired key assets and assumed certain liabilities of SmartReply, a mobile marketing company located in Irvine, California. The acquisition price included cash payments of $3.2 million upon closing and requires contingent cash payments currently estimated at $1.4 million, but up to a maximum of $8.9 million, in the form of an earn-out over a three year period. The first earn-out period was completed as of June 30, 2012 and a payment of $211,000 will be made in the third quarter of 2012. Subsequent annual payments will be determined over the next two years based upon year-over-year revenue growth in our mobile marketing business.

 

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In February 2012, we assumed an equipment lease from the acquisition of 2ergo Americas. This 36 month operating lease commenced in September 2011 and requires quarterly cash payments of approximately $30,000 through August 2014.

Except for the contingent cash payments and equipment lease payments noted above, our contractual obligations have remained substantially unchanged from those reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

Off-Balance-Sheet Arrangements

As of June 30, 2012, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation

S-K of the SEC.

Critical Accounting Policies

We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.

At June 30, 2012, we had unrestricted cash and cash equivalents totaling $17.0 million. These amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents were held for working capital purposes. At June 30, 2012, we also had short-term investments of 7.2 million, consisting primarily of commercial paper and U.S. government agency bonds, which were all classified as available-for-sale. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

 

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the six months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Indemnification Regarding Karayan Litigation

Over the past several months, class action litigation has been initiated against a number of banks and retailers, including some of our clients, alleging that “mobile termination” text messages violate the U.S. Telephone Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers. When a business receives a text message indicating that the sender wishes to “opt out” of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any additional text messages.

On October 21, 2011, we received a notice from GameStop Corp. and GameStop Inc., which together we refer to as GameStop, requesting indemnification in connection with a class action litigation entitled Karayan v. GameStop Corp. and GameStop Inc., which we refer to as the Karayan Litigation, which had been initiated against GameStop based in part on mobile termination text messages. We are not a named defendant or other party in the Karayan Litigation.

On January 6, 2012, we delivered a letter agreement to GameStop, in which we agreed to indemnify GameStop in relation to the Karayan Litigation. After investigation, we determined to deliver the letter agreement dated January 6, 2012 in order to, pursuant to the provisions of our Master Pricing Agreement with GameStop, (a) indemnify GameStop for damages, losses and fees resulting from the aspects of the Karayan Litigation relating to mobile termination text messages and (b) confirm that we will take sole control over the defense, and any settlement, of the Karayan Litigation. In addition to claims relating to mobile termination text messages, the Karayan Litigation also asserts claims alleging that GameStop is liable to certain of its customers because it failed to obtain prior express consent to the delivery of text messages. In the letter agreement, we reserved our rights concerning any argument that we may have as to our obligation to indemnify GameStop with respect to the aspects of the Karayan Litigation relating to the alleged lack of prior express consent. We have filed a motion to dismiss or in the alternative stay the litigation pending a determination by the Federal Communications Commission in relation to our Petition for Declaratory Ruling on mobile termination messages. In response to the motion, plaintiff has agreed to seek a stay of the litigation from the court until such time as the Federal Communications Commission has ruled on our Petition for Declaratory Ruling.

We intend to defend vigorously against the claims in the Karayan Litigation that allege GameStop violated provisions of the TCPA in delivering mobile termination text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of our indemnification obligations to GameStop, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Karayan Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

See “Item 1A. Risk Factors – We could be subject to substantial damages and expenses if our clients violate U.S. Telephone Consumer Protection Act restrictions as the result of the use of mobile termination text messages.”

Sager Litigation

On January 11, 2012, a class action litigation, which we refer to as the Sager Litigation, was filed against Bank of America and us as co-defendants. The Sager Litigation alleges that we and Bank of America sent text messages to the plaintiff without the plaintiff’s prior express consent, in violation of the TCPA. Plaintiff is seeking confirmation of a class of individuals who received unauthorized text message solicitations sent of behalf of us. On June 21, 2012 we moved to stay the litigation pending, among other things, a determination by the Federal Communications Commission in relation to our Petition for Declaratory Ruling on mobile termination messages. The hearing on the motion to stay is set for September 14, 2012. We intend to defend vigorously against the claims in the Sager Litigation that allege we violated provisions of the TCPA in delivering text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of the Sager Litigation, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Sager Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

 

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On June 18, 2012 we received a notice from Bank of America, requesting indemnification in connection with the Sager Litigation. We are investigating this matter to evaluate the extent, if any, to which it is required to indemnify the client for damages, losses and fees resulting from the lawsuit. At this time it is not possible to estimate the amount, if any, for which we may be responsible under its indemnification obligations to Bank of America, but it is possible that such an amount may be substantial.

See “Item 1A. Risk Factors – We could be subject to significant penalties or damages if our clients violate U.S. federal or state restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.”

A2P SMS Antitrust Litigation

On April 5, 2012, a class action litigation, which we refer to as the Club Texting Litigation, was filed against numerous defendants, including us. On April 6, 2012, a related class action litigation, which we refer to as the TextPower Litigation, was filed against numerous defendants, including us. On May 10, 2012, a further related class action litigation, which we refer to as the iSpeedBuy litigation, was filed against numerous defendants, including us. On June 14, 2012 a consolidated class action complaint, which we refer to as the A2P SMS Antitrust Litigation, was filed which amended and consolidated the Club Texting Litigation, TextPower Litigation and iSpeedBuy Litigation. In the A2P SMS Antitrust Litigation, we are named as alleged successor-in-interest to 2ergos Americas, which we acquired in February 2012. The A2P SMS Antitrust Litigation alleges that the named mobile telecom companies and alleged aggregators violated the Sherman Act through the use of various common short code requirements related to the sending of text messages by businesses to consumers. Further, the A2P SMS Antitrust Litigation is seeking confirmation of a class of entities and persons who leased a common short code from Neustar, Inc. and sent or received text messages through one or more aggregators. We have served an indemnification claim on 2ergo Group plc, the former parent company of 2ergo Americas, in relation to the A2P SMS Antitrust Litigation, but we intend to defend vigorously against the claims in the A2P SMS Antitrust Litigation that allege violations of the Sherman Act. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of the A2P SMS Antitrust Litigation, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the A2P SMS Antitrust Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

See “Item 1A. Risk Factors – Our recent acquisitions and any future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value, divert management attention, and subject us to third-party claims or other unexpected costs.”

Other Proceedings

The customer communications industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various legal proceedings from time to time.

Our recently acquired subsidiary 2ergos Americas received a notice from one of its clients requesting indemnification in connection with a patent infringement lawsuit initiated against the client based in part on various alleged web and mobile applications supplied by 2ergos Americas to that client. We are investigating this matter to evaluate the extent, if any, to which we are required to indemnify the client for damages, losses and fees resulting from the lawsuit. At this time it is not possible for us to estimate the amount, if any, for which we may be responsible under our indemnification obligations to this client, but it is possible that such an amount may be substantial. We have served an indemnification claim on 2ergo Group plc, the former parent company of 2ergo Americas, in relation to this request.

 

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Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below and all of the other information contained in this report before deciding whether to purchase our common stock. The market price of our common stock could decline due to any of these risks and uncertainties, and investors might lose all or part of their investments in our common stock.

Risks Related to Our Business and Industry

Our hosted contact center services face intense competition, and our failure to compete successfully would make it difficult for us to add and retain clients and would impede the growth of our business.

The market for hosted contact center services is intensely competitive, changing rapidly and highly fragmented. It is subject to rapidly developing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of industry participants. Increased competition could result in pricing pressure, reduced sales or lower margins, and could prevent our current or future services from achieving or maintaining broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients and our business, financial condition and operating results will be seriously harmed.

Predictive dialers have been the basic method of automated customer communications for the last two decades, particularly for collections activity. The vast majority of telephony customer contact today is completed using predictive dialer technology. Our hosted customer contact services compete with on-premise predictive dialers from a limited number of established vendors and a number of smaller vendors, as well as predictive dialers hosted by some of those smaller vendors on an application service provider basis. Many businesses have invested in on-premise predictive dialers and are likely to continue using those dialers until the dialers are no longer operational, despite the availability of additional functionality in our hosted customer contact services.

We also compete with a number of providers of hosted contact center services. A limited number of established vendors and a number of smaller, privately held companies offer hosted services that compete principally on the basis of price rather than features. In addition, a small number of vendors focus on providing hosted services with features more comparable to ours. These vendors generally compete on the basis of return on investment, features and price. Other companies may enter the market by offering competing products or services based on emerging technologies, such as open-source frameworks, or by competing on the basis of either features or price. Clients could also potentially employ a multi-vendor strategy for risk mitigation purposes.

We increasingly compete with companies providing hosted contact center services focused on specific vertical markets, such as healthcare, or on a single communications channel, such as text messaging. Because these solutions are targeted to more narrowly defined markets and enable their providers to develop targeted domain expertise, those providers may be able to develop and offer targeted customer contact solutions than a company, such as ours, that seeks to offer a broad range of hosted customer contact services to businesses across a variety of vertical markets.

Some of our competitors have significantly greater financial, technical, marketing, service and other resources than we have. These vendors also have larger installed client bases and longer operating histories. Competitors with greater financial resources might be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors could be in a stronger position to respond quickly to new technologies and could be able to undertake more extensive marketing campaigns.

We have begun to invest in our mobile marketing offerings, and our business could be negatively affected if the market does not develop as we expect or if we fail to offer services that successfully address the needs of a rapidly changing market.

In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012 we acquired 2ergos Americas, a provider of mobile business and marketing solutions. As a result of these acquisitions and our internal development of mobile messaging solutions based on our existing technology, we have invested, and expect to continue to invest, significant financial and management resources in building and offering our mobile marketing services.

Our mobile marketing business is at an early stage of development, and we may not achieve or sustain demand for our mobile marketing offerings. Our success in this effort will depend in part on the performance, availability and pricing of our mobile marketing services in comparison to a wide array of competing products and services. It will also depend on the willingness of businesses to increase their use of mobile marketing applications. The market for these types of services is changing and developing rapidly, as competitors introduce new and enhanced products and services and react to changes in technology, client demands and

 

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regulatory requirements. To succeed, we need to enhance our current services and develop new services on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of clients. New products and services based on emerging technologies or industry standards could render our existing services obsolete and unmarketable.

Our mobile marketing endeavors involve significant risks and uncertainties, including distraction of management from other operations, insufficient revenues to offset associated expenses and inadequate return on capital. We cannot assure you that our mobile marketing strategies and offerings will be successful and will not materially adversely affect our reputation, financial condition or operating results.

Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock.

Our quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. Our agreements with clients typically do not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the actual usage of our services each quarter by existing and new clients. Quarterly fluctuations in our operating results also might be due to numerous other factors, including:

 

   

our ability to attract new clients, including the length of our sales cycles;

 

   

our ability to sell new applications and increased usage of existing applications to existing clients;

 

   

technical difficulties or interruptions in our cloud-based services;

 

   

changes in privacy protection and other governmental regulations applicable to the communications industry;

 

   

changes in our pricing policies or the pricing policies of our competitors;

 

   

changes in the rates we incur for services provided by telecommunication or data carriers or by text or email aggregators;

 

   

the financial condition and business success of our clients;

 

   

purchasing and budgeting cycles of our clients;

 

   

acquisitions of businesses and products by us or our competitors;

 

   

competition, including entry into the market by new competitors or new offerings by existing competitors;

 

   

our ability to hire, train and retain sufficient sales, client management and other personnel;

 

   

restructuring expenses, including severance and other costs attributable to terminations of employment;

 

   

timing of development, introduction and market acceptance of new communication services or service enhancements by us or our competitors;

 

   

concentration of marketing expenses for activities such as trade shows and advertising campaigns;

 

   

expenses related to any new or expanded data centers;

 

   

expenses related to merger and acquisition activities; and

 

   

general economic and financial market conditions.

Many of these factors are beyond our control, and the occurrence of one or more of them could cause our operating results to vary widely. Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful.

We may fail to forecast accurately the behavior of existing and potential clients or the demand for our services. Our expense levels are based, in significant part, on our expectations as to future revenues and are largely fixed in the short term. As a result, we could be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues.

Variability in our periodic operating results could lead to volatility in our stock price as equity research analysts and investors respond to quarterly fluctuations. Moreover, as a result of any of the foregoing or other factors, our operating results might not meet our announced guidance or expectations of investors and analysts, in which case the price of our common stock could decrease significantly.

 

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We could be subject to substantial damages and expenses if our clients violate U.S. Telephone Consumer Protection Act restrictions as the result of the use of mobile termination text messages.

Over the past several months, class action litigation has been initiated against a number of banks and retailers, including some of our clients, alleging that “mobile termination” text messages violate the U.S. Telephone Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers. When a business receives a text message indicating that the sender wishes to “opt out” of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any additional text messages.

On October 21, 2011, we received a notice from GameStop Corp. and GameStop Inc., which together we refer to as GameStop, requesting indemnification in connection with a class action litigation entitled Karayan v. GameStop Corp. and GameStop Inc., which we refer to as the Karayan Litigation, which had been initiated against GameStop based in part on mobile termination text messages. We are not a named defendant or other party in the Karayan Litigation.

On January 6, 2012, we delivered a letter agreement to GameStop, in which we agreed to indemnify GameStop in relation to the Karayan Litigation. After investigation, we determined to deliver the letter agreement dated January 6, 2012 in order to, pursuant to the provisions of our Master Pricing Agreement with GameStop, (a) indemnify GameStop for damages, losses and fees resulting from the aspects of the Karayan Litigation relating to mobile termination text messages and (b) confirm that we will take sole control over the defense, and any settlement, of the Karayan Litigation. In addition to claims relating to mobile termination text messages, the Karayan Litigation also asserts claims alleging that GameStop is liable to certain of its customers because it failed to obtain prior express consent to the delivery of text messages. In the letter agreement, we reserved our rights concerning any argument that we may have as to our obligation to indemnify GameStop with respect to the aspects of the Karayan Litigation relating to the alleged lack of prior express consent. We have filed a motion to dismiss or in the alternative stay the litigation pending a determination by the Federal Communications Commission in relation to our Petition for Declaratory Ruling on mobile termination messages. In response to the motion, plaintiff has agreed to seek a stay of the litigation from the court until such time as the Federal Communications Commission has ruled on our Petition for Declaratory Ruling.

Class action litigation has been initiated against a number of businesses to date with respect to claims under the TCPA involving mobile termination text messages, and it is likely that similar claims will be asserted in the future against businesses, some of which may be our clients. If we are required to indemnify a client under such a future claim, we could incur material costs and expenses that would have a material adverse effect on our business, financial condition and operating results. Moreover, if we were obligated to indemnify clients with respect to multiple class actions of this type, the costs of defending those actions could, by themselves and without regard to the ultimate outcomes of the actions, have a material adverse effect on our business, financial condition and operating results.

Defects in our platforms, disruptions in our services or errors in execution could diminish demand for our services and subject us to substantial liability.

Our multi-channel platforms are complex and incorporate a variety of hardware and proprietary and licensed software. From time to time we have found and corrected defects in a platform. Cloud-based services such as ours frequently experience issues from undetected defects when first introduced or when new versions or enhancements are released. Defects in either of our platforms could result in service disruptions for one or more clients. For example, in October 2008 we experienced a partial outage of the SoundBite Engage platform, which precluded some clients from executing their campaigns in their desired timeframes. Our clients might use our services in unanticipated ways that cause a service disruption for other clients attempting to access their contact list information and other data stored on a platform. In addition, a client may encounter a service disruption or slowdown due to high usage levels of our services.

Clients engage our client management organization to assist them in creating and managing a campaign. As part of this process, we typically construct and test a script, map the client’s input file into our platforms, and map our output files to a client-specific format. In order for a campaign to be executed successfully, our client management staff must correctly design, implement, test and deploy these work products. The performance of these tasks can require significant skill and effort, and from time to time has resulted in errors that adversely affected a client’s campaign.

Because clients use our services for critical business processes, any defect in one of our platforms, any disruption in our services or any error in execution could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses.

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our platforms or a resulting disruption in our services, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our insurance premiums will not increase as a result of recent litigation or that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occurrence of changes in our

 

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liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

Interruptions, delays in service or errors in execution from our key vendors would impair the delivery of our services and could substantially harm our business and operating results.

In delivering our cloud-based services, we rely upon a combination of hosting providers, telecommunication and data carriers, and text and email aggregators. We serve our clients from five hosting facilities that are owned and operated by third parties. Three of the lease agreements for these facilities effectively renew for one-year periods, subject to three months’ advance notice of termination, and one renews monthly, subject to thirty days’ advance notice of termination. The fifth lease agreement terminates in 2014. If one of these lease agreements terminates and we are unable to renew the agreement on commercially reasonable terms, we may need to incur significant expense to relocate the data center or to agree to the terms demanded by the hosting provider, either of which could harm our business, financial position and operating results.

Our clients’ campaigns are handled through a mix of telecommunication and data carriers as well as text and email aggregators. We rely on these service providers to handle millions of customer contacts each day. From time to time these service providers may fail to handle contacts correctly, which could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses for which we are not fully indemnified or insured. While we have entered into contracts with multiple telecommunication carriers and text aggregators, we currently do not have fully redundant data, text or email services. Our contracts with carriers and aggregators generally can be terminated by either party at the end of the contract term upon written notice delivered by the party a specified number of days before the end of the term. In addition, we generally can terminate a contract at any time upon written notice delivered a specified number of days in advance, subject to the payment of specified termination charges. If a contract is terminated, we might be unable to obtain pricing on similar terms from another provider, which would affect our gross margins and other operating results.

Our hosting facilities and the infrastructures of our service providers are vulnerable to damage or interruption from floods, fires and similar natural events, as well as acts of terrorism, break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such a natural disaster or misconduct, a loss of power, a decision by a hosting provider to close a facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our provision of our services. Any interruption or delay in providing our services, even if for a limited time, could have an adverse effect on our business, financial condition and operating results.

Actual or perceived breaches of our security measures could diminish demand for our services and subject us to substantial liability.

Our services involve the storage and transmission of clients’ proprietary information. Cloud-based services such as ours are particularly subject to security breaches by third parties. Breaches of our security measures also might result from employee error or malfeasance or other causes, including as a result of adding new communications services and capabilities to our platforms. In the event of a security breach, a third party could obtain unauthorized access to our clients’ contact list information and other data. Techniques used to obtain unauthorized access or to sabotage systems change frequently, and they typically are not recognized until after they have been launched against a target. As a result, we could be unable to anticipate, and implement adequate preventative measures against, these techniques. Because of the critical nature of data security, any actual or perceived breach of our security measures could subject us to litigation and significant liability for damage to our clients’ businesses, could cause existing or potential clients not to use our services, and could harm our reputation.

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from claims related to security breaches, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

Our recent acquisitions and any future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value, divert management attention, and subject us to third-party claims or other unexpected costs.

In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012 we acquired 2ergos Americas, a provider of mobile business and marketing solutions.

 

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SmartReply. We currently are completing the migration of former customers of SmartReply to our platforms. We acquired the SmartReply assets in order to broaden our client base, and we will be unable to recognize the anticipated benefits of the acquisition if we are unable to transition legacy SmartReply clients to our platforms in a timely manner.

 

   

2ergo Americas. We have just begun the process of integrating the operations, technology and personnel of 2ergo Americas. We expect this process will be more complex than in our previous acquisitions due to the need to integrate elements of the 2ergo Americas software platform with our platforms and due to the complexities likely to be involved in addressing certain technologies previously shared by 2ergo Americas and its parent. We acquired 2ergo Americas in order to broaden our client base and gain technology and personnel, and we will be unable to recognize the anticipated benefits of the acquisition if we are unable to integrate the acquired technology effectively in a timely manner or if we fail to maintain and incentivize the former 2ergo Americas employees in a manner that enables us to maintain existing clients and add additional mobile marketing clients. In April and May 2012, three related class action litigations, which have now been consolidated, were filed against numerous defendants, including us in our alleged capacity as successor-in-interest to 2ergo Americas, alleging violations of antitrust laws that purportedly occurred before we acquired 2ergo Americas. We may incur damages and other expenses as a result of these litigations, or as the result of other actions of 2ergo Americas occurring prior to the acquisition, that could have a material adverse effect on our business, financial condition and operating results. In addition, any such matters could divert management’s attention from our operations.

If we encounter unforeseen technical or other challenges in these integration and migration processes, our business and results of operations could be harmed. In particular, challenges or difficulties in migrating or expanding the legacy SmartReply and 2ergo Americas client bases may distract our management’s attention from focusing on our other business operations and may result in our recognizing a lower level of revenues than we expected when we entered into the transactions.

Our business strategy contemplates that we will seek to identify and pursue additional acquisitions of businesses, technologies and products that will complement our existing operations. We cannot assure you that any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including:

 

   

difficulties in integrating the operations and personnel of the acquired companies;

 

   

maintenance of acceptable standards, controls, procedures and policies;

 

   

potential disruption of ongoing business and distraction of management;

 

   

impairment of relationships with employees and clients as a result of any integration of new management and other personnel;

 

   

inability to maintain relationships with suppliers and clients of the acquired business;

 

   

difficulties in incorporating acquired technology and rights into our services and platforms;

 

   

unexpected expenses resulting from the acquisition;

 

   

potential unknown liabilities associated with acquired businesses; and

 

   

unanticipated expenses related to acquired technology and its integration into our existing technology.

Acquisitions could result in the incurrence of debt, restructuring charges and large one-time write-offs. Acquisitions could also result in goodwill and other intangible assets that are subject to impairment tests, which might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders would be diluted and earnings per share could decrease.

From time to time, we might enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we are unable to evaluate and execute acquisitions properly, we could fail to achieve our anticipated level of growth and our business and operating results could be adversely affected.

Our product development efforts could be constrained by the intellectual property of others, and we could be subject to claims of intellectual property infringement, which could be costly and time-consuming.

The customer communications industry and the telecommunications industry are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. We have in the past been subject to litigation, now concluded, with a third party that alleged that our services violated the third party’s intellectual property rights. As we seek to extend and expand our services, we could be constrained by the intellectual property rights of others.

 

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We might not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If our services violate any third-party proprietary rights, we could be required to re-engineer our platforms or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-engineer our services, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Further, our platforms incorporate open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown.

The expansion of our business into international markets exposes us to additional business risks, and failure to manage those risks could adversely affect our business and operating results.

Historically we targeted substantially all of our sales and marketing efforts principally to businesses located in the United States. In recent years, however, we have focused on increasing resources on businesses located in Europe. We anticipate that an increasing portion of our revenue in future periods will be derived from outside the United States. The continued expansion of our international operations will require substantial financial investment and significant management efforts and will subject us to a number of risks and potential costs, including:

 

   

difficulty in establishing, staffing and managing sales and other operations in countries outside of the United States;

 

   

compliance with multiple, conflicting and changing laws and regulations, including employment and tax laws and regulations;

 

   

uncollectability of receivables or longer payment cycles in some countries;

 

   

currency exchange rate fluctuations;

 

   

limited protection of intellectual property in some countries outside of the United States;

 

   

challenges encountered under local business practices, which vary by country and often favor local competitors;

 

   

challenges caused by distance, language and cultural differences; and

 

   

difficulty in establishing and maintaining reseller relationships.

Our failure to manage the risks associated with our international operations could limit the growth of our business and adversely affect our operating results.

The global economic conditions and related credit crisis may continue to adversely affect our business.

Global market and economic conditions have been negative in recent years, with tighter credit conditions in most major economies since 2009. Continuing concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility, declining business and consumer confidence, increased unemployment, and diminished economic expectations. These market conditions have led to a decrease in spending by businesses and consumers. Continuing turbulence in the United States and international markets and economies and prolonged declines in business and consumer spending could result in lower sales of our services, longer sales cycles, difficulties in collecting accounts receivable, gross margin deterioration, slower adoption of new technologies and increased price competition, any of which may have a negative effect on our financial condition and results of operations.

Many of our clients are not obligated to pay any minimum amount for our services on an on-going basis, and if those clients discontinue use of our services or do not use our services on a regular basis, our revenues would decline.

The agreements we enter into with many of our clients do not require minimum levels of usage or payments and are terminable at will by our clients. The periodic usage of our services by an existing client could decline or fluctuate as a result of a number of factors, including the client’s level of satisfaction with our services, the client’s ability to satisfy its customer contact processes internally, and the availability and pricing of competing products and services. If our services fail to generate consistent business from existing clients, our business, financial condition and operating results will be adversely affected.

 

 

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We derive a significant portion of our revenues from the sale of our services for use in the collections process, and any event that adversely affects the accounts receivable management industry or in-house accounts receivable management departments would cause our revenues to decline.

We sell our hosted customer contact services for use in the collections process by accounts receivable management agencies and by large in-house accounts receivable management departments. Revenues from these businesses represented 60% of our revenues in the first six months of 2012, 70% of our revenues in 2011, 75% of our revenues in 2010 and 77% of our revenues in 2009. We expect that revenues from accounts receivable management businesses will continue to account for a substantial part of our revenues for the foreseeable future.

Accounts receivable management businesses are particularly subject to changes in the overall economy. In a sustained economic downturn such as the recession experienced globally since 2009, accounts receivable management agencies can be affected adversely by declines in liquidation rates as a result of higher debt and lower disposable income. A prolonged economic downturn will impact these agencies as fewer loans are granted due to the imposition by lenders of conditions on the extension of credit that are not acceptable to potential borrowers. Accounts receivable management businesses also can be affected adversely by a sustained economic upturn, which may result in lower levels of consumer debt default rates. In addition, these businesses may be affected adversely by tightening of credit granting practices as well as technological advances and regulatory changes that affect the collection of outstanding indebtedness. Any such changes, conditions or events that adversely affect these businesses could cause us to lose some or all of the recurring business of our clients in the accounts receivable management industry, which in turn could have a material adverse effect on our business, financial condition and operating results.

Moreover, two clients accounted for a total of 19% of our revenues in the first six months of 2012, 23% of our revenues in 2011, 23% of our revenues in 2010 and 29% of our revenues in 2009. One of these clients is an accounts receivable management agency and the other is a large in-house accounts receivable management department of a telecommunications business. In addition to the risks associated with accounts receivable management businesses in general, our business, financial condition and operating results would be negatively affected if either of these clients were to significantly decrease the extent to which it uses our hosted customer contact services.

Our business will be harmed if we fail to develop new features that keep pace with technological developments and emerging consumer trends.

Businesses can use a variety of communication channels to reach their customers. Emerging consumer trends have forced a greater focus on alternative channels, customer preferences and communications via mobile devices and a failure to address these trends would be a threat to the adoption of our services. Our business, financial condition and operating results will be adversely affected if we are unable to complete and introduce, in a timely manner, new features for our existing services that keep pace with technological developments. For example, because most of our clients access our cloud-based services using a web browser, we must modify and enhance our services from time to time to keep pace with new browser technology.

Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could harm our operating results.

Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or will be acquired. For example, in February 2011 West Corporation, a provider of voice and data solutions, announced it had acquired Twenty First Century Communications, Inc., a provider of automated alerts and notification solutions. In August 2011 Augme Technologies, Inc., a mobile marketing service, acquired substantially all of the assets of Hipcricket, Inc, a mobile marketing and advertising company. In December 2011 Lenco Mobile Inc., a provider of advertising and technical platforms primarily for the high-growth mobile and online marketing sectors, acquired iLoop Mobile, Inc., a mobile marketing service organization.

In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could have a material adverse effect on our business, operating results and financial condition.

Failure to maintain our direct sales force will impede our growth.

We are highly dependent on our direct sales force to obtain new clients and to generate repeat business from our existing client base. It is therefore critical that our direct sales force maintain regular contact with our clients, both to gauge client satisfaction with our services as well as to highlight the value that use of our services adds to their enterprises. There is significant competition for direct sales personnel. Our ability to achieve growth in revenues in the future will depend in large part on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. New hires require significant training and typically take more than a year

 

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before they achieve full productivity. Our recent and planned hires might not achieve full productivity as quickly as intended, or at all. If we fail to keep, hire and successfully train sufficient numbers of direct sales personnel, we will be unable to increase our revenues and the growth of our business will be impeded.

Because competition for employees in our industry is intense, we might not be able to attract and retain the highly skilled employees we need to execute our business plan.

To continue to execute our business plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior engineers and senior sales executives. We might not be successful in attracting and retaining qualified personnel. We have experienced from time to time in the past, and 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 we have. In addition, in making employment decisions, particularly in technology-based industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Volatility in the price of our common stock could therefore, adversely affect our ability to attract or retain key employees. Furthermore, the requirement to expense stock options could discourage us from granting the size or type of stock options awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business plan and future growth prospects could be severely harmed.

If we are unable to protect our intellectual property rights, we would be unable to protect our technology and our brand.

If we fail to protect our intellectual property rights adequately, our competitors could gain access to our technology and our business could be harmed. We rely on trade secret, copyright and trademark laws, and confidentiality and assignment of invention agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property might not prevent misappropriation of our proprietary rights. We have three issued patents and eleven patent applications pending in the United States. Our issued patents and any patents issued in the future may not provide us with any competitive advantages or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and might afford little or no effective protection of our proprietary technology. Consequently, we could be unable to prevent our intellectual property rights from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of intellectual property rights is expensive, difficult and, in some cases, impossible. Litigation could be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we might not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

We are subject to risks associated with outsourcing services to third parties, and failure to manage those risks could adversely affect our business and operating results.

We contract with several third-party vendors that provide services to us or to whom we delegate selected functions. These third-party vendors supplement our internal engineering efforts. Our arrangements with these third-party vendors may make our operations vulnerable if the third parties fail to satisfy their obligations to us:

 

   

The failure of a third-party vendor to provide high-quality services that conform to required specifications or contractual arrangements could impair our ability to enhance our solutions or to develop new solutions, could create exposure for non-compliance with our contractual commitments to our clients, or could otherwise adversely affect our business and operating results. In particular, a client may impose specific requirements on us, such as an obligation to provide our solutions using only personnel in the United States, with which it may be difficult or impossible for a third-party vendor to comply or for which we may be unable to monitor compliance.

 

   

If a third-party vendor fails to maintain and protect the security and confidentiality of data to which it has access, we could be exposed to lawsuits or damage claims that, if upheld, could materially and adversely affect our profitability or we could be subject to substantial regulatory fines or other penalties.

 

   

If a third-party vendor fails to comply with other applicable regulatory requirements, we may be held liable for the vendor’s failures or violations. We cannot assure you that our third-party vendors are, or will be, in full compliance with all applicable laws and regulations at all times or that our third-party vendors will be able to comply with any future laws and regulations.

Our third-party vendor arrangements could be adversely impacted by changes in a vendor’s operations or financial condition or other matters outside of our control. There is no assurance that our third-party vendors will continue to provide services to us or that they will renew or not terminate their arrangements with us. Any interruption in their services could adversely affect our operations unless and until we can identify a new vendor or replace an existing vendor’s services with internal resources at additional cost.

 

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Our platforms rely on technology licensed from third parties, and our inability to maintain licenses of this technology on similar terms or errors in the licensed technology could result in increased costs or impair the implementation or functionality of our cloud-based services, which would adversely affect our business and operating results.

Our multi-tenant customer communication platforms relies on technology licensed from third-party providers. For example, we use the Apache web server, the Oracle WebLogic application server, the JBoss Application server, Nuance Communications text-to-speech and automated speech recognition software, the Oracle database, and the MySQL database. We anticipate that we will need to continue to license technology from third parties in the future. There might not always be commercially reasonable software alternatives to the third-party software that we currently license. Any such software alternatives could be more difficult or costly to replace than the third-party software we currently license, and integration of that software into our platforms could require significant work and substantial time and resources. Any undetected errors in the software we license could prevent the implementation of our cloud-based services, impair the functionality of our services, delay or prevent the release of new features or offerings, and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which might not be available on commercially reasonable terms or at all.

Industry consolidation could reduce the number of our clients and adversely affect our business.

Some of our significant clients from time to time may merge, consolidate or enter into alliances with each other. The surviving entity or resulting alliance may subsequently decide to use a different service provider or to manage customer contact campaigns internally. Alternatively, the surviving entity or resulting alliance may elect to continue using our services, but its strengthened financial position or enhanced leverage may lead to pricing pressure. Either of these results could have a material adverse effect on our business, operating results and financial condition. We may not be able to offset the effects of any such price reductions, and may not be able to expand our client base to offset any revenue declines resulting from such a merger, consolidation or alliance.

Our ability to use net operating loss carryforwards in the United States may be limited.

As of December 31, 2011, we had net operating loss carryforwards of $24.0 million for U.S. federal tax purposes and an additional $6.0 million for state tax purposes. These carryforwards expire between 2013 and 2031. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We experienced ownership changes for these purposes in 2007, which resulted in an annual limitation amount of approximately $8.0 million on the use of net operating loss carryforwards generated from November 29, 2001 through November 8, 2007. To the extent our use of net operating loss carryforwards is limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

If we are unable to raise capital when needed in the future, we may be unable to execute our growth strategy, and if we succeed in raising capital, we may dilute investors’ percentage ownership of our common stock or may subject our company to interest payment obligations and restrictive covenants.

We may need to raise additional funds through public or private debt or equity financings in order to:

 

   

fund ongoing operations;

 

   

take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses;

 

   

develop new services and products; and

 

   

respond to competitive pressures.

Any additional capital raised through the sale of equity may dilute investors’ percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all. A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations.

Risks Related to Regulation of Use of Our Services

We derive a significant portion of our revenues from the sale of our services for use in the collections process, and our business and operating results could be substantially harmed if new U.S. federal and state laws or regulatory interpretations in one or more jurisdictions either make our services unavailable or less attractive for use in the collections process or expose us to regulation as a debt collector.

 

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Revenues from clients in the accounts receivable management industry and large in-house, or first-party, accounts receivable management departments represented 60% of our revenues in the first six months of 2012, 70% of our revenues in 2011, 75% of our revenues in 2010 and 77% of our revenues in 2009. These clients’ use of our services is affected by an array of complex federal and state laws and regulations. The U.S. Fair Debt Collection Practices Act, or FDCPA, limits debt collection communications by clients in the accounts receivable management industry, including third parties retained by creditors. For example, the FDCPA prohibits abusive, deceptive and other improper debt collection practices, restricts the timing and content of communications regarding a debt or a debtor’s location, and allows consumers to opt out of receiving debt collection communications. In general, the FDCPA also prohibits the use of debt collection communications to cause debtors to incur more debt. Many states impose additional requirements on debt collection communications, including limits on the frequency of debt collection calls, and some of those requirements may be more stringent than the comparable federal requirements. Moreover, debt collection communications are subject to new regulations, as well as changing regulatory interpretations that may be inconsistent among different jurisdictions. For example, in February 2012 the Federal Communications Commission, or FCC, modified its rules to require opt-in for all prerecorded calls made to mobile phones, which limits our clients’ ability to use our services to call a mobile phone for the purposes of collections without having prior written consent from a customer. Our business, financial position and operating results could be substantially harmed by the adoption or interpretation of U.S. federal or state laws or regulations that make our services either unavailable or less attractive for debt collection communications by existing and potential clients.

We provide our services for use by creditors and debt collectors, but we do not believe that we are a debt collector for purposes of these U.S. federal or state regulations. An allegation by one or more jurisdictions that we are a debt collector for purposes of their regulations could cause existing or potential clients not to use our services, harm our reputation, subject us to administrative proceedings, or result in our incurring significant legal fees and other costs. If it were to be determined that we are a debt collector for purposes of the regulations of one or more jurisdictions, we could be exposed to government enforcement actions and regulatory penalties and would be subject to additional rules, including licensing and bonding requirements. The costs of complying with these rules could be substantial, and we might be unable to continue to offer our services for debt collection communications in those jurisdictions, which would have a material adverse effect on our business, financial condition and operating results. In addition, if clients use our services in violation of limits on the content, timing and frequency of their debt collection communications, we could be subject to claims by consumers that result in costly legal proceedings and that lead to civil damages, fines or other penalties.

We could be subject to significant penalties or damages if our clients violate U.S. federal or state restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.

Under the TCPA, it is unlawful to use an automatic telephone dialing system or an artificial or prerecorded message to contact any cellular or other wireless telephone number, unless the recipient previously has consented to receiving this type of communication. In February 2012 the FCC modified its rules to require opt-in for all autodialed or prerecorded calls made to mobile phones, which limits our clients’ ability to use our service to call a mobile phone for the purposes of information, customer care or telemarketing without having prior written consent from a customer. Many states have enacted restrictions on using automatic dialing systems and artificial and prerecorded messages to contact wireless telephone numbers, and some of those state requirements may be more stringent than the comparable federal requirements.

Our services provide our clients with the capability to transmit artificial and prerecorded messages. Although our services are designed to enable a client to screen a contact list to remove wireless telephone numbers, a client may determine that prerecorded communication to certain wireless telephone numbers are permitted because the recipients previously have consented to receiving such communication. We cannot ensure that, in using our services for a campaign, a client removes from its contact list the names of all persons who are associated with wireless telephone numbers and who have not consented to receiving artificial or prerecorded communication. On January 11, 2012, a class action litigation, which we refer to as the Sager Litigation, was filed against Bank of America and us as co-defendants. The Sager Litigation alleges that we and Bank of America sent text messages to the plaintiff without the plaintiff’s prior express consent, in violation of the TCPA. Plaintiff is seeking confirmation of a class of individuals who received unauthorized text message solicitations on our behalf. On June 21, 2012, we moved to stay the litigation pending, among other things, a determination by the Federal Communications Commission in relation to our Petition for Declaratory Ruling on mobile termination messages. The hearing on the motion to stay is set for September 14, 2012. We intend to defend vigorously against the claims in the Sager Litigation that allege we violated provisions of the TCPA in delivering text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of the Sager Litigation, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Sager Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

On June 18, 2012 we received a notice from Bank of America, requesting indemnification in connection with the Sager Litigation. We are investigating this matter to evaluate the extent, if any, to which it is required to indemnify the client for damages, losses and fees resulting from the lawsuit. At this time it is not possible to estimate the amount, if any, for which we may be responsible under its indemnification obligations to Bank of America, but it is possible that such an amount may be substantial.

 

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In May 2008, a federal district court in California held that the Telemarketing and Consumer Fraud and Abuse Prevention Act prohibits any autodialed or prerecorded telephone call to a consumer’s cell phone unless the consumer had specifically consented to such calls. The same provision of such Act also applies to the sending of commercial text messages to cell phones. The ruling overturned an earlier FCC interpretation that permitted autodialed and prerecorded calls to the cell phone of any consumer who had provided the cell phone number in connection with requesting a product or service. The ruling applied only in California and was subsequently overturned but, as a result of the initial decision, some existing or potential clients may decide to limit their use of our service to reach consumers on wireless numbers, which could materially adversely affect our revenues and other operating results.

If clients use our services in a manner that violates any of these governmental regulations, federal or state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our service. If clients use our services to screen for wireless telephone numbers and our screening mechanisms fail, we may be subject to regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed.

Regulatory restrictions on the use of artificial and prerecorded messages present particular problems for businesses in the accounts receivable management industry. These third-party accounts receivable management agencies and debt buyers do not have direct relationships with the consumer debtors and therefore typically do not have the ability to obtain from a debtor the consent required to permit the use of autodialed or prerecorded messages in contacting a debtor at a wireless telephone number. These businesses’ lack of a direct relationship with debtors also makes it more difficult for them to evaluate whether a debtor has provided such consent. For example, a accounts receivable management agency frequently must evaluate whether past actions taken by a debtor, such as providing a cellular telephone number in a loan application, constitute consent sufficient to permit the agency to contact the debtor using autodialed or prerecorded messages. Moreover, a significant period of time elapses between the time at which a loan is made and the time at which a accounts receivable management agency or debt buyer seeks to contact the debtor for repayment, which further complicates the determination of whether the accounts receivable management agency or debt buyer has the required consent to use an automatic telephone dialing system or prerecorded messages. The difficulties encountered by these third-party accounts receivable management businesses are becoming increasingly problematic as the percentage of U.S. consumers using cellular telephones continues to increase. If these third-party accounts receivable management businesses are unable to use an automatic telephone dialing system or prerecorded messages to contact a substantial portion of their debtors, our services will be less useful to them. If our clients in the accounts receivable management industry significantly decrease their use of our services, our business, financial position and operating results would be substantially harmed.

We could be subject to penalties if we or our clients violate U.S. federal or state telemarketing restrictions due to a failure of our services or otherwise, which could harm our financial position and operating results.

The use of our services for marketing communications is affected by extensive federal and state telemarketing regulation. The Telemarketing and Consumer Fraud and Abuse Prevention Act and the TCPA, among other U.S. federal laws, empower both the Federal Trade Commission, or FTC, and the FCC to regulate interstate telephone sales calling activities. The FTC’s Telemarketing Sales Rule and analogous FCC rules require us to, for example, transmit Caller ID information, disclose certain information to call recipients, and retain certain business records. FTC and FCC rules proscribe misrepresentations, prohibit the abandonment of telemarketing calls and limit the timing of calls to consumers. Both the FTC and FCC also prohibit telemarketing calls to persons who have placed their numbers on the national Do-Not-Call Registry, except for calls made with an existing business relationship, or EBR, or subject to other limited exceptions. If we fail to comply with applicable FTC and FCC telemarketing regulations, we may be subject to substantial regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed. The FTC’s Telemarketing Sales Rule, for example, imposes fines of up to $16,000 per violation. The FCC may also impose forfeitures of up to $16,000 per violation of its telemarketing rules. If clients use our services in a manner that violates any of these telemarketing regulations, the FTC or FCC may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our services.

In addition, in 2008 the FTC adopted an amendment to the Telemarketing Sales Rule requiring that “express written consent” be obtained for all pre-recorded sales calls that are delivered as of September 1, 2009. Thus, a business that attempts to sell goods or services through the use of prerecorded messages will need to take the extra step to obtain “opt-in” from consumers before pre-recorded sales calls can be delivered, even with respect to consumers with whom the business has an EBR. We cannot ensure that, in using our services for a campaign, a client will obtain appropriate “opt-in” authorization before placing prerecorded telemarketing calls or that the client properly interprets and applies the “opt-in” requirement. If clients use our services to place unauthorized calls or in a manner that otherwise violates FTC or FCC restrictions on prerecorded telemarketing calls, U.S. federal or state authorities may seek to subject us to substantial regulatory fines or other penalties, even if the violation did not result from a failure of our screening mechanisms.

Many states have enacted prohibitions or restrictions on telemarketing calls into their states, specifically covering the use of automatic dialing system and predictive dialing techniques. Some of those state requirements are more stringent than the comparable federal requirements. If clients use our services in a manner that violates any of these telemarketing regulations, state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our services.

 

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To the extent that our services are used to send text or email messages, our clients will be, and we may be, affected by regulatory requirements in the United States. Businesses may determine not to use these channels because of prior consent, or opt-in, requirements or other regulatory restrictions, which could harm our future business growth.

Our failure to comply with numerous and overlapping information security and privacy requirements could subject us to fines and other penalties as well as claims by our clients for damages, any of which could harm our reputation and business.

Our collection, use and disclosure of personal information are affected by numerous privacy, security and data protection regulations. We are subject to the Gramm-Leach-Bliley Privacy Act when we receive nonpublic personal information from clients that are treated as financial institutions under those rules. These rules restrict disclosures of consumer information and limit uses of such information to certain purposes that are disclosed to consumers. The related Gramm-Leach-Bliley Safeguards Rule requires our financial institution clients to impose administrative, technical and physical data security measures in their contracts with us. Compliance with these contractual requirements can be costly, and our failure to satisfy these requirements could lead to regulatory penalties or contractual claims by clients for damages.

In some instances our services require us to receive consumer information that is protected by the Fair Credit Reporting Act, which defines permissible uses of consumer information furnished to or obtained from consumer reporting agencies. We generally rely on our clients’ assurances that any such information is requested and used for permissible purposes, but we cannot be certain that our clients comply with these restrictions. We could incur costs or could be subject to fines or other penalties if the FTC determines that we have mishandled protected information.

Many jurisdictions, including the majority of states, have data security laws including data security breach notification laws. When our clients operate in industries that have specialized data privacy and security requirements, they may be subject to additional data protection restrictions. For example, the federal Health Insurance Portability and Accountability Act, or HIPAA, regulates the maintenance, use and disclosure of personally identifiable health information by certain health care-related entities. States may adopt privacy and security regulations that are more stringent than federal rules, and we may be required by such regulations to establish comprehensive data security programs that could be costly. If we experience a breach of data security, we could be subject to costly legal proceedings that could lead to civil damages, fines or other penalties. We or our clients could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could damage our reputation or harm our business, financial position and operating results.

Since 2007 we have been certified as compliant with the Payment Card Industry, or PCI, Data Security Standard, which mandates a set of comprehensive requirements for protecting payment account data. Our continuing PCI compliance is essential for many of our customer communication offerings, such as fully-automated payment transactions and payment authorizations, and is particularly important for financial institutions, credit card issuers and retailers. We must seek and receive certification of PCI compliance on an annual basis. PCI compliance measures are rigorous and subject to change, and our implementation of new customer communication platform technology and solutions could adversely affect our ability to be re-certified. As a result, we cannot assure you that we will be able to maintain our certification for PCI compliance. Our loss of PCI certification could make our customer communication solutions less attractive to potential customers, particularly those in the financial and retail industries, which in turn could have an adverse effect on our revenue and other operating results.

We may record certain of our calls for quality assurance, training or other purposes. Many states require both parties to consent to such recording, and may adopt inconsistent standards defining what type of consent is required. Violations of these rules could subject us to fines or other penalties, criminal liability, or claims by clients for damages, any of which could hurt our reputation or harm our business, financial position and operating results.

It may be impossible for us to comply with the different data protection regulations that affect us in different jurisdictions. For example, the USA PATRIOT Act provides U.S. law enforcement authorities certain rights to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. Some foreign laws, including some in the European Union, prohibit such disclosures. Such conflicts could subject us and clients to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from claims related to information security and privacy breaches, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

 

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The expansion of our business into international markets requires us to comply with additional debt collection, telemarketing, data privacy or similar regulations, which may make it costly or difficult to operate in these markets.

Although historically we have targeted substantially all of our sales and marketing efforts principally to businesses located in the United States, more recently we have begun focusing more resources on businesses located in Europe. In April 2010, for example, we formed a subsidiary under UK law to target businesses located in the United Kingdom. Countries other than the United States have laws and regulations governing debt collection, telemarketing, data privacy or other communications activities comparable in purpose to the U.S. and state laws and regulations described above. Compliance with these requirements may be costly and time consuming, and may limit our ability to operate successfully in one or more foreign jurisdictions.

Many of the regulations governing our activities in the European Union result from EU legislation on privacy and data protection. As a result, the principal lawmakers for our purposes are European institutions – the European Commission, the European Parliament and the Council of Ministers. We take into account developments in the European Union as well as developments in the United Kingdom. Because our primary international business is driven from the United Kingdom, our regulatory due diligence to date has been focused on this member State. In terms of enforcement, the UK regulators of primary importance to us are:

 

   

Ofcom, the independent regulator and competition authority for the UK communications industry;

 

   

the Information Commissioner, an independent authority whose role is to uphold information rights in the public interest, promoting openness by public bodies and data privacy for individuals; and

 

   

the Office of Fair Trading, an independent authority that enforces consumer protection and competition laws and reviews proposed mergers.

The Communications Act of 2003 gives Ofcom the power to issue and enforce notifications when it has reasonable grounds to believe a person has persistently misused an electronic communications network or service in such a manner, or otherwise engage in conduct that has either the effect, or likely effect, of causing another person unnecessarily to suffer annoyance, inconvenience or anxiety. The other sector-specific legislation governing our UK operations consists of The Privacy and Electronic Communications (EC Directive) (Amendment) Regulations (2003) as amended in 2011 to implement the new e-privacy EU Directive. These regulations contain marketing rules governing businesses that send marketing and advertising by electronic means such as telephone, fax, email, text message and picture (including video) message and by using an automated calling system. These regulations also cover related areas such as telephone directories, traffic and location data, and the use of cookies.

Risks Related to Ownership of Our Common Stock

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends in part on the research and reports that equity research analysts publish about our company and business. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about our company and business.

Future sales of our common stock by existing stockholders could cause our stock price to decline.

If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. The market price of shares of our common stock could drop significantly if our officers, directors or other stockholders decide to sell shares of our common stock into the market.

Our directors, executive officers and their affiliated entities will continue to have substantial control over us and could limit the ability of other stockholders to influence the outcome of key transactions, including changes of control.

As of July 31, 2012, our executive officers and directors and their affiliated entities, in the aggregate, beneficially owned 46% of our common stock. In particular, affiliates of North Bridge Ventures Partners, including James A. Goldstein, one of our directors, in the aggregate, beneficially owned 29% of our common stock. Our executive officers, directors and their affiliated entities, if acting together, are able to control or significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These stockholders may have interests that differ from those of other investors, and they might vote in a way with which other investors disagree. The concentration of ownership of our common stock could have the effect of delaying, preventing, or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and could negatively affect the market price of our common stock.

 

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Our corporate documents and Delaware law make a takeover of our company more difficult, which could prevent certain changes in control and limit the market price of our common stock.

Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions that could enable our management to resist a takeover of our company. These provisions could discourage, delay, or prevent a change in the control of our company or a change in our management. They could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. Some provisions in our charter and by-laws could deter third parties from acquiring us, which could limit the market price of our common stock.

We do not intend to pay dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Accordingly, investors are not likely to receive any dividends on their common stock in the foreseeable future, and their ability to achieve a return on their investment will therefore depend on appreciation in the price of our common stock.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information about purchases of our common stock that were made by us during the quarter ended June 30, 2012.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total Number of
Shares (or Units)
Purchased(1)
     Average Price Paid per
Share (or Unit)
     Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs(2)
     Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet
Be Purchased Under
the Plans or Programs
 

April 1 to 30, 2012

     7,200       $ 3.08        7,200      

May 1 to 31, 2012

     4,868         2.43        4,868      

June 1 to 30, 2012

     30,047         2.62        30,047      
  

 

 

       

 

 

    

Total

     42,115       $ 2.68         42,115       $ 1,997,041  
  

 

 

       

 

 

    

 

(1) As of June 30, 2012, we had repurchased an aggregate of 191,209 shares of our common stock pursuant to the repurchase program that we publicly announced in March 2010.
(2) The board of directors approved our repurchase of shares of common stock having a value of up to $2,500,000 in the aggregate pursuant to the program announced in March 2010.

 

Item 5. Other Information

2012 Management Cash Compensation Plan

On August 2, 2012, the board of directors adopted and approved a 2012 management cash compensation plan, or the Compensation Plan, for the following executive officers, or the Plan Executives:

 

   

James A. Milton, President and Chief Executive Officer;

 

   

Robert C. Leahy, Chief Operating Officer and Chief Financial Officer;

 

   

Timothy R. Segall, Chief Technology Officer; and

 

   

Mark D. Friedman, Executive Vice President and General Manager, Mobile Services Business Unit, and Chief Marketing and Business Development Officer.

In December 2011 the compensation committee considered and approved, subject to board approval, an initial version of the Compensation Plan that was based on our board-approved 2012 operating plan. In March 2012, before the board had considered the initial version of the compensation plan, the compensation committee determined it was appropriate to modify the initial version of the Compensation Plan in order to give effect to reflect (a) the board-approved operating plan for 2ergo Americas, which we acquired in February 2012, and (b) increased legal fees due to new litigation activity. The Compensation Plan, which reflects those modifications, was reviewed and approved, subject to board approval, by the compensation committee in March 2012, and then approved by the board on August 2, 2012. The principal terms of the Compensation Plan are summarized below.

The Compensation Plan has two components: base salary and variable performance-based bonuses. In establishing the participants’ base salary and bonus levels for 2012, the compensation committee reviewed information provided by an independent executive compensation consulting firm for purposes of establishing 2012 compensation for the Plan Executives, together with updates of that information prepared by management at the request of the compensation committee. The recommended 2012 base salaries and bonus levels were based on a number of factors, including a comparison of base salaries and bonuses for comparable positions at the peer companies, the responsibilities of the position, the experience of the Plan Executives and the required knowledge of the Plan Executives.

Base Salaries

The 2012 annual base salaries of the Plan Executives as established under the Compensation Plan are as follows:

 

   

James A. Milton, $340,000;

 

   

Robert C. Leahy, $265,500;

 

   

Timothy R. Segall, $257,500; and

 

   

Mark D. Friedman, $257,500.

 

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Variable Performance-Based Compensation for General Participants

The aggregate target bonus amount established under the Compensation Plan for the President and Chief Executive Officer, the Chief Operating Officer and Chief Financial Officer, and the Chief Technology Officer, or collectively the General Participants, is $415,000, or the General Bonus Target.

The portion of the aggregate target bonus payable to the General Participants is based upon components for revenue (33%), pro forma operating income (33%) and strategic initiatives and goals (34%).

 

   

The revenue component will be earned on an annual basis and will be computed in accordance with a schedule approved by the compensation committee, which schedule must provide that the revenue component will be payable in full if and only if revenue for 2012 equals or exceeds the amount of revenue reflected in our operating plan for 2012.

 

   

Pro forma operating income is defined as operating income determined in accordance with U.S. GAAP, plus (a) the total amount of expense recorded in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, or ASC 718, (b) the total amount of amortization of intangibles recorded in accordance with U.S. GAAP and (c) the total amount of expense recorded in accordance with U.S. GAAP as a result of the pro forma operating income component. The pro forma operating income component of the General Bonus Target will be earned on an annual basis and will be computed in accordance with a schedule approved by the compensation committee, which schedule must provide that the pro forma operating income component will be payable in full if and only if pro forma operating income for 2012 equals or exceeds the amount of operating income reflected in our operating plan for 2012 plus $136,950 (the amount of the pro forma operating income component of the General Bonus Target).

 

   

The compensation committee is responsible for identifying strategic initiatives and goals and for evaluating and determining the extent to which each of those initiatives and goals is satisfied as of December 31, 2012.

The portion of the aggregate general bonus target payable to the General Participants will be allocated among the General Participants in accordance with the following percentages:

 

   

James A. Milton, 43.37% (maximum of $180,000);

 

   

Robert C. Leahy, 31.33% (maximum of $130,000); and

 

   

Timothy R. Segall, 25.30% (maximum of $105,000).

Amounts payable under the General Bonus Target will be due within 30 days after the later of (a) the issuance of an audit report with respect to our consolidated financial statements for 2012 and (b) the approval by the compensation committee of the General Bonus Target amounts payable.

Variable Performance-Based Bonus for CMO

The aggregate amount of the target bonus available for the Executive Vice President and General Manager, Mobile Services Business Unit, and Chief Marketing and Business Development Officer, or CMO, is $105,000, or the CMO Bonus Target.

The aggregate amount of the CMO Bonus Target payable to the CMO will equal the sum of the components for mobile services business unit revenue (50%), revenue component (20%), pro forma operating income component (20%), and strategic initiatives and goals (10%).

 

   

The mobile services business unit, or MSBU, revenue component will be earned on an annual basis and will be computed in accordance with a schedule approved by the compensation committee, which schedule must provide that the MSBU revenue component will be payable on a commission basis.

 

   

The revenue component will be earned on an annual basis and will be computed in accordance with a schedule approved by the compensation committee, which schedule must provide that the revenue component will be payable in full if and only if revenue for 2012 equals or exceeds the amount of revenue reflected in our operating plan for 2012.

 

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Pro forma operating income is defined as operating income determined in accordance with U.S. GAAP, plus (a) the total amount of expense recorded in ASC 718, (b) the total amount of amortization of intangibles recorded in accordance with U.S. GAAP and (c) the total amount of expense recorded in accordance with U.S. GAAP as a result of the pro forma operating income component of the CMO Bonus Target. The pro forma operating income component of the CMO Bonus Target will be earned on an annual basis and will be computed in accordance with a schedule approved by the compensation committee, which schedule must provide that the pro forma operating income component will be payable in full if and only if pro forma operating income for 2012 equals or exceeds the amount of operating income reflected in our operating plan for 2012 plus $21,000 (the amount of the pro forma operating income component of the CMO Bonus Target).

 

   

The compensation committee is responsible for identifying strategic initiatives and goals and for evaluating and determining the extent to which each of those initiatives and goals is satisfied as of December 31, 2012.

Amounts payable under the CMO Bonus Target will be due within 30 days after the later of (a) the issuance by our independent registered public accounting firm of an audit report with respect to our consolidated financial statements for 2012 and (b) the determination and approval by the compensation committee of the CMO Bonus Target amount payable.

A copy of the Compensation Plan is filed as Exhibit 10.1 with this quarterly report on Form 10-Q and is incorporated herein by reference.

 

Item 6. Exhibits

 

Exhibit
Number

  

Description of Exhibit

10.1†    2012 Management Cash Compensation Plan
31.1    Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350
101.INS#    XBRL Instance Document
101.SCH#    XBRL Taxonomy Extension Schema Document
101.CAL#    XBRL Taxonomy Calculation Linkbase Document
101.DEF#    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB#    XBRL Taxonomy Label Linkbase Document
101.PRE#    XBRL Taxonomy Extension Presentation Linkbase Document

 

Compensatory plan or arrangement.
# Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements 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.

 

  SoundBite Communications, Inc.
Date: August 6, 2012   By:  

/s/ James A. Milton

    James A. Milton
    President and Chief Executive Officer
Date: August 6, 2012   By:  

/s/ Robert C. Leahy

    Robert C. Leahy
    Chief Operating Officer and Chief Financial Officer
    (Principal Financial and Chief Accounting Officer)

 

40

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